Fintech (Financial Technology)

Fintech is a portmanteau of financial technology and refers to the emerging sector of businesses that provide innovative solutions for digital banking, payment processing, investment management, and other financial services. Companies offering Fintech often leverage technological advancements to create user-friendly products that can facilitate transactions and offer personalized services to customers.

Fintech also plays a significant part in developing decentralized finance, known as DeFi, and cryptocurrencies (digital money). Digitizing money transfers, calculating transaction costs, buying and selling cryptocurrencies, etc., are all part of fintech.

It is the most rapidly growing technology in the world and presents itself as the innovator of the finance industry. Global fintech investments crossed the $100 billion mark in 2020 with more than 3000 funding deals.

Evolution of Fintech

There are three generations of fintech: fintech 1.0, fintech 2.0, and fintech 3.0. All of these eras play a significant role in the development of the finance industry as it is today.

Fintech 1.0

The first generation of fintech developed electronic funds transfer in the 1860s. 

In the early twentieth century, The Federal Reserve of America created the electronic fund transfer system to a larger scale known as Fedwire. It connected 12 reserve banks around the country through a morse-code programmed system. 

Fintech 2.0

The second generation started in the late 1960s till the 2008 financial crisis. Barclays initiated the first ATM in 1967, and the US government developed NASDAQ in 1971. This generation changed the manual banking system towards digitalization. 

The changing banking system enabled investors and wall street tycoons to create immense wealth through different investment options. However, due to the technological aspect, these investments had limited regulations.

Fintech 3.0

After the fall of the world economy in 2008, people challenged the regulatory framework of the finance industry. Apart from that, mobile phones came into existence. Consequently, it became more accessible for the general public to study and understand financial systems.

This generation also laid the foundation of Bitcoin in 2009. Although the financial industry initially resisted the idea of cryptocurrency, it soon became a popular investment option.  

Decentralized Finance (DeFi)

DeFi is an essential product of financial technology. It is a monetary system not controlled by the central bank and helps eliminate the banking fees and commissions for its customers. Customers only need an internet connection to manage and transfer funds globally. 

DeFi works on blockchain technology. Blockchain is a computer-programmed ledger used to record transactions through encrypted blocks. These blocks can’t be altered and provide a strong layer of security.

With the growing investments on an individual level, DeFi can create an intermediary or third-party free investment platform. As a result, people can use DeFi to invest, transfer money, fund a derivative, or do any other financial transaction without the involvement of any bank or broker.

Today, DeFi is the most considerable risk faced by conventional banks. As DeFi moves towards cutting down the middle-man expense.

Why Is Fintech Important?

Financial technology challenges the traditional transaction system’s large commissions on payment transfers and investments. The purpose of fintech is to help on the individual level by cutting down costs and generating easy & smooth transactions.  

Businesses today use revolutionized business practices with fintech disrupting the old methods. Companies can use crowdfunding and seed funding as alternatives to venture capitalism and angel investors. The investments can also move from country to country with no involvement of financial institutions. 

What’s more, Fintech makes it simpler to manage your funds through an online banking system. It is a much more secure way to handle your investments. It also reduces the amount of time going to the bank for every service.

Additionally, with the invention of decentralized finance, the entire finance industry is becoming transparent for every individual. Email, messages, and mobile applications keep customers informed about their money. 

One significant impact of fintech is the involvement of financial professionals in teaching finances online through various courses and videos. Studying these courses not only makes more people interested in financial technology but also serves as the groundwork for new fintech applications developing regularly. 

Current Uses of Fintech

Every company that deals with capital movement use fintech products today. Businesses, banks, and the government sector use fintech as well. The products of fintech may include investment apps, crypto exchanges, payments apps, Robo-advisors, and much more.

Investment Applications in Fintech

Stock brokerages are now available online through different applications that help you invest online and manage your funds. Fidelity Investment is the most used application for investments worldwide, created by the multinational financial services organization Fidelity.

Payment Applications

Anyone who pays their bills online is a user of online payment applications. These applications save time going to the bank. The story of payment apps starts with the development of Paypal in 1998. After that, Google pay, Apple pay, Meta pay, and Western union, among others, started digital currency wallets. The purpose of these wallets is to make the payment system quicker and hassle-free. 

Cryptocurrency Exchange 

Cryptocurrencies are the most sought-after investments of the twenty-first century. Investors buy cryptocurrencies through online exchanges. These currencies transfer to the investor’s online account, a crypto wallet. Binance is the largest crypto exchange in the world in terms of users and daily transactions.

Robo-advisors

A Robo-advisor is an AI-based financial application that generates investment decisions through surveys and research. Further, the creation of these apps minimizes human interventions in the decision-making process. In this regard, the most popular Robo-advisor app is Betterment. The app provides its users with professional monetary advice and investment portfolios. 

Future of Fintech

Fintech designs the most advanced structure in the finance industry. Even with worsening global economic conditions, investors are bringing capital to new fintech startups. Since, they believe these startups will help small-scale businesses and individuals find good investment options and cost-saving methods. 

Everything has advantages and disadvantages. For example, fintech is improving the financial conditions of individuals. However, some drawbacks need to be addressed. For instance, online systems have security breaches and hacking.

Furthermore, many people are losing money in some cryptocurrency scams present in the market. As a result, central banks are trying to create regulatory frameworks to address the fintech market’s security risks. 

In Conclusion,

Fintech is the future of financial services. After the pandemic, the current market suggests that investments in fintech will double in the coming few years, exceeding the $200 billion mark. Developed and underdeveloped countries are benefiting from this technology altogether. Additionally, there are bachelor’s and master’s programs in financial technology worldwide.

Today, fintech can help businesses on an individual level and the entire business world on a macroeconomic level. Moreover, with better strategies and future development, fintech can provide a secure and understandable monetary system.