What is FinTech and why is everyone talking about it?

From payments to wealth management, from peer-to-peer lending to crowdfunding, a new generation of startups is starting to shine in the industry. FinTech (Financial Technology) refers to an economic industry composed of companies that use technology to make financial systems more efficient.

“The Rise of FinTech – New York’s Opportunity for Tech Leadership“, a report by Accenture and the Partnership Fund for New York City, reveals that global investment in FinTech ventures has tripled to nearly $3 billion in 2013 from approximately $1 billion in 2008. According to Economist, in 2014 FinTech firms attracted $12 billion in investment, and Goldman Sachs estimates revenues in the sector worth $4.7 trillion.

FinTech companies cover a wide range of sub-industries, from crowdfunding (Kickstarter) and peer-to-peer lending (Lending Club) to algorithmic asset management (WealthFront) and thematic investing (Motif Investing). FinTech companies also operate in data collection (2iQ Research), payments (Xoom), cyber security (iDGate), credit scoring (ZestFinance), digital currency (Coinbase), education lending (CommonBond), exchanges (SecondMarket), working capital management (Tesorio) and even quantum computing (QxBranch).

Even though they operate in such a diverse set of domains, these companies share a common characteristic – they build and implement technology which is used to make financial markets and systems more efficient. This is why the FinTech revolution might reshape and improve the finance industry in three essential ways:

• FinTech representatives have new and smarter ways of assessing risk – They gather and review information on everything from social media reviews to companies’ usage of logistics firms, to assess how well small businesses are doing. Some use machine learning to underwrite consumers whose credit scores were damaged during the financial crisis, or the wisdom of crowds to finance startups.
• FinTech disruptors will cut costs and improve the quality of financial services – They are cleared of regulators, legacy IT systems, branch networks or the need to protect existing businesses.
• The FinTech rookies will create a more diverse and stable credit landscape – Internet based firms are less geographically concentrated, and small American banks already use lending platforms to diversify their own portfolios. Also, the FinTech firms avoid the two basic risks in banking: mismatched maturities and leverage, by simply matching borrowers and savers directly.

On the other hand, we should also consider that the financial industry has traditionally been dominated by big firms that are often resistant to change. This psychological barrier may prove to be a fundamental challenge, and FinTech companies hoping for broad adoption of new financial technologies have to overcome institutional indifference and regulations while acquiring and retaining public trust.

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