What is Fintech and Why Is It Important?

Financial technology, or fintech, has revolutionized the way individuals and businesses manage money by improving and automating financial services and processes. For example, mobile applications such as Robinhood and Venmo have made it easier than ever to invest and transfer funds, using just a smartphone. Additionally, artificial intelligence (AI) allows companies to streamline processes like data analysis and fraud detection. But what is fintech, and why is fintech important? Read on to learn more about this exciting industry.

Fintech refers to innovative applications, hardware, and software that allow people to access financial products and services digitally. Banks have used automatic teller machines (ATMs) and computers for decades. Contemporary fintech, however, emerged in 2008 after the global financial crisis. This event caused widespread mistrust of banks, motivating many people to seek alternative financial solutions.¹

Other factors contributing to the development of fintech include the invention of smartphones and the development of new government regulations. For example, in many countries, open banking regulations require financial institutions to share consumer data with third-party service providers such as Zelle. Many startup companies have capitalized on these changes by creating new technology that disrupts traditional banking methods.²

Today, innovations such as peer-to-peer payment apps and robo-advisors make it possible for consumers to manage their finances digitally. You can use tools like bank accounts and investment portfolios without ever setting foot inside a brick-and-mortar bank. In addition, companies in all industries have turned to fintech to optimize their financial operations.²

Because fintech is so versatile, the industry has grown dramatically in the last few years. In 2017, the fintech sector was worth $90.5 billion. As of 2023, the industry’s value is $179 billion.³

Fintech is a broad term that encompasses a wide range of digital products and services. Some of the most popular fintech innovations include:

A blockchain is a decentralized, digital database that stores information about financial transactions. The database records payments like Bitcoin and non-fungible token (NFT) purchases as individual ‘blocks’ of information linked together in an unchangeable sequence, or ‘chain.’ The blockchain database stores this information on multiple computers, or nodes, at several different locations.⁴

Blockchain technology has several advantages. People don’t have to rely on a third party, such as a bank, to verify financial transactions, and the decentralized network improves accuracy and security. Finally, unlike traditional banks, blockchains never shut down, so users don’t have to wait until the bank opens to confirm payments.⁴

A robo-advisor is a virtual investment assistant powered by AI. This tool uses algorithms to provide customized investment guidance based on a customer’s financial goals. The robo-advisor automatically expands and rebalances portfolios, taking the guesswork and stress out of investing.⁵

This technology offers many benefits for individuals and companies. A robo-advisor typically costs less than a human financial advisor, allowing more consumers to take advantage of the service. Additionally, many insurance companies use robo-advisors to recommend insurance policies and process claims automatically.⁵

Thanks to the rise of smartphones, mobile payments have exploded in popularity. This technology allows customers to connect their bank accounts or credit cards to apps and mobile wallets. For example, many shoppers order and purchase products with mobile web browsers. Consumers can also use free applications, such as Cash App and Google Pay, to transfer money between businesses, family members, and friends.⁶

Experts predict that 1.31 billion people will use mobile payment technology in 2023.⁷ This fintech promotes financial access by making it easy for people worldwide to make instant transactions.

We have become familiar with the quick process of tapping a credit card on a terminal to complete purchases. With multifactor biometric verification integrated into that smartchip technology, those transactions become more secure.

The fintech-empowered buyer can use an authorized smartcard to pay just by speaking, or by placing a picture or fingerprint through the sensors in a smartphone. By installing two identifiers on a phone terminal and using them to protect a payment throughout a digital transaction, the buyer can deter cybercriminals. Without the right voice, image or fingerprint, a hacker may have stolen credentials but no way to use them.⁸

Fintech has shaken up the financial industry and changed the way people interact with their finances. Significant benefits of this disruptive technology include:

Around 64% of American adults lack vital financial knowledge and skills.⁹ Fintech can help people make informed decisions about their money. Gamified apps like Greenlight, for instance, make it fun for children to learn about finances.¹⁰ Similarly, budgeting and mobile banking apps empower people to develop healthy spending and saving behaviors. Many fintech companies have created products specifically for residents of rural communities and developing countries, spreading financial literacy globally.¹¹

Access to financial services is unevenly distributed across populations and countries. For example, while 95% of Americans have bank accounts, only 52% of Indonesians do. Fintech fosters financial inclusivity by enabling traditionally underserved populations to open savings accounts, apply for loans, and so on. Furthermore, due to reduced overhead costs, this technology typically comes with lower fees than conventional financial institutions charge. As a result, fintech can boost living standards and reduce social inequities.¹²

Historically, consumers traveled to physical banks to complete simple tasks such as depositing paychecks and applying for loans. Fintech saves people time by allowing them to manage their finances conveniently, from any location at any time. For instance, most online banks allow clients to open checking or savings accounts from their phones. These types of services provide the convenience and instant gratification that may consumers crave.¹³

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