09 Sep What Is Fintech? Industry Goals And Major Players
You might have heard the word “fintech” bandied about in boardrooms and in financial publications, but as with many elements of the tech industry, a basic definition can be hard to come by. Take some time to learn what fintech and the fintech industry is, what fintech startups have found major success, and what the industry as a whole aims to do.
As you’ll see, this is an important area to watch, even if you don’t plan to undertake any fintech projects yourself. The startups in this industry are radically changing the way we spend, receive, and organize money in both personal and professional contexts, making it valuable to keep your finger on the pulse. Read also about a secure dataroom to support business transactions in general.
The “fin” in “fintech” doesn’t refer to a fin like that you’d find on a shark. It’s a shortening of the word “financial,” which, when combined with the word “tech,” represents the financial technology sector. Technology has been a part of finance for a (relatively) long time.Stock markets have been using computerized technology for decades, well before it became common for individuals and families to keep computers in their homes. The Nasdaq Stock market, which was founded in 1971, was considered revolutionary at the time because it was the first all-electronic stock market.
Unlike traditional markets, Nasdaq wasn’t housed in a physical building and didn’t rely on paper tickets and other analog trading tools. This is one of the most prominent early examples of digital technology and finance coming together to create a more efficient and streamlined process for the transfer of funds and assets.
According to Investopedia, though, “fintech” didn’t really come into its own until the 21st century. Originally, financial technology consisted mostly of programmers and developers working in the financial services industry. These professionals were usually employees of a larger company that dealt mostly with finance or finance-adjacent business activities and these early fintech professionals focused primarily on the behind-the-scenes, or back end, tech for the traditional banking and finance industry.
That began to change during the dot-com-bubble era of the late 20th century.Startups in the fintech industry began cropping up in the late 1990s, with notable examples including PayPal, founded in 1998, and X.com, founded in 1999.
These early fintech companies sought to establish services that allowed users to conduct banking activities through digital means. X.com was originally an online bank, one of the first of its kind, but its founder, Elon Musk, decided to merge with one of its competitors, the PayPal predecessor known as Cofinity.Together, the companies rebranded as PayPal, and they managed to blow their competition out of the water, culminating in a $1.5 billion acquisition by eBay in 2002, which remains a major milestone in the fintech industry and is still regarded as one of the most successful acquisitions of all time.
PayPal is a great example of how broad and sort of nebulous the fintech label can be. There are so many different things a user can do with PayPal, from generating invoices for customers and clients to making online payments to e-commerce businesses using a credit card or linked bank account.
Businesses and consumers alike can use and benefit from the services PayPal provides and while the company is not without controversy, its diverse range of valuable tools keeps it on top in its industry. Some fintech startups and established fintech businesses have a much more focused mission, but this varies on a case by case basis.
There’s no one, specific way to define this field. Consumer banks, money transfers, automated investment portfolio management, online student loans, alternative lending, debt consolidation, payment processing, end-to-end payments and many other services and concepts can fall under the fintech umbrella. The name itself, financial technology, shows how broad the definition can be. Anything that falls in the middle of the Venn Diagram of finance and technology can be considered to be fintech.
Fintech Success Stories: What Sets These Startups Apart?
Aside from PayPal, there have been some notable examples of high-profile fintech startups making their way to successful acquisitions and IPOs. In most cases, the successful fintech startups are the ones that either develop useful programs that can be applied within a more traditional financial institution or create tools that change the way businesses and consumers spend, manage, and receive money.
Successful fintech examples include everything from Square, the company that allowed small business owners to turn their phones into cash registers with a simple credit card reader headphone jack plugin, to Credit Karma, a personal finance enterprise that focuses on credit score management and education.
As these examples show, fintech startups are often focused on changing the current face of the financial industry, often to make it more agile and user friendly. Fintech startups tend to compete with long-established financial institutions by offering a friendlier, more personal experience to users, often with a side of acknowledgement that the financial industry can be manipulative and confusing.
But, as we mentioned above, some fintech startups create software and tools that entrenched financial institutions can use to move their business models into the 21st century. There’s another class of fintech startup that relies on automation to make investment portfolio management more accessible to people who don’t have a whole lot of money to invest in the first place.
Robo-advisors are programs that use algorithm-driven bots to find the best investments for users, and some analysts are touting them as a better alternative to human financial advisors. Whether this is true or not, there’s a lot to like about these fintech companies. For one, most of them are profitable right out of the gate. Tech startups often have trouble finding ways to monetize—that’s still an issue for companies like Instagram and Twitter—but that isn’t often such an issue with fintech. There are some notable exceptions, like Venmo, which initially didn’t charge its users anything, but ultimately, fintech deals with money and it’s not hard to find ways to charge fees, which Venmo plans to start doing for commercial customers.
With automated investment tools, though, it makes sense for the robo-advisor to take a cut of what the user is either investing or earning. Some robo-advisors don’t start charging until a user has crossed a certain threshold, and presumably, once the user has crossed that line, which typically falls somewhere around $25,000, they’re already happy with the service and will be comfortable to pay for it.
Betterment, SigFig and Wealthfront are all examples of robo-advisor tools available in app form, which makes investing more convenient and accessible than ever before. This is a service that benefits consumers, especially those who might feel that their relative lack of wealth will get them subpar treatment from a traditional financial advisor. It’s a great example of what fintech is like at its best.
Overall, fintech is presenting in increasingly useful and promising ways. These relatively young companies are paving the way for the future and established financial institutions and financial services providers are having to stay on their toes to keep up. Some, like Schwab, are even following young fintech startups’ lead and coming out with their own robo-advisor apps. If you want to understand the future of the financial industry, you’re going to need to keep your finger on the fintech pulse.