Fintech is more than just a buzzword in the financial industry today. Fintech, which is short for financial technology, is becoming an integral part of the global financial industry, as its new innovative technologies are disrupting the status quo of traditional financial services. While almost all aspects of the financial industry are now facing disruption from fintech start-ups, there are five key areas that have seen the biggest growth and the most attention in the fintech space.
As smartphone usage is increasing globally it is no surprise that consumers are looking to do more than just take pictures, send messages and play games on their phones. They also want to conduct their banking transactions via mobile apps. This demand has been met by several fintech start-ups, so-called challenger banks, which are offering mobile and online banking services at a lower cost that its competitors from ‘old banking’. Companies such as US-based Simple, which offers free mobile and online banking or UK-based mobile-only bank Monese, which offers a bank account, debit card and cheap international money transfers are seeing customers flock towards them, as younger consumers are becoming more inclined to trust a tech company than a traditional bank with their money.
International money transfers and remittance services are another area that has seen massive disruption from the fintech world. Companies such as TransferWise and WorldRemit are allowing customers to send money abroad at a much lower cost than high street banks or traditional remittance companies. As international money transfers have traditionally been a very costly affair, new low-cost money transfer services have been met with huge customer demand.
Online trading & wealth management
Advances in technology have disintermediated retail trading away from banks towards online brokerages that allow cheaper access to the financial markets.
Wealth management has undergone similar disruption in the last few years, since the rise of so-called ‘robo advisors’. Robo advisors, such as market leaders Betterment and Wealthfront, are online wealth management companies that offer automated, algorithm-based portfolio construction and investment advice, without the need for human financial advisors. With robo advisors the investor puts his or her money into a diversified portfolio of low cost ETFs, which greatly reduces the costs of investing compared to putting money into traditional mutual funds.
In the alternative finance space two new innovative financial services have come out of the world of fintech; peer-to-peer lending and equity crowdfunding.
Peer-to-peer lending refers to a method where individuals and SMEs can borrow from a large number of individuals without the use of traditional financial intermediaries. This is especially useful for SMEs, as most banks have cut SME lending aggressively to reduce balance sheet, since the 2008 financial crisis. The lenders, in return, receive high fixed interest returns uncorrelated to the global fixed income market.
Equity crowdfunding works in a similar way as peer-to-peer lending, but instead of debt financing companies can raise funds via an equity offering using an online crowdfunding platform. Private investors can pick and choose which SMEs and start-ups they would like to invest in and can do so even with only a small amount of money.
The blockchain refers to a ledger database that collects a continuously growing list of data. It has become popular as the publicly available ledger for all transactions of the cryptocurrency bitcoin. However, the blockchain technology can also be used beyond the scope of simply collating currency transactions. In the global financial industry the interest for the blockchain has been massive as it could, for example, completely replace the current settlement processes for financial securities. Hence, not surprisingly, many major banks are investing in the development of the blockchain technology with the aim to reduce the costs of financial transactions.