What is FinTech?

Representative of innovative research and development in the financial and information technology sectors, FinTech broadly serves to add automated speed, efficiency, and flexibility to the financial landscape, enhancing the way firms deliver their services and products, and the way customers experience and use them.

With investors directing more than $53 billion in funding towards FinTech start-ups in 2019, the industry is expected to reach a value of over $300 billion by 2022. The dramatic growth of FinTech has consequences for traditional financial institutions: as firms integrate FinTech within their commercial infrastructures, they must also understand how that will change the way they do business and affect their regulatory responsibilities.

How does FinTech enhance financial services?

The FinTech industry is often associated with start-ups but includes established technology firms and financial institutions that use advances in technology, high speed internet connectivity, and financial data to create new financial apps and services and provide better value for customers. FinTech also expands financial engagement: by delivering services online and through internet-connected mobile devices, FinTech products can reach customers in financially under-served or under-banked regions of the world.

The nature of FinTech varies from company to company and from application to application. FinTech products serve a broad spectrum of functions and purposes, ranging from customer-focused spending analysis apps and bill payment services, to business-to-business compliance products designed to help firms better navigate the regulatory landscape (RegTech). At the cutting edge of financial technology, firms are incorporating artificial intelligence models into their services to deliver a greater depth of financial data, anticipate future financial trends, and better tailor their products to customers’ needs.

How is it used?

The innovative potential of FinTech is reflected by the range of technologies that it incorporates, and the financial sectors in which it is deployed. Examples of FinTech applications include:

• Budgeting. Where customers once kept track of expenditure via manual-entry spreadsheets or accountancy services, FinTech apps can scan account activity quickly and accurately in order to deliver targeted budget and spending analysis, and recommendations for more suitable products.
  
• Banking. Backed by FinTech, challenger banks have developed a range of online products to disrupt the traditional financial landscape, offering customers flexible, secure banking services delivered online and accessible anywhere. Meanwhile, high street banks have integrated FinTech to add depth, flexibility, and security to their existing products and services.
  
• Trading. FinTech apps offer users access to a range of investment products, including stocks and share trading. Algorithmic asset and portfolio management features allow users to participate in trading markets around the world at a lower cost, via their computers and phones.
  
• Insurance. Insurance apps enable customers to input risk data online and receive instant quotes on a comprehensive range of insurance products. Similarly, price comparison websites can use customer inputs to compare quotes from multiple providers.
  
• Payment services. Advances in cybersecurity have allowed firms to develop payment apps for phones and other mobile devices. Apps such as Google Pay and Apple Pay enable users to pay for goods and services without cash, in a range of in-person retail settings.
  
• Crowdfunding. FinTech has provided firms and creators with an alternative to traditional funding models. Using online platforms such as Kickstarter and Patreon, users can connect with individual investors from all over the world to crowdfund their projects with multiple smaller, individual donations.
  
• Blockchain. Blockchain technology has enabled developers to create cryptographically secured, tradable tokens known as cryptocurrencies. Tracked by their respective blockchains, without the need for a central bank to manage supply, cryptocurrencies essentially represent a decentralised form of currency and can be used to pay for certain goods and services, or traded between users anywhere in the world via exchange platforms.

How is FinTech regulated?

Advances in FinTech have expanded the financial possibilities for firms and consumers, introducing new and sometimes unexpected ways to engage with the financial landscape. However, the pace of innovation has also created challenges for global financial regulators as criminals find ways to exploit gaps in regulation to engage in illegal activities. The rapid growth of digital financial activity has increased hacking and phishing incidents along with other types of cybercrime: losses from cybercrime are expected to total around $6 trillion in 2021, with that figure rising to $10.5 trillion by 2025.

While global regulation of FinTech has been inconsistent, some regulators have introduced new legislation, including personal data protections, reporting obligations, and rules regarding the electronic transfer of funds across borders. Key regulations from international regulators focused on FinTech risks include:

• EU. General Data Protection Regulation, Anti-Money Laundering Directives, Payment Services Directive 2
• US. California Consumer Privacy Act
• Singapore. Payment Services Act 2019
• Financial Action Task Force. Recommendation 16 ‘The Travel Rule’