Think back, for a moment, to your pre-COVID-19 life. In those less socially distanced days, fintech was the unsung hero of your Friday night.
You deposited your paycheck by snapping a photo on your smartphone and uploading it to your bank’s mobile app. You checked Mint to gauge your monthly entertainment budget. At dinner, you and your buddy split the tab using Venmo. Later, you tapped your phone at the bar to pay for a drink with Apple Pay. When it was time to head home, you hopped in an Uber, where you paid for the ride with a stored credit card—or even in Bitcoin.
Even if you don’t realize it, fintech is likely a big part of your personal and professional day-to-day. Ernst and Young’s 2019 Global FinTech Adoption Index cites the adoption rate of fintech as more than two-thirds (64%) globally, up from 16% in 2015. According to the report, three out of four consumers used money transfer and payment solutions last year.
As with many emerging technology sectors, fintech can be an ambiguous concept due to the sheer breadth of tools, platforms and services that fall under its yawning umbrella. If you’re still asking yourself what exactly fintech is, here’s a breakdown.
Fintech is a portmanteau for “financial technology.” It’s a catch-all term for any technology that’s used to augment, streamline, digitize or disrupt traditional financial services.
Fintech refers to software, algorithms and applications for both computer- and mobile-based tools. In some cases, it includes hardware, too—like smart, connected piggy banks or virtual reality (VR) trading platforms. Fintech platforms enable run-of-the-mill tasks like depositing checks, moving money among accounts, paying bills or applying for financial aid. They also encompass technically intricate concepts like peer-to-peer lending or crypto exchanges.
The annual Forbes Fintech 50 compiles some of the hottest platforms on the market worth noting. The 2020 list included companies like Chime, a digital-only bank, and Affirm, a resource for instant, fixed-rate, point-of-sale loans. Stripe also emerged as an investor darling this year, with a $1 billion vote of confidence in the form of funding from Sequoia Capital, General Catalyst and Visa, among others.
Fintech branches off into a number of more granular industries: wealthtech (apps like Wealthsimple, an online investment management service), investtech (like Acorns, which lets users round purchases up to the nearest dollar, investing the change in a diversified portfolio) and insurtech (such as Next Insurance, a mobile-first carrier). It has use cases across nearly every industry, geographical market and business model.
Banks use fintech for both back-end processes—behind-the-scenes monitoring of account activity, for instance—and consumer-facing solutions, like the app you use for checking your balance. Individuals use fintech for everything from tax calculations to dabbling in the markets, with no prior investing experience necessary.
Businesses rely upon fintech for payments processing, e-commerce transactions, accounting and, more recently, seeking assistance with government assistance programs like the Payroll Protection Program (PPP). In the wake of the COVID-19 pandemic, more and more businesses are turning to fintech to enable features like contactless payments or other tech-fueled transactions.
Just because fintech is buzzy doesn’t mean it’s brand new. Although the phrase was only added to the Merriam-Webster dictionary in 2018, the concept dates back decades. ATMs, for example, were at one time on the very cutting edge of fintech innovation, as were signature-verifying technologies first used by banks in the 1860s.
In recent years, fintech has morphed from being associated with scrappy startups to becoming a major facet of established and legacy financial institutions. Whereas the term once largely implied Silicon Valley-based disruptors shaking up the big banks, today, many companies have teamed up with the incumbents they purportedly sought to usurp.
As a result, some of the world’s most widely recognized institutions now have their own fintech nest egg under their wing. JP Morgan invested $25 million in fintech startups in 2019. Capital One has created fintech-infused “banking cafés” to usher young, digitally savvy customers in the door. And, in 2016, Citi launched the Citi Developer Hub to invite third-party programmers to test and share feedback on application programming interfaces (APIs).
Fintech has been proving its value in the face of the coronavirus pandemic, even as some of its iterations suffer. For instance, even though the Capital One cafés are closed temporarily, banks and credit unions across the U.S. have been able to transact—and offer COVID-19 support and services—digitally. Longer-than-usual wait times for telephone service also can be avoided by going online or accessing a bank or credit union’s mobile app.
The financial services sector isn’t typically synonymous with nimbleness. But today, adaptability and quick iteration (not to mention, instant gratification) is precisely what consumers and business owners expect—and, increasingly, need.
Fintech helps expedite processes that once took days, weeks or even months, like requesting a credit score report or sending an international money transfer. Platforms like Upstart and TransferWise accomplish these tasks in a fraction of the time as was the norm even five years ago. There’s been speculation about how fintech might help expedite traditionally red-tape-bound processes like distributing economic stimulus funds.
Fintech also holds the potential to improve financial inclusion: In some parts of the world, fintech fills needs for the unbanked, where governmental or institutional support is lacking.
Part of the reason fintech has the ability to streamline traditionally clunky processes is because it’s based in ones and zeros versus human skills and opinions. While many fintech platforms include elements of both traditional brokers/advisors and algorithms, others help users navigate financially complex tasks without interacting with a real, live human at all.
For instance, today’s consumers can bypass traditional bank branches for things like applying for a loan (Lending Club) or even a mortgage (Better.com). Casual investors no longer need to meet face-to-face with financial experts to painstakingly go over the ins and outs of their portfolios—they can peruse their options online, or even enlist the help of chatbots to make decisions.
To illustrate just how far fintech has brought the financial services world into a Jetsons-style reality, look no further than robo-advisors—digital platforms that provide automated, algorithm-informed investment suggestions and financial planning advice, with little to no human oversight. One such platform in this arena that made the 2020 Forbes Fintech 50 is Betterment, an advisory firm that touts itself as “the smart money manager.”
There also are plenty of fintechs mobilizing to help customers stay afloat amid the financial turmoil caused by the pandemic. Some, like Lending Club, are actively providing financial relief and establishing aid programs to assist those most affected. Others are focusing efforts on assisting the front line. Stripe, for example, is fast-tracking support for telemedicine platforms.
Ultimately, the answer to the question of how fintech affects your life is a case-by-case matter. Outside of tasks that have become ingrained into day-to-day banking like online account monitoring, the impact of fintech upon your life is a personal decision, dictated how many services you choose to interact with. You can go as deep as you want, or simply stay surface-level.
One interesting way in which fintechs have altered the financial services industry pertains to consumer trust. The EY report illuminates a striking trend: Fully 68% of respondents cited willingness to use financial tools developed by nontraditional (that is, nonfinancial) institutions. And 89% of SME adopters reported being willing to share data with fintech companies.
Essentially, platforms no longer need to hold Wall Street cachet for consumers and businesses to hand over financial data, or even their hand-earned cash.
But it remains to be seen if this trust is well-founded, or if the benefits outweigh the potential risks. Engaging with fintechs—many of which remain largely unregulated, particularly in the Wild West realm of cryptocurrencies and blockchain—can lead to unwanted or unexpected threat exposure.
The idea that fintechs adhere to some kind of higher moral standard than the big banks is also proving largely illusory. As fintech expert Ron Shevlin points out, banks and customers engaging in “fintech fetishism”—an excessive optimism associated with its early iterations—are now facing a harsh reality check as many promising startups face obstacles both due to and independent of the coronavirus pandemic.
It’s prudent to approach flashy, yet unproven, fintechs and their lofty promises with a healthy dose of skepticism. As digital data becomes orders of magnitude more extensive and integral to day-to-day life, so, too, do large-scale security snafus. Recent hacks including high-profile Bitcoin heists have brought these risks to public consciousness.
To date, there’s no consensus on exactly how safe fintech solutions are across the board. Such assurances will likely be difficult to come by, given the scope and scale of fintech proliferation. But consumers are smart to be wary: 71% of fintech adopters checked the affirmative for the EY survey question, “I worry about the security of my personal data when dealing with companies online.”
Nobody knows for sure what fintech innovations are on the horizon, and this uncertainty is exacerbated by the chaos caused by the pandemic. Early 2020 projections that the maturing sector will continue to see expansion in 2020 have proven only partially accurate. Deloitte notes that interest rate cuts and the coronavirus-induced economic roller coaster have upended industry assumptions about the immediate future of fintech.
Fintechs, like their customers, have suffered financial setbacks—some have had to downsize or furlough staff, and others are struggling to secure investor funding amid hasty transitions to virtual meetings with VCs. But at the same time, demand for fintech has perhaps never been higher: Businesses and banking customers are increasingly relying on technology to help them navigate their financial livelihoods.
Deloitte predicts that an economic recovery will go hand in hand with new opportunities for fintechs. This may be particularly true in a business environment that’s become instantly more amenable to digital financial services and e-commerce out of sheer necessity.
Larger and long-term trends for the future of fintech remain relatively intact. Consolidation, partnerships and continued collaborations between legacy banks and fintechs seem imminent. And consumers can probably expect to see continued emergence of companies touting shiny, headline-worthy services, including the likes of blockchain, cryptocurrency, artificial intelligence and peer-to-peer transactions.
The bottom line? Fintech is officially a major player in the global economy, business landscape and fabric of modern society at large. The field is widespread, rapidly growing and, it appears, here to stay.