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FinTech has emerged as one of the decisive areas today, not only for companies and specific sectors, but as a fundamental key to the entire economy. The dynamics, models and tools of FinTech have evolved to become something that has transcended its original conception.
Their commitment to innovation and not being afraid to establish and execute totally out-of-the-box guidelines have made possible the rise and success of this currently crucial industry.
It would seem that we have already seen everything in this area, however FinTech is constantly conceiving new types of business, tools that make this possible and ways to impact other sectors beyond finance or banking.
What is FinTech?
FinTech is the acronym for the terms "Finance" and "Technology", financial technology. The concept can be defined as the set of actors (applications, processes, companies, products, business models, and business structures) dedicated to implementing innovations and the use of technology to offer financial services and their derivatives.
Thus, the meaning of FinTech refers to all activities that, for their development, must integrate technology and the development of innovative models when conceiving, designing, offering, and providing services and products in the area of finance and banking.
Although it seems to stay there, this also extends to insurance, financial investment services, and other related areas. Although these also have their own specific terminology to segment them (InsurTech, WealthTech...).
Already in 2020, FinTechs were directly lending around 7% of the entire banking and financial sector. This percentage increased fivefold if we refer to their indirect impact through the integration of their solutions in traditional non-FinTech companies.
The year-on-year growth of venture investment in FinTech currently stands at 177%, with financial technologies focused on developing innovative solutions taking the lion's share of investment. Trends indicate that during 2022 and by next 2023 growth will be sustained at the same level or reach higher levels.
An industry that began developing solutions back in the early 2000s with the first online customer areas in traditional banking, has managed to establish a roadmap for innovation in which to iterate and create new platforms that enable new opportunities for both businesses and users.
FinTech companies: who is leading this area?
We began this article by delving into the definition and meaning of FinTech as a set of actors. This being the case, it is common to wonder how FinTech works and what kind of ecosystem has been created around this important area.
While there is no single approach to this area given its breadth and the way it impacts both directly and indirectly on other related industries and sectors, a number of general categories with subgroups can be established to bring together most of the stakeholders:
1. Digitized traditional financial companies
Companies in the financial and banking sector that are beginning to digitize their operations and offer services and products through online channels.
- Mobile banking: Area focused on remote solutions.
- Related areas: Digitalization of insurance companies, investment services or real estate sectors.
- Trade finance: Trading of international and domestic commercial transactions.
- Equity Finance: Corporate financing using digital tools.
2. New financial platforms
Companies and businesses that offer financial services and products that would not be possible without technology.
- Neobanks: Direct online banking that only offers remote services and whose models attempt to differentiate themselves from traditional digitalized banking.
- Wallet cards: Agile and secure debit card services.
- Distribution of financial products: Comparative platforms for mortgages or any type of financial product, with or without advice.
- WealthTech: Financial and investment services based on digital platforms. Also noteworthy in this category are trading platforms or innovative social-trading platforms.
- Cryptocurrencies: Crypto asset management platforms included or not in the previous category of general forex market trading platforms.
- Robo-advisory: Investment in all types of assets programmatically and automated by bots with AI technology.
- InsurTech: Digital insurers with a proposition similar to neobanks.
- PropTech: Real estate companies with similar models.
- Online lending: Whether or not they are integrated with neobanks, new companies have emerged exclusively in agile lending with an online focus.
3. Alternative financing
Financing companies that make use of financial markets and instruments outside the traditional banking circuit.
- Crowdfunding: Also known as crowdfunding, this mechanism of collective and participatory financing required technology to connect lenders and borrowers.
- Lending or P2P: Private-to-private lending platforms without traditional financial intermediaries.
- Factoring: Short-term financing mechanisms based on the advance of collections.
4. Personal finance and management
Home and personal finance management platforms that, with the help of artificial intelligence and other digital solutions, support users in managing their savings and, in addition, offer other types of additional financial products and services.
5. Payments
New payment services based on NFC, instant transfers such as Bizum or payment with facial biometrics, with PSD2 compliance. Escrow payment methods such as paypal also stand out. The electronic signature has also brought about an important change in the sale and purchase between individuals on the Internet, for example.
6. Services and Tools
Technology companies providing the technological solutions that make possible the activity, growth and optimization of resources in the players in the categories listed above.
- Digital Onboarding: Registration and acquisition of new clients in any market and under any circumstances and channel, complying with the technical and regulatory standards required of FinTech companies.
- Electronic Signature: Solutions for managing the contracting cycle of financial products and services. Sometimes under the same platform together with onboarding.
- Certified digital communication: Electronic fax services for communications of any kind between customers and financial services companies.
- RPA and Automation: Process optimization and automation of mechanical tasks for the operation of FinTech players and digitalized banking.
- Secure authentication and biometrics: Establishing access controls to FinTech platforms based on multi-factor strategies, including biometrics as one of them, is causing companies to allow their customers to operate in their enabled zones to perform checks under any level of risk with security. Facial recognition technologies are already playing a decisive role in FinTech and will continue to expand.
- Blockchain: Traceability of operations and security for any transaction of FinTech companies,
- AI and Machine Learning: From conversational bots to system integrations
- Financial Sandbox: Creation of product and service development environments and their regulatory framework to design new FinTech ecosystems.
7. Compliance and regulation
The FinTech sector, like traditional banking and finance, must comply with industry regulation and standards in each market in which it operates. These standards are very concrete and specific and companies in the industry face two major challenges: Facing million-dollar and even criminal penalties for failing to establish exhaustive controls and discouraging potential clients with tedious and complex controls. FinTech companies specialized in regulation provide a coordinated response to these two problems:
- RegTech: Companies focused on supporting or outsourcing the compliance function in FinTech companies with the use of technology, converting approval processes that would take days or weeks under traditional conditions to be closed in minutes with the same or greater security and legal backing.
- Identity Verification: Focuses on the Know Your Customer (KYC) and Know Your Business (KYB) requirements needed in the industry to onboard customers and be able to offer them products and services securely.
- Anti-Fraud Controls: Fraud prevention and risk management tools to comply with AML (Anti Money Laundering) policies in an automated way and in any region.
Currently, FinTech is tending towards a specialization model. In this sense, we can say that although large companies continue to innovate in their technology departments, they are increasingly relying on specialist partners who provide them with solutions for their specific use cases with adapted and scalable technologies based on digital platforms.
What specialized FinTech companies bring to the table
Both large and small companies in the financial, banking or insurance sector do not have to invest in costly and time-consuming technological developments and can turn to startups or digital platforms that, as specialized FinTech companies, have already developed these tools and are constantly updating them.
These specialist FinTech companies enable agile and rapid deployment thanks to their unique, segmentation-based model:
- They develop platforms that, in compliance with the most demanding technical and legal standards, make it possible to offer new financial services and products that were previously unimaginable.
- They make use of the latest technology and apply it to the use cases of the sector, being specialists in technology and software development.
- They are able to have a global vision given the breadth of clients they have, acquiring multidisciplinary expertise and cross-referencing information to develop better solutions.
- They automate and digitize processes with the use of tools based on artificial intelligence, machine learning and big data.
- They optimize resources and speed up times, improving with each new update of their platforms.
FinTech trends for 2022 and 2023
The current trends for this year and next year in FinTech are based on the customer journey of the customer and user of these companies. This means that companies are focusing and organizing their operations around the new demands and needs of the new consumer.
The implementation of strategies based on artificial intelligence and the wide extension of facial biometrics are technologies that we will see more of in the coming years, with greater user adoption and privacy-focused solutions.
Cloud computing and the development of products and services for FinTech in the cloud, instead of heavy and complex structures, will mark the way to face the challenges of the sector.
Fintech in 2022 and 2023 will continue to grow at the same pace as it has in previous years or even more sharply. The regulatory sandbox and the contribution that RegTech has made to it will allow for the expansion and growth of more FinTechs.
Digital Platforms for the financial and related sectors
Although we have been talking throughout the article about software and technology providers for the financial and banking sector, the initial conception that we may have is that of digital transformation companies or large consulting firms.
However, SaaS and PaaS digital platforms are taking the lead with end-to-end products that are constantly being upgraded. FinTechs can now deploy a new line of business in days with the latest technology without having to resort to costly, time-consuming projects.
In today's complex and competitive environment, especially in this area, it is crucial to be updated and accompanied by a specialist who implements changes without affecting the structure of the business, ensuring a response capacity never seen before and creating scalable and sustainable models.
Financial technology in other industries
The dynamics and ways of proceeding endemic to FinTech have spilled over into other industries that have taken advantage of this business model development philosophy to digitize their own areas and innovate for growth.
Similarly, FinTech technology tools and service providers have modified the developments made for this industry so that they are usable and adaptable to other areas to make them more competitive and scalable.
This is the example of PropTech for the real estate sector, the automotive sector with its ancillary financing solutions, carsharing, or the eCommerce industry of any kind. The telecommunications sector or private services (utilities) have also made use of the tools and technologies initially developed for FinTech but have a long way to go in their respective lines of business.
The relationship between RegTech and FinTech
RegTech and FinTech have shared many headlines in the economic press in recent years. And the fact is that both areas share not only the focus of action but also the technologies that make their innovative solutions possible.
Banking and finance are, if not the most, one of the most regulated industries and subject to institutional control due to the sensitivity of their activity and the type of operations they perform. For this reason, along with financial technology providers, regulatory technology providers have begun to emerge.
This industry, with its own ecosystem, not only serves the financial sector but develops compliance solutions for each and every area of the economy.
Many businesses believe that regulations and regulatory changes are frictions and roadblocks. However, the reality is the opposite, as RegTechs, like their "sisters" and FinTech counterparts, are able to generate opportunity and growth thanks to the regulatory framework where others find problems.
