The world of finance is embracing new technologies that sounded like science fiction a decade ago. Between activities such as online banking, stock market investing, and international trade, new opportunities are arriving at breakneck speeds. This is all possible under an umbrella term known as fintech, which expands access to financial services and makes possible the futuristic world of cryptocurrency.
Read on to learn more about what fintech is, its surprisingly long history, and the promises (not to mention risks) associated with it.
What Is Fintech, Exactly?
Simply put, fintech, or financial technology, is the application of technology within finance. The “fin” of fintech covers all areas of finance, from everyday banking to stock trading, investing, wealth management, and beyond. The “tech” encompasses nearly every technological innovation, including software (PayPal, Stripe, etc.), mobile applications (e.g., mobile banking apps), blockchain technology (e.g., cryptocurrencies), and artificial intelligence.
Fintech is part of our daily lives, whether we’re swiping a credit card, sending a Venmo payment, using a robo-investor, or making a digital bill payment.
Fintech Technologies and Applications
The changes to our financial lives owing to fintech’s reach can be seen every day. Using cloud-based systems, for example, day traders can now operate in their home offices, stretching the stock market from Wall Street to our own backyards. Internet-based customer service has become more refined, cost effective, and widely used than ever.
There are hundreds of applications available for fintech computing. Advanced telecommunications, wealth management, and understanding customer behaviors to help make sophisticated business decisions are all under the fintech purview. Investment decisions based on computer systems that analyze market trends are a key application.
In addition, fintech options are making it possible to distribute financial services to a much broader audience. As the costs of financial services go down, thanks to the reach of technology, many more individuals will be able to afford financial options that were once available only to the wealthy.
Furthermore, the world of finance is so complex that some of our best and brightest bankers are stumped when trying to explain how everything works. The unexpected Great Recession, 2007–2009, triggered by a subprime loan crisis, proved that investment banking had become an economic Rubik’s Cube, with too many moving parts for most of us to comprehend.
That happens. Economies over the centuries have always had ups and downs. But bankers now believe fintech offers high-powered safeguards that make investments cheaper, safer, and more readily available for a huge, new audience—an audience previously not wealthy enough to participate in high-powered investing.
Fintech promises revolutionary new strategies that run across the board. Its applications are useful in manufacturing, governing, urban planning, retail, science, education, aerodynamics, telecommunications—you name it. Exciting new applications are even geared toward the future of work and labor, which now pivots on remote technology in a post-pandemic world.
The Importance of Data in Fintech
The secret weapon in the world of fintech is, in a word, data.
Data analytics is the wave of the future. We can now collect so much information that human beings are simply overwhelmed by what to make of it. Computers, however, can look at incredible amounts of data, organize it, dissect it, and make astounding uses of it.
Data is what allows computers to make safe and accurate choices. When applied to finance, it can help banks and financial corporations advise investors, participate in cryptocurrencies, manage payrolls, and develop peer-to-peer lending platforms.
In short, fintech uses big data to power innovations that change the way we pay, invest, and understand our finances.
The Emergence of Blockchain Technology and Cryptocurrencies
Perhaps the pinnacle of fintech applications is cryptocurrency—a digital value marker that exists only online. As such, this currency is not issued by any government, so it can avoid government rules, regulations, and costs. Cryptocurrency is a cheaper method of transferring value from one company to the next since there is no third party underwriting the transaction. (The U.S. Treasury Department, in contrast, underwrites transactions since they insure banks by way of the Federal Reserve Bank.)
Cryptocurrencies are digital inventions that serve to guarantee transactions by another means, which is called blockchain technology. Blockchains are, essentially, online ledgers that exist not in one server, but on multitudinous computers owned by cryptocurrency members. The data that guarantees the validity of transfers is “mined” from the computers, which then makes the security of cryptocurrencies guaranteed through “blockchain mining.”
While this is only one facet of fintech technologies, the financial world recognizes a seismic shift in banking is underway, so much so that crypto-based companies are known as “disruptors.” Whether disruptors are pioneers or pirates, however, has yet to be decided, as the $1.14 trillion cryptocurrency market is not risk-free. But while the market flourishes, cryptocurrencies will continue to raise eyebrows and expectations.
Artificial Intelligence in Fintech
Recent tech headlines hint at some of the marvels to come with financial stakeholders strapping in for a ride into the future. At the forefront of these stunning breakthroughs is artificial intelligence, or AI.
Let’s first take a peek at the fundamentals of artificial intelligence. To make the flip from computers that compute to computers that think, you have to figure out how to get a computer to learn, the field known as machine learning.
With advanced programming, computers learn in four different styles:
Data-Set Learning: With enough data, a computer can identify patterns and learn from its own observations.
Classification Learning: Computers draw conclusions from observed values by determining which category new observations belong.
Regression Learning: Computers estimate the relationship between variables in order to predict future events.
Forecasting Learning: Computers analyze trends to make predictions of how data will behave in the future.
All these systems hint at the range of ways AI will change finance, commerce, and culture. Computers are now poised to perform in a dynamic probabilistic fashion by deploying probabilistic guesswork to determine the most likely answer to a problem. Applications of AI in fintech are nearly endless, but a few examples include
- analyzing customer data and behavior to improve existing fintech products, like mobile banking apps
- automating investing through robo-advisors that algorithmically determine investment options based on customer goals and risk tolerance
- improving security, automating fraud detection, and safeguarding sensitive customer information
A “Bit” of Fintech History
The term fintech was coined by Citigroup (then Citicorp) in 1993 as part of their effort to demonstrate their embrace of technology. But the history of fintech goes much farther back.
In the 1860s the first transcontinental telegraph occurred, laying the groundwork for a global financial system; in the early 1900s, the Federal Reserve used Morse code to transfer funds between banks; and in 1950, we saw the first example of a credit card. Because of fintech’s broad definition, it’s possible to look back centuries and find interesting cases of financial technology.
Fast-forward to today and most claim Bitcoin was the first cryptocurrency, but there were predecessors. The first, says Investopedia, was a system called eCash. From an idea first postulated in 1983, David Chaum created eCash in 1990 through his company called DigiCash.
Also in the early stages were b-money, Bit Gold, and Hashcash, each of which influenced the development of Bitcoin, launched in 2008, the first cryptocurrency to make a very large splash and now the largest by far.
Satoshi Nakamoto and the History That Made Bitcoin Possible
Bitcoin also benefited from a white paper published under the pseudonym Satoshi Nakamoto. The paper outlined the blockchain system that is the foundation for online crypto transactions. It was assumed this pseudonym was the name of a group of Japanese developers, but six years after the paper’s publication, Newsweek announced it had found the real Satoshi Nakamoto: an unemployed physicist at the time (2007) living in California, with his first name Dorian.
The Biggest Fintech Companies
Because fintech has such a broad definition, some of the largest corporations in the world can be considered fintech companies. That’s why it might be easier to examine the biggest fintech companies by their focus:
- Credit Cards: Visa ($470 billion) and Mastercard ($360 billion)
- Digital Payments / Software: PayPal ($70 billion), Stripe ($55 billion), and Square ($33 billion)
- Cryptocurrency: Bitcoin ($500+ billion), Ethereum ($200+ billion), and Tether ($80+ billion)
This is just a glimmer of the many companies—from startups to major corporations—in the fintech space.
The Potential Risks and Dangers of Fintech
With any new technology promising innovation, excitement and hype build while questions about risk get overlooked. And while many fintech products and services have improved our daily lives, some have had unintended problematic consequences, while others have been nothing short of a disaster.
Robinhood, valued at close to $12 billion, was innovative in that it made investing, particularly in the stock market, accessible to anyone with a smart phone. The average person without access to stock brokers or financial professionals was suddenly able to buy and sell stock with the tap of a button. But Robinhood began to be criticized for making trading too easy. Customers with little knowledge or experience could engage in risky investment decisions, sometimes leading to heartbreaking consequences.
Another cautionary tale from the fintech world is FTX, a cryptocurrency exchange that allowed customers to buy and sell crypto assets. TV ads were common and featured many celebrity cameos. FTX was valued at $32 billion in early 2022, only to collapse, declare bankruptcy, and face many criminal investigations one year later. The aftershock of FTX’s collapse and ensuing investigations continues to play out.
There are many ways fintech can go wrong, from funding to compliance failures; Forbes has a piece on some of the ways fintech companies can find themselves in trouble.
Learn More About Fintech
Interested in learning more about the world of fintech? The resources below provide excellent explainers of how fintech works, examples of fintech innovations, and more.