Fintech is short for financial technology (a word combination known as a portmanteau if you’re interested). But what does ‘fintech’ actually mean? What tech does it use? And how does it affect you? Let’s find out.
Fintech: what’s it all about?
Fintech is pretty broad and, in truth, there’s no official definition.
However, the Bank of England describes it as “technology-enabled financial innovation that could result in new business models, applications, processes or products”. In other words, fintech is technology that can help us do more with our money.
Fintech is behind some of the products and services many of us take for granted, including things like:
- Contactless payments
- Digital banking
- Money management apps
- Investment guidance through artificial intelligence (AI), such as robo-advisors
- Alternative funding such as peer-to-peer lending and crowdfunding
What technology does fintech use?
The tech behind fintech is wide-ranging. Let’s explore three examples.
1. Data analytics
We’re not talking about a few V-look ups on an Excel spreadsheet. Fintech data analytics involves tonnes of information known as big data.
This data covers your financial habits, including your spending patterns, which can be analysed to give banks and other organisations insight. They do this by using AI and algorithms. Analysing data can also help lenders to credit score potential customers.
This type of tech can also include the analysis of ‘alternative data’. This is essentially all of the other information that can be collected about you. It includes studying your web searches, social media, app use and even data from wearable devices like an Apple watch.
The information gleaned can then be used to build a more rounded picture of who you are and what products might (or might not) interest you.
2. Open banking
This is when you share your bank details with a third party, enabling you to view all of your different accounts in one place. Open banking can help you manage your money and be used to find better deals across a range of financial products.
3. Digital and cryptocurrency
Fintech has also helped drive the development of cryptocurrencies*, many of which use blockchain technology. This tech enables a number of cryptocurrencies (such as Bitcoin) to remain decentralised and publicly monitored.
Crypto’s rising popularity has, in turn, inspired conversations around digital versions of ‘real’ currencies like the Euro.
What are the pros and cons of fintech?
As with most tech developments, there are benefits and drawbacks. Pros include:
- Faster and simpler processes – making online banking more efficient and accessible
- Greater competition – sharing data means service providers will need to up their game and stay competitive to attract consumers
- Safer systems – distributed ledger technology (like blockchain) can store information in multiple places at the same time. As a result, this demonstrates how systems can be made more secure.
And cons include:
- Exclusion – less digitally-savvy consumers may feel overwhelmed or anxious about the move to online banking.
- Inability to access products – reliance on algorithms and AI could lead to consumers missing out on products and services. Whereas face-to-face banking allows decisions to be tailored to your circumstances.
- Risk of scams – new or unfamiliar processes and tech can help fraudsters bamboozle unwitting consumers into parting with cash.
How does fintech affect you?
Fintech has been influencing how we manage our money for a lot longer than you might think.
In fact, the very first example of technology being used to innovate finance was the humble cash machine. Back in 1967, Barclays Bank set up the very first automatic teller machine (ATM) at its Enfield branch.
Fintech also saw the unveiling of First Direct in 1989. Launched by Midland Bank (now HSBC), it was the first bank in the world without physical branches. And in 1995, the Security First Network Bank in the US became the world’s first online-only bank.
So, although the word itself seems like a thoroughly modern invention catering to our digital world, fintech has been around for more than 50 years.
*The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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