FinTech and Its Impact on the Finance Industry

As technology continues to shape human society, financial technology–also known as FinTech–has emerged as a ubiquitous force in financial markets and the banking sector. Indeed, FinTech has enjoyed decades of hypergrowth, recently reaching $550 billion in capitalization.¹

FinTech refers to the application of new technological advancements to products and services in the financial services industry. The scope of FinTech is vast and encompasses a wide array of applications, including managing payment services, bank accounts, and personal finances through apps, executing stock trades at the click of a button, applying for loans without visiting a financial institution, and using cryptocurrencies for transactions. The essence of FinTech lies in its ability to streamline, enhance, and often wholly transform traditional financial services. This article explores FinTech and the impact it's having on the finance industry.

The very beginning of FinTech goes back further than you may think. From the mid-19th century to the early 20th century, innovations such as the first transatlantic cable and Fedwire allowed people to transfer money electronically.² FinTech services entered a new phase as the banking industry embraced Automated Teller Machines (ATMs), the National Association of Securities Dealers Automated Quotations Stock Market (NASDAQ) was created, and online banking grew.

However, the rise of the internet and the 2008 financial crisis paved the way for financial technology as the world knows it today.³ As trust in traditional banking faltered and new regulations opened the market to new providers, FinTech 3.0 ushered in Bitcoin and a new era for digital payments and finance.⁴ Now, through the years of the Coronavirus pandemic, the world has seen anywhere from 4,000 to 10,000+ different cryptocurrencies.⁵

A prominent feature in modern FinTech blockchain technology is a distributed ledger that allows for data and transactions to be shared in a way that is irreversible and transparent. This technology is what allows the exchange of cryptocurrencies.⁶

But now, new technologies have the eye of finance. Artificial intelligence (AI) and machine learning (ML) are helping to drive data analytics insights, perform intelligent data retrieval and real-time calculations, and engage in forecasting. Financial institutions can use ML and AI to conduct sentiment analysis, detect anomalies, and provide recommendations.⁷ Additionally, the combination of AI technology and robotic process automation (RPA) tools are improving the automation tasks in banking services, like sorting documents, interpreting free-form text, and analyzing complex reports.⁸

The value of noncash payments, which has increased 9.5% annually since 2018, recently reached $128.51 trillion in value.⁹ It's because of this rise in the adoption of cashless options such as digital wallets that major companies are discussing the pros and cons of a cashless economy.¹⁰ Increasingly popular cashless options include:

• Mobile wallets: Digital wallets such as Apple Wallet and Google Pay store the information found on credit and debit cards, allowing users to make secure and convenient online payments with their mobile devices
• Peer-to-Peer (P2P) payments: Platforms such as Venmo and Zelle have simplified the process of transferring money between individuals, making transactions like splitting bills or sending gifts quick and effortless
• QR code payments: Companies such as Stripe and Cash App utilize QR codes that allow users to make electronic payments simply by scanning a code with their smartphone

Beginning in the early 2000s and rising to prominence in the 2010s, crowdfunding has emerged among FinTech innovations as a way for underfunded startups and other projects to find and build audiences while requesting and accepting their financial support.¹¹ Increased customer confidence has made crowdfunding so popular that it generates $17.2 billion annually in North America, and the market is projected to double by 2027.¹²

Additionally, online lending apps and platforms create investment opportunities, helping startups and small businesses find investors and gather the capital they need to get off the ground.

Though many still turn to traditional investment advisors, the rise of the FinTech industry has yielded robo-advisors that automate the investment process based on an individual's financial goals. Robo-advisors work by analyzing a client's current finances and financial goals, applying modern portfolio theory, and investing that person's money into portfolios built around low-fee Exchange Traded Funds (ETFs).¹³

While customer expectations have long seen investment and wealth management as a practice reserved for the affluent, it's believed by some that the advancement of FinTech will bring about a democratization of wealth management by making these opportunities more accessible to the general public.¹⁴

Regulatory technology (RegTech) is a subset of FinTech that focuses on leveraging technology to enhance and streamline regulatory compliance processes in the financial system. It represents a significant shift in how financial institutions manage regulatory requirements, aiming to make compliance faster, more efficient, and more adaptable to ever-changing regulatory landscapes.¹⁵

To keep up with regulations surrounding customer identity security, Know Your Customer (KYC) automation has emerged. It refers to the use of technology to simplify and enhance the process of verifying the identity of clients. This technology offers heightened security surrounding sensitive customer information and helps to ensure regulatory compliance.¹⁶

FinTech innovation is making great strides in bringing services to the so-called ‘unbanked’—people who are not served by traditional banks or similar financial institutions—and spreading mobile banking to developing countries and regions. The World Bank estimates that 1.7 billion adults around the world are unbanked.¹⁷ Because of this, they often face challenges like high transaction costs and financial instability. However, through digital financial services, FinTech is furthering financial inclusion: making banking opportunities more accessible via easy-to-access banking apps.¹⁸

FinTech is also disrupting the banking sector by offering services through digital banks and neobanks. While digital banks offer banking services entirely online, neobanks offer nontraditional services.

Also known as challenger banks, neobanks are often FinTech startups that don't have physical branches. They often partner with FDIC-insured banks to offer not only checking and savings options but also budgeting and saving services to help their customers.¹⁹ Neobanking is expected to reach over 78 million users, with an expected transaction value of $2.6 trillion, by 2027.²⁰

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