The first in a series of articles about the financial technology sector
The internet has created an environment in which innovation is the norm, and revolution sparked from new ideas and their intelligent, technology-based implementation is a continuous reality. Companies like Amazon, which disrupted the retail book industry, and Netflix, which revolutionized the way we watch movies (and now television), have been titans in the business world for one simple reason: they brought to consumers a new, more convenient, and arguably more efficient way to consume. These companies, along with a plethora of others, were able to work around traditional industry standards, bypass the restrictions of middlemen of conventional, too-big-to-change firms, and ultimately change the way consumers expect to receive products they want.
Prior to the internet age, the consumption of goods and services could be an expensive, inconvenient, time-intensive endeavor. Visiting a brick-and-mortar location, having a limited ability to shop competitors’ pricing for the same products, and the unfortunate truth that clarity in cost was hard to come by all set the stage for sweeping change. Integrating the growing power of technology with traditional business models took time, and patience, but first movers in consumer-facing industries were able to shift the way we shop and ultimately the way we connect with businesses.
A digital revolution has been upon us for the last two decades, and I think it’s safe to say we are all grateful. A lag has existed, however, in certain sectors, despite a call for action among consumers.
During the sharp decline in economic growth and stability during 2008, it was clear a change was imminent in the financial sector, as big banks stood on shaky ground and investors fled the market at astonishing rates. Faith in the conventional financial systems had been shattered, and it seemed there was no easy way out of the expensive mess consumers and banks alike had been put in. Inefficiencies in banking and investments had come to light in the worst possible way, and tech-oriented entrepreneurs took advantage of the perfectly timed opportunity.
Under its broadest definition, financial technology or “fintech” companies include those working to integrate technology in financial business, both in the business-to-consumer (B2C) and business-to-business (B2B) realms. The majority of fintech companies are still considered startups, as the revolution within the financial industry is still in its infancy. If banks were to define financial technology companies, they would most likely name those that work in partnership with current banking systems; to ask the fintech market for a definition, however, results in a different answer. Although the identifier used to determine what a fintech business is and what it is not is vague at best, one thing is clear: not only are fintech companies not seeking relationship with big banks, they are, in essence, attempting to turn the banking industry in its traditional sense on its side.
Crisis begets change, and the major players in fintech are experts in strategic disruption.
A Revolution within a Revolution
Even under the more specific definition of fintech from companies themselves, a broad range of businesses fall under the fintech wing. The need for change in the financial sector has brought a number of startups to the forefront, each with varied purpose and different end users. Any service a traditional bank offers, a fintech startup is now providing an alternative solution, and that results in an enormous list of players in the market.
Some believe that as the financial technology sector continues to progress, each of the following subsectors in fintech will be their own standalone niche, but for now, fintech includes companies serving these specific consumer and business needs: mobile payment and money transfers, crowdfunding for startups or nonprofits and crowdlending for individuals and business, as well as personal financial management tools, including asset management and budgeting. Although this list is not exhaustive, it represents the categories of service for consumers and business with the greatest potential for continued growth.
Why Fintech Matters
It is important to note the reluctance of traditional banking infrastructures in embracing the latter definition of the fintech sector – in order to create disruption in a clearly misguided, slow to change industry, companies must have the regulatory ability to do so. Because specific guidelines for startups under the fintech umbrella have been slow to materialize in a manner that is easy to comprehend, banks have paid little attention to the somewhat stealthy uptick in the industry. Instead of preparing for an influx of competition – and ultimately, responding to consumer and business needs – banks turned a blind eye.
But fintech companies are much more flexible than large, traditional banking institutions because they do not physically hold deposits, and are therefore less regulated than their archaic banking counterparts. They are able to shift quickly with the demands of the market because of the murky regulatory waters in which they swim. It is worth mentioning that this does not completely thwart compliance and regulatory issues within the fintech sector, and the need for unbiased controls still exists even in the sector’s infancy. Fortunately, direction from regulatory powers is on the horizon, creating fertile ground for exponential growth.
Now, as the fintech market expands at an unprecedented rate, big banks are starting to take notice – so is the consuming public.
In addition to creating a financial environment that is founded on clarity, connection and overall efficiency, the rise of financial technology business plays an even greater role in the global economy. Fintech presents an opportunity for business owners to grow their companies, across a wide range of sectors, no matter the size and regardless of background; it also provides a new way for consumers to get the products and services they need or want in a way that suits the now-technology-driven routine most of us expect. Most importantly, the financial technology universe is opening the doors to investing in an entirely new way. By providing entrepreneurs invaluable access to millions of investors–far removed from the previously stuffy, difficult-to-access private equity and venture capital space—and providing platforms for those investors to connect with businesses they want to support, fintech is changing the way we do business. For good.
In the upcoming weeks, we will discuss the current marketplace that is financial technology in-depth, including those platforms fueling its revolution, as well as projected trends for the industry as a whole.