What is FinTech?
FinTech (financial technology) is an umbrella word comprising software, mobile applications, and other technologies designed to enhance and automate traditional forms of finance for both corporations and individuals. FinTech may range from simple mobile payment apps to large blockchain networks containing encrypted transactions.
What is a FinTech Company?
Any firm that utilizes technology to change, improve, or automate financial services for businesses or consumers is referred to as a "fintech company." Mobile banking, peer-to-peer payment systems like Venmo and CashApp, automated portfolio managers like Wealthfront and Betterment, and trading platforms like Robinhood are some examples. It may also be applied to the creation and trade of cryptocurrencies like Bitcoin and Dogecoin, among many others.
History to FinTech
While fintech appears to be a new succession of technology achievements, the core notion has been around for a while. Early credit cards in the 1950s were among the first fintech products made available to the general public, as they reduced the need for users to carry actual cash in their daily lives. Fintech then expanded to incorporate bank mainframes and online stock trading platforms. PayPal was created in 1998, making it one of the first fintech businesses to function exclusively on the internet – a breakthrough that has since been surpassed by mobile technology, social media, and data encryption. This fintech revolution gave rise to the mobile payment applications, blockchain networks, and social media-based payment choices that we now rely on.
How does FinTech work?
While fintech is a complex idea, it is feasible to obtain thorough knowledge. FinTech streamlines financial transactions for individuals and businesses, making them more accessible and often less expensive. It can also refer to businesses and services that use artificial intelligence, big data, and encrypted blockchain technology to conduct highly secure transactions within an internal network. Fintech attempts to simplify the transaction process by removing potentially superfluous stages for all parties involved. For example, a smartphone app such as Venmo or CashApp lets you pay others at any time of day or night by sending dollars directly to their bank account. However, if you paid with cash or a check, the receiver would need to go to the bank to deposit the funds.
The Technologies that power FinTech
AI, big data, and blockchain technology have all totally altered how businesses move, store, and safeguard digital cash in modern finance. AI, in particular, may give organizations significant insights into consumer behavior and spending habits, helping them to better understand their clients. Big data analytics may assist businesses in forecasting market shifts and developing new data-driven business strategies. Blockchain, a newer financial technology, enables decentralized transactions without the involvement of a third party by utilizing a network of blockchain users to monitor prospective modifications or additions to encrypted data.
FinTech models: China vs The West
The Chinese business model is similar to this: companies closely examine Western innovations. They imitate, borrow, and even misappropriate technology — and then they scale it massively. Take, for example, mobile payments. Despite the fact that it is an American invention, China's mobile payments market is 50 times larger than that of the United States. However, whereas Western businesses tend to specialize in a single industry — for example, PayPal and Stripe focus on payments, Robinhood on mobile investment, and Kabbage on lending - Chinese enterprises choose a more wide, horizontal approach. They have created extensive ecosystems and super applications (such as WeChat) that cater to a wide range of customer demands in financial services such as payments, wealth management, loans, and other services such as ride-sharing, meal ordering, travel reservations, and so on.
The end-to-end services and ecosystems built by Chinese IT enterprises are pretty outstanding. We hear a lot about Apple's ecosystem, but it's not as extensive as the ecosystems of the major Chinese IT businesses. Despite the fact that Apple has Apple Pay, it appears to be on the outskirts of Apple's ecosystem. On the other hand, Alipay (from Alibaba) and WeChat (from Tencent) are at the heart of their own ecosystems. With their wealth increasing, the Chinese are looking for a strong return on their financial holdings. They certainly want something more than what Chinese banks provide, which is zero for ordinary savings accounts. As a result, services like wealth management and asset management are on the rise.
Large Chinese fintech businesses have extended their products to the point that some are "becoming financial institutions in their own right and competing for head-on" with banks. It "attests to the wide-ranging financial capabilities of these enterprises, unlike their European or American counterparts," according to the fact that China's four main state-owned banks have cooperated with at least one large Chinese technology firm.
To be sure, there are difficulties in the fintech industry. Consider the peer-to-peer (P2P) lending networks in China, which are especially crucial for small and medium-sized businesses with restricted credit access. The problem here is to "prevent the sector from becoming too large to fail." Since 2016, the P2P market in China has seen a lot of upheavals, with over a third of these platforms experiencing issues owing to ceased operations, disagreements, frozen withdrawals, or executives who have absconded with investors monies. Failures have persisted despite a regulatory revamp of the Chinese P2P market in the previous two years. "There is significant debate about the future viability and scale of the Chinese P2P industry." Furthermore, there are headwinds from the weakening Chinese economy and how it may impact fintech.
Initial coin offerings, cryptocurrencies, and peer-to-peer scandals such as those involving Ezubao (China), Lending Club (United States), and TrustBuddy (Sweden) have propelled fintech to the forefront of policy and research agendas in both China and the West. Policymakers face the dilemma of preserving market integrity and establishing clear regulations while supporting financial innovation. There are also growing worries regarding AI's societal influence and its implications for financial inclusion.
Sweden was one of the first Western countries to adopt a cashless economy, but it was not without controversy. The speed with which Sweden has gone cashless has been a disadvantage. Opponents argue that it has moved too quickly, resulting in financial exclusion, particularly for the elderly and low-income groups who may lack computer literacy. When considering a cashless society, financial inclusion is also critical. Both parties may benefit from Sweden's experience.
Another problem for the West is that FinTechs must improve their game. "A business strategy centered on easy-to-use and simple interfaces with free services will no longer be enough to distinguish." One positive feature is the United Kingdom's regulatory "sandboxes," which allow FinTech concepts to be tested in a controlled and monitored setting. This notion is currently being implemented on a worldwide scale.
Some learnings for both sides
The major lesson the West can learn from the Chinese is to focus on developing integrated solutions and ecosystems that can become ingrained in the lives of its users, rather than focusing on a single product or service in isolation. Chinese players strive to have a thorough understanding of their customers and use that knowledge to create goods and services that cover their complete digital experience.
The essential takeaway from the West is about teamwork. Western economies have witnessed more engagement between fintech businesses and traditional banking institutions. Fintechs seeking to scale up exponentially may not necessarily have the luxury of time and resources to construct everything from scratch. Collaboration with other businesses can help save money and save time to market.