What is a Fintech?
The word fintech comes from the combination of two words:
- Finance
- Technology
The FSB defines fintech as “technological innovation in financial services that could lead to new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services”. In other words, we could say that fintechs are innovative organisations that offer financial solutions through the use of technology.
Why did fintechs appear?
The beginning of fintech originated after the financial crisis of 2008. Since that crisis, different startups started to appear all over the world as an alternative to traditional banking. But ….. How were small companies able to compete with traditional banking giants?
First of all, the banking sector is considered to be the main responsible for the financial crisis of 2008, generating a bad reputation of the banking system and the main organisations that make it up. The banks’ policies were characterised by a lack of transparency in terms of prices and commissions, and due to the lack of liquidity in the banking sector, credit was closed to many companies and individuals, generating a need to look for alternative sources of financing.
Added to this, the great advance in technology made it much cheaper to develop fully digital products, and people began to perceive it as “old” or “a waste of time” to resolve their financial matters in physical offices. This is where the so-called “Platforms” appear, unique in their network effects. The recent digital fever accentuated by the COVID-19 pandemic is pushing many business actors to become platforms.
Last but not least, millennials, who are already part of the financial ecosystem, tend to move away from traditional banking models, are digital natives, grew up in the internet era, use mobile phones for practically everything, do not understand elements of their work, leisure or relationship life that are not channelled through this channel, value sharing more than owning, and trust new collaborative economy companies such as Uber and Airbnb, among others, more than traditional companies.
Characteristics of fintechs
The main characteristic of a fintech is disruptive innovation, a concept developed by Clayton Christensen, an academic and business consultant. This type of innovation is one that disrupts or redefines the trajectory of how a product or service works. According to his theory, dominant companies have difficulty in adopting this type of innovation because they focus on improving the product or service that has always provided them with results and stability, an approach that today can be their own destruction. Young start-ups, with their disruptive proposals, are capable of creating new markets.
Another characteristic is that fintech companies focus on the “customer experience” as the key to success; it is not enough with digital transformation and the adoption of new technologies, but success depends on the ability of companies to build a service to the full satisfaction of their users. Traditional banks have another type of culture, whereas fintechs, as they are created from scratch, are born with a culture of customer centricity, simplicity and above all transparency. This is where concepts such as UX design (user experience) appear, which in simple words focuses on designing the website or application in a user-friendly way (comfortable, easy to use, secure, user-friendly, among others).
Some Fintech according to their activity
- Budgeting applications: allow users to view all their accounts, movements, expenses, visualising trends and thus facilitating the management of their finances through their mobile phones.
- Digital banks: banks without physical offices, completely digital.
Crowdfunding: This is the so-called collaborative economy. - Robo-Advisors: these are fintechs that, through intelligent algorithms, offer intuitive recommendations of financial assets to users.
- Blockchain and cryptocurrencies: digital currencies, i.e. they cannot be physically touched or held, they are decentralised and all transactions are stored in a “ledger”. These currencies are exchanged between parties electronically without the need for an intermediary. The technology behind cryptocurrencies is called “blockchain”. Basically, the blockchain is an online record of transactions, which can involve money, the movement of goods and the exchange of information.
- Insurance: New insurance companies use algorithms to calculate risk and generate a list of potential customers.
A bit of numbers
The total value of investments in fintech organisations increased sharply between 2010 and 2019, when it reached $168 billion. In 2020, fintechs saw their investments fall by more than a third, reaching a value of $105.3bn across 2861 companies. This decrease was mainly due to the lack of the mega mergers and acquisitions seen in 2019.
Conclusions
Fintechs improve access to information by opening up opportunities for new types of projects and attracting new categories of investors. Traditional banks, while running behind many fintech companies, are becoming important players within the fintech ecosystem, many of them injecting funds into technology and others buying fintech startups. Financial technology is likely to continue to evolve, with new innovations replacing or refining existing technologies.
