Fintech: Reinventing the Financial Services Industry

Most analysts are quick to note that the financial services industry is among the last to be disrupted by technology. Aside from PayPal making a splash at the turn of the 21st century, traditional banks have dominated the payments space. But now, with technology at consumers’ fingertips and an entrepreneurial spirit breathing new life into financial technology (fintech), new market entrants are giving the larger, more established financial institutions a run for their money.

Bringing Fintech to Light

Fintech is short for “financial technology” that uses software to provide financial services ranging from lending to payments. Fintech startups are creating new applications and solutions that are changing business models and processes in an industry that has remained largely traditional in its approach to products, services, and competitive strategy. For a concrete example of fintech innovation, think mobile wallets—and consider an article like 11 Terms You’ll Need To Know To Manage Your Wallet In The Future as the tip of the iceberg. Three of the terms shown on Forbes.com show how fintech is changing the way people and businesses approach financial management:

• iMoneyCenter—labeling your cellphone as your global bank
• RoboRetire—the act of entrusting your retirement pan to smart algorithms
• VirtueBucks—describing how movement recorded on your wearable fitness tracker could translate to lower life insurance premiums

Industry Experts Weigh In

Welcoming visitors to explore The Forbes Fintech 50, Forbes Investing Editors proclaim that “The U.S. financial services industry had pretax profits of $281 billion last year, and new technology is threatening every penny of it.” And Inc.com reveals in Why Fintech Is One of the Most Promising Industries of 2015 that Goldman Sachs estimates upstarts could steal up to $4.7 trillion in annual revenue, and $470 billion in profit, from established financial services companies. What’s more, in How the Payments Industry is Being Disrupted, McKinsey&Company points to financial technology as a main driver of change in the payments landscape:

• Nonbank digital entrants will transform the customer experience, reshaping the payments and broader financial-services landscape.
• Modernization of domestic payments infrastructures is under way.
• Cross-border payments inefficiencies are opening doors for new players.
• Digitization in retail banking has important implications for transaction bankers.

Innovating for a Mobile, On-demand, Global Economy

Fintech companies are developing technology that makes financial systems and markets more efficient, more affordable, and more accessible to consumers of B2B and B2C services. Here’s a short list of Fintech companies and what they have to offer:

Addepar—enables investment advisors to analyze and manage all of a client’s assets, from hedge funds and private equity, on desktop and mobile via cloud-based software
CircleUp—connects creators of new consumer products with potential investors and distributors (equity-based crowdfunding)
HelloWallet—links bank, credit, savings, and investing accounts, and sold as an employee benefit
Lendup—serves as a more affordable alternative to payday loans
LendFriend—facilitates personal loans in underserved markets
Xendpay—offers a “pay what you want model” enabling users to set their terms for transferring money
FundingCircle—facilitates peer to peer lending for savers to lend money to small and medium sized businesses
Square—offers wide range of financial services for merchants
Stripe—provides an online and in-app payment platform
TransferWise—matches buyers and sellers of currencies to reduce the fees for international money transfers
WePay—customizes online payment services for crowdfunding sites and small business software

These new entrants are putting customer at the center in ways traditional banks haven’t—and consolidations among them are helping them gain strength. What are banks doing in response to the increased competition? The article on AmericanBanker.com, Fintech Came Knocking in ’15; How Will Banks Answer?, suggests that established financial institutions are, can, and should be doing a number of things to meet their customers’ changing expections:

• Building technology (e.g. blockchain)
• Looking for startups to acquire or partner with
• Boosting loyalty programs to reward customers for staying
• Leveraging cloud technology for systems including payments and analytics
  • Investing in and exploring APIs and open platforms for integration and collaboration

It has become clear that fintech is redefining the financial services industry—and it’s just getting started. We will follow developments in fintech and explore its impact on payments, but for now, see Payment Technology Innovations and Trends from CES 2016 and Disruption and Analytics: Driving Payments to the Next Generation.