It is no news that technology is finding its way into all aspects of human lives. Form smart devices to online advertising, manufacturing and finance, developers are doing a constant work in making the world we live in as easy and automated as possible, to keep up with our hectic schedule.
Taking a look back at recent history, the integration of technology into the finance industry came as no surprise for anybody. Imagining everyday life without ATMs, contactless payments or online purchases is not something any of us would find pleasing. In recent years, the financial marketing is experiencing a shift, as more and more products arise, but this time appealing more to consumers rather than financial institutions. Fintech products, as they have become known in the branch, are tools that offer consumers and businesses a new perspective over the loaning, investing and budget-managing sectors.
Recent studies have shown that over 100 million Americans have bad credits and nearly half the country’s population is having difficulties in getting a loan. Based on these statistics, the need for fintech products is indisputable. But what exactly is fintech and how is it changing the future of the financial industry as we know it?
Fintech VS Traditional Lending
Fintech is short for Financial Technology and englobes, broadly speaking, every kind of technology that improves the financial industry. These types of products are used to facilitate the access and management of financial products for companies, business owners and consumers. Essentially, fintech organizations analyze different factors, like government records and even social media and transform them into data points to provide individuals with financial products suited for their need. While traditional lenders have very specific criteria consumers and businesses need to meet, fintech institutions are more permissive.
To better understand how fintech companies fund their customers, a comparison to traditional loans is needed. In simple terms, banks accept deposits from customers that are later invested as loans for other customers. The way banks make profit is by applying an interest rate on the loans. That is why banks need to take extreme caution when extending loans, to makes sure they don’t lose the necessary funding. FinTech companies, on the other hand, use new lending models that don’t require deposits. They offer the ground for individuals to lend money to other individuals, in exchange for a small brokering fee.
New Lending Models
Let’s take for example online lending companies, that use investment money to fund their customers. One of the most used lending models is peer-to-peer (P2P), which does not require any form of collateral. Online lending has experienced an increase in popularity, leading to the apparition of loan comparison websites, such as LoanStar, that analyze loan products and offer reviews to help customers find the best-suited product. Those who are most interested in P2P loans are individuals who seek to start a small business, and the reasons are abounding. Apart from the already discussed eligibility process, P2P loans have a faster approval rate, as the response typically comes within 24 hours.
Future entrepreneurs are also given the opportunity of crowdfunding, which is the most popular type of P2P loan. Entrepreneurs present their project on a platform, where lenders can evaluate and finance it. After the amount needed has been reached, they can implement their product and are expected to distribute it to investors as a form of repayment.
Fintech companies rely on a substantial amount of data collected from online platforms, such as PayPal, Amazon, Yelp, Facebook or LinkedIn, to create the profile of the borrower and determine their possibility of repayment. While access to this type of data was barely available ten years ago, the process is now within a few clicks away and provides valuable information about the debtor’s integrity.
A raising question about this type of data analysis is the safety of the process. Fintech companies have come with a solution to this as well, developing measures to protect the personal information of their customers. They use tokens to examine data from those particular online websites, but don’t have any access to collect or save the information.
Unique Financial Products
Although P2P lending is the most common product, fintech companies are taking it one step further and are focused on creating new tools to fit more individuals, such as young adults in search of student loans, personal loans and even mortgages. But fintech companies are also offering more personalized financial products that are not related to loans or credits, such as digital wallets, mobile-only stock trading apps or customized insurance policies.
Although many products begun as promising start-up programs, nobody expected them to be worth billions of dollars in just a few years. For example, the mobile-only app Robinhood, a trading app that charges no fees for trades is evaluated at over $5 billion and is expected to change the stock market as we know it.
Artificial intelligence is working its way towards the financial industry as well, with the possibility to learn and analyze the spending habits of individuals and use the information to help them make better saving decisions.
In the last 8 years, finance and especially fintech products have experienced a massive success, with new companies introduced to the public almost daily. In order to constantly evolve, but keep meeting the markets’ expectation, they have to grow quickly, but at the same time maintain the flexibility they have accustomed their users with.
Experts have evaluated the promising future of fintech products and innovations are expected in the following areas:
- Cryptocurrency and digital coins: developers are working to incorporate digital coins into everyday transactions
- Smart contracts: utilizing computer software to automatize the execution of contracts between sellers and buyers
- Insurtech: streamlining the insurance industry through the use of technology
- Underbanked services: products that address to individuals with low incomes that are typically overlooked by financial companies
- Cybersecurity: with the increment of alarming expansion of cybercrime and the tight connection between online data and fintech, developers are looking to strengthen the protection of online information