FinTech Explained: The beginners’ guide to Financial Technology and how it affects your business

The Fourth Industrial Revolution is here. It brings changes to our everyday lives by interlacing our physical and digital lives through innovating the ways we communicate, dine, shop, go to vacations and ultimately the way we spend our money. What was known as one of the most traditional business models of how the customers are utilizing the financial products, such as payments, mortgages, savings, lending, insurance, etc. is now teaming up with the new age FinTech companies to meet the needs of the digital native clientele.

The term FinTech stands for Financial Technologies, and in its broadest sense, that’s exactly what it is, the new technology and innovation that aims to not only reshape the delivery of traditional financial services, but also disrupt them by using digital wallets, mobile payments, money transfers, crowdfunded loans, tokenized asset management and more.

What started as a competition, now continues to be a collaboration. The traditional financial institutions such as HSBC, Credit Suisse and others, that were previously known for their lack of agility and openness to explore new ways of meeting their clients’ needs are now developing their own FinTech ideas.

Blockchain

Blockchain is a continuously growing record of transactions in a form of so-called blocks shared between a network of participants, bringing them about transparency and speed as well as enhanced security. Each block contains information from the previous blocks, making them resistant to any modification of the data. Blockchain uses Digital Ledger Technology (DLT) which allows real time transparent transactions and require no central supervision.

The technology itself is not only limited to the financial services, but could rather provide transparency for many different industries, including government institutions, healthcare, logistics, retail and consumer goods, automotive and many more.

Cryptocurrency

Cryptocurrency a decentralized digital currency that uses encryption to secure financial transactions, generate creation of additional units and validate transactions of assets by using decentralized validation independent of a central bank or government. The decentralized control of each unit typically works through blockchain, which serves as a public transaction database.

Bitcoin (BTC) was the first form of open-sourced cryptocurrency released in 2008. Since then, more than 4000 forms of alternative coins (aka AltCoins) were created, most known being Ethereum (ETH), Litecoin (LTC), Ripple (XRP) and others.

Smart contracts

Smart contracts are self-executing contracts between two parties carried out by utilizing blockchain technology. These transactions are trackable and irreversible and are executed through a decentralized network in a transparent, credible way while avoiding the clearance services of third parties.

Smart contracts save huge amounts of time and costs involved in transactions which usually require a human to execute them.

Digital wallets

Digital wallet is a type of a pre-paid online or mobile account that is used for online purchases and retail payments made via near field communication (NFC). Digital wallets are protected by a password and can be linked to the user’s bank account. They might also contain user’s driver’s licence, health card, loyalty cars, digital coupons, etc.

A cryptocurrency wallet is a digital wallet where private keys for cryptocurrencies are stored.

Cybersecurity

With many cases of cybercrime and data breach, a new way of cyber security must have been developed. The decentralized storage of data provided by a blockchain technology makes it virtually impossible for hackers to corrupt data, as the information is stored on many locations.

ChatBots

Chatbots are computer programs that rely on rules and machine learning to provide a human-like response to communication with humans. FinTechs have made significant progress in developing applications that not only work as 24/7 customer service representatives, but also as a personal financial adviser, a marketing tool to promote products and gather feedback, and fraud detection and prevention.

Through artificial intelligence and advanced chatbot support, firms can offer new or value added services that enhance customer experience through functionalities such as real-time access to bank accounts, spending insights, tailored financial recommendations, expense tracking, budgeting, and smart investing.

InsurTech

Insurance, being one of the industries that hasn’t changed throughout the years, seemed to be in a desperate need of innovation. Traditionally, insurance companies would use broad actuarial tables to assign policy seekers to a certain risk category that was often not suitable for them and caused insurees to often pay more for their insurance plans than needed. Today, InsurTechs offer solutions that calculate ultra-customized policies, social insurance and dynamic price premiums according to observed behavior.

Using inputs from all kinds of big data sources such as GPS tracking of cars and mobile phones, fitness tracking devices, and many more, these companies are now able to improve pricing policies and bring higher profitability, identify risk and underwriting efficiency in a better way and bring more precise customer segmentation.

RegTech

RegTech services help companies comply with regulations and protocols fighting fraud, data breach, cyber hacks, money laundering and others. They monitor real-time online transactions in order to identify possible irregularities. The outliers are observed and analyzed and reported to the financial institutions that deal with early identification of potential threats.

RegTech tools help minimize risks and costs related to data breaches and other fraudulent activities.

Financial inclusion for unbanked and underbanked

Many segments of the society are not recognized as viable users of mainstream banking services due to their low income, age, language barriers, lack of financial history and credit records, etc. FinTech companies have seen an opportunity in this segment and are offering digital-only solutions in a form of crowdfunding, social lending, robo-advisors and digital payments.

It is clear that FinTechs are here to stay. The shift in the organizational behavior of banks and insurance companies will significantly change business models towards ones who incentivize and engage consumers.