What is Fintech?

Fintech is any type of technology which is used to support or enable financial services, including banking. Short for financial technology, what is categorised as such has changed significantly in recent years, as more technological innovations have become available. The sector is very broad, meaning understanding it and its market implications can be quite difficult. So, to help you form an idea of what it is and how it works, we’ve created this post.

Size of the sector

Fintech is one of the fastest growing sectors in the world. In the UK alone, it adds more than £6.6 billion into the economy. Much of this increasing growth can be attributed to the increasing availability of smartphones and the internet; many fintech technologies are utilised entirely through these avenues (Monzo, a digital banking service, is operated solely through a smartphone or tablet application).

Types of fintech

There are a number of broad categories that are defined as fintech, several of which are listed below:

• Cryptocurrencies, such as bitcoin
• Alternative finance, such as Iwoca, an online platform that provides loans to small businesses
• Digital banks, such as Monzo and Tide
• Robo-advisors & Personal Finance, including companies like Motif and Vanguard
• Insurance technologies, like Clover and WeSavvy
• Payments & remittances – PayPal and BitPesa are two examples that fall under this category.

Bear in mind that, as the market is so heavily saturated and broad, not all of the different types have been listed here.

The different companies that utilise it

The pwc categorises fintech companies into four distinctive categories:

• Large, well-established financial institutions, such as HSBC and other large banks. These can also be called incumbents.
• Big tech companies that are active in financial services but not exclusively, such as Apple, Twitter & Google.
• Companies that provide infrastructure or technology that facilitates financial services transactions, such as MasterCard.
• Fast-moving companies, often startups, which offer a particular innovative technology or process. Examples that fall under this category include companies like M-Pesa, TransferWise and Iwoca.

It’s been around longer than you might think

Because of fintech’s rise to prominence in the last decade or so, it’s easy to think that it’s a recent development. However, this is not the case; technology has always played an important role in the financial sector, contributing to a number of key developments down the years. To name a couple, the 1950s saw the rise of credit cards, whereas the first ATM was unveiled by Barclays in 1967. Numerous other developments took place in subsequent decades, with many of them being internal developments in banks, so consumers were unlikely to be aware of them.

The role of start-ups

The total capital invested in Fintech startups rose from $1.8bn in 2010 to $22.3bn in 2015, indicating the large and very quick development of this area of the market. Startups generally use new technologies in innovative ways to offer already existing financial services. Many of these services having previously been available solely through traditional financial institutions. However, they tend to do so in a more customer-friendly way. This has led to many coming into direct competition with traditional incumbents. For instance, digital banks, such as Tide, are in direct competition with high street banks for customers. It has also affected the way in which many traditional institutions conduct their business. Continuous improvements to areas like mobile banking are now increasingly important, as startups regularly offer the user an enhanced experience over incumbents.

Collaboration and the example of TransferWise

Not all startups are in direct competition with traditional institutions. Collaborations amongst a range of Fintech companies have become increasingly popular in recent times, with some feeling that it’s the key to the future success of the sector. And, looking at the example of TransferWise, this argument doesn’t seem particularly farfetched.

TransferWise is a money transfer service that allows users to transfer money across borders and currencies significantly cheaper than traditional banking services. After launching in 2011, the company was valued at $1 billion in 2015. The success of the company has continued since; in June 2018 it entered into a partnership with digital bank Monzo, integrating their API to help customers send money in 16 currencies straight from the Monzo app. This is also significant as it’s an example of two startups combining their services to offer an improved experience for the user. However, collaboration is not just limited between startups; at the start of the month, TransferWise confirmed that it was now working with Banques Populaires’ and Caisses d’Espargne (BPCE), France’s second largest bank.

Unsurprisingly, it was originally believed that traditional institutions felt threatened by start-ups, although examples like this one demonstrate that even some of the well-established financial institutions are taking on a far more collaborative approach. HSBC partnering with Tradeshift is another example of this and, perhaps, suggests the future precedent for many of the companies operating within the fintech sector.

Fintech and the developing world

In developing countries where banking penetration is far smaller, fintech technologies are having a massive impact on the way inhabitants use their money. For example, M-Pesa, a phone-based money transfer service, is enjoying considerable popularity in developing countries, such as Kenya and Tanzania. Traditionally, the life savings of those living in developing countries are kept in cash and not in a bank account. However, the invention of such an app, which allows them to make purchases, transfers, deposits and withdrawals means users of the app no longer need to carry around large sums of money on them. And as a result, they’re less likely to become victims of robbery.

Possible implications for the future

Thanks to payment technologies, such as Apple Pay and Contactless, the way in which consumers purchase goods has changed. This year debit cards are set to overtake cash as the most frequently used payment method in the UK, whilst it is predicted that by 2026 only 21% of all payments made in the UK will be made using cash. Could this mean for a cashless society in the not so distant future?

And what about ATMs? According to Accenture’s leading director, they are changing to meet customer’s needs; services like donating to charity, buying stamps and applying for a credit card may soon be available through them. With many fintech technologies being utilised via a smartphone, the convenience aspect appears seemingly important. Applying for loans, transferring money abroad and an endless number of other financial services are now available at your fingertips. Perhaps then, it is felt that ATMs have to do something similar, in order to compete.

The fintech market is continually growing, with a wide range of existing services being offered in a number of inventive new ways, and new emerging technologies which offer an entirely new service altogether. Whilst predicting exactly what the future holds for the industry is impossible, if technology continues to develop as quickly as it has the past decade, some of the innovations are sure to be quite remarkable.