What Is FinTech, Anyway?

FinTech companies are businesses that leverage new technology to create better financial services for both consumers and businesses. Of course, that begs another question: What is financial technology? We define it as all parts of technology that help provide financial services and products to customers. Those customers can be individuals, companies, or governments.

FinTech is also frequently used as an umbrella term for various subcategories, such as WealthTech and RegTech.

FinTech’s dimensions

FinTech may sound simple from the definition you just read, but there are multiple dimensions. You need to think about each of these factors:

• Which part of finance is being impacted (financial sector)?
• Which business model is being used?
• Which technology is being used?

FINTECH Circle has coined the term Fintech Cube to describe the intersections of these factors. The following figure illustrates this cube, in which there are three axes: the financial sector on the x-axis, the business model on the y-axis, and technology on the z-axis.

Each of these dimensions can be further categorized. For example, this figure expands on the concept by adding key areas of financial services that can benefit from FinTech. All financial sectors are shown on one side of the cube, including retail banking, trading, and insurance (among others).

The following figure summarizes the most important business models from business-to-consumer (B2C), business-to-business (B2B), business-to-business-to-consumer (B2B2C), to business-to-government/regulator (B2G), to platform-based business models, crowdfunding, and peer-to-peer (P2P) lending.

The following figure shows the third dimension — the technology being used, which can range from cloud computing, big data, artificial intelligence (AI)/machine learning (ML), blockchain (distributed ledger technologies), the Internet of Things (IoT), quantum computing, and augmented and virtual reality.

FinTech start-ups, for example, can now be more easily categorized and compared. For example, you may have a retail banking (financial sector x-axis) solution focused on the business model of B2C and using various technologies, such as cloud, big data analytics, and AI. Such a company would be called a challenger bank, sometimes also referred to as digital bank or neo-bank.

As another example, you may have a WealthTech company that sells its software to hedge funds. You could describe it as being focused on asset management (x-axis), B2B business model (y-axis), and using several types of technology from the z-axis in combination.

What has changed in FinTech

There have been tremendous changes in the financial technology landscape in the last decade. Consider the following:

• Just 20 years ago, it would have been very expensive to launch a FinTech company, whereas today the required expenditure is much more affordable. The decreasing technology costs have reduced the barriers to entry.
• The funding landscape is also different now. Twenty years ago, there was little funding available for early-stage FinTech firms, but today venture capitalist and corporate venture arms of both financial institutions and tech companies invest large sums in scalable FinTech companies.
• The industry dynamics have also changed. Previously, technology suppliers to financial services firms were seen as pure vendors. Lately, there has been a powershift in which FinTech companies, larger scale-ups, and unicorns are clearly seen as partners or competitors to established financial players. Even tech giants such as Facebook and Google, which have historically focused on e-commerce or social media platforms, have moved into the FinTech arena. In China, we have seen Ant Financial and WeChat taking leadership positions with their FinTech offerings, which are integrated into their other services in a seamless way.

Established financial institutions should read this book to understand how the tech giants embraced the digital age and transformed the industries they now dominate. They need to appreciate how they can adopt their own transformation rather than be disrupted by new firms entering the industry.

Traditional banks have already seen their revenues and margins decrease as FinTech firms have undercut their prices on, for example, foreign exchange, lending, payments, and traditional banking services, particularly as open banking is promoted by regulators.

Asset managers have already seen their margins reduced by a move to passive rather than active asset management, but this has further developed into robo-advisors that use algorithms to disintermediate financial advisors and portfolio managers. Equally, the insurance industry has found that companies using predictive analytics, based on big data access, are better able to price and manage risks than they have.

In all of these organizations, boards need to develop new strategies based around digital transformation and innovation teams that will work in conjunction with existing product and business development. They must also work with technology teams to help them determine how they compete in this new environment. Of course, one of their biggest hurdles will be themselves as they need to instill a new culture that embraces change from the top down.