Fintech, or financial technology, refers to technology related to banking or financial services. This type of innovation includes online banking solutions and mobile payment apps. Fintech innovation first appeared in the early 2000s, when the growing popularity of the internet – and later, smartphones – began transforming customer expectations. Users wanted faster, more accessible financial services, and fintech delivered solutions.

After the 2008 financial crisis, low levels of customer trust in traditional banks encouraged fintech startups to create more transparent and customer-friendly alternatives. Fintech has taken on projects such as revolutionising investment strategies with robo-advisors, simplifying insurance through insurtech, and easing dense regulatory processes with regulatory technology (RegTech). These advancements have made existing financial operations smoother and provided functions that banks and clients now find indispensable. Publicly traded fintechs represented a market capitalisation of $550 billion as of July 2023.

Below is a short guide to fintech innovation: the industry’s current state, its recent evolution, and how it has continued to shift customer behaviour.

What’s in this article?

• What counts as fintech?
  
• Examples of fintech
  
• What is fintech used for?
  
• The evolution of fintech in recent years
  
• What innovations are powering fintech?
  
• How fintech is changing the financial industry
  
• How fintech is shifting customer behaviour
  
• Regulation in fintech
  

What counts as fintech?

Fintech includes a broad spectrum of technologies and applications involved in financial services. Here’s what falls under the fintech umbrella.

Digital banking and payments

• Mobile banking apps that allow users to manage accounts, transfer funds, and pay bills on their smartphones

• Digital wallets that enable contactless payments using mobile devices or wearables

• Peer-to-peer (P2P) payment systems that facilitate direct money transfers between individuals

• Neobanks: digital-only banks without physical branches that have fully online banking services

Investment and wealth management

• Robo-advisors: automated investment platforms that provide algorithm-driven financial advice

• Online brokerage platforms that allow users to buy and sell stocks, bonds, and other assets online

• Micro-investing apps that enable users to make regular, small investments

• Algorithmic trading that uses computer programs to execute trades based on predefined strategies

Lending and financing

• P2P lending platforms that connect borrowers directly with lenders, bypassing traditional banks

• Crowdfunding platforms that allow individuals or businesses to raise funds

• Online lending platforms that provide personal, business, or student loans with simpler digital processes

• Alternative credit scoring that uses non-traditional data to assess creditworthiness

Insurtech

• Online insurance platforms that allow users to compare and purchase insurance policies

• Usage-based insurance that calculates premiums based on usage of a product or service

• Claims processing tools that simplify the insurance claims process using artificial intelligence (AI) and automation

RegTech

• Compliance software that helps financial institutions comply with regulations and mitigate risks

• Fraud detection that uses AI and machine learning (ML) to identify and prevent fraudulent activities

• Anti-Money Laundering (AML) solutions that monitor and report suspicious financial transactions

Blockchain and cryptocurrency

• Cryptocurrency exchanges: platforms for buying, selling, and trading cryptocurrencies such as Bitcoin and Ethereum

• Payment systems that use blockchain technology for secure, transparent transactions

• Decentralised finance (DeFi) platforms that provide financial services without intermediaries using blockchain

Examples of fintech

Here are some examples of well-known fintech companies.

Digital banking and payments

• Chime: A neobank with fee-free current and savings accounts, early direct deposit, and automatic savings features

• Revolut: A digital banking app with multi-currency accounts, international money transfers, and cryptocurrency exchange

• Square: A financial services platform with mobile payment processing solutions for businesses, point-of-sale systems, and business financing

• Venmo: A P2P payment app popular for splitting bills and sending money to friends and family

• Plaid: A data network that connects financial apps to bank accounts for secure data sharing

• Stripe: A financial services company that provides payment processing infrastructure for businesses of all sizes

Investment and wealth management

• Robinhood: A commission-free stock trading platform popular with young investors

• Acorns: A micro-investing app that rounds up purchases to the nearest dollar and invests the spare change

• Betterment: A robo-advisor that gives financial advice and conducts automated portfolio management

• Wealthfront: A popular robo-advisor with tax-loss harvesting and automated rebalancing features

• Coinbase: A popular cryptocurrency exchange platform for buying, selling, and storing cryptocurrencies

• Credit Karma: A personal finance company with free credit scores, reports, and personalised financial recommendations

Lending and financing

• LendingClub: A pioneer in P2P lending that connects borrowers with individual investors

• SoFi: A financial services company with student loan refinancing, personal loans, mortgages, and investment services

• Affirm: A fintech company with buy now, pay later services for purchases at select retailers

Insurance

• Lemonade: A digital insurance company that provides renters, homeowners, and pet insurance, with a focus on social impact

• Root Insurance: A car insurance company using telematics to determine rates based on driving behaviour

• Oscar Health: A health insurance company that focuses on technology and customer service

What is fintech used for?

Here’s how customers and businesses use fintech.

Customer use

• Access to financial services: Fintech has democratised access to financial products. Customers can open bank accounts, apply for loans, and access financial services from their smartphones without ever visiting a bank branch. This is especially helpful for people who live in remote areas or those who don’t have easy access to traditional banking services.

• Simplified transactions: With fintech, users can purchase goods and transfer money instantly through apps or websites. This convenience extends to paying bills, sending money abroad, or splitting expenses with friends.

• Personal finance management: Fintech provides a variety of products that help customers manage their personal finances. Apps can track spending, help create budgets, and alert users about potential savings.

• Investment opportunities: Fintech platforms have opened up investment opportunities to a broader audience, including those who might not have had the means or knowledge to invest before. Customers can start investing with small amounts of money and learn about the stock market, cryptocurrencies, and other investment vehicles through user-friendly interfaces.

• Credit solutions: Fintech has made credit more accessible. Customers can obtain loans more quickly than with traditional banks, due to simplified online applications and algorithms that assess creditworthiness in real time. Some fintech services also provide credit solutions such as buy now, pay later schemes that aren’t typically offered by conventional banks.

• Insurance products: Insurtech platforms make purchasing insurance more straightforward and user-friendly. They use simplified claims processes and develop personalised insurance packages.

• Financial education: Many fintech applications focus on educating their users about finance and provide valuable resources to improve financial literacy. This empowers customers to make informed decisions about their finances and investments.

Business use

• Market reach: Fintech dramatically lowers barriers to entry, making financial services accessible to a broader audience. This enables businesses to tap into underserved demographics and regions.

• Better payment processes: Fintech solutions such as mobile payments, real-time transactions, and digital wallets simplify and speed up the payment process. This improves customer experience and satisfaction and facilitates quicker access to funds and a reduction in transaction-related overhead.

• Lower operational costs: Fintech reduces the costs of financial transactions and management by using automation, AI, and digital platforms. Businesses can reinvest these cost savings into core business activities or pass them on to customers as lower prices.

• Financial customisation: Data-driven fintech allows businesses to offer customised financial products that meet the specific needs of individual customers. This capability improves service delivery and helps identify new product opportunities based on customer behaviour and preferences.

• Investment decisions: Advanced analytics and automation in fintech provide businesses with deeper insight into market trends and investment opportunities. These tools help fine-tune investment strategies, balance portfolios, and improve overall financial performance with data-backed decisions.

• Financial management: Fintech has comprehensive tools that integrate a variety of financial management functions – such as accounting, budgeting, and tax preparation – into a cohesive system, offering a holistic view of financial health.

• Diverse financing options: Fintech platforms provide alternative financing options such as P2P lending and invoice financing. These alternatives help businesses secure more flexible terms and quicker access to capital.

• Security measures: Fintech uses advanced security technologies such as encryption, blockchain, and biometrics to protect financial data and transactions. This security framework helps businesses maintain customer trust.

• Compliance and regulatory reporting: Fintech simplifies compliance through automated systems that ensure accurate, timely reporting. This reduces the risk of compliance breaches and lowers the administrative burden of regulatory requirements.

The evolution of fintech in recent years

Recently, fintech has shifted from an emerging field to an innovation powerhouse. Blockchain has made transactions more secure and transparent and set a new standard for how we handle financial data. Mobile banking and payment apps have made financial services accessible to anyone with a smartphone and revolutionised money management. Apps such as Venmo and Square have made it easy to send cash to friends or settle debts. Fintech has changed customer expectations about how fast and convenient moving money digitally should be, creating effects that impact the entire financial industry.

AI is another major step for fintech. AI powers everything from chatbots that can answer your banking questions to sophisticated robo-advisors that manage investments. AI is making financial services smarter, faster, and often cheaper, but it is also creating new concerns about security and regulation.

As fintech evolves, becoming more advanced and accessible, it will continue to change the finance and banking industries.

What innovations are powering fintech?

Here are the main technologies powering new advancements in fintech:

• AI and ML: Fintechs now use AI for hyper-personalised product recommendations, market trend predictions, and back-office operations enhancement. ML algorithms are becoming sophisticated enough to detect fraud in real time, protecting customers and minimising losses.

• Blockchain and distributed ledger technology (DLT): Blockchain’s potential goes beyond cryptocurrencies. Smart contracts are revolutionising everything from supply chain management to real estate transactions. DeFi platforms now offer traditional financial services such as lending and trading without the need for intermediaries.

• Application programming interfaces (APIs): Open banking APIs allow fintech companies to tap into bank data and create integrated solutions such as budgeting tools and account aggregation platforms. This improves the customer experience and promotes competition and innovation in the industry.

• Cloud computing: Cloud-based infrastructure allows fintech companies to save on costs, quickly deploy new services, and scale up or down as needed. The cloud also enables real-time data processing, which is important for tasks such as fraud detection and personalised financial recommendations.

• Big data and data analytics: Fintech companies are using advanced analytics to extract valuable insight from their massive datasets. This data-driven insight, which includes customer challenges and future market trends, empowers businesses to make more informed decisions, create more relevant products, and deliver a better customer experience.

• Biometrics and cybersecurity: Fintechs are already using fingerprint scanning and facial recognition for mobile banking and payments, which improve security and simplify the user experience. In cybersecurity, fintech companies are developing new ways to protect sensitive data and stay one step ahead of cybercriminals.

How fintech is changing the financial industry

Fintech is making the financial industry more inclusive and efficient while expanding the array of services available to customers. Here’s what this transformation looks like:

• Expanding access: Fintech is breaking down the traditional barriers to financial services. Financial services are now accessible to anyone with an internet connection and don’t require users to visit a physical bank. This shift is particularly important for people in remote or underserved regions.

• Transforming user experience: Fintech innovations have overhauled the customer journey in finance. Processes that took days, such as applying for a mortgage and opening a new bank account, can now take minutes on a smartphone or computer through an intuitive interface.

• Reducing costs: By using technologies such as AI and cloud computing, fintech companies operate with lower overheads. They can pass on these lower costs to customers through lower fees for transactions, maintenance, and other financial services.

• Introducing new products: Fintech is constantly inventing new products and services to meet customer needs, from real-time cross-border payments to investment platforms that cater to niche markets.

• Improving security: As more financial operations become digital, fintech companies are creating cutting-edge security measures. From biometrics for user authentication to blockchain technology for securing transaction records, fintech is setting new standards for financial security.

• Promoting financial literacy: Fintech empowers users to take control of their financial health. Through intuitive budgeting tools, automated savings programmes, and detailed financial analytics, these platforms encourage better financial behaviour and promote a deeper understanding of personal finance.

• Facilitating industry integration: Fintech has facilitated a closer integration of financial services with other sectors such as retail, healthcare, and property. This convergence enables smoother transactions and more personalised service delivery.

How fintech is shifting customer behaviour

Fintech innovations have encouraged a shift towards more autonomous, informed, and real-time customer interactions with money. Here’s how these changes are taking shape:

• Financial engagement: Fintech makes financial management more interactive and engaging with user-friendly apps and platforms. People are more likely to check their financial status, track spending, and make informed decisions on the go. This creates a more active relationship with personal finances and encourages users to take charge of their financial future.

• Digital-first banking: Fintech apps offer convenience and speed that physical banks can’t match, and this appeals to a growing demographic of people who are moving away from traditional banking methods towards digital-first solutions. This changes where we bank and how banks are thinking about customer service and product offerings.

• Instant transactions: Services such as Venmo and a variety of mobile banking apps have normalised instant financial transactions. This has set new expectations for speed and ease, transforming how customers view payments and making them less likely to use cheques and cash.

• Customised financial products: Fintech has led to more personalised financial products and services that are more relevant and effective for individual users. Customers can now receive recommendations for financial products that match their spending habits, investment preferences, and personal goals.

• Financial literacy: Fintech is improving financial literacy with products that provide insight into spending patterns and financial health. Customers are becoming more knowledgeable and proactive about managing their finances, which can lead to better financial decisions and more responsible credit and investment practices.

• Sustainable and ethical finance: Fintech is aligning more with customer values such as sustainability and ethical investing. This trend is reshaping investment patterns and encouraging financial institutions to reconsider their own practices and product lines.

• Security expectations: Fintech firms are designing new ways to protect customer data and transactions. This focus on security has boosted customer trust and set higher standards across the financial industry.

Regulation in fintech

Regulation in fintech is evolving as lawmakers and regulatory bodies continue to adapt to the industry’s swift changes. Fintech companies must be agile, compliant, and proactive in engaging with regulatory processes and developments. Companies in this space must balance the speed of innovation with the checks and balances presented by regulators, and regulators must be flexible enough to accommodate new business models without compromising customer safety and market integrity.

Here’s how regulation is shaping fintech:

• Global and local compliance: Fintech companies must adhere to the regulations for every jurisdiction in which they operate. Often, this means they navigate multiple sets of consumer and data protection laws and AML requirements.

• Data protection and privacy: Data protection and privacy are at the forefront of regulatory concerns for fintech. Regulations such as the General Data Protection Regulation (GDPR) in the EU and the California Consumer Privacy Act (CCPA) set strict guidelines on how data must be handled.

• AML and Know Your Customer (KYC): Fintech companies must implement strong AML and KYC procedures to prevent financial crimes. These regulations ensure that fintechs verify customer identities and monitor transactions for suspicious activity.

• Payment services directives: In regions such as the EU, directives such as the revised Payment Services Directive (PSD2) regulate payment services and payment service providers. These directives work to increase competition and participation in the payments industry while improving security in online and mobile payments.

• Regulatory sandboxes: Some regulatory bodies have established “sandboxes”, where fintech startups can test their new products in a controlled environment without immediately incurring all the normal regulatory consequences. This allows regulators to understand and shape the evolving financial technologies without stifling innovation.

• Consumer protection laws: Fintech companies are subject to consumer protection laws that ensure fair treatment, transparency, and the right to privacy. These laws protect customers from fraud, unfair practices, and other potential harms.

• Capital and liquidity requirements: Some fintech firms might be subject to capital and liquidity requirements, similar to traditional banks. These regulations ensure that fintech firms can withstand financial stresses and protect their customers’ assets.