Financial technology

After reviewing more than 200 scientific papers citing the term "fintech," a study on the definition of fintech concluded that "fintech is a new financial industry that applies technology to improve financial activities."[6] Fintech is the new applications, processes, products, or business models in the financial services industry, composed of one or more complementary financial services and provided as an end-to-end process via the Internet.[4] Fintech can also be considered as “any innovative ideas that improve financial service processes by proposing technology solutions according to different business situations, while the ideas could also lead to new business models or even new businesses." [7]

Financial technology has been used to automate investments, insurance, trading, banking services and risk management.[8][9]

The services may originate from various independent service providers including at least one licensed bank or insurer. The interconnection is enabled through open APIs and open banking and supported by regulations such as the European Payment Services Directive.

In trading on capital markets, innovative electronic trading platforms facilitate trades online and in real time. Social trading networks allow investors to observe the trading behavior of their peers and expert traders and to follow their investment strategies on currency exchange and capital markets. The platforms require little or no knowledge about financial markets, and have been described as disruptors which provide "a low-cost, sophisticated alternative to traditional wealth managers" by the World Economic Forum.[10]

Robo-advisers are a class of automated financial adviser that provide financial advice or investment management online with moderate to minimal human intervention.[11] They provide digital financial advice based on mathematical rules or algorithms, and thus can provide a low-cost alternative to a human advisers.

Global investment in financial technology increased more than 2,200% from $930 million in 2008 to more than $22 billion in 2015.[12] The nascent financial technology industry in London has seen rapid growth over the last few years, according to the office of the Mayor of London. Forty percent of the City of London's workforce is employed in financial and technology services.[13]

In Europe, $1.5 billion was invested in financial technology companies in 2014, with London-based companies receiving $539 million, Amsterdam-based companies $306 million, and Stockholm-based companies receiving $266 million in investment. After London, Stockholm is the second highest funded city in Europe in the past 10 years. Europe's fintech deals reached a five-quarter high, rising from 37 in Q4 2015 to 47 in Q1 2016.[14][15] Lithuania is starting to become a northern European hub for financial technology companies since the news in 2016 about the possible exit of Britain from the European Union. Lithuania has issued 51 fintech licenses since 2016, 32 of those in 2017.[16]

Fintech companies in the United States raised $12.4 billion in 2018, a 43% increase over 2017 figures.[17]

Christine Lagarde, Managing Director of the International Monetary Fund addressing in 2018 at the Singapore FinTech Festival, the largest FinTech festival in the world.

In the Asia Pacific region, the growth will see a new financial technology hub to be opened in Sydney, in April 2015.[18] According to KPMG, Sydney's financial services sector in 2017 creates 9 per cent of national GDP and is bigger than the financial services sector in either Hong Kong or Singapore.[19] A financial technology innovation lab was launched in Hong Kong in 2015.[20] In 2015, the Monetary Authority of Singapore launched an initiative named Fintech and Information Group to draw in start-ups from around the world. It pledged to spend $225 million in the fintech sector over the next five years.[21]

While Singapore has been one of the central Fintech hubs in Asia, start ups in the sector from Vietnam and Indonesia have been attracting more venture capital investments in recent years. Since 2014, Southeast Asian Fintech companies have increased VC funding from $35 million to $679 million in 2018 and $1.14 billion in 2019.[9]

Fintech start-ups around the world have been noted for their innovation, creativity, and cutting-edge work styles, and as a result these aspects have worked their way into each workplaces’ culture. This emphasis on collaboration and alliance has resulted in workplaces where afternoon office happy hours occur every Friday, in-office yoga classes are offered to help relieve employees’ stress, and other engaging activities are hosted. These environments are not only fun for employees, but build a more productive and friendly workplace that enhance company performance.[22] What makes fintech's workplace culture especially unique is the methods used to preserve this special environment, which is through the hiring process. There are three key ways fintech start-ups maintain this state-of-the-art culture through their hiring process: involving the whole crew, being consistent, and clarifying their mission. By allowing multiple departments to have a say in who is hired and making their mission clear to all prospective employees, start-ups are able to attract prospects who hold the same values and goals as the company itself.[22] The unique workplace culture fintech startups operate around gives fintech an edge over traditional banking and explains why fintech is the future of the financial industry.

Within the financial services industry, some of the used technologies include artificial intelligence (AI), big data, robotic process automation (RPA), and blockchain.

Artificial Intelligence is a blanket term for many different technologies. In terms of the "fintech" industry, AI is used in various forms. AI algorithms can be used to predict changes in the stock market and give insight into the economy. AI is used to provide insight on customer spending habits and allows financial institutions to better understand their clients. Chatbots are another AI-driven tool that banks are starting to use to help with customer service.

Big Data is another "fintech" technology that financial institutions utilize. In the finance sector, big data can be used to predict client investments and market changes and create new strategies and portfolios.[23] Big Data can be used to analyze customer spending habits and therefore improve fraud detection. Big Data helps banks create segmented marketing strategies and can be used to optimize the operations of a company.

Robotic Process Automation is an artificial intelligence technology that focuses on automating specific repetitive tasks. In terms of "fintech", RPA is used to perform manual tasks that often are repetitive and completed daily.[24] These tasks just involve the input of information into a system and do not require much skill thus companies are replacing them with RPA which can complete the task quicker and more efficiently. RPA helps to process financial information such as accounts payable and receivable more efficiently than the manual process and often more accurately. RPA can be used to increase the productivity of the financial company.[25]

Blockchain is another financial technology that is beginning to be used in the industry. Out of all the "fintech" technologies, blockchain was developed for the purposes of finance and thus has direct ties to financial institutions. The main feature of Blockchain in financial services is decentralization where do not need to trust a third party to execute transactions.[26] Though blockchain is still an emerging technology, many companies recognize the impact that it will have and are investing accordingly.[27]

Other forms of fintech technologies act to supplement and enhance existing financial services. These include services such as transferring funds between banks by companies such as Plaid (company) and augmenting payroll services for consumers by companies such as Clair.[28]

Financial magazine Forbes created a list of the leading disruptors in financial technology for its Forbes 2019 global Fintech 50.[29] In Europe there is a list called the FinTech 50,[30] which aims to recognise the most innovative companies in fintech.[31]

A report published in February 2016 by EY commissioned by the UK Treasury compared seven leading fintech hubs: the United Kingdom, California, New York City, Singapore, Germany, Australia and Hong Kong. It ranked California first for 'talent' and 'capital', the United Kingdom first for 'government policy' and New York City first for 'demand'.[32]

For the past few years, PwC has posted a report called the "Global Fintech Report". In the 2019, the report covers many topics revolving around the financial technology sector. The report discusses the landscape of the "Fintech" industry and some of the emerging technologies in the sector. It provides strategies for financial institutions on how to incorporate more "fintech" technologies into their business.[33]

Finance is seen as one of the industries most vulnerable to disruption by software because financial services, much like publishing, are made of information rather than concrete goods. In particular blockchains have the potential to reduce the cost of transacting in a financial system.[34] While finance has been shielded by regulation until now, and weathered the dot-com boom without major upheaval, a new wave of startups is increasingly "disaggregating" global banks.[35] However, aggressive enforcement of the Bank Secrecy Act and money transmission regulations represents an ongoing threat to fintech companies.[36] In response, the International Monetary Fund (IMF) and the World Bank jointly presented Bali Fintech Agenda on October 11, 2018[37] which consists of 12 policy elements acting as a guidelines for various governments and central banking institutions to adopt and deploy "rapid advances in financial technology".[38]

The New York Venture Capital Association (NYVCA) hosts annual summits to educate those interested in learning more about fintech.[39] In 2018 alone, fintech was responsible for over 1,700 deals worth over 40 billion dollars.[40]

In addition to established competitors, fintech companies often face doubts from financial regulators like issuing banks and the Federal Government.[41][42] In July 2018, the Trump Administration issued a policy statement that allowed FinTech companies to apply for special purpose national bank charters from the federal Office of the Comptroller of the Currency.[43] Federal preemption applies to state law regarding federally chartered banks.[44]

Data security is another issue regulators are concerned about because of the threat of hacking as well as the need to protect sensitive consumer and corporate financial data.[45][46] Leading global fintech companies are proactively turning to cloud technology to meet increasingly stringent compliance regulations.[47]

The Federal Trade Commission provides free resources for corporations of all sizes to meet their legal obligations of protecting sensitive data.[48] Several private initiatives suggest that multiple layers of defense can help isolate and secure financial data.[49]

In the European Union, fintech companies must adhere to data protection laws, such as GDPR. Companies need to proactively protect users and companies data or face fines of 20 million euros, or in the case of an undertaking, up to 4% of their total global turnover.[50] In addition to GDPR, European financial institutions including fintech firms have to update their regulatory affairs departments with the Payment Services Directive (PSD2), meaning they must organise their revenue structure around a central goal of privacy.[51]

Any data breach, no matter how small, can result in direct liability to a company (see the Gramm–Leach–Bliley Act)[52] and ruin a fintech company's reputation.[53]

The online financial sector is also an increasing target of distributed denial of service extortion attacks.[54][55] This security challenge is also faced by historical bank companies since they do offer Internet-connected customer services.[56]

Many FinTech technologies have very high start-up costs but very low marginal costs for adding additional customers, effectively necessitating many FinTechs to act as natural monopolies.[57]

• Smart contract

• Teigland, R., Siri, S., Larsson, A., Puertas, A. M., & Bogusz, C. I. (Eds.) (2018). The Rise and Development of FinTech (Open Access): Accounts of Disruption from Sweden and Beyond. Routledge. ISBN 9780815378501.CS1 maint: multiple names: authors list (link) CS1 maint: extra text: authors list (link)
• Media related to Financial technology at Wikimedia Commons