If you have heard the term “FinTech” floating around and are not exactly sure where to start, this is where to begin. FinTech stands for financial technology, and it first emerged in the 21st century. When this occurred, it originally referred to the back-end systems at financial institutions. However, today FinTech looks at more consumer-facing services and its definition has been altered to reflect that.
Some industries that FinTech includes extends to education, retail banking, nonprofit, investment management, fundraising, and more. Furthermore, FinTech has been used in the development of cryptocurrencies like Bitcoin. When it comes to the technology that allows both consumer and businesses to better manage their financial operations, FinTech is what you are looking for. It includes operations, processes, software, and algorithms.
The impact of FinTech
The FinTech startups that you are most likely to hear about are the ones that will upend the current providers in the market. These are the traditional financial providers that you know and are familiar with. FinTech startups are seeking to undercut these providers by being more flexible and serving a new segment within the market. Additionally, they aim to provide both faster and better services. For example, if you want greater access to credit or microloans (and you do not meet the traditional criteria) then these startups are often able to offer you options.
A great example is the loan originator Upstart. Their focus is FICO — the first company to ever offer a credit-risk model with a score. If you have ever wondered exactly what this score has to do with you, your “worthiness” to borrow, and why it determines so much, then Upstart has your back. They are looking to make FICO obsolete by utilizing other types of data to determine your creditworthiness. For example, they advocate utilizing your employment history, education, and other similar factors to underwrite and decide how to price loans.
So, what does that mean for the banking and finance sector?
Financial services is the largest sector in the world, and this very fact is edging out banks when it comes to who is dominating the world of money. In many ways, FinTech startups are specifically designing components that are intended to outperform banks. What are those components exactly?
Financial stability – The appealing part of FinTech is its potential for vigilance (and perhaps even regulation) in financial services. Financial stability addresses the policies that protect the soundness of the financial system itself. While the current system poses some risk, it is appealing to have the potential for increased financial stability through FinTech due to its speed and scale.
Competition – FinTech startups are a known element of disruption for banks. They create increasing competition for them. The creation of competition allows these startups a way in.
Data rights – According to Deltec Bank, the Bahamas - “Data rights are a huge issue when it comes to the finance sector.” Banks typically paint themselves as big proponents of client privacy. Data protection has become incredibly necessary to operate anywhere within banking or the financial sector. That said, the notions of data privacy, ownership, and value are constantly changing which makes it challenging to keep up with. This is yet another area that FinTech is looking into to ensure security.
Final thoughts
FinTech funding is rising, and while FinTech startups are seeking to disrupt traditional banks, the banks are taking notice. In fact, they are looking into their own ability to become faster, cheaper, and more efficient and to integrate some of the features that FinTech promotes like mobile payments and AI.
Disclaimer: The author of this text, Robin Trehan, has an Undergraduate degree in economics, Masters in international business and finance and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries and/or employees.
About Deltec Bank
Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.
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