Back to Basics: What is FinTech?
Definition, Characteristics, Benefits.
This article is for beginners – read this blog article to find out what FinTech is.
What is FinTech?
FinTech is a word we somehow recently became familiar with, but due to the lack of standard definition, even the experts have a hard time pinpointing what FinTech entails.
So, what is fintech?
FinTech Etymology and Definition
Simply put, FinTech is an abbreviation of “financial technology.” The term “FinTech” is used to describe the novel, tech-driven trend that emerged in the post-2008 crisis era. The products and services created as a result, along with the companies behind these products and services are called “Fintechs.”
Cambridge Dictionary describes “FinTech” as the abbreviation of financial technology, the business of using technology to offer financial services in new and better ways.
Merriam-Webster describes “FinTech” as the products and companies that employ newly developed digital and online technologies in the banking and financial services industries.
Guided by the dictionary definition, the European Central Bank defines FinTech as the “technology-enabled innovation in financial services.”
All in all, FinTech represents innovation and revolution in financial markets, without any doubt. Triggered by market unrest and technological developments, banking has changed once and for all in the past years. Nevertheless, although most resources narrow FinTech down to its digitalization aspect, FinTech is responsible for more than that. Thanks to the change triggered by the FinTech startups and technology companies, FinTech represents the regulatory, technical, ethical, economic, and philosophical changes in the market as a whole.
FinTech Market Players
The FinTech market includes licensed and well-established financial institutions, as well as FinTech startups or Tech companies that offer direct-to-consumer services or provide an infrastructure of technology.
Banks and licensed financial institutions
Payment service providers (PISPs, AISPs, and e-money providers)
FinTech startups (B2B or B2C)
Tech and BigTech companies
Regardless of the companies offering them, the services and products categorized as “FinTech” create value by either inventing novel tech infrastructures or platforms, adopting users in ways it didn’t exist before. Alternatively, FinTech services address new user segments by lowering the entry barriers or serving the existing user segments using updated business models or value propositions.
What are the benefits of FinTech?
FinTech has different meanings for different generations. The generations born into digital, people below 30, perceive FinTech as the status quo as they haven’t experienced any other way. However, for the people who were not born into digital transformation but had to adjust to it, FinTech represents a revolution. These generations had to conduct their first banking transactions at bank branches, signing batches of terms and conditions. Therefore, for people above 30, FinTech isn’t a minimum standard but rather a peak.
Regardless of how people perceive FinTech, it enriched banking experiences in the following ways:
Convenience: With the shift to web and mobile banking, and instant payment transfers (or the “real time feeling”), we can bank 24/7, regardless of where we are or what time it is. The convenience comes from the lack of dependency on bank locations and branch opening-closing hours.
Product Diversity and Choice: Banking was a serious business conducted by serious people back in the 90s. Now, two developers can come together to create enhanced banking services. Banking is not a monopoly anymore; consumers can select their favorites from many different providers and banks.
Freedom of Choice: In addition to the increased competition in the financial markets, thanks to customer-centric regulations, customers own their data. Banking data can be transferred among providers and can be used to optimize the banking experience.
Reduced Costs: Increased market competition and customer-centric regulations resulted in more budget-friendly and transparent banking processes.
Lowered Entry Barriers: Financial services used to address specific clientele with certain standards. Using the broad reach of technology, FinTech lowered the barriers to financial services, enabling more users to access basic or advanced financial services. This phenomenon is known as “financial inclusion” and can be better observed in developing geographies.
Pain-point Centric: In contrast to the 90s profit-centric banking mentality, banking has taken customer problems (“customer pain points”) at heart, aiming to create services that solve the daily problems of everyday people.
Characteristics of FinTech Startups
FinTech start-ups are active in financial services, taking over or expanding the traditional financial market reach. Since they are involved in regulated, highly competitive markets and disrupt centuries-old traditions, they have to be dynamic, innovative, creative, adaptive, transparent, yet structured and resilient.
Common FinTech Solutions
Most consumers associate FinTech with digital assets and cryptocurrencies; as for Gen Y and Z, the change in banking was gradual and didn’t include the “shock factor,” unlike the Web3 revolution. On the other hand, people above 45+ had to bear a rough ride over the years due to the change from branch banking to wearables and digital assets.
FinTech is much more than Bitcoin, NFTs, or other digital assets. Only the consumers who remember traveling domestically to instruct a rent payment or tuition (as not all towns or cities had bank branches) or rushing to branches before public holidays can emphasize the significance of the banking milestones.
Thanks to the wide range of products and services FinTech startups and digital banks offer nowadays and the various channels, we can bank 24/7 without commuting, approving thick batches of paper, and paying hefty fees.
But what other FinTech solutions exist out there?
FinTech covers a vast market opportunity, including payment products (e-money, remittance products, account services, and multi-banking), banking, deposit and saving products (challenger banks, neobanks), insurance services (InsurTech), money and budget management services, robo-advisors, microlending, P2P lending and crowdfunding, digital assets (cryptocurrencies, NFTs, tokenized assets), alternative investment products (neobrokers, crowd investing platforms, WealthTech providers) and so much more. In addition, there are many other solutions that address the needs of banks and financial service providers. Some ease the regulatory compliance burden. Last but not least, some FinTech service providers act as marketplaces, offering product comparisons or mediating stakeholders.
Regardless, almost all services traditionally under the definition of financial services or are used to improve financial services can be put under the “FinTech” category.
What is FinTech doing to banks?
Although there have been long-lasting discussions about whether FinTech startups or banks will win, we now see that the market has evolved more into a cooperation mentality. Nowadays, banks and FinTechs compete, get inspired by one another, and cooperate to improve the end-user experience. This consolidation, which is also called “coopetition,” eventually consolidated financial services, starting the end of redundant organizations (e.g., slow and banks, “incumbents”) and practices (e.g., bank branches). The banks and financial service providers that are having a hard time adapting to the needs of the market and users are disappearing slowly but steadily. This doesn’t mean that the digital will always win, though. The FinTech startups that weren’t able to back up their value proposition with a resilient business model or overinflated their innovation are also experiencing challenges. In the end, the adaptive, customer-centric, yet resilient organizations will win.
The change in banking impacts the bankers primarily. In the next five years, consumers will experience more bank branch closings. The bankers who cannot repurpose their work and adapt to the tech developments will lose their titles, as banks are on a hiring spree for developers and tech experts. The market will witness more banks becoming tech companies and investing in tech development, which impacts job definitions and titles as we speak. In the short term, we won’t be talking of “bankers” anymore but FinTech and BankTech experts, innovation managers, data scientists, and banking experience managers. Does it sound too funky? Check LinkedIn and see it for yourself!
What’s next?
As proven by the pandemic, FinTech is the new normal in banking. We will see more innovative solutions becoming the standard while the adaptation rates are increasing. Now, developments such as the war and economic downturns show us the need to be independent of institutions and geographies and be able to move our assets and savings with a single finger.
TL; DR..
Since we are often asked what #FinTech is, whether it is all about crypto exchanges or how newcomers can enter the ecosystem, we have created a 20 min podcast for <Fmi.online - Financial markets institute>, together with Ryan Spendelow,
Check it out for a TL; DR audio guide to FinTech and how to navigate a career in the changing financial sector.
🎙️Spotify: https://spoti.fi/3sXjutg
🎙️ Apple: https://apple.co/3ahYKWN
If you need a more in-depth or advanced analysis of FinTech and its impacts on your personal or corporate status quo, give us a shout, and our experts will be happy to help.
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If you need a more in-depth or advanced analysis of FinTech and its impacts on your personal or corporate status quo, give us a shout, and our experts will be happy to help. 〰️
