What Is Fintech And Why Does It Matter?

The term “fintech” seems to be everywhere lately. Is this just a buzzword or is it buzzworthy? Let’s look at the details.

What is fintech?

Fintech is the shortened term for “financial technology.” It refers to companies that find ways to make financial services more efficient, intelligent and user-friendly by adopting and incorporating innovative technology and applications.

These can include different types of payment services, financial services, peer-to-peer transactions, alternative lending platforms and new crypto-currencies. And while some of these companies and new systems, like Bitcoin for example, have been seemingly quite volatile and downright confusing, there are an increasing number that have a much broader appeal to consumers and businesses alike.

Startups are the most common fintech company, as they can reinvent the wheel and start from the ground up for financial applications and processes – which are often complex and extremely resource heavy to change in legacy companies. These new fintech companies can also challenge the traditional system and create disruption in the market by offering new software and service that customers will expect from all competitors.

One example becoming more common is mobile payments. In some markets in fact, using your smartphone to pay for items is an everyday occurrence. And mobile banking has become more secure, safe and reliable – with apps providing instant access to the majority of your everyday banking needs. As consumers become more familiar and comfortable with such services, services such as Apple Pay are starting to gain real momentum and will force retailers, consumers and the financial industry to adapt.

Some high profile fintech companies getting a lot of buzz include:

• Sofi: This fintech firm started by offering student loan assistance, then building upon that relationship to enter personal finance including mortgages and personal loans. By taking employment history and other factors into account, they’ve been able to offer solutions that weren’t typically available, especially to the younger consumer demographic.
• OurCrowd: This Jerusalem-based company is considered a leader in equity crowdfunding for accredited investors. Managed by a team of investment pros who fund startups, they have put up $170 million from 1,500 investors.
• Square: A simple device that turns your smartphone or tablet into a cash register. Swipe a customer card, accept payment, email receipts and get reports right to your laptop.

How will fintech companies change the market?

Although fintech companies are a hot trend, they are not forecast to wipe out traditional banking. Rather, they’ll be seen as a complement to the system, providing an ‘assist’ to bankers’ normal activities and practices while providing more options for customers in terms of available day-to-day technology.

The Economist reports that Silicon Valley fintech firms received $4 billion in funding in 2013, then an increase to $12 billion in 2014.  With such an influx in venture capital (VC) and other dollars, there’s no question this industry is set for success, and not just a flash in the pan trend.

That same report shows three key ways that fintech will change the market:

1. Cutting costs and improving quality of financial services: Without the same regulators, legacy IT systems that are complex and outdated, and brick-and-mortar branches as the old-school banking institutions, there are immediate cost savings possible in this industry. Fintech firms, in conjunction with alternative lenders, can often offer better deals to both borrowers and lenders.

2. Risk assessment: These new companies are clever – by capturing information from social media sites and online reviews to assess a small business’ performance. They also use machine learning to improve underwriting, and sites like Kickstarter are using crowdsourcing to help fund the fintech companies. By relying on algorithms and an innovative new generation of consumers, the industry can offer a fresh suite of services and limit their own risk.

3. Diversifying and stabilizing the credit landscape: By being geographically widespread and avoiding the heavy overhead of bricks-and-mortar locations like many traditional institutions, fintech firms can potentially limit their liability. They match borrowers with lenders and act as the platform or middleman to get the deal done. The lender assumes the risk so the fintech firm can grow their business and offerings. Other more established lenders can take advantage of fintech in order to access the best people, the best practices and make better decisions by not being limited to geography.

Should my business partner with a fintech firm? 

If you value the face-to-face relationships in business, you may not get that with a fintech firm for your financing needs. They are fast growing, looking for new business and may not offer traditional in-person service. That’s not to say this is the case with every fintech firm, but keep this in mind when investigating options for your business dealings.

And if you’re looking to develop a business partnership with a firm that has a rich history and experience in the market, and not just one with a rich VC funding, this may not be the place for you. There is nothing wrong with startups, VC funded companies and growth. In fact, it’s quite the opposite. Entrepreneurs, business owners and innovators in fintech firms are forward thinking and help advance the entire industry, and should be well respected.

But businesses will no doubt come and go, be swallowed up by competition and perform the classic startup “pivot.” As with any business decision, due diligence is the best practice when deciding on which partners are best for your company.