What Is Fintech? How This Disruptive Industry Works

Venmoing a friend. Investing on your phone. Checking your bank balance online. All these everyday activities used to require interacting with a financial services professional. Now, thanks to financial technology (i.e., fintech), consumers can perform these tasks and more within minutes.

All of these uses make up a fast-growing, multihundred-billion-dollar industry. Fintech is growing at a compound annual growth rate (CAGR) of ~20%, with analysts predicting the industry to be worth $1.5T+ by 2030. There are currently 26k+ startups operating in the space — a twofold increase compared to 2020.

Because of its disruptive nature and rapid growth, fintech offers several business opportunities for budding entrepreneurs. As fintech expands, so will its reach into your business. By learning about the industry’s history, regulations, and future, you can better prepare yourself for its impacts and opportunities.

Table of contents:

• What is fintech?
• What is a fintech company?
• The history of fintech
• The future of fintech
• Examples of fintech

What Is Fintech?

The term “fintech” describes any technology that enables consumers to conduct financial transactions digitally. The technology replaces many services offered by financial institutions, such as wealth management, banking, investments, and more.

What Is a Fintech Company?

A fintech company is a business that creates and sells technology meant to improve, change, or automate a financial service. They usually fall into one of the following categories:

• Lending
• Peer-to-peer payments
• Mobile payments
• Buy now, pay later (BNPL)
• Wealth management
• Blockchain and cryptocurrency
• Banking
• Insurance

For example, you might invest with Robinhood, send money with Cash App, or shop online with PayPal. Fintech also has numerous applications in business, from using Square to process store payments to leveraging Kickstarter to raise money for your business.

The History of Fintech

Fintech, as it’s known today, dates back to the digitization of banking in the late 1960s, when Barclays opened its first ATM; NASDAQ, the first digital stock exchange, launched in 1971.

PayPal’s 1999 launch revolutionized how we sent money, an early nod to how fintech would soon impact consumers. The introduction of smartphones in the late 2000s enabled consumers to access their bank accounts using mobile apps.

2005 saw the launch of Zopa, the first major player in peer-to-peer lending. A few years later, the first robo-advisor started offering automated financial advice to clients. The first digital currency, Bitcoin, launched in 2009.

In the early 2010s, trading platforms, like Robinhood, offered fee-free trading to everyday consumers for the first time. In recent years, major brokers such as Charles Schwab and Fidelity have followed suit, slashing commissions on trades to zero.

Today, almost nine in 10 Americans use fintech. Even big banks have felt the pressure to evolve, with many integrating tech such as mobile apps and robo-advisors into their traditional offerings.

The Future of Fintech

Like most industries, fintech’s future revolves around artificial intelligence (AI) and machine learning (ML). Consulting giant McKinsey even advises financial institutions to adopt an “AI-first mindset” to prevent fintech companies from taking over their territory.

The fintech industry will see a greater use of AI and ML to improve analytics, increase customer personalization, and connect data sources.

Fintech faces many of the same regulations as other financial institutions. However, regulations around cryptocurrency have lagged behind the pace of the industry. As the industry grows, so do efforts to regulate it.

Many challenges in regulating cryptocurrency come down to fundamentals, such as defining a “crypto asset.” Cryptocurrency encompasses an array of products, requiring regulators to consider specialized regulations for different types of crypto.

Moreover, countries have taken vastly different approaches in how they regulate cryptocurrency — some have outright banned it, while others seek to grow these markets. This makes it inherently challenging for international authorities to create regulations, especially as countries finalize regulations and catch up with the industry.

Examples of Fintech

1. Consumer lending: Affirm

Affirm enables consumers to shop online and pay in installments. Users check out and purchase with Affirm, then are prompted to select a payment schedule. This could mean paying in monthly installments or in four interest-free payments.

2. Peer-to-peer payments: Venmo

Venmo provides a peer-to-peer payment platform for consumers and businesses to transfer money electronically. Nonbusiness users can send money to friends to split expenses, such as dinner bills or rent.

Users can also set up business profiles and receive payments through Venmo, which charges a fee for instant bank transfers.

3. Investing: Robinhood

Robinhood helps consumers make commission-free trades, with no minimums to open an account. Users download the Robinhood app; select stocks, options, or bundles; and choose the amount of money they want to invest.

The platform democratizes investing, enabling any user to build a portfolio at no cost.

4. Blockchain and cryptocurrency: Coinbase

Coinbase is an exchange platform for all types of cryptocurrency, from bitcoin to non-fungible tokens (NFTs). Users can sign up and browse the cryptocurrency marketplace. They can then buy, sell, and store assets within Coinbase, which also offers analytical tools to help optimize users’ portfolios.

5. Banking Services: Chime

Chime is an online banking platform that partners with regional banks to innovate and improve the banking experience. Chime reduces or eliminates overdraft and service fees, creates products to improve user experience, and allows users to check their accounts via its app. While Chime itself is not a bank, their technology has improved banks’ services and customer satisfaction.

6. Insurance: Zipari

Zipari provides health insurance companies with a customer experience platform to help them increase engagement, build better relationships, and improve operations. The B2B firm offers solutions, such as personalized next-step recommendations for platform users and comprehensive customer reports, to help their clients make improvements across all aspects of customer experience and management.

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