Personal Finance

Fintech: A Comprehensive Guide to Technology and Finance

    Fintech

    It’s a word you hear at dinner parties and from first-semester business students. The experts claim it’s changing the financial world, but is it worth all the excitement? Cool and convenient, fintech is more than just doing your banking on your phone. But how exactly is fintech changing the fundamentals of our financial transactions? What does this really mean for you, the average consumer, and not Walter Wallstreet who lives and breathes “the free market”? 

    By the end of this post, you’ll have those questions answered (and a few more you might not have thought of). We’ll give you definitions in layperson’s terms, along with easy-to-understand examples to clarify the basics of fintech — all without you having to set foot in a financial management course. Maybe you can wow your friends with some concepts they might have missed!

    What is fintech?

    In the most basic and broadest sense, fintech (a portmanteau of financial technology) is essentially any technological advancement in financial services. So, yes, now that you can check your savings account, file a check, and transfer money through your bank’s app — all of that is fintech. However, fintech gets a little more complicated once you start using artificial technology, big data, or cloud services for investing, insurance, securities, and cryptocurrencies. Cryptocurrencies are also one of the most significant changes in financial technology in recent years, but we’ll get into that a bit later. 

    But none of this would be possible without the internet. Cryptocurrencies, Bitcoin, Ether — these are a direct result of the digital community uniting behind a single idea and supporting its value. Did you ever think you’d live to see the day where the Internet agreed on something? Well, that day is here and it’s building an entirely new industry. 

    Fintech in general doesn’t rely on the electronic masses to succeed, but it does rely on the technology itself. Just as you can now order a ride home — or all of the egg rolls from Panda Express — through your phone, fintech gives millions the opportunity to have more control over their personal finances. And that’s pretty much it. As technology evolves and changes the world around us, the financial sector is simply another facet of that change. And, quite honestly, that’s a good thing. 

    What does it mean for you?

    If you work the 9-to-5 grind, the most significant fintech advances might be something you see on your Facebook timeline, thinking, “oh, cool,” as you scroll past. While you might not see the immediate effects of new financial technology, they are changing the way banks and other financial institutions interact with their customers. 

    When it comes to more recent technological innovations, some of them are easier to see. Microsoft is using AI to map ancient cities; big data is attempting to save the planet from carbon emissions; and now you can pick up an electric scooter to finish off your commute for the day. 

    New fintech companies rely on AI and big data to provide simplified financial decisions and solutions, which forces old brick-and-mortar banks to improve their services as well. This competition (the very foundation of our American society) offers individualized financial reporting, lower transaction costs, and more supportive customer service, which in the end means you save money. 

    Management apps such as Digit or Mint offer daily insights to where and how your money is being spent, suggest long-term wealth plans, and initiate prompts to remind you to pay your bills. 

    Artificial intelligence has a huge part to play in managing our finances online. These “robo-advisors” can automate financial planning and investment services. AI is quicker and more accurate at detecting fraudulent spending on your account, and can better analyze your spending habits to create a more personalized financial strategy. 

    Foreign transaction fees could soon be a thing of the past. Bigger companies like Transferwise are competing with major banks by offering fees that they claim are eight times cheaper than a conventional bank. 

    When the Wall Street experts on the news talk about fintech disrupting the industry, it means the old ways are breaking down. Because of the intersection of finance and technology, there are new systems to use (and potential exploit). The technologically savvy folks get excited when this happens, but for you and me, fintech is here to make our lives easier. It makes investing faster and safer, saving for college a breeze, and personal financial management something you can do in your sleep. Simple as that.

    The Jargon of Fintech

    Here is where a deeper dive into fintech begins. While fintech is making life for everyday consumers just a little bit easier, it also allows for some pretty radical change — so much so that digital currency is now a thing. Here’s where we’ll explore the finer points of fintech, including how it’s affecting other industries. 

    Cryptocurrency

    Currency is something we all know and understand. Every country has one and generally, we can all agree on the value of it, because it’s just money. It’s what we all, as citizens of one nation or another, exchange for goods and services. Simple as that. Moving forward, keep those three concepts around money in your head: 

    • Most people must have access to it
    • Sellers must agree to accept it for their efforts
    • Everyone agrees upon its value and trusts that it will last 

    Cryptocurrency takes all of those ideas and shakes them up — but just a bit. Cryptocurrency is digital currency that doesn’t pass through banks or governments, meaning that it is referred to as being “decentralized.” It’s not associated with any single entity that exists in a physical form, hence the “digital” terminology, and each unit is made via encryption — the act of converting data into code — and external validation.

    Cryptocurrency is available across any border, accessible with simply an internet connection, and is entirely free to use — which changes the game for quite literally billions of people. About half of the entire human population (around 2 billion people) do not have easy access to a bank or other financial services. With cryptocurrency, these people are allowed to be a part of the financial market. Financial inequality around the globe continues to grow, stemming from greedy governments preventing the free flow of money in and out of the country, and from bankers levying significant fees for exchanges or wire transfers, making transactions slow and expensive. Cryptocurrency can solve all of these problems. 

    Bitcoin

    Bitcoin is one form of cryptocurrency. You may have also heard of Ether, Dash, Ripple, of Litecoin. It, like all cryptocurrency, runs on math (checked by a network of computers) to be secured, as opposed to a bank or a person. Which means it’s valuation is always accurate. 

    Think of a Bitcoin as a wallet. From that wallet, you take out money to pay people and you store money that’s been given to you. Every time you exchange money, a time-stamped record is made and added to an on-going data set of all other transactions made. This public and open ledger is known as the block-chain. An exchange is a digital room where you can buy or sell cryptocurrencies. 

    As Investopedia puts it: “The value of bitcoin is heavily dependent on (a) the faith of investors, (b) the integration of cryptocurrency into current financial institutions, and (c) the public’s willingness to learn and use a new form of currency.”

    Miner

    How is this digital currency put into circulation, you may ask, if there is no bank or central figure to “mint” money? Bitcoins are only generated after a transaction has been verified to be accurate and then added to the blockchain as a reward. Transactions are only verified after a computer has completed a complex mathematical (or cryptographic) problem, known as a “hash.” 

    “Since the difficulty of this puzzle increases the amount of computer power the whole miner’s invest,” says Ameer Rosic of BlockGeeks, “there is only a specific amount of cryptocurrency tokens that can be created in a given amount of time. This is part of the consensus no peer in the network can break.”

    So, what's next for fintech?

    A 2018 NewVantage survey found that 80% of big data executives fear the disruption coming from smaller fintech start ups — and with good reason. According to the McKinsey management consulting firm, $23 billion of venture and growth equity has been deployed to these over the last five years. Over $150 billion could be invested in fintech companies over the next 3-5 years, according to PricewaterhouseCoopers. In Austin, Texas (the new Mecca of tech over Silicon Valley, according to CNBC), 25 small fintech businesses raised $139.7 million in the first three months of 2017 alone!

    So, at first glance, these numbers are pretty astounding, but as with every new advancement that comes down the pipeline, it’s important to take a step back and consider the global impact of this growth. A 2019 survey by Interac Corp. found that less than a third of Canadians believe that technology is making their personal information safer. 82% say there are negative consequences in letting companies access their personal or financial data online. In 2017, SalesForce found that only 26% of Americans strongly agreed with the statement that banks had their best interests in mind. 48% of American consumers trust financial services with their financial information; a number that again includes fintechs.

    While unfortunate for us, this lack of trust is a huge opportunity for fintech startups to truly shift the foundations of the financial world. If this new industry intends to “disrupt” in the most basic sense, they should appropriately address the public’s concern over data safety, who has access to this data, and how/why this data is collected. By improving the identification process that grants access to sensitive data, fintech will do what banks never could and provide individuals products that best serve the customer.

    What's emerging now?

    As fintech and the technology powering these changes continues to grow and evolve, we can expect to see other industries working to integrate it. At these levels, personalization and trust will be even more critical to initiate technological growth.

    InsureTech (or insurtech)

    Like fintech, the idea behind insuretech is pretty simple: bring decades worth of outdated processes, systems, and reports into the 21st century through the fusion of insurance and technology. This can take on many forms, such as using technology to make digital premium payments, digitizing claims processing, or improving basic customer communications. 

    Companies like Root, Lemonade, Hippo, and The Zebra are all the forefront of this nascent industry

    Remittance industry 

    A remittance is another name for the transfer of money. However, in this context, it’s often a transfer of money between a migrant worker and his or her family back in their country of origin. Fintech has taken huge strides to reduce the cost and difficulty with which this process occurs. 

    Mostly, Western Union dominated this industry, but as of 2011, TransferWise, Finablr, and MoneyGram have all taken significant positions within the market. 

    Real estate

    Buying a house is an expensive process, not including the price of the actual house. Both parties require a real estate agent to oversee the transaction, which costs the owner and seller 6% in commission and fees. The process of the transaction is ineffective and slow, and additional parties (like the bank and title companies) tend to walk away with a significant amount of money. 

    Companies like Redfin and OpenDoor are challenging the entire process and the traditional 6%. They are cleaning up slow transactions and even buy homes that aren’t fully ready to be on the public market (i.e. houses in need of repair).

    If you’re looking for more, CBSInsight has put together a resource of the top 250 fintech startups to watch.

    Jobs in Fintech

    Regardless of fintech, working for a technology company is pretty much inevitable for many people these days. Skills like coding, managing data science, and understanding cyber security are ones that will set a candidate above the rest of her competition. Getting a job in fintech requires theses sorts of skills, as they provide a base point for which to understand technology that constantly grows and evolves. 

    According to MoneyTech, these are the most valuable skills to have if you’re looking for a job in fintech:

    The next fintech trend is up to you

    The entire fintech industry is built around two guiding principles: saving money and better serving the customer. In this rapidly changing world, if there is a company that does not meet those requirements, they’ll be out of business within a year, pushed out by someone who does it better, faster, and who probably remembers your name. 

    As Chris Skinner, author of Digital Human, stated: “The new world is one of transient relationships, shorter-term commitments and everything online all the time. However, the financial system is built for lifetime relationships, long-term engagement, and everything over the counter.” Fintech closes that gap between bank teller and customer, tech giant and client, and asks, “How can we help?”  

    The ZebraResource Center