Fintech, short for “financial technology,” refers to the use of digital technologies to deliver financial services and solutions. This sector encompasses everything from online banking, mobile payment apps, and peer-to-peer lending platforms to more complex technologies such as blockchain and artificial intelligence (AI). These products and the technologies behind them are changing how we send and receive funds, and how we manage personal and business finances – displacing traditional methods.

In the first half of 2024, global fintech funding in the payments sector alone totalled $21.4 billion, which signals continued investment in the industry. Below, we’ll cover how fintech works, the different types of fintech products and businesses on the market, and open questions about fintech’s future and growing impact.

What’s in this article?

• How fintech works: Key features and functionality
  
• Types of fintech companies
  
• How fintech has changed financial services
  
• Challenges and risks facing fintech
  
• Open questions about fintech’s future
  

How fintech works: Key features and functionality

Here are some common features and services of fintech companies and their products.

• User-centric interfaces: Fintech solutions often prioritise user experience, providing intuitive, mobile-first interfaces that simplify complicated financial transactions and make financial management accessible to a broader audience. These interfaces include personalised dashboards, real-time notifications, and easy navigation.

• Automated services: Many fintech functions use automation. Technologies such as AI and machine learning provide automated financial advice, personalised investment strategies, and automated loan underwriting. These features reduce manual intervention, making processes faster and more cost-effective.

• Security features: Fintech companies typically use advanced security protocols such as biometric authentication, end-to-end encryption, and blockchain technology to ensure the security and integrity of financial transactions and data privacy.

• Real-time processing: Fintech companies use high-speed data processing technologies to offer real-time payments, instant loan approvals, and live financial account updates. This can significantly improve the pace of financial operations.

• Data analytics and big data: Fintechs use their data access to offer personalised products and services by analysing spending habits, investment behaviours, and credit histories. This data-driven approach enables more accurate risk assessments and customised financial advice.

• Application programming interface (API) integration: Many fintech companies, especially in banking infrastructure and payment solutions, provide APIs for integration with other financial systems. This enables the expansion of services and creates a more interconnected financial industry.

• Regulatory compliance: Many fintech companies provide automated features that track and report transactions to comply with global financial regulations.

• Blockchain and smart contracts: Blockchain technology creates transparency and lowers transaction costs, especially in the cryptocurrency and trade finance sectors. Smart contracts automate agreements and transactions that are executed only when set conditions are met, without any intermediary.

• Peer-to-peer (P2P) platforms: In the lending and wealthtech sectors, P2P platforms facilitate direct transactions between individuals without traditional financial intermediaries. This often results in lower rates for borrowers and higher returns for investors.

• Multi-channel support: Fintech companies often support multiple channels (e.g., web, mobile apps, third-party services). This gives users access to financial services anytime and from anywhere, for greater convenience and accessibility.

Types of fintech companies

Here are the main categories into which most fintech businesses and products fall.

• Digital banks and neobanks: These institutions provide online-only financial services without traditional physical branch networks. Digital banks and neobanks typically offer services such as current and savings accounts, loans, and investment products – often with lower fees and a better customer experience due to AI-driven personalisation.

• Payment solutions: This category includes companies facilitating money transfers and payments. They range from mobile payment apps to complex business-to-business (B2B) payment systems. These solutions enable simpler, faster transactions, often with improved tracking and security features.

• Personal finance management (PFM): PFM fintechs provide tools for individuals to manage their personal finances. These tools include budgeting apps, financial tracking, and advisory services. They help users fine-tune their spending, savings, and investments through user-friendly interfaces.

• Insurtech: These technology-driven companies are transforming the insurance industry with simplified claims processing, policy management, and risk assessment. They often use data analytics and machine learning to customise products to individual needs.

• Wealthtech: Wealthtech firms focus on investment and wealth management services. They use technology to offer automated investing advice, portfolio management, and retail investment platforms that expand access to previously restricted asset classes.

• Lending and credit tech: This segment includes platforms with alternative lending options such as P2P lending, microloans, and crowdfunding. These platforms often use new credit scoring models based on nontraditional data points to extend credit to underserved populations.

• RegTech: Regulatory technology companies help businesses comply with regulations more easily and at lower cost. They provide services such as identity verification, compliance checks, risk management, and reporting tools for compliance in the highly regulated financial sector.

• Blockchain and cryptocurrency: Companies in this category use blockchain technology for various applications, including cryptocurrencies, smart contracts, and decentralised finance (DeFi) solutions. Using decentralised systems, they transform aspects of payments, securities, compliance, and other financial functions.

• Trade finance: Fintechs in trade finance focus on improving the process of international trade financing. They provide platforms and tools that help connect buyers and sellers across borders, often with greater transparency and faster transaction times.

• Banking infrastructure and APIs: These companies provide backend solutions that help other financial institutions and fintech startups quickly deploy financial services. They have APIs for various banking functions that enable new entrants to quickly integrate and offer financial services without building systems from scratch.

How fintech has changed financial services

Here’s how fintech has changed the financial services industry in recent years.

• Accessibility and inclusion: Fintech has increased access to financial services by providing them to underserved populations and individuals who have been excluded from traditional banking systems. Fintech has launched digital financial services in more than 98 countries. Mobile banking apps, online lending platforms, and digital payment solutions have empowered people to manage their finances, access credit, and make transactions regardless of their location or socioeconomic status.

• Customer experience: Fintech’s user-friendly interfaces, personalised recommendations, and 24/7 availability mitigate the issues of long queues, extensive paperwork, and limited access to financial information. These features have raised the standard for customer experience in the financial sector.

• Simplified operations: Fintech has automated and simplified financial processes and reduced intermediaries. This has driven down costs for both businesses and customers and resulted in lower fees, higher interest rates for savings accounts, and faster transaction times.

• Customer control: Fintech has promoted a culture of transparency and empowerment that gives customers more control over their financial data and decisions. Open banking initiatives, real-time transaction tracking, and personalised financial insight are just a few examples of how fintech is giving customers control.

• Improvement and disruption: Fintech has sparked a wave of improvements, challenging traditional business models and pushing the boundaries of what’s possible in financial services. From blockchain-powered smart contracts to AI-driven robo-advisors, fintech is frequently creating new opportunities and transforming the industry.

• Collaboration and competition: Fintech has created a dynamic environment where collaboration and competition coexist. Traditional financial institutions are partnering with fintech startups for their agility and technological expertise, while new players are challenging incumbents and driving them to improve and adapt.

Challenges and risks facing fintech

Here are some of the biggest challenges and risks facing fintechs.

• Compliance: The pace of improvement in fintech often outpaces the development of regulatory frameworks. This can create uncertainty and compliance challenges for both startups and established players. Navigating evolving regulations across different jurisdictions can slow growth and improvement.

• Cybersecurity and data privacy: Because fintech companies handle vast amounts of sensitive financial and personal data, they are attractive targets for cyberattacks. Data breaches, identity theft, and fraud pose risks to both individual users and fintech companies’ stability and reputation.

• Financial stability: The interconnected fintech environment and the quick adoption of new technologies and business models raise concerns about potential systemic risks. The failure of a major fintech player or a widespread cyberattack could have cascading effects on the broader financial system, potentially causing instability and economic disruption.

• Customer protection: As fintech products and services become increasingly complicated, there’s a greater risk of customer harm. Customers – particularly those with less financial literacy – need protection against misleading marketing practices, hidden fees, and predatory lending.

• Market concentration: The fintech space is highly competitive, and new entrants are constantly vying for market share. This can raise concerns about market concentration and the potential for dominant players to stifle improvement or engage in anti-competitive practices.

• Operational disruptions: Fintech companies rely heavily on technology, which makes them vulnerable to operational and technological interruptions. System outages, software glitches, and cyberattacks can disrupt services, impact the customer experience, and cause financial losses.

• Flexibility: Fintech startups often struggle with growing operations to manage demand while maintaining service quality and regulatory compliance. Quick expansion can lead to operational inefficiencies and a worse customer experience.

• Intellectual property: In a sector driven by improvement, protecting intellectual property can be a challenge. There is always the risk of infringement, particularly in less regulated markets, and this can stifle innovation and give undue advantage to competitors that exploit loopholes to replicate successful products.

• Financial inclusion: While fintech aims to improve financial inclusion, the swift digitisation of financial services can risk doing the opposite for those without access to technology.

• Ethics and bias: As fintech companies increasingly use AI and machine learning for decision-making processes such as credit scoring and risk assessments, they might risk embedding systemic biases in these algorithms. This can lead to unfair practices and discrimination that inadvertently affect certain groups of people.

Open questions about fintech’s future

Here are some pressing questions to consider about fintech’s future, including how fintech might continue impacting the finance sector.

• Regulation: How will global regulatory bodies evolve while balancing consumer protection with promoting innovation?

• Traditional banks: Will traditional banks survive the digital transformation instigated by fintech? Can traditional banks integrate fintech solutions without losing their customer base to entirely digital alternatives?

• Financial inclusion: Are fintech’s advancements in increasing accessibility sustainable and equitable in the long term? How will fintech companies ensure they don’t exclude underserved communities that lack access to technology?

• AI: What are the future implications of AI’s role in fintech, especially in terms of ethics and bias? As AI continues to automate more financial decisions, how will the industry ensure these technologies are used responsibly?

• Customer privacy: As fintech companies collect and analyse vast amounts of data, how will they balance using this data to improve services with protecting individuals’ privacy?

• Cryptocurrencies: Will cryptocurrencies stabilise enough to become a standard part of everyday financial transactions, or will they remain a niche space?

• Flexibility: As fintech companies expand, can they maintain the same level of efficiency and reliability? Will they be able to handle growing transaction volumes without compromising service quality or security?

• Interoperability: How will different systems and platforms integrate to provide financial services across borders? Will different fintech systems be able to work together on a global scale?

• Economic resilience: Can fintech companies withstand major economic shocks? Will they be able to help mitigate the effects of economic disruptions and provide greater economic stability and resilience?

• Social and ethical norms: Will fintech’s influence on social behaviours and ethical norms grow? How might fintech shape views on money, privacy, and trust in the long term?