Financial technology, or FinTech, generally refers to new technologies used and developed to improve or simplify financial services. Improving may mean automating the delivery and use or incorporating new technologies for expanded capacities. Financial service providers in different segments are finding new ways to run their businesses thanks to innovative tech tools. They are improving client interaction and the way they trade and monitor for regulatory compliance. FinTech companies are at the intersection of financial services and technology, and they are constantly transforming monetary operations, such as investment banking, wealth management, trading and research.
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What Is FinTech and How Does It Work?
FinTech is transforming what we know as the traditional financial industry, even though it was thought of as a disruptor when it first emerged. FinTech changes contribute in large and small ways to an evolving operations landscape involving brokers and dealers.
According to the Financial Industry Regulatory Authority (FINRA), an independent nongovernmental organization (NGO) that writes and enforces the rules governing registered brokers and broker-dealer firms in the United States, as the sheer scale and number of FinTech innovations grow in the securities industry, companies in the financial sector will need to continuously change business models and operations to keep up. FinTech companies are breaking new ground with innovative products and financial service solutions using a wide array of technologies, including machine learning, cloud computing and blockchain systems.
And the FinTech industry shows no signs of slowing. Take, for example, how artificial intelligence (AI) lending platform Upstart saw its valuation nearly double in just one day (from $61 to $115 per share) during the first quarter of 2021. Today’s need for faster financial output coupled with new technologies and historically strong venture capital activity have led to a need for FinTech innovations and solutions—and companies like Upstart, Venmo and PayPal are answering the call and reaping the rewards.
Examples of FinTech
FinTech encompasses a broad swath of financial industry areas. There are a number of FinTech businesses that specialize in various investor and banking needs, including regulatory technology (regtech), digital asset technologies (cryptocurrency and blockchain), crowdfunding platforms and insurance technology (insurtech). There are also stock-trading apps and robo-advisers as well as artificial intelligence (AI) applications that offer automated customer service functions. You may have also heard of social media sentiment-based trading and sophisticated fraud and financial crime surveillance. To support investor protection and maintain market integrity as financial technology advances and grows, FINRA’s Office of Financial Innovation (OFI) oversees issues related to significant advancements by FinTech member firms.
Regulatory technology, or regtech, helps financial institutions by employing innovative tools to improve their regulatory governance, reporting, compliance and risk management. Computer company IBM, for example, offers clients regtech services such as IBM Financial Crimes Insight for fraud prevention and detection and IBM OpenPages for managing risk and regulatory compliance. Other regtech companies include Suade Labs, IdentityMind Global (owned by Acuant) and Silverfinch (owned by Compliance Solution Strategies).
Because regulation is an essential function in financial services, companies can benefit from innovative regtech to help them stay compliant, ensure investor protection and safeguard market security—all while still offering the customer support and options to satisfy clients. Firms need reliable and effective applications for things like compliance monitoring, fraud prevention and data management. According to FINRA, regtech tools can help firms meet compliance obligations more quickly and cost-effectively.
Regtech can also help financial services firms stay on top of shifting government rules and policies, so they can institute appropriate control measures in a timely manner. Using AI and automation, regtech helps improve a firm’s ability to assess risk and automate compliance.
There is a growing demand for these types of regtech services and applications. According to Juniper Research, spending on regtech by financial institutions seeking to avoid costly regulatory fines is expected to grow from an already impressive $10.6 billion estimate in 2017 to a whopping $76.3 billion in 2022. What’s more, the report found that as a percentage of overall regulatory spending, regtech will also increase dramatically, from 4.8% in 2017 to an estimated 34.4% by 2022. Regtech is not just for large companies, either. These technologies are scalable enough to let small organizations better navigate regulatory waters alongside big firms.
When smaller companies embrace regtech, the ROI can be substantial in terms of competitiveness, according to a 2019 TechCrunch article. Benefits small companies may reap from regtech include better customer experiences (thanks to automated data protection controls and safe ways to analyze data), faster ways to generate valuable insights, and better ways to build programs that give clients a sense of real value.
Cryptocurrency and Blockchain
Cryptocurrency (virtual coins and tokens) and blockchain (distributed ledger) technologies are perhaps the most well-known and most scrutinized types of FinTech today. Cryptocurrencies, such as the popular Bitcoin digital currency that was created in 2009, are a type of digital asset. Cryptocurrency exchanges, such as Coinbase and Gemini, let users buy and sell these virtual coins online. Other digital assets can consist of securities and non-security products and can include initial coin offerings (ICOs) or pre-ICOs. Digital assets are represented by or recorded in blockchains.
Blockchain technologies, also known as distributed ledger technology (DLT), is the foundation of cryptocurrency trading and has moved into regulated industries like banking. Blockchain offers a faster, more efficient way to use secure data to transmit, receive and track orders, which is why it is also used to help reduce fraud in industries outside of finance. DTL infrastructure and protocols allow for simultaneous access, validation and record updating across a widespread network involving multiple entities or locations. Using a decentralized digital database, blockchain technologies allow for storage of all information in a secure and accurate manner using cryptography, taking away the need for a central authority to guard against manipulation. The information can still be accessed using cryptographic signatures and “keys.” Once the information is stored, it becomes an unalterable database and is governed by the rules of the network.
The operation of blockchain technology may involve the use of a public or private network. According to a FINRA report on distributed ledger technology [PDF, 410 KB], the first blockchain network, for bitcoins, was established as a public network with no membership restrictions and the stored encrypted data was visible to all network participants. Private networks are usually preferred in the financial services sector. They are permissioned networks, allowing the network operators to restrict access to only trusted parties. Permissions on private networks may also be tiered.
According to FINRA, the market for digital assets has grown significantly and has increasingly been of interest to retail investors. FinTech that focuses on cryptocurrency and blockchain may also include technologies designed to address investor protection concerns, such as fraud and other securities law violations involving digital assets and the platforms on which they trade.
The term crowdfunding gets its name from the fact that it uses small amounts of capital gathered from a large number of individuals (a virtual crowd) to finance a new business venture. Thanks to social media, crowdfunding offers easy accessibility to large numbers of people. Crowdfunding websites bring together entrepreneurs and investors, including venture capitalists. Crowdfunding sites typically generate revenue from a percentage of the funds raised.
Crowdfunding platforms allow users to invest their money in businesses, products and individuals. These FinTechs have disrupted traditional funding models by seizing the opportunity to build a community of lenders and borrowers in new ways online. Crowdsourced lending benefits those with a lack of funds by giving them access to capital at reasonable interest rates and it benefits lenders by creating an attractive revenue stream. Crowdfunding has opened opportunities for funding to more individuals, as well as opening up more opportunities for smaller financial lending institutions to compete with larger ones for clients.
The more traditional scenarios for crowdfunding are usually either a startup seeking funding to launch a new product or a service or individual in some kind of health or financial emergency due to a natural disaster or tragic event. More recently, new websites are offering ways for artists, writers, musicians, podcasters and other creatives to crowdfund their work as a means of supplementing their livelihood—or even as a primary source of income, in some cases.
Commonly-used crowdfunding platforms include:
- GoFundMe – For individuals with personal or entrepreneurial fundraising needs.
- Indiegogo – For all kinds of ideas, products and causes.
- KickStarter – For a wide array of startups and entrepreneurs.
- Mightycause – For nonprofits.
- Patreon – For creative professionals.
- SeedInvest – For startups and investors.
- StartEngine – For startups and those wanting to invest in startups.
Stock Trading Apps
Stock trading apps are an innovative type of FinTech that enable investors to trade stocks using their mobile devices from anywhere, rather than calling or visiting a stockbroker. Some examples of popular stock trading apps are Robinhood and Acorns. According to The Motley Fool, stock trading apps have made buying and selling stocks easier than ever because they give people hands-on trading features and more.
Stock trading apps can be traced back to 2013, when startup Robinhood launched what would soon fundamentally change the financial services industry. The free app with no fees and no account minimums had a rock-star-like debut. Robinhood offered its user-friendly mobile app with a unique social feature—incentives for users to invite friends and family, rewarding them for each invitee that funded a Robinhood account. By 2018, the platform had surpassed heavyweight E-Trade when it reached 4 million brokerage accounts. In 2020, it reported having amassed 13 million users.
There are also FinTech tools known as robo-advisers, or “robos,” that offer algorithm-based portfolio recommendations and management to lower costs and increase efficiency. Robos are not stock trading apps, but are client-facing digital investment advice tools. FINRA defines digital investment advice as any digital tool that helps recommend specific securities to an investor, allowing automated investor profile building. Digital investment advice also helps prepare proposals and sales materials or helps develop an asset allocation.
While each investor has their own preferences and needs when it comes to stock trading apps, some common features users find important include:
- Access to stock research.
- Commission-free stock trading.
- Competitive margin rates.
- Cryptocurrency trading.
- Fractional stock share buying options.
- Mutual funds selection.
- Options trading.
- Research and educational tools.
- Support for different types of accounts.
- User-friendly design.
Insurance technology is also known as insurtech. According to the National Association of Insurance Commissioners (NAIC), insurtech is the innovative use of technology in the insurance industry. Like other subsets of FinTech, insurtech has been transformational within its given industry. Insurtech companies, such as Oscar Health and Credit Karma, are changing the business models and competitive landscape of the insurance market, and its innovations have influenced the entire insurance trade. Distribution, product design, underwriting, claims management, balance sheet management and marketing have all been influenced by insurance technologies. And these technologies have touched various forms of insurance, especially property and casualty, life and health.
InsurTech companies generally aim to offer highly customized insurance policies using current data streams from consumers’ digital devices. Price premiums are then determined according to observed behavior. Insurtech uses a wider array of sources than traditional insurance models normally do, including internet-connected ones like GPS and health and activity trackers on our smart devices. The result is a more exact system of risk groupings, which allows for more competitively priced offerings to customers.
Once primarily considered a disruptor of the mainstream insurance industry, insurtech companies now encompass more functions focused on collaboration. Both traditional insurance providers and startups now realize what the potential gains are from combining technology with a deeper understanding of the customer. A 2019 PwC Global CEO Survey [PDF, 1.9 MB] found fewer industry executives reported they were concerned about the speed of technological change, changing consumer behavior or new market entrants. Today, insurtech is helping bring together what PwC refers to as “adjacent industries” to provide better service and value to customers and insurers. The adjacent industries of particular relevance right now include agriculture, health, cybersecurity, the sharing economy, wealth management, transportation and more.
Insurtech pioneers are also exploring new ways to use apps to better manage and monitor large numbers of unrelated policies and to create on-demand insurance for one-off events, such as borrowing a friend’s car. Additionally, insurance technology developers are looking into ways to create customized group coverage and ways that let AI handle some of the time-consuming tasks of brokers.
FinTech and the Future
One thing the COVID-19 pandemic made clear to the finance and banking industries was that FinTech was a useful tool for handling unprecedented disruptions and change. According to the Centre of Excellence on Emerging Development Perspectives, lockdowns and social distancing requirements increased the importance of having remote ways for customers and institutions to monitor and manage finances safely and securely. FinTech companies were well-placed to deal with increased digital demand and remote working conditions. Moving forward, the benefits of digital financial services in providing secure, low-cost, and contactless financial tools to a widespread customer base has become even more apparent. Even as businesses and communities open up again post-pandemic, FinTech tools will still be essential to day-to-day operations.
According to the International Monetary Fund, FinTech companies in the United States made up 38% of the unsecured personal loan market in 2018. Today, financial technology companies are well positioned to thrive into the future because they offer the ability to have robust, desirable and secure financial services quickly, simply and even remotely. FinTech is helping various broker-dealer business lines evolve, including investment banking, wealth management and trading. And as banking and finance infrastructures and systems grow, FinTech is expected to be a part of the equation.
Learn More About FinTech Boot Camps and Courses
Developing your FinTech skills and understanding can help you stay on top of emerging and innovative technologies. Online FinTech bootcamps offer students a way to learn relevant skills that may help them transition into new careers. Bootcamps also offer a hands-on education that lets participants develop real-world skills through student projects. Online FinTech courses cover a broad range of subjects, including risk management, financial regulations, innovation strategies and more. They are generally less rigorous than the short-term, intensive bootcamp programs. Often, both these learning options let people continue working or studying while taking FinTech classes that fit around their schedules.
Last updated April 2021