What is Fintech? (last updated 2 November 2017)
No doubt you’ve heard about the big buzz in Fintech and want to learn more.
This page is your resource to learning more about Fintech. We’ll keep it up to date for you, so be sure to bookmark it.
The word “fintech” actually made its way into the Oxford dictionary and is defined as
“Computer programs and other technology used to support or enable banking and financial services”
Wikipedia, it defines “Fintech” as
“Financial technology, also known as FinTech, is a line of business based on using software to provide financial services. Fintech companies are generally start-ups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software.”
Investorpedia adds further colour to this question – what is Fintech?
“Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century. Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions. Since the end of the first decade of the 21st century, the term has expanded to include any technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investment and even crypto-currencies like bitcoin.”
How we answer the question “what is Fintech”
We believe that Fintech is best defined by the 3 outcomes it bring:
- Disruption – technology is used to disrupt or transform financial services. new products and business model are created outside traditional financial services. Good examples are Peer to Peer lending, allowing savers to directly lend to borrowers. Blockchain technology promises to bring about widescale disruption.
- Operational Efficiency – technology is used to improve the performance of financial services firms or reduce costs. Regtech (technology used to aid regulatory compliance) is a good example. It promises to reduce compliance costs by up to 50%.
- Better Customer Experience – technology is used to improve how financial services firms serve their customers. Mobile only banking is a good example, or mobile payments.
They comprehensively capture all of the transformation taking place through Fintech. Unless you can think of other outcomes, in which case, get in touch.
Is Fintech confined to the world of start-ups?
A 2014 research report commissioned by UK Trade and Investments, make a distinction between “Traditional and Emergent” Fintech.
The report defined “Traditional Fintech” to include market players that are generally perceived as facilitators, typically larger incumbent technology vendors supporting the financial services sector. Emergent Fintech include disruptors and innovators who disintermediate incumbent financial services firms or provide new technology solutions to service existing needs.
Such a definition leads to a misleading assumption that disruptive Fintech can only come from start-ups. Incumbents can certainly leverage the power of Fintech to enhance operational efficiency and deliver a better customer experience. However, why can’t they disrupt their own markets. A consortium of banks, for example, explored how they could redefine how they trade among themselves using blockchain technology. If successfully implemented, this new technology could eliminate the need for centralised clearing exchanges and allow banks to trade with each other within seconds rather than days, and at a fraction of the cost of traditional trading models.
For further information, read our blog “Fintech Startup is a Misconception”.
Is Alternative Finance the same as Fintech?
This is an often asked question. Firstly, “Alternative Finance” is not defined in the Oxford Dictionary as yet, however it refers to financial products and services provided by non-mainstream players such as banks and insurance companies.
So Peer to Peer lending (P2P), for example, is an alternative finance business. It just so happens that P2P is also a Fintech firm, because an electronic platform is central to their business model, where they arrange loans for borrowers directly from lenders.
But not all alternative finance businesses are Fintech companies. For example, a “challenger bank” provide similar services to what a bank provides, however, instead of disruptive technology, they may pursue a “better customer service” or “cheaper pricing” strategy.
In general though, most alternative finance businesses are being built on the back of technological innovation and therefore, its safe to classify them as Fintech players.
What are the Different Types of Fintech Business Models?
Fintech is a broad category describing an entire market. And it’s quite hard to try and get your head around this rapidly evolving market. But knowing the landscape can have great advantages:
- If you are just starting out, it will give you a good idea of what’s working and what is not, and more importantly, which segment provides the best opportunity for fastest growth;
- If you are already a Fintech pioneer, then knowing the landscape will help you explore market gaps that you can expand into;
- You will have a much better handle on new and emerging competitors threatening your business model; and
- If you are an incumbent player, then knowledge of the landscape will help you identify acquisition or joint venture partnering opportunities.
For your and our benefit, we have started to map out the Fintech landscape. You can access this map by Clicking here. You also get a chance to help us build this map and keep it updated, so don’t forget to leave your comments, observations, or suggested changes to the map.
If you are looking to get started in Fintech, but are not sure which business model to pursue, then sign up for out free course: “Regulated Fintech – How to get Started in the Right Way”. in Part 2 of this three part Free course, we examine the different business models in the the following areas: savings and deposits, capital raising, payments, insurance, and investment management. We also give you practical business ideas with reference to firms that are already playing in each of these areas.
The Fintech Ecosystem
Fintech as an industry, has many parts and players. We attempt to sketch out the landscape below.
Broadly, Fintech is divided into five major areas:
- Fintech players providing financial services;
- Technology supporting transformation in financial services;
- Intermediaries using Fintech to broker financial services;
- Fintech enablers – supporting the growth of this sector and firms within it
Each is explored in more detail below:
Fintech players providing financial services
There are 5 categories of financial services providers
- Savings and lending – these are equivalent to banks that provide loan finance. Challenger banks, P2P lenders, consumer credit lenders, point of sale finance, and balance sheet lenders are good examples.
- Equity raising – such firms companies raise finance. Crowdfunding is the classic example of a disruptive equity raising model.
- Payments – these firms use technology to improve how payments are made between one party and another. Mobile payments, point of sale electronic payments, and innovative foreign exchange firms, are good examples.
- Insurance (Insuretech) – technology is used to enhance how insurance products and services are delivered. For example, internet of things allow insurer to monitor your home and automatically shut off water supply to avoid major damage if a leak occurs. Devices fitted in your car can track your driving patterns to either increase or decrease premiums depending on how you driv.
- Investments (or Wealth) management – technology is used to help consumers invest better. For example, robo advice will automatically invest your money depending on your risk parameters input into a model. Investing is made simpler and cheaper and accessible to more people.
Technology supporting transformation in financial services
There are specific Fintech technologies emerging, including:
- Blockchain – is set to revolutionise finance. Think of it as the internet of the financial services world. Blockchain is a digitised and decentralised public ledger financial services transactions. Its an immutable ledger – which means that once information is on the ledger, it cant be deleted or manipulated. The ledger is also replicated across millions of computers, so destroying one doesn’t have any detrimental impact. This technology was originally used as the backbone accounting method for virtual currency like bitcoin. This technology has widespread application used by disruptors and incumbents.
- Regtech – uses technology such as machine learning, artificial intelligence and big data analytics to help financial services firms analyse data and comply, automatically if possible.
- Robo Advice – algorithm based systems allow for better performing investment management that is cheaper and possibly faster.
- Internet of Things – involve devices placed in homes or other assets that allow insurers to monitor and control risks.
Usually, technology firms invest in research and development to develop technological solutions that they sell to financial services firms.
Intermediaries using Fintech to broker financial services
They allow consumers to get a better deal, using technology to trawl through the internet to find consumers the best financial services product or service at the best price. They also help consumers better manage their money by consolidating their financial services products. For example, using API’s consumers can get access to all their investments and bank account under one roof, allowing them to optimally manage their investments and day to day budget.
Regulator play an important part in the Fintech ecosystem. They bring trust and credibility to licensed firms and reassure investors that their money is safe when dealing with these regulated firms.
Increasingly, regulators are playing an enabling role to drive the growth of Fintech, in the home that they can bring greater depth, redundancy and therefore safety in the financial system by stimulating more competition. Regulators are setting up innovation hubs, advice units and regulatory sandbox to create a supporting environment for entrepreneurs to innovate.
They take on many forms, such as accelerators, incubators, consultants, advisers, investors and the media. All are focused on profiting by helping to develop the Fintech sector and players within it. In full disclosure, we are a Fintech enabler, working to launch grow and evolve Fintech ventures.
How Big is the Fintech Market
According to a recent (2015) Accenture study, global investment in Fintech tripled from $4.05 billion in 2013 to $12.2 billion in 2014, with Europe being the fasted growing region in the world, dominated by the United Kingdom and Ireland.
In H1 of 2017, Fintech sector attracted $6.5bn of venture capital investment across 787 deals globally, according to Innovate Finance. Admittedly a decrease of 45% year-on-year. However, this is after the hype in 2015, when every investor was chasing this sector. The market has stabalised to steady state and investors are looking for quality Fintech firms.
So why is venture capital chasing the Fintech sector so aggressively? That’s because this market is growing faster than any other market in the world. Depending on how you define Fintech, the UK market has grown by around 200% year on year. This is impressive growth.
If this the next gold rush?
What’s Driving the Growth in Fintech?
The three primary drivers of Fintech are:
- Technological innovation;
- A more internet savvy consumer who trusts technology companies more than their banks (such as the Millennials); and
- Believe it or not, regulation and Government support.
We cover these topics in great detail in Part 1 of our free course “Regulated Fintech: How to get Started in the Right Way”. Access this course and a host of other educational content by clicking here now.
Are all Types of Fintech Companies Regulated?
Now a Fintech business is a financial services business. We all know that financial services is a highly regulated market. So why should Fintech be any different.
Remember, the firms are regulated through the activities they carry out. So if the Fintech firm provide what the regulator defines as “regulated activities”, then they will be regulated. Being regulated means that he firm has to get a “license” (or become authorised) before they start trading and once authorised, there is an on-going need to ensure they comply with the applicable regulations.
The UK was a pioneer in bringing about regulatory certainty on Fintech. In 2013, the Financial Conduct Authority (FCA) introduced distinct regulation for crowdfunding and peer to peer lending. In 2014, they introduced an Innovation Hub, aiming to help innovative financial services firms navigate through the complex regulatory maze.
In the UK, donation and rewards based crowdfunding, as well as a properly constructed invoice financing business is not regulated (as at July 2015). This may change in the future.
For firms that want to enter this market but don’t want to be regulated, there are regulatory exemptions that they can take advantage of. But be cautious as you will need to meet stringent conditions and ensure that your business processes are structured in a way that keeps you out of the regulatory net. Remember though that FCA can also regulated such exempted businesses in the future and maybe also make the regulation apply retrospectively.
Want to get started in Fintech?
Love the developments in Fintech? Do you want to be a part of this exciting market, but you don’t know how to get started? Worried that you won’t be able to deal with the complex regulation or regulation will delay your launch significantly?
Help is at hand. We have put together a comprehensive and FREE three part course: “Regulated Fintech: How to get Started in the Right way”. By signing up for his course, you will also have instant access to a library of invaluable educational content that will help you get started and grow your regulated Fintech business, regardless of whether you are a start-up or a multinational incumbent financial services player looking to get involved in Fintech.