Tech is changing the way the world works, including the financial world. In recent years, how people and businesses manage and receive money has changed considerably. Fintech, or financial technology, is in large part behind the massive shift in the industry. Apps, websites, and even new forms of currency have all disrupted the financial field.
Fintech promises to solve several of the problems that banks and financial institutions faced in the past. If your financial institution is looking for ways to make the most of fintech, it helps to understand what it is, what it aims to do, and the challenges and opportunities it might present.
What Is Fintech?
Financial technology or fintech usually refers to a type of software or program that provides financial services to individuals or businesses. So far, fintech has touched all corners of the financial industry, from banking and insurance to investing and lending.
Although most people think of business to business (B2B) or business to consumer (B2C) apps when they think of fintech, one of its initial uses was in the back-end of financial institutions. In its earliest days, fintech wasn’t meant to be seen or used by the average person. That has changed considerably as more fintech programs were developed to meet the needs of consumers or businesses — needs they might not have realized they had.
A fintech program is any program that uses an internet connection, the cloud or mobile device to provide a financial service. A few common examples of fintech include:
- Peer-to-peer payment apps: Such as Venmo, PayPal, and Zelle.
- Mobile payment apps: Mobile wallets make it easy for people to make payments without carrying around cash or a credit card.
- Robo-advising websites and apps: Investing programs that automatically adjust an individual’s portfolio based on their risk tolerance and changes in the market.
- Blockchain and cryptocurrency: Such as alternative currencies like Bitcoin as well as security uses for blockchain technology.
- Mobile or online banking: Online-only or mobile banks such as Ally or Marcus.
- Crowdfunding programs: Websites or apps that allow individuals or businesses to raise money from regular people, rather than venture capitalists or other traditional investors.
- Peer-to-peer lending programs: Websites or apps that let people get loans from other individuals, rather than from banks and traditional lenders.
- Payment processing programs: Software programs that help smaller businesses collect credit card and other payment methods, usually with fees that are much lower than those charged by traditional payment processors.
- Insurance programs: Fintech makes it easier for people to shop for insurance products, as apps can deliver several quotes to them all at once.
- Budgeting programs: Budgeting apps that connect to people’s bank accounts and credit cards streamline the process of keeping track of income and spending.
Problems Fintech Can Solve
There are many pros of fintech, as the use of technology has helped to solve numerous problems that both businesses and consumers face. Some of fintech’s capabilities and the issues it has worked to address include:
1. Access to Payment Options
Today’s consumers have more payment options than ever before, from using a credit card to writing a check, and from using the currency of their home country to paying in a foreign currency. In the past, companies that wanted to accept multiple forms of payment had to assume some level of risk, rely on a variety of payment processors and pay high fees.
Fintech is helping to broaden the payment options available to individuals and expand the payment methods businesses can accept. Some fintech payment processing apps charge a flat rate for all credit card transactions, for example. Others will let people pay in a foreign currency and charge an exchange rate that is better than the rate offered by traditional banks.
2. Security Concerns
Now more than ever, people are concerned about the security of their financial information. The security measures often used to protect people’s data, such as PINs, might not be as secure as you would expect. It is relatively easy to guess a four or six-digit number. Fintech is helping to solve security concerns by integrating biometric security measurements into certain programs. ATMs can scan a person’s fingerprint rather than asking them for a PIN. Other forms of biometric authentication include voice recognition and iris scanning.
3. Limited Access to Financing
One of the great catch-22s of obtaining financing is that, to get a loan, most people need to have a loan or credit history already. Businesses that are just starting can find it particularly challenging to get the loan financing they need. Fintech programs that remove many of the traditional barriers to obtaining funding can help smaller companies or specific individuals get the money they need to get started, expand or achieve personal goals. In the U.S., 3.2 million borrowers took out peer-to-peer loans totaling more than $48 billion between 2006 and 2018.
Along with providing an alternative route to financing to businesses or individuals who might be turned down by a traditional bank or lender, fintech-enabled, peer-to-peer lending platforms also aim to make loans more affordable or to help people pay off their debts. Some individuals use peer-to-peer lending apps or websites to consolidate credit card loans or private student loans. Although the interest rates vary widely based on a person’s credit history or the specifics of the lending site, many find that they receive a lower interest rate when they work with a peer-to-peer lending app.
4. Reaching the Unbanked
As of 2017, around 1.7 billion people around the world did not have a bank account. Although the number of “unbanked” people has fallen in recent years — in 2014, around 2 billion people did not have a bank account — more than one-quarter of the global population still falls into the “unbanked” category. There are many reasons why people do not open a bank account, but the primary one is that they do not have enough money to do so.
Fintech can help to make the financial industry more inclusive by expanding the range of financial services available and by broadening access to financial services. For example, instead of requiring a minimum account balance that might be out of reach for someone on a low income, a fintech app can help a person establish a savings account and save whatever they can afford, such as $5 per month. Since the app is mobile-based, a person will not need to travel a long distance to open an account in person, removing another common barrier to opening a bank account.
Providing individuals who are not traditional bank customers with options for saving benefits those individuals and demonstrates one of the advantages of fintech for financial institutions. Expanding access enlarges a bank’s or financial institution’s customer base.
5. Limited Access to Investing
Fintech has helped to expand access to investing to people who traditionally were reluctant to invest or communities that traditionally focused on using and saving cash. Historically, investment firms targeted male customers, ignoring women who might have been interested in investing. Certain apps have focused on opening investment accounts and developing portfolios for customers who might previously be ignored by brokerages or who might not have felt welcome as a brokerage’s customer.
Additionally, some robo-advisory programs and online brokerages have reduced the cost of entry to the investment world. Similar to fintech programs that reach the unbanked, investment apps now allow people to open accounts with small deposits, instead of the thousands of dollars often required by traditional brokers.
Fintech in Banking
Initially, the companies behind many digital finance and fintech apps and programs were outside of the traditional banking industry. Companies such as PayPal are not banks and aren’t subject to the same regulations and rules that banks need to follow. Although they are technically outside of the banking industry, the services many fintech companies offer directly compete with the services offered by banks and other traditional financial institutions.
According to PwC, nearly three-quarters of executives in the financial sector believe that fintech is likely to disrupt the consumer banking industry. More than 80% of banks believe that they could lose up to 20% of customers to independent fintech companies in the next five years.
To catch up, banks are beginning to update their technology options and to shift the focus of their services. PwC reports that more than 80% of fintech companies believe that they put the needs of customers first, but just over half of all banks believe the same. In the coming years, banks will likely begin to offer services and programs, such as mobile apps, that put the needs of the customer first or that aim to anticipate and quickly respond to customer concerns.
Fintech Examples in Banking
Although they might not be as advanced as stand-alone fintech companies, banks have started to offer programs and services that make use of technology to meet their customers’ needs better and that seek to anticipate and solve problems. Several fintech solutions developed for banks include:
1. Virtual Assistants
Several traditional and online banks have introduced virtual assistants, which help users manage their money, pay bills and detect fraud or other concerns. One example of a virtual assistant is erica, from Bank of America. The bank released erica to a limited market in March 2018, before introducing the program to all of its app users three months later. During the first three months of the app’s existence, more than 1 million people started using it.
Among the services erica provides are showing customers all of their financial transactions with a particular retailer, providing links to articles on financial topics when requested and directly connecting users to a live agent when needed.
Capital One has a similar virtual assistant named Eno. Along with providing people with access to their account information when asked or sending credit or fraud alerts, Eno can also generate virtual credit card numbers that individuals can use when shopping online. The virtual numbers protect a customer’s real card number and can only be used during a single transaction, helping to reduce the risk of fraud.
2. Mobile Apps
More than half of all banks offer a mobile app to their customers, according to PwC, and the vast majority, 90%, expect the use of their apps to grow over time. Mobile banking apps provide customers with access to their account information on the go. The apps let people verify that they have enough money in a checking account to make a purchase and let them transfer funds freely from checking to savings. Many apps also allow people to deposit checks by taking a picture of a check with their phone’s camera. The mobile check deposit feature eliminates the need to go to brick-and-mortar bank or an ATM to make a deposit, increasing convenience for banking customers.
3. Peer-to-Peer Payments
Peer-to-peer payment websites and apps have been around for decades at this point. But programs such as PayPal and Venmo, which is now owned by PayPal, operated as independent third parties. Users could connect their bank account information to their PayPal and Venmo accounts to send money to friends or businesses and to get paid by others. The money would then sit in the PayPal or Venmo account until a person transferred it to their bank.
Banks have begun to catch on to the value of offering peer-to-peer payment options beyond traditional cash and checks. More than 30 U.S.-based banks worked together to develop the peer-to-peer payment app Zelle. Zelle is similar to Venmo and PayPal, but with one major difference. The funds a person transfers to a friend or relative using Zelle don’t sit in a third party account. Instead, they travel directly from one person’s bank account to another person’s account, reducing the wait time for receiving funds.
Challenges Facing the Fintech Industry
Although the future looks bright for fintech, there are several challenges that the industry needs to confront. Even as more and more businesses and individuals adopt apps and programs to streamline their financial situations, concerns remain in several areas. Among the top issues in fintech are:
1. Privacy Concerns
People want to know that their private information is going to be kept safe and secure by the companies they work with. To that end, more than half of all banks, fintech companies, and other financial services companies believe that privacy and security concerns are among the top threats facing fintech, reports PwC. One way to protect the data and privacy of anyone who uses a fintech program is to regularly review and update the security measures that are in place and to make sure that anyone working on the program or app is up-to-date on security best practices.
Another challenge that the fintech industry faces is a lack of customer understanding or knowledge when it comes to the benefits offered by a particular program. For example, cryptocurrency can be challenging for the average person to understand, which might make it less likely to be widely adopted. Incorporating educational programs or using virtual assistants that can explain the benefits of certain services or fintech programs clearly can help to increase comprehension and adoption.
3. Regulatory Concerns
The financial industry is heavily regulated, while the fintech industry is somewhat less so. For example, non-bank peer-to-peer payment companies do not necessarily have to follow the same rules that a bank offering a similar service does. There is a chance that regulations will increase as more fintech companies come on the market. There is also a chance that banks and fintech companies that want to work together will need to find a way to navigate the regulatory process successfully.
Hydrogen Helps You Take Advantage of What Fintech Has to Offer
The advantages of fintech far outweigh the challenges that face it. Whether you work with a fintech startup, a global or U.S.-based retail bank or a challenger bank that’s seeking to disrupt the industry, Hydrogen has a solution to help you with product development. Our API platform allows you to build custom fintech apps and products from a single platform while our No-Code offerings enable you to quickly configure pre-built white label applications. You can develop a savings and checking app, investing program, financial wellness tracker, or hundreds of other applications in minutes.
We’re happy to walk you through the process of using our platform and building your fintech apps. To learn more, contact us or start building today!