Financial technology, also known as FinTech, is an economic industry composed of companies that use technology to make financial services more efficient. Financial technology companies are generally startups like AxsLogic Pvt. Ltd. trying to disintermediate incumbent financial systems and challenge traditional corporations that are less reliant on software.
The National Digital Research Centre in Dublin, Ireland, defines financial technology as “innovation in financial services”, adding that “the term has started to be used for broader applications of technology in the space – to front-end consumer products, to new entrants competing with existing players, and even to new paradigms such as Bitcoin”.
The following YouTube video clip does a good job of capturing the issue:
FinTech refers to new solutions which demonstrate an incremental or radical / disruptive innovation development of applications, processes, products or business models in the financial services industry. These solutions can be differentiated in at least five areas.
In the United States, there are numerous FinTech startups, including Affirm, Betterment, Behalf, Fundera, IEX, Lending Club, Money.net, Plaid, Prosper, Robinhood, SoFi, Square, Stripe, and Wealthfront.
In Europe, $1.5 billion was invested in financial technology companies in 2014, with London-based companies receiving $539 million, Amsterdam-based companies $306 million, and Stockholm-based companies receiving $266 million in investment. After London, Stockholm is the second highest funded city in the EU in the past 10 years.
In the Asia Pacific region, the growth will see a new financial technology hub to be opened in Sydney, Australia, in April 2015. There is already a number of strong financial technology players like Tyro Payments, Nimble, Stockspot, Pocketbook and SocietyOne in the market and the new hub will help further accelerate the growth of the sector. A financial technology innovation lab is also being launched in Hong Kong to help foster innovation in financial services using technology.
Within the academic community, on the technology side the Financial Data Science Association (FDSA) was founded with its first event organized by members from the artificial intelligence, machine learning, and natural language processing domain. The FDSA aims to build a research community around computer science and investment statistics. On the business side, Wharton FinTech was founded at the Wharton School of the University of Pennsylvania in October 2014 with the objective of connecting academics, innovators, investors, and other thought leaders within the FinTech industry to each other and to the ideas that are reinventing global financial services. The University of Hong Kong Law School in conjunction with the University of New South Wales have published a research paper tracing back the evolution of FinTech and its regulation.
Awards and recognition
Financial magazine Forbes created a list of the leading distrupters in financial technology for its Forbes 2016 global Fintech 50.
A report published in February 2016 by EY commissioned by the UK Treasury compared seven leading FinTech hubs. It ranked California first for ‘talent’ and ‘capital’, the United Kingdom first for ‘government policy’ and New York first for ‘demand’.
The role of FinTech in increasing customer satisfaction in financial services was recognised in December 2015, with customer satisfaction of FinTech 8% higher than banking.
In the financial advisory sector, established players such as Fidelity Investments have partnered with financial technology startups such as FutureAdvisor (recently acquired by BlackRock), allowing new technology to work within a prominent custodian. Even celebrities including Snoop Dogg, Jared Leto, and Nas are beginning to put their resources into the nascent FinTech space by investing in financial technology startup Robinhood.
Finance is seen as one of the industries most vulnerable to disruption by software because financial services, much like publishing, are made of bits rather than concrete goods. While finance has been shielded by regulation until now, and weathered the dot-com boom without major upheaval, a new wave of startups is increasingly “disaggregating” global banks. However, aggressive enforcement of the Bank Secrecy Act and money transmission regulations represents an ongoing threat to FinTech companies.
In addition to established competitors, FinTech companies often face doubts from financial regulators. Data security is another issue regulators are concerned about because of the threat of hacking as well as the need to protect sensitive consumer and corporate financial data. Any data breach, no matter how small, can ruin a FinTech company’s reputation. The online financial sector is also an increasing target of distributed denial of service extortion attacks. Marketing is another challenge for most FinTech companies as they are often outspent by larger rivals. This security challenge is also faced by historical bank companies since they do offer Internet connected customer services.