Financial technology

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Financial technology, also known as FinTech, is an economic industry composed of companies that use technology to make financial services more efficient. Financial technology companies are generally startups trying to disintermediate incumbent financial systems and challenge traditional corporations that are less reliant on software.[1]

Definition and key areas

The National Digital Research Centre in Dublin, Ireland, defines financial technology as "innovation in financial services", adding that "the term has started to be used for broader applications of technology in the space – to front-end consumer products, to new entrants competing with existing players, and even to new paradigms such as Bitcoin".[2]

FinTech refers to new solutions which demonstrate an incremental or radical / disruptive innovation development of applications, processes, products or business models in the financial services industry. These solutions can be differentiated in at least five areas.[3]

  1. First, the banking or insurance sector are distinguished as potential business sectors. Solutions for the insurance industry are often more specifically named "InsurTech".
  2. Second, the solutions differ with regard to their supported business processes such as financial information, payments, investments, financing, advisory and cross-process support.[4] An example is mobile payment solutions.
  3. Third, the targeted customer segment distinguishes between retail, private and corporate banking as well as life and non-life insurance. An example is telematics-based insurance that calculates the fees based on customer behavior in the area of non-life insurance.
  4. Fourth, the interaction form can either be business-to-business (B2B), business-to-consumer (B2C) or consumer-to-consumer (C2C). An example is a social trading solutions for C2C.
  5. Fifth, the solutions vary with regard to their market position. Some, for example, provide complementary services such as personal finance management systems, others focus on competitive solutions such as e.g. peer-to-peer lending.
Sector Business process Customer segment Interaction form Market position
  • Bank
  • Insurer
  • Bank/insurer
  • Non-bank/insurer – bank/insurer-cooperation
  • Non-bank/insurer – bank/insurer-competition

Global investment in financial technology increased more than twelvefold from $930 million in 2008 to more than $12 billion in 2014.[5] The nascent financial technology industry 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.[6] Some of the better-known FinTech companies in London include Funding Circle, Nutmeg and TransferWise.

In the United States, there are numerous FinTech startups, including Affirm, Betterment, Behalf, Fundera, IEX, Lending Club, Money.net, Plaid, Prosper, Robinhood, SoFi, Square, Stripe, and Wealthfront.[7]

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 the EU in the past 10 years.[8]

In the Asia Pacific region, the growth will see a new financial technology hub to be opened in Sydney, Australia, in April 2015.[9] There is already a number of strong financial technology players like Tyro Payments, Nimble, Stockspot, Pocketbook and SocietyOne in the market and the new hub will help further accelerate the growth of the sector.[10] A financial technology innovation lab is also being launched in Hong Kong to help foster innovation in financial services using technology.[11]

Within the academic community, on the technology side the Financial Data Science Association (FDSA) was founded with its first event organized by members from the artificial intelligence, machine learning, and natural language processing domain. The FDSA aims to build a research community around computer science and investment statistics. On the business side, Wharton FinTech was founded at the Wharton School of the University of Pennsylvania in October 2014 with the objective of connecting academics, innovators, investors, and other thought leaders within the FinTech industry to each other and to the ideas that are reinventing global financial services. The University of Hong Kong Law School in conjunction with the University of New South Wales have published a research paper tracing back the evolution of FinTech and its regulation.[12]

Awards and recognition

Financial magazine Forbes created a list of the leading distrupters in financial technology for its Forbes 2016 global Fintech 50.[13]

A report published in February 2016 by EY commissioned by the UK Treasury compared seven leading FinTech hubs. It ranked California first for 'talent' and 'capital', the United Kingdom first for 'government policy' and New York first for 'demand'.[14]

The role of FinTech in increasing customer satisfaction in financial services was recognised in December 2015, with customer satisfaction of FinTech 8% higher than banking.[15]

Industry context

In the financial advisory sector, established players such as Fidelity Investments have partnered with financial technology startups such as FutureAdvisor (recently acquired by BlackRock), allowing new technology to work within a prominent custodian.[16] Even celebrities including Snoop Dogg, Jared Leto, and Nas are beginning to put their resources into the nascent FinTech space by investing in financial technology startup Robinhood.[17]

Outlook

Finance is seen as one of the industries most vulnerable to disruption by software because financial services, much like publishing, are made of bits rather than concrete goods. 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.[18] However, aggressive enforcement of the Bank Secrecy Act and money transmission regulations represents an ongoing threat to FinTech companies.[19]

Challenges

In addition to established competitors, FinTech companies often face doubts from financial regulators.[20] 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.[21] Any data breach, no matter how small, can ruin a FinTech company's reputation.[22] The online financial sector is also an increasing target of distributed denial of service extortion attacks.[23] Marketing is another challenge for most FinTech companies as they are often outspent by larger rivals.[24] This security challenge is also faced by historical bank companies since they do offer Internet connected customer services.[25]

References and notes

  1. "What is FinTech?". Wharton FinTech. September 2014. Retrieved 9 December 2014. 
  2. "So what is FinTech?". National Digital Research Centre. March 2014. Retrieved 26 November 2014. 
  3. Alt, R., Puschmann, T. (2012). The rise of customer-oriented banking - electronic markets are paving the way for change in the financial industry. Electronic Markets, 22(4), 203-2015.
  4. "FinTech Innovation Labs eligibility criteria". Accenture. Retrieved 26 November 2014. 
  5. "The Boom in Global Fintech Investment" (PDF). Accenture. 2014. Retrieved 9 December 2014. 
  6. "What is FinTech and why does it matter to all entrepreneurs?". Hot Topics. July 2014. Retrieved 9 December 2014. 
  7. Shin, Laura. "The Fintech 50 - In Photos: Fintech 50: The Future Of Your Money". Forbes. Retrieved 2016-05-16. 
  8. "Stockholm FinTech: An overview of the FinTech sector in the greater Stockholm Region". Stockholm Business Region. June 2015. Retrieved 12 July 2015. 
  9. "Sydney FinTech hub based on London's Level39 coming next April". BRW. November 2014. Retrieved 26 November 2014. 
  10. "FinTech heats up competition with the youngest and fittest". Australian Financial Review. January 2015. Retrieved 5 January 2015. 
  11. "FinTech Innovation Lab in Hong Kong Launches With Eight Firms". Forbes. February 2015. Retrieved 9 February 2015. 
  12. "The Evolution of FinTech: A New post Crisis Paradigm?". Douglas W. Arner, Janos Barberis, Ross P. Buckley. October 2015. Retrieved 26 October 2015. 
  13. Samantha Sharf (2015-12-09). "The Forbes Fintech50". Forbes. Retrieved 2015-12-10. 
  14. "An evaluation of the international FinTech sector" (PDF). EY. February 24, 2016. Retrieved February 25, 2016. 
  15. "Customer Insight in Financial Services". Smart Money People. Retrieved May 22, 2016. 
  16. "Fidelity Investments Forges Alliance With Low-Cost Player". The New York Times. October 2014. 
  17. "Nas, Snoop Dogg Bet Big On Robinhood App". Black Enterprise. September 2014. 
  18. "How FutureAdvisor plans to shake up wealth management". Fortune. May 2014. 
  19. "Criminalizing Free Enterprise: The Bank Secrecy Act and the Cryptocurrency Revolution". Westlaw's Computer & Internet Journal. July 2, 2015. 
  20. "Old Laws, New Models". Taylor Wessing. October 2014. 
  21. "Protect Your Assets: Cybersecurity + FinTech". Wharton Fintech. March 2015. 
  22. "Financial Startups Reimagine Banking, but Security Still Paramount". Cloudbric. 10 July 2015. Retrieved 15 September 2015. 
  23. "Who's Behind DDoS Attacks and How Can You Protect Your Website?". Cloudbric. 10 September 2015. Retrieved 15 September 2015. 
  24. "4 Rules for Late Stage FinTech Marketing". North Point Partners. July 2015. 
  25. "Who lies behind the latest cyber attacks on JPMorgan Chase?". The Economist. 28 August 2014.