Monday, 8 November 2021

Fintech or Financial Technology

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Financial technology (abbreviated fintech or FinTech) is the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services.[1][2] It is an emerging industry that uses technology to improve activities in finance.[3] The use of smartphones for mobile banking, investing, borrowing services,[4] and cryptocurrency are examples of technologies aiming to make financial services more accessible to the general public. Financial technology companies consist of both startups and established financial institutions and technology companies trying to replace or enhance the usage of financial services provided by existing financial companies. A subset of fintech companies that focus on the insurance industry are collectively known as insurtech or insuretech companies.[5][6]

Definition[edit]

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."[7] 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 “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."[8]

Key areas[edit]

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

Robo-advisers are a class of automated financial adviser that provide financial advice or investment management online with moderate to minimal human intervention.[10] 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.[11] 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.[12]

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.[13][14] 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.[15]

Fintech companies in the United States raised $12.4 billion in 2018, a 43% increase over 2017 figures.[16]

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.[17] 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.[18] A financial technology innovation lab was launched in Hong Kong in 2015.[19] 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.[20]

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]

Technologies[edit]

Fintech companies use a variety of technologies, including artificial intelligence (AI), big data, robotic process automation (RPA), and blockchain.

AI algorithms can provide insight on customer spending habits, allowing financial institutions to better understand their clients. Chatbots are another AI-driven tool that banks are starting to use to help with customer service.[21]

Big data can predict client investments and market changes in order to create new strategies and portfolios, analyze customer spending habits, improve fraud detection, and create marketing strategies.[22][citation needed]

Robotic Process Automation is an artificial intelligence technology that focuses on automating specific repetitive tasks.[23] RPA helps to process financial information such as accounts payable and receivable more efficiently than the manual process and often more accurately.[24]

Blockchain is an emerging technology in finance which has driven significant investment from many companies.[25] The decentralized nature of blockchain can eliminate the need for a third party to execute transactions.[26]

Awards and recognition[edit]

Financial magazine Forbes created a list of the leading disruptors in financial technology for its Forbes 2021 global Fintech 50.[27] In Europe there is a list called the FinTech 50,[28] which aims to recognise the most innovative companies in fintech.[29]

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'.[30]

For the past few years, PwC has posted a report called the "Global Fintech Report". The 2019 report covers many topics of the financial technology sector, describing the landscape of the "Fintech" industry, and some of the emerging technologies in the sector. And it provides strategies for financial institutions on how to incorporate more "fintech" technologies into their business.[31]

Outlook[edit]

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.[32] 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.[33] However, aggressive enforcement of the Bank Secrecy Act and money transmission regulations represents an ongoing threat to fintech companies.[34] In response, the International Monetary Fund (IMF) and the World Bank jointly presented Bali Fintech Agenda on October 11, 2018[35] 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".[36]

The New York Venture Capital Association (NYVCA) hosts annual summits to educate those interested in learning more about fintech.[37] In 2018 alone, fintech was responsible for over 1,700 deals worth over 40 billion dollars.[38] In 2021, one in every five dollars invested by venture capital has gone into fintech.[39]

Challenges and solutions[edit]

In addition to established competitors, fintech companies often face doubts from financial regulators like issuing banks and the Federal Government.[40][41] 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.[42] Federal preemption applies to state law regarding federally chartered banks.[43]

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.[44][45] Leading global fintech companies are proactively turning to cloud technology to meet increasingly stringent compliance regulations.[46]

The Federal Trade Commission provides free resources for corporations of all sizes to meet their legal obligations of protecting sensitive data.[47] Several private initiatives suggest that multiple layers of defense can help isolate and secure financial data.[48]

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.[49] 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.[50]

Any data breach, no matter how small, can result in direct liability to a company (see the Gramm–Leach–Bliley Act)[51] and ruin a fintech company's reputation.[52]

The online financial sector is also an increasing target of distributed denial of service extortion attacks.[53][54] This security challenge is also faced by historical bank companies since they do offer Internet-connected customer services.[55]

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.[56]

See also[edit]

References and notes[edit]

  1. ^ Infinite Financial Intermediation, 50 Wake Forest Law Review 643 (2015)
  2. ^ Van Loo, Rory (February 1, 2018). "Making Innovation More Competitive: The Case of Fintech". UCLA Law Review. 65 (1): 232.
  3. ^ Schüffel, Patrick (2016). Taming the Beast: A Scientific Definition of Fintech. Journal of Innovation Management. pp. 32–54.
  4. ^ Jump up to:a b Sanicola, Lenny (February 13, 2017). "What is FinTech?". Huffington Post. Retrieved August 20, 2017.
  5. ^ "The Surprising Way Startups Are Disrupting the Life-Insurance Business". Wall Street Journal. June 10, 2019. Retrieved October 13, 2021.
  6. ^ "Insurtech startups are leveraging rapid growth to raise big money". TechCrunch. April 20, 2021. Retrieved October 13, 2021.
  7. ^ Schueffel, Patrick (March 9, 2017). "Taming the Beast: A Scientific Definition of Fintech". Journal of Innovation Management. 4 (4): 32–54. doi:10.24840/2183-0606_004.004_0004. ISSN 2183-0606.
  8. ^ Leong, Kelvin.; Sung, Anna (2018). "FinTech (Financial Technology): What is It and How to Use Technologies to Create Business Value in Fintech Way?" (PDF). International Journal of Innovation, Management and Technology. 9 (2): 74–78. doi:10.18178/ijimt.2018.9.2.791. hdl:10034/622459. S2CID 67842383.
  9. ^ Jump up to:a b "Vietnam closes in on Singapore as fintech funding booms". Nikkei Asian Review. Retrieved December 4, 2019.
  10. ^ Lieber, Ron (April 11, 2014). "Financial Advice for People Who Aren't Rich". The New York Times.(subscription required)
  11. ^ "Global Fintech Investment Growth Continues in 2016" (PDF). Accenture. 2017. Retrieved January 15, 2018.
  12. ^ "What is FinTech and why does it matter to all entrepreneurs?". Hot Topics. July 2014. Retrieved December 9, 2014.
  13. ^ "Stockholm FinTech: An overview of the FinTech sector in the greater Stockholm Region". Stockholm Business Region. June 2015. Retrieved July 12, 2015.
  14. ^ "Fintech Investments Skyrocket in 2016– Report". redherring.com. Retrieved July 12,2016.
  15. ^ "Brexit a boon for Lithuania's 'fintech' drive". The Business Times. Retrieved March 3,2018.
  16. ^ Kauflin, Jeff. "The 11 Biggest Fintech Companies In America 2019". Forbes. Retrieved February 15, 2019.
  17. ^ "Sydney FinTech hub based on London's Level39 coming next April". BRW. November 2014. Archived from the original on March 20, 2016. Retrieved November 26, 2014.
  18. ^ "Subscribe | theaustralian". www.theaustralian.com.au. Archived from the original on July 1, 2019. Retrieved September 29, 2017.
  19. ^ "FinTech Innovation Lab in Hong Kong Launches With Eight Firms". Forbes. February 2015. Retrieved February 9, 2015.
  20. ^ "Fintech – the next frontier for Hong Kong's battle with Singapore?". Retrieved September 26, 2016.
  21. ^ "Chatbot: The intelligent banking assistant". PwC. Retrieved March 5, 2021.
  22. ^ Xu, Lei; Gao, Runpeng; Xie, Yu; Du, Peng (January 2019). "To Be or Not to Be? Big Data Business Investment Decision-Making in the Supply Chain". Sustainability. 11 (8): 2298. doi:10.3390/su11082298.
  23. ^ FORE School of Management, New Delhi, India; Madakam, Somayya; Holmukhe, Rajesh M.; Bharati Vidyapeeth University, Pune, India; Kumar Jaiswal, Durgesh; National Institute of Industrial Engineering (NITIE), Mumbai, India (January 30, 2019). "The Future Digital Work Force: Robotic Process Automation (RPA)". Journal of Information Systems and Technology Management. 16: 1–17. doi:10.4301/S1807-1775201916001.
  24. ^ "Intelligent process automation: The engine at the core of the next-generation operating model | McKinsey". www.mckinsey.com. Retrieved December 9, 2019.
  25. ^ "Deloitte's 2019 Global Blockchain Survey | Deloitte Insights". www2.deloitte.com. Retrieved November 13, 2019.
  26. ^ Treleaven, Philip; Gendal Brown, Richard; Yang, Danny (2017). "Blockchain Technology in Finance". Computer. 50 (9): 14–17. doi:10.1109/MC.2017.3571047. ISSN 0018-9162.
  27. ^ "The Most Innovative Fintech Companies In 2021". Forbes. June 8, 2021. Retrieved July 5, 2021.
  28. ^ "THE FINTECH50 Top 10 2020". The FinTech 50. Retrieved July 5, 2021.
  29. ^ "About The FinTech50 I the 50 hottest FinTechs". The FinTech 50. Retrieved June 27,2018.
  30. ^ "An evaluation of the international FinTech sector" (PDF). EY. February 24, 2016. Retrieved February 25, 2016.
  31. ^ PricewaterhouseCoopers. "Global FinTech Report 2019". PwC. Retrieved November 8,2019.
  32. ^ Tasca, Paolo; Tomaso Aste; Loriana Pelizzon; Nicolas Perony (2016). Banking Beyond Banks and Money: A Guide to Banking Services in the Twenty-First Century. Springer. p. 215. ISBN 9783319424484. Retrieved November 16, 2016.
  33. ^ "How FutureAdvisor plans to shake up wealth management". Fortune. May 2014.
  34. ^ "Criminalizing Free Enterprise: The Bank Secrecy Act and the Cryptocurrency Revolution". Westlaw's Computer & Internet Journal. July 2, 2015.
  35. ^ "The Bali Fintech Agenda". IMF. Retrieved November 15, 2018.
  36. ^ Global, IndraStra. "Decoding the Bali Fintech Agenda". IndraStra. ISSN 2381-3652.
  37. ^ "NYVCA". The New York Venture Capital Association. Archived from the original on May 1, 2019. Retrieved December 16, 2019.
  38. ^ Davis, Lindsay. "2019 Fintech Trends To Watch". CBInsights.
  39. ^ "Investment in fintech booms as upstarts go mainstream". Econimist. July 15, 2021. Retrieved July 30, 2021.
  40. ^ "Old Laws, New Models". Taylor Wessing. October 2014.
  41. ^ "Groundbreaking FinTech Innovations: Threat for banks, or opportunity of a lifetime?". Business Insider. January 3, 2018.
  42. ^ "OCC Begins Accepting National Bank Charter Applications From Financial Technology Companies" (2018–74). Office of the Comptroller of the Currency. July 31, 2018. Retrieved March 6, 2020.
  43. ^ Note, Recent Policy Statement: OCC Allows Fintech Companies to Apply for National Bank Charters, 132 Harv. L. Rev. 1361 (2019).
  44. ^ "Ensuring Cybersecurity In Fintech: Key Trends And Solutions". Forbes (magazine). March 2015.
  45. ^ "Protect Your Assets: Cybersecurity + FinTech". Wharton Fintech. March 2015. Archived from the original on January 10, 2016. Retrieved August 4, 2015.
  46. ^ "How FinTech Leaders Are Using The Cloud To Meet Compliance". Solgari.com. Archived from the original on December 30, 2017. Retrieved February 9, 2017.
  47. ^ "Data Security". Federal Trade Commission.
  48. ^ "Top 10 ways to secure your stored data". Computerworld. August 3, 2006.
  49. ^ "Rules for business and organisations". European Commission - European Commission. Retrieved November 1, 2019.
  50. ^ "Payment services (PSD 2) - Directive (EU) 2015/2366". European Commission - European Commission. Retrieved November 1, 2019.
  51. ^ "Data Security Considerations for FinTech Companies". Bloomberg. April 23, 2013. Archived from the original on September 5, 2017.
  52. ^ "Financial Startups Reimagine Banking, but Security Still Paramount". Cloudbric. July 10, 2015. Retrieved September 15, 2015.
  53. ^ "Banks Lose Up to $100K/Hour to Shorter, More Intense DDoS Attacks". American Banker. April 23, 2015.
  54. ^ "How Hackers Make Money from DDoS Attacks". Fortune. April 23, 2016.
  55. ^ "Who lies behind the latest cyber attacks on JPMorgan Chase?". The Economist. August 28, 2014.
  56. ^ Rabin, Konstantin (October 21, 2020). "Does Fintech create monopolies or does it destroy them?". Retrieved October 21, 2020.

Further reading[edit]

  • 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.
  •  Media related to Financial technology at Wikimedia Commons

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