Understanding How Fintech Works

Fintech has become one of the most used words in the startup ecosystem today, yet few fully understand how it’s grown or can define its scope.

An abbreviation for Financial Technology, fintech refers to new technologies that seek to improve and automate the use and delivery of financial services. This category of startups includes anything from mobile payment apps, to roboadvisors, to cryptocurrency.

When the term ‘fintech’ first surfaced, it referred to the back-end technology systems of financial institutions like banks, including activities such as international money transfers and depositing cheques using smartphones. With time, the scope of the term broadened to include sectors like financial education, retail banking, fundraising and non-profit, and investment management.

China, closely followed by India, is leading the way in the fintech market, with more than half of consumers using services like money transfer, financial planning, borrowing, and insurance. These markets have also proved to be excellent for opportunistic and savvy companies looking to access the vast unbanked and underbanked populations of Asia. Through fintech, users who do not have access to traditional banking and financial services can make online transactions and gain access to insurance or credit.

The launch of peer-to-peer lending platform Venmo, owned by PayPal Holdings, disrupted the bank-dependent system of lending and borrowing between peers by almost eliminating the need for banks. To combat the rise of apps like this, traditional banks are heavily investing in fintech. For example, Goldman Sachs Group Inc launched a mobile-banking app called Marcus which provides commission-free saving accounts.

There are about 26 fintech unicorns (startups with a valuation of US$1 billion or more), globally. The fintech market worldwide was valued at US$127.66 billion in 2018, and is predicted to grow to US$309.98 billion in 2022.

According to the PwC Global FinTech Report 2016, 77% of financial institutions aim to incorporate blockchain into their operations, and 90% of payment companies plan to use blockchain in 2020. It is estimated that cumulative investment in fintech will exceed US$150 billion within 3 to 5 years. This prediction, however, could be affected by the global Coronavirus outbreak.

Applications of Fintech

Crowdfunding:

As seen in companies like Kickstarter, fintech allows Internet and app users to send or receive money from others on the platform. It also allows specific individuals or businesses to pool funds from a variety of sources on a single platform.

Cryptocurrency:

Crypto exchanges like Coinbase match buyers with sellers of Bitcoin and Altcoins. Blockchain and cryptocurrencies are some examples of fintech outside traditional banking, and are still mistrusted by many financial institutions and even organizations outside of the financial sector.

Mobile Payments:

In the last few years, use of mobile payment apps like Apple Pay, Alipay, and Paytm has increased exponentially. All these apps use sophisticated financial technology, and in some cases their adoption was accelerated by external circumstances. For example, India-based Paytm and other cashless payment operators achieved phenomenal growth after the government invalidated over 80% of the cash in circulation in a move known as ‘demonetization.’

Insurance:

Insurtech includes everything from car insurance, to home insurance, to data protection. The insurtech sector in India received investments worth $183 million in 2019, up from $89.2 million in 2018.

Robo-Advising and Stock-Trading Apps:

Robo-advising provides algorithm-based asset management recommendations and portfolio management at a lower cost than an individual would face as compared to working with a traditional wealth manager. While some investors may still prefer the face-to-face experience when it comes to managing their wealth, many people–particularly younger people investing smaller amounts–are willing to experiment with robo-advisory.

Typical Fintech Users

Business-to-Business (B2B)

Fintech is used by businesses to obtain loans, financing and other financial services through smartphones. Additionally, cloud-based platforms and customer relationship management services like Salesforce provide enterprise-oriented services that allow companies to access and manage financial data, with B2B-focused cross-border payments startups like Airwallex catering to businesses’ international transfer needs.

Business-to-Consumer (B2C)

Fintech is used in several B2C applications like PayPal, Venmo, and Apple Pay, which allow users to transfer money through the Internet. Budgeting apps like Mint allow users to track their finances. In a third category, companies like ZhongAn Insurance and Lufax provide services like insurance and credit digitally.

Key Players

Ant Financial Services Group, formerly Alipay, is an affiliate of Alibaba Group and is the highest valued fintech company in the world with a valuation of US$150 billion. Other prominent Asian fintech companies include digital lender Qudian, digital insurance provider ZhongAn, Internet-based lending platform Lufax, and JD Digits (formerly JD Finance), which provides financial advisory and loans.

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