What is Fintech?
If you’ve ever paid for something with your phone, transferred money using an app or checked your bank statement online, then you’re already part of a multi-billion dollar industry. It’s called fintech, and it’s changing economies around the world. Fintech is short for financial technology.
Banks are one of the engines of the modern economy, but the way they work is under threat tech-payment giants and digital currencies are revolutionising how people use money. And this could have dramatic consequences far beyond banking. It could affect consumer privacy, government, power and the stability of the entire financial system.
The word fintech originally described the backend technologies of traditional banks. The first time most of us heard the word fintech was probably sometime in the last decade, but the first recorded use of it goes back a lot further to 1971. It was originally used to describe the back-end technology used by banks and big financial institutions. Kind of ironic? Seeing as now we use it to talk about their competition, the first fintech company that really went global is a company we all know well, PayPal which was launched in 1998 by Elon Musk. Although it wasn't until quite a bit later the term fintech was used more widely.
Fintech definition and meaning:
Financial technology is the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. It is an emerging industry that uses technology to improve activities in finance.
Well, the term fintech includes a huge range of products, technologies, and business models that are changing the financial services industry. It refers to everything from cashless payments, to crowdfunding platforms, to robo-advisors, to virtual currencies. So every time you donate to someone’s Kickstarter campaign - that’s fintech. Or if you transfer money to someone using Venmo - that’s also fintech. And that’s just the beginning. Worldwide hundreds of companies are trying to disrupt the banking and finance industries by changing the way we pay and borrow money. And investors are buying it.
Global fintech investment was $105 billion in 2020 – the third highest year on record despite a significant drop compared to $165 billion in 2019. Startups focusing on payment and lending technologies received the majority of those funds. It’s not just startups that are getting into fintech. Some of the world’s biggest companies from Apple to Alibaba are going big on it, too. Just think of PayPal, Apple Pay or Alipay.
- Global fintech investment was $105 billion in 2020 – the third highest year on record despite a significant drop compared to $165 billion in 2019.
- While M&A deal value dropped in the first half of 2020 ($10.9 billion), it rebounded to over $50 billion in H2'20, led by the $22 billion acquisition of TD Ameritrade by Charles Schwab and the $7.1 billion acquisition of Credit Karma by Intuit.
- VC investment in fintech globally rose year-over-year – from $40 billion over 2,834 deals to over $42 billion investment across 2,375 deals. Median VC deal sizes grew significantly for all deal stages between 2019 and 2020, including angel and seed ($1.3 million to $1.7 million), Early Stage ($5 million to $5.8 million), and Late Stage ($10.5 million to $15 million).
- Total fintech investment in the Americas was robust with over $79 billion in investment, including $58 billion in H2'20. The US accounted for $76 billion of this total, including $55 billion in H2'20. EMEA saw $14.4 billion in fintech investment in 2020, including a record $9.25 billion in VC funding. Meanwhile, fintech investment in the Asia-Pacific region dropped to the lowest level since 2014: $11.6 billion.
- Corporate-participated venture investment in fintech was incredibly strong in 2020 at $21 billion, with both the Americas ($9.7 billion) and EMEA ($4.8 billion) seeing record annual levels of CVC investment.
- Global investment in cybersecurity quadrupled – from $500 million in 2019 to over $2 billion in 2020.
One reason for all of this investment? Consumers are adopting fintech - fast. China and India are leading the way with more than half of consumers using services like money transfers, financial planning, borrowing and insurance. Financial technology has filled a void for people around the world who don’t have access to traditional banking services. In fact, it’s estimated nearly two billion people worldwide are without bank accounts.
Kenya’s success story with Fintech:
Now, thanks to fintech, all you need is your phone to take out a loan or insurance. Take Kenya, which pioneered a mobile banking system called M-Pesa. Kenyans access their M-Pesa accounts directly on their mobile phones to transfer money, pay bills or take out loans. Today, an estimated 96% of households in Kenya use M-Pesa and one study found it has helped lift roughly 2% of Kenyan households out of extreme poverty.
The rise of fintech has forced traditional lenders, insurers and asset managers to embrace new digital technologies. For example, wealth managers now have to compete with robo-advisors - which are automated financial planning services. Talk about the rise of the robots, right? Thanks to high-tech algorithms, these services are available 24/7 and can be more affordable than traditional asset managers. That helps explain why robo-advisors already have billions of dollars under management.
Fintech isn’t without risks:
Like any growing industry, fintech isn’t without risks. And some regulators have struggled to keep up with the fast pace of innovation. Think of peer-to-peer lending platforms, where individuals borrow and lend without going through a bank. Compared to traditional banks, these services might not be required to set aside as much money in case customers default on their loans. This can be risky for companies and consumers. Data privacy is another major concern. As more financial services go digital, cyber attacks become a bigger risk. The challenges facing financial technology are likely to grow as more and more businesses go digital. But for many of the companies and consumers here - fintech is more than a buzzword. It’s a big business opportunity.
What exactly is a Fintech company?
Fintech firms combine technology (such as artificial intelligence, blockchain, and machine learning) into conventional banking systems to make them safer, quicker, and more economical. Fintech is one of the most rapidly developing digital areas, with businesses pioneering in practically every aspect of finance, from transfers and loans to credit scoring and stock trading.
- Fintech refers to the use of technology into financial services organizations' offerings in order to enhance their usage and delivery to customers.
- It essentially works by unbundling such organizations' offerings and generating new markets for them. Startups in the banking business disrupt incumbents by increasing financial inclusion and leveraging technology to reduce operating costs.
- Fintech financing is increasing, but there are several regulatory issues to contend with.
More on Fintech:
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