What is Financial Technology (Fintech)

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Definition:

Financial technology (aka fintech) refers to the modern technology that has been introduced into the financial industry.

🤔 Understanding Financial Tech (Fintech)

Technology has transformed the financial services industry in significant ways. Fintech (aka financial technology) consists of software and digital services that businesses and consumers use in nearly every subset of financial services today. It’s a broad term that includes any technology such as software, internet, and cloud services used for finance-related activities. Common examples include mobile apps that people use to send and receive money, online investing services, and cryptocurrency like Bitcoin. Fintech has helped innovate a fairly traditional industry and has made financial services more accessible. It has also brought many new competitors to the financial sector.

Example

Mobile apps (think PayPal, Zelle, and Venmo) mean that anyone can send money to another person from their smartphone, without going to a bank. The apps have changed the way people exchange things like cash or checks.

Takeaway

Financial technology is kind of like an all-in-one investment destination…

Through financial technology, you can often do just about everything in one place: Maintain your investments, check on the status of stocks, and manage your finances.

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What is the history of financial technology?

The financial services industry is no stranger to technology. Between the 1950s and 1970s, developments like credit cards and automatic teller machines (ATMs), followed by the invention of NASDAQ (the first digital stock exchange), were considered major advances. Fintech took its next major step in the 1980s and 1990s with the invention of online banking.

Following the 2008 financial crisis, there was a significant boom of fintech with the invention of Bitcoin, the first cryptocurrency. As Bitcoin’s popularity rose, it made way for a new type of transaction without the need of traditional middle men, like banks. Many other cryptocurrencies followed suit, such as Ethereum, XRP, and Tether.

Some experts argue that fintech helped make the financial services industry accessible to more people. For example, the creation of the smartphone apps allowed people to do things like deposit a check or pay bills without needing to visit a bank in person. Meanwhile, money-transfer apps like Venmo changed the way people send or receive money. Robo-advisors (algorithm-based, automated investment services) have become a modern alternative to financial advisors.

What are the uses of financial technology?

Fintech has made its way into many different corners of the financial services industry, from business to personal finance. Some types of fintech have become commonplace, while others specifically market to a particular subset of the population. For example, robo advisors specifically market themselves to those who previously didn’t have access to or an interest in traditional investment services.

Here are some primary examples of fintech:

Online banking

Online banking has been around for a while, but today’s use of fintech has taken that one step further. (Think of banks that only exist online.) Many banks have managed to reduce overhead costs by removing brick and mortar branches. Some of these banks may pass savings along to consumers by offering low or no-fee accounts, high-interest savings accounts, or cash-back on debit card purchases.

Budgeting

Budgeting apps let you do things like track spending and balance a checkbook on your smartphone. Some apps let you connect to your bank account, allowing you to track income and spending automatically.

Robo-advising

Robo-advisors have changed the way people think about hiring a professional, like a financial advisor or broker, to help with more investing needs. Robo-advising services and apps help consumers to invest, sometimes with minimal fees and low initial investment minimums. Some traditional investment firms have started offering similar services.

Mobile payments

Mobile payments services allow users to make payments and exchange money digitally. Services like Apple Pay and Google Wallet let you make purchases in stores using a mobile device instead of credit card or cash. Other mobile payment services, like Venmo and PayPal, allow individuals and businesses to send and receive money through a mobile app.

Lending

Online lenders have made it easier to shop for a loan and compare interest rates, often without the need to go to a physical bank or credit union.

Cryptocurrency

Cryptocurrencies (aka digital currencies) like Bitcoin became one of the first significant trends in the use of fintech. Like any other currency, cryptocurrency is one that individuals can use to buy goods and services through online transactions.

Crowdfunding

Online platforms like Kickstarter and GoFundMe have changed the way people raise money, whether it’s for a new product, a creative project, a charity, or even a personal cause. They’ve made it easier for individuals to go directly to the general public with a proposal — Think of a filmmaker looking to fund a new documentary, or a family trying to raise money for a major medical expense.

What are the biggest financial technology startup companies in the United States?

As fintech attracts more venture capital, the industry and its players continue to grow. Here’s a list of some of the biggest names in fintech. (Note: this list includes the financially most valuable private U.S. fintech companies as of February 2020. It does not include publicly-traded companies.)

  • Stripe: Worth $35B, Stripe is the largest private fintech company in the United States as of 2020. The company offers online payment processing and billing for businesses accepting online payments. Their customers include small businesses and large corporations like Amazon and Facebook.
  • Ripple: Ripple facilitates international online payments for financial institutions. The company is worth $10B. The founders also created a cryptocurrency known as XRP.
  • Coinbase: Now worth $8.1B, Coinbase started as a cryptocurrency exchange. They now also offer cryptocurrency storage and security services to institutions.
  • Robinhood: Robinhood, offers commission-free investing on stocks, funds, options, and cryptocurrencies. With a value of about $7.6B, Robinhood comes in at fourth on the list of largest private fintech companies.
  • Chime: The online bank offers checking and savings accounts without fees. Chime differentiates itself from traditional banks by not implementing overdraft fees or minimum balances. In 2020, the company is worth $5.8B.
  • Plaid: Worth $5.3B, Plaid serves as a middle-man in the fintech industry by connecting payments between different financial services, like payment apps and online banks.
  • SoFi: SoFi started as a student loan refinancing company, but has since become a full-service bank with loans, checking and savings accounts, insurance, and investing services. As of 2020, they’re worth $4.8B.
  • Credit Karma: Credit Karma, worth about $4B, is known for its free credit score service and credit monitoring. Since its founding, the company has expanded its business into online savings accounts and tax filing.
  • Opendoor: The real estate company offers an alternative to the traditional route of selling a house. Users can list their home on Opendoor and receive cash offers through the site. The company is worth $3.8B.
  • Root: Root is an auto insurer who uses a smartphone app to monitor its customers’ driving habits. Root has a value of $3.7B.

What are the trends in financial technology?

Fintech is a rapidly changing industry, with new trends emerging each year. Here are some of its biggest trends in 2020:

  • Artificial Intelligence (AI): While AI is not new to financial technology, its role in the field is expected to keep growing. According to one survey, 52% of financial services companies that responded reported that they’re investing in AI. Some banks are using AI for customer service, while others are using it for fraud detection and robo-investing. The financial industry continues to find new uses for AI, as well as works to improve its current uses to allow it to tackle more complicated tasks.
  • Blockchain: This technology isn’t new in fintech, but companies are using it in new ways. For example, blockchain technology is now being used in smart contracts (digital contracts) and smart bonds (bonds that automatically pay bondholders). Other financial uses included safer and faster international payments, as well as insurance claims processing.
  • Sharing economy: Just as companies like Uber and Airbnb have allowed anyone a chance to participate in the rental car and hotel industries, fintech firms might do the same for banking and loans. As more and more companies enter the market, fintech may open new opportunities, like loans borrowed from individuals instead of a bank.
Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory.

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