Fintech is a general term that describes financial technology, such as apps and software used for banking, investing, and other financial services. It’s also one of the fastest-growing areas of focus for venture capitalists, so it’s critical to understand the landscape so you can make viable investment decisions.
The rapid growth of fintech is driving massive innovation in the financial industry. Recent advances in blockchain technology, cryptocurrency, and improvements in artificial intelligence (AI) and machine learning are moving the trend forward, but it’s still in a nascent phase.
If you’re considering investing in fintech, I think it’s important to understand the landscape from a historical perspective before we get into the various business models and investment opportunities. As with any startup ecosystem, knowing what challenges and barriers exist is vital so you can go into the process with your eyes wide open.
The History of Fintech
The origins of fintech can be traced back to the early days of banking and financial services.
One of the earliest examples is the use of paper checks, which dates back to around 1400. The world’s first stock exchange was created in Amsterdam in 1611, though trading goods for profit was already a thing in Belgium since the late 1400s.
20th Century
In the early 1900s, there was a shift from paper-based transactions to electronic ones, driven by technological advances such as the telegraph and telephone. In 1914, the New York Stock Exchange introduced an automated trading system that used punch cards to execute trades.
About 1939, a guy named Luther Simjian sprang onto the market with a “hole-in-the-wall” system, a precursor to today’s ATMs. Though he secured 20 patents on his machine, there was little demand for it then, so the bank removed it.
The next big development came in the form of credit cards. The first credit cards (or reasonable facsimile) were introduced around 1930 and were a way for department stores to have their own credit system. Still, it wasn’t until 1950 that credit cards became popular, starting with Diner’s Club and American Express. By the 1960s, credit cards were becoming more widely accepted. Magnetic stripe technology was invented by IBM and launched during this decade, improving the speed and accuracy of recording and tracking credit card transactions.
In the 1970s, computerization transformed banking. In 1969, the first ATM in the United States opened for business.
The birth of the internet in the early 1990s was a watershed moment for fintech, creating a range of new possibilities for financial services. Online banking and shopping became possible, and new ways to invest, such as online trading, emerged.
Y2K to Now
The global financial crisis defined the 2000s. In response, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in the United States, introducing several new regulations, such as the Volcker Rule, which limited banks’ ability to engage in proprietary trading. In the aftermath of the crisis, there was a shift towards mobile banking and digital payments.
The 2010s and beyond have been dominated by the rise of big data and analytics and the increasing use of artificial intelligence (AI) and machine learning in financial services.
Today, fintech is ubiquitous. Businesses and consumers use some form of it daily, from online banking apps to accounting technology, ecommerce websites, payment processing, and more.
Fintech Business Models
As financial systems become more secure and reliable, new business models are emerging, solving problems for many diverse customer demographics. Some of the most common fintech business models include:
- Alternative credit scoring technologies support borrowers and lenders in determining creditworthiness. Data is culled from various sources, largely pulled from an individual’s (or company’s) digital footprint. Sometimes, people with a perfectly stable income might not qualify for bank loans, and alternate credit scoring is a way to open up that market and reduce the risk for private lenders.
- Online/digital banking services, such as web-based banking apps, automation, and AI that helps you manage finances or make investment decisions.
- Digital wallets are massive right now and growing with the mainstream adoption of cryptocurrency.
- Peer-to-peer lending offers investors a way to lend money directly to businesses or individual borrowers at a much better rate than you could expect from mainstream financial markets.
- Insurtech or digital insurance can provide coverage at a much-reduced rate over traditional insurers. It also helps insurance companies establish new products and market them to people online.
- Neobanking covers many areas, including managing online accounts, budgeting, saving, and supporting the credit process.
- Payment gateways, such as PayPal, Stripe, iZettle, etc., offer flexible ways for online merchants to accept card payments without going through a complicated application process. The payment processor takes a percentage of the sale in exchange for the service.
These are just a few examples. Suffice it to say there are limitless opportunities in fintech, especially when addressing the concerns of niche industries or implementing emerging technologies like blockchain.
Investment Decisions
Fintech offers attractive opportunities for investors. According to Allied Market Research, the fintech market is projected to increase by more than $587 billion to $698 billion by 2030.
Digital payment services are leading the wave of development, representing 80% of today’s revenue in the sector. In the months following the initial Covid shutdowns, fintech stocks continually outpaced traditional financial services, which have still not yet fully recovered. Fueled by the need for contactless and virtual services, fintech adoption in the United States has grown from 58% to 88% since March 2020.
Probably one of the most significant challenges when investing in fintech is managing risk. There is still a great deal of uncertainty around crypto, for example. Yet new business models are emerging around blockchain, NFTs, and crypto that merge digital with tangible goods—and that’s pretty exciting. For example, imagine being able to invest in a classic piece of art or even real estate. It’s being done!
There is little doubt of the high growth potential here, especially in decentralized finance, mobile trading apps, and digital financial services. In the first half of 2022, PitchBook reports that fintech startups racked up $53.5 billion in venture capital and are well poised to outpace 2021.
Challenges
Fintech is undoubtedly on track for explosive growth, but the sector is not without its challenges. Understanding those challenges might make your investment or startup decisions a little easier.
Here are some of the biggest concerns in fintech today:
Compliance
Industry compliance is getting more stringent day by day, and the financial industry operates under some of the strictest regulations of any industry outside of healthcare. Maintaining compliance can be complex as you need to address international and domestic laws.
Security
Most businesses will not recover from a breach. The average cost of a data breach is $4.35 million, but in the United States, it rises to over $11 million per incident. Information security is critical, most especially in fintech.
Talent shortfalls
Companies in every industry are experiencing talent shortages, and fintech is no exception. Unless your company (or the one you’re investing in) has a solid and well-established team, growth and scale can be an issue.
Changing consumer trends
We’ve seen so much disruption over the past couple of years there is reason to believe that it will continue. Emerging tech will replace older solutions, so you must ensure you’re riding the edge of new trends to stay on top of your customers’ needs and wants.
Now that you know a little more about fintech trends, I hope you are inspired to dive deeper and discover how it fits into your future plans.