Fintech: What it is and what financial professionals need to know (2024)

The financial sector is no stranger to being disrupted by technology. Once run by paper checks and printed ledgers, the sector’s new digital tools and interfaces have made tasks like banking, investing, and making payments more streamlined and efficient than ever. For financial professionals, it’s important to understand how these innovations can improve operations, expand customer reach, and enhance security.

The fintech industry merges financial services with technology, and is designed to modernize how individuals and institutions interact with money. Fintech companies harness technology, such as AI and blockchain, to provide more agile, cost-efficient, and user-centric solutions to conduct transactions, manage investments, and provide more seamless alternatives to traditional banking.

Benefits of fintech for financial institutions

Fintech goes beyond digitizing existing services by reimagining them to offer users greater convenience, transparency, and accessibility. For financial institutions, fintech adoption brings a suite of benefits that can help them maintain a competitive edge and broad customer base.

• Operational efficiency: Leveraging technology-driven solutions like AI and automation, financial institutions can streamline processes, reduce human error, and enhance speed, resulting in cost savings and more nimble operations.
• Enhanced customer experiences: With the advent of intuitive interfaces, personalized services, and instant feedback mechanisms, fintech allows institutions to offer a more tailored and efficient customer journey.
• Access to insights: Fintech tools equip financial institutions with robust analytics, granting them the ability to glean deeper insights into customer behaviors, preferences, and risk profiles, facilitating smarter decision-making.
• Diverse products: Fintech platforms often allow institutions to expand their products and services portfolio, from digital wallets and peer-to-peer (P2P) lending to innovative investment tools, reaching new customer segments.
• Global reach: Digital platforms break down geographic barriers, allowing financial institutions to serve customers anytime and anywhere, broadening their market reach.
• Improved security: Advanced cybersecurity tools within fintech offer enhanced protection against fraud and cyber threats, ensuring both the institution and customer assets remain safeguarded.
• Regulatory compliance: Many fintech solutions come equipped with built-in regulatory and compliance tools, ensuring that institutions can easily adhere to ever-evolving financial regulations.

• Want to learn more about fintech and other finance trends? Sign up for the Banking & Payments newsletter.

Fintech’s influence isn’t limited to just banking. It is the umbrella term that includes innovation across a wide range of sub-industries, providing solutions for varied business types that cater to financial needs and challenges. Those categories include:

Neobanks

Neobanks are digital-only banks without traditional physical branches. They provide banking services predominantly through mobile apps and online platforms, and are often known for user-friendly customer experiences.

Paytech

Payment technology aims to streamline and enhance payment processes for both consumers and businesses. This includes digital wallets; P2P payment platforms; contactless payment products; and buy now, pay later services.

Insurtech

Insurtech is where technology meets the insurance industry, with companies investing in innovations like generative AI, internet of things, and blockchain technologies to provide more tailored insurance products, efficient claim processing, and risk management solutions.

Wealthtech

Wealth technology focuses on modernizing wealth management and investment processes. This sector includes robo-advisors, personal finance tools, and digital brokerage platforms.

Lendtech

Revolutionizing lending and borrowing, lending technology platforms offer online loans, P2P lending opportunities, and alternative credit assessment methods, making the lending process more transparent and accessible.

Regtech

Regulatory technology companies create tools that help financial institutions comply with regulations more efficiently and at a lower cost. They utilize technologies like big data analytics and AI to monitor transactions, detect anomalies, and ensure compliance.

What financial institutions need to know about the fintech industry

As digital solutions become more integrated into everyday banking and financial services, traditional institutions face both challenges and opportunities, especially from fintech startups. Staying abreast of fintech’s growth, understanding evolving customer expectations, and adapting strategies will ensure legacy institutions stay relevant.

How are fintechs different from traditional banks?

Although fintechs and traditional banks both serve the financial needs of consumers, their approaches are different. Fintechs prioritize online platforms and user convenience, usually honing in on specific needs. Traditional banks, however, are grounded in their long-standing brand recognition, predominantly operating through physical branches. They typically offer a comprehensive suite of services.

What is the largest fintech in the US?

With a valuation of $50 billion as of March 2023, Stripe is the largest fintech in the US, according to Forbes’ “10 Biggest Fintech Companies in America 2023” list. (The rankings are derived from the companies’ most recent public fundraising values.) Here are the top three US fintechs, per Forbes’ list:

1. Stripe: $50 billion (Last raise: March 2023). Established in 2010, Stripe stands tall as a payment processing behemoth for online businesses.
2. Chime: $25 billion (Last raise: August 2021). As the preeminent digital bank in the US, Chime redefined banking with its user-centric offerings of free checking accounts, no overdraft fees, and timely cash advances.
3. Ripple: $15 billion (Last public valuation: January 2022). As the bridge between businesses and crypto-grading entities, Ripple is known for its own cryptocurrency called XRP.

What are the risks for fintechs?

Fintechs amass vast troves of user data and can become targets for cyberattacks, which underscores security and privacy concerns. Coupled with a frequently murky regulatory environment, this can breed uncertainty and potential misuse.

Additionally, the industry’s rapid evolution, while driving innovation, also introduces risks such as system outages, financial exclusion for those lacking access to tech, and the volatility seen in sectors like the NFT market.