Financial Technology

Financial Technology


The financial technology, or "fintech," industry consists of companies in a wide range of industries. The most obvious include banks, credit card companies, insurance companies, credit reporting agencies, software developers, investment firms, and a diverse mix of financial enterprises. Some portions of the industry are established enough to have gained their own nomenclature, including "insurtech" (insurance), "wealthtech" (investments and wealth management), and "regtech" (regulatory reporting, monitoring, and compliance).

At one end of the spectrum, innovative technology startups play a prominent role in researching, developing, and launching new offerings and getting them to market with lightning speed. However, the world's largest financial companies also have a stake in the industry and have made significant investments in financial technology. Finally, government agencies, including the Securities and Exchange Commission, develop regulations that govern the activities of industry players and their products and services.

While the industry itself includes many different types of companies, things become more complex when their target customers are added to the mix. Financial technology products and services are used to conduct transactions that may flow in multiple directions. Interactions may happen in purely business-to-business or business-to-consumer contexts. Alternatively, consumers may use financial technology solutions to conduct transactions with one another, or with a business. Nonprofit organizations also use the financial technology industry's solutions for functions like donor management, fundraising, and operations.

The industry's focus on changing and disrupting the way traditional financial services are created and provided means new solutions and categories are being introduced constantly. While virtually every product and service (including algorithms, chatbots, mobile applications, software, and hardware) involves financial information or transactions, the similarities between them can vary significantly. Examples of common functions or tasks include:

  • account monitoring
  • budgeting
  • credit monitoring
  • cryptocurrency exchanges
  • financial advising
  • investment management
  • loan applications
  • mobile deposits
  • mobile payments
  • money transfers
  • online bill payment
  • online trading
  • payment processing
  • peer-to-peer lending
  • saving
  • stock trading

In 2020, the global economy was significantly impacted by the SARS-CoV-2 (COVID-19) outbreak, which disrupted virtually every industry and created a recession in many countries. Despite this, the financial technology industry achieved strong overall growth, according to a joint study conducted by the World Bank, the Cambridge Centre for Alternative Finance at the University of Cambridge’s Judge Business School, and World Economic Forum. The study described how various aspects of the industry had been impacted, both positively and negatively, during the first half of 2020. The strongest gains were achieved in the retention of existing customers and users (29%), new customers/users (22%), and the number of unique corporate customers (15%). The most significant negative effects included an uptick in arrears or late repayments (14%) and time to value (11%). The number of claims, non-payments, and defaults on outstanding loans all increased 9 percent.

The exchange of funds and sensitive information, including account numbers and Social Security numbers, is at the heart of the financial technology industry, and thus security is a primary concern. Identity theft and financial loss are real risks that must be considered when using any financial product or service. This especially is true in the case of offerings from startups and businesses that are relatively unknown or based in other countries. However, even established and well-known corporations are victims of hacks and data breaches.

Regulation is another pressing issue with financial technology. Many of the industry's products and services are on the cutting edge and meant to be disruptive. They may violate or fall outside the parameters of existing regulations. In some cases, fast-moving financial technology companies may inadvertently break existing laws, resulting in hefty fines from government regulators, including the Securities and Exchange Commission. In other instances, the industry's offerings have been used to blatantly circumvent regulations or fees.

Technology is at the heart of the industry. Emerging technologies are fueling much of its growth. Artificial intelligence (AI) is a prime example. By the 2020s, stock trading was becoming more automated, with less reliance on human involvement. In October 2019, The Economist explained that 35 percent of the U.S. stock market was run by computers operating under human rules. In the case of both trading activity and institutional equity assets, the figure was much higher (60%). AI is the technology behind robo-advisors, which provide investment and financial planning advice using algorithms.

The Economist noted that AI programs were "writing their own investing rules, in ways their human masters only partly understand." The article noted that industries "from pizza-delivery to Hollywood are being changed by technology, but finance is unique because it can exert voting power over firms, redistribute wealth and cause mayhem in the economy."

Another emerging technology, blockchain, supported cryptocurrencies like Bitcoin, but also had other applications including funds transfers and trade settlement. According to PwC, "a blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority."

During the early 2020s, special-purpose acquisition companies (SPACs) had emerged as an option for companies to sidestep the traditional initial public offering (IPO) process and become publicly listed. SPACs, which did not have operations of their own, existed solely for the purpose of acquiring other companies and taking them public. The Wall Street Journal revealed that SPACs were especially popular with financial technology startups, leading to industry deals worth billions of dollars. In its May 27, 2021, issue, the publication stated that more than $100 billion had been raised by SPACs in the first half of 2021 alone, according to SPAC Research.