Fintech has become a buzzy label that often doesn't really mean anything. We asked execs at 21 startups like Brex, Kabbage, and N26 what really counts.
For me, fintech is simply a universal term that has emerged to describe how technology is applied to either solve a problem or create a new solution related to delivering a financial offering.
Fintech is a rapidly growing area of technology investment that's impacting everything from how we make purchases, secure loans and invest money to how businesses pay vendors and monitor their cash flow. It's thinking about how we move money in new and innovative ways, while creating connections and sharing information.
Fintech is often thought about as a relative newcomer to the technology conversation, but in reality, it's been around for over a century, as some of the first business applications for technology were focused on financial process and electronic ledger evolution from paper-based processes. The first electronic fund transfer system dates back to the early 1900s, but there are many people who note the first ATMs as the official "birth" of fintech – so it just depends on how you define it.
The term fintech means many different things to different people. Broadly, "fintech" refers to the innovative use of technology in the design and delivery of financial services. For Betterment, "fintech" is defined by much more than the products and services that it provides, but rather by the outcome(s) it brings. A true fintech company puts technology at the heart of its financial services offering, inspiring technological change that fundamentally changes the way financial services are accessed, or provided.
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When we think about fintech, it's more than a company using technology to simply blow up the status quo in an unsustainable way, or chasing tech fads in order to attract customers. Rather they are tackling some long-standing issues that the financial services industry has long faced — such as high fees, complex products and lack of transparency.
A fintech company can be one of two things.
1. A provider of technology services or products to financial institutions or other fintechs.
2. A direct-to-consumer service or product that leverages technology to improve the financial lives of their consumers, which in our case is small businesses.
Fintech companies require deep domain expertise in several areas. First, in order to improve or disrupt an industry such as financial services, you will need to have extensive knowledge of the existing systems, which can be quite complex and involve many players.
Second, an understanding of the evolving threat landscape is critical in order to keep your customers — whether it is a bank, business or a consumer — safe and secure.
Third, you must build a culture of compliance and be vigilant about keeping up with evolving regulations, constraints, and requirements. A core component of being a fintech company is managing risk, thus establishing sophisticated monitoring and data analytics is necessary to protect yourself and customers from potential loss.
I think some misconceptions are that fintechs are just applying a nice UI/app on financial services. This is not the case. Specifically, fintech companies require managing risk, compliance, capital, and complex operations. The benefit to consumers is not just driven by better UI, but a whole different way of doing business.
Many established, large companies are dabbling in banking such as Google or T-Mobile, however, that doesn't make them fintech companies. Fintech companies have deep DNA in building financial services. Some of the companies I mentioned are more partnering with white-label solutions who power their products rather than building the solutions themselves.
Fintech is anything that provides, or something that replaces, any function that a traditional financial services institution would do. So products that a bank would offer — any company that is offering any of those products for sure is in the category of fintech.
And I think the second category is software that is adjacent or that interacts directly with financial service institutions. I'd put in that category Plaid or any software that the banks buy to use internally.
I think that the center of it is traditional banks and financial services. So anything that replaces any of their offerings or anything that interacts in a deep way with them.
Fintech is the sector of technology companies that is modernizing financial services. It includes companies making it easier to pay people and businesses on top of the existing banking system, like Google Pay, but also companies that are developing fundamentally new infrastructure for payments, investing, and broader financial services like Coinbase.
Investopedia defines it as "new tech that seeks to improve and automate the delivery and use of financial services." But when people talk about fintech, they tend to think about two broad categories of companies.
1. Companies that challenge the traditional banks (think about neo-banks, e-wallets, P2P lenders, robo-advisors).
2. Companies that provide technology that enhance the efficiency of banks and other players.
But in our view, what really defines fintech is the junction of great technology with the right regulatory framework to provide truly customer-centric services (both end users and enterprises).
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Fintech is first and foremost about consumer centricity. The whole DNA of a successful fintech company revolves around user experience. Many banks have failed in usability, especially because of the way they are structured, with IT being just one of many departments, and IT focusing on security over usability. It will be hard and expensive for banks to change, but they will do it, probably via acquisitions.
Traditionally, money is the only thing where the digital version moves slower than the physical version. This year at CES we heard how many technologies are set to impact the fintech sector — from security and AI to 5G. The exciting part of fintech today encompasses the broad set of technologies that are increasing the speed and ease of digital money movement, and leveling the playing field so there is more fairness in the financial system.
What's exciting about fintech is that it has the possibility to change the world for people - not just large institutions and the wealthy.
From my perspective, fintech really is just tech companies that are looking to enable better, more efficient, modern financial services, principally through technology. I think the label often can be abused. We're seeing, through this notion of partnership, financial services being layered in pretty much everywhere, from the Google's to the Amazon's and elsewhere.
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Fintech, in a way, is a sexy name for something that has been happening for a long time.
Before we really thought of this as being a tech startup thing or a new generation of companies, Wall Street was populated by hundreds, if not thousands, of companies that were using technology to make financial services better.
A great example of that is Bloomberg. They're a tech company, New York City's big tech success. They were using technology to deliver better financial services. They ended up being competitive with some previous systems that banks and traders were using, but they weren't competitive necessarily with the core Wall Street offerings around banking and capital markets.
Fintech is a bit of a misnomer, as it implies there isn't tech in financial services. The reality is the top few banks spend multiples more on technology than all the financial technology startups combined.
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The benefit startups have is that they have long runways and aren't bound to quarterly earnings — they can embark on endeavors that could upend how financial services works today without worrying about cannibalizing their own working business lines. To me, this is what fintech really is — technology centric companies approaching the financial services market in revolutionary ways that could disrupt current models and transfer $trillions of market capitalization. The flipside to this is until a fintech is profitable, it is still dependent on the whims of private capital — and those whims can be fickle.
Ironically, the successful fintechs of today — the ones who build disruptive and sustainable businesses — will be the incumbents of tomorrow, only to eventually be disrupted by the next wave of financial technology startups.
The term fintech has evolved over the past few decades. As most people understand it up to now, fintech means adding technology to a traditional financial service product — asset management, insurance, payments, etc. — either through selling to the incumbent or competing with them. Think of the startup Venmo competing with banks vs. the technology provider that worked with the banks to build Zelle.
But we're entering into a new era of "fintech." The term will no longer be used to define a certain type of company. Rather, financial services will be an embedded component in every software company's tech stack. Similar to how we went from talking about "internet" companies to assuming that all companies use the internet as a component, the role fintech plays in our world moving forward will become vastly more ubiquitous and embedded, to the point that we won't even use the term "fintech" anymore.
We think of fintech companies really as technology companies that happen to be innovating in the financial sector. Financial institutions that adopt technology to enhance their existing services are very different than companies like Gemini that could not exist without the very technology they were built with and for.
Financial technology is ultimately a means to an end. In markets like the ones we operate in, it's about enabling a son or daughter to go to college, helping a newly married couple buy their first home, or supporting a person who is ill to access the finance they need for treatment, in addition to facilitating fast and easy payments.
For a company that is a tech-forward, tech-focused company that is creating services that interact with people's money, I think you can rightly call yourself a fintech. And there are different levels to that.
You've got the tech companies that really are service providers to other banks that don't really touch consumer money and don't really interact with the payment systems in quite the same way. I'm sort of a big-tent fintech guy. I don't mind them calling themselves fintech because they also are tech for the financial services industry.
I think if you look at all of the fintech companies that have launched since 2003, the theme has been: how do you take a single product that has historically been offered by a bank and offer it directly to a customer or to an end user using the internet.
And now you have this rebundling. Kabbage was only providing small businesses access to capital until recently. Square was only providing small businesses with access to payment services. And now all those things are converging.
The original fintech innovators, like Charles Schwab, Intuit, PayPal, LendingClub, and most recently Plaid, have something in common. These companies are first about being customer-centric, and then about having a focus on helping customers leverage the better information and reduced effort required to benefit from the increasing digitization of money and payments.
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As we start 2020, we think it might be time to retire the concept of "tech-enabled financial services" in favor of something that is truly differentiated – aligning a company's business strategy with the financial success of their customers – which is not how retail banking works today.
Today, the fintech sector is not differentiated. We have companies that fall into two categories:
- Traditional financial institutions that will continue to deploy tactics that separate you from your money.
- New companies that will continue to create products and services that make it easier for people to make smart decisions that make their money grow.
There will always be a debate on whether they can work together. The reality is they won't unless both are committed to putting the customer's interest ahead of their corporate interests.
Fintech is an emerging sector that uses technology to improve, enhance and innovate within financial services, making it more accessible and user-friendly for both consumers and businesses. Fintech challenges traditional banking methods to offer services that are faster, easier, cheaper, or all of the above.
Fintechs need to offer the agility and innovation associated with a technology company but within a framework that is highly focused on regulation, data privacy and security. Scalability is also fundamental as the market scope is huge and fintechs need to be able to work with some of the largest systems and datasets while building trust, transparency and consumer confidence as a responsible keeper of consumer's finances.
To me, fintech means two things. First, it's about capital. It's about some form of helping a business or a consumer deal with money. So 'fin' is a really key piece of this whole thing. And money is what makes the US economy go, especially in banking. Banks keep one dollar for every ten dollars they make available through payments or credit. So there's a levered aspect, and risk aspect to the market for fintech.
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What the banks need to do is to automate and get their systems upgraded. Right now, they use a lot of manila folders and steel file cabinets. They have to get into using software to automate, and that's where the fintechs are playing. Fintechs are very good with technology and they can actually get that technology and they can be the white label private technology base for the banker or lender.
Fintech companies revolutionize and innovate traditional financial services products and practices. Ultimately they're changing the way people interact with their money — making money management and financial tools more accessible and a part of customers' everyday lives.
It's a heavily regulated industry — whether through SEC, FINRA, SIPC, etc. — so there's a lot of investment and prioritization around legal and compliance efforts. It's also absolutely essential that our customers trust us and know that we're always putting them first and working in their best interests. Finance is the ultimate center of peoples' lives — current and future. Leveraging technology and personalized advice, you can help make a significant difference in their lives. But, it's impossible to make a real impact without that trust.
A fintech company puts technology at the heart of a financial service offering (i.e. banking, payments, insurance, lending) to give customers a better alternative to traditional financial products. By not being tied to legacy technology, fintechs can offer cheaper, faster, and more convenient products.
Financial service companies and banks tend to have strong competency in the regulatory and compliance domain. Technology companies are stronger in adopting new technologies and pushing the envelope in technological innovation. Successful fintechs walk the line and establish competencies in both aspects - they build a compliance and regulatory competency just as strong as traditional financial services while adopting new technologies and using it to their advantage as tech companies.
The compliance, regulatory, and technological barriers to entry are all quite high for fintechs. The largest barrier to entry fintechs face, however, is making consumers aware that they're being underserved by finance companies.
When people think of fintech today, they typically think about companies that fall into five distinct categories — payments, lending, insurance, investing and banking.
Many don't consider the fact that fintech companies aren't actually limited to these categories — fintech can be used to improve financial processes across a number of industries, such as retail, logistics and healthcare.
More attention needs to be paid to the real applications that fintech has for other industries, as there is a huge opportunity for fintech to disrupt the consumer experience and simplify a number of financial pain points.
"A 'fintech' is a non-bank company that uses technology to provide a better financial services product or service to customers, usually in partnership with or built on a separate bank. By the nature of this construct, they can focus their resources on creating a specialized and differentiated experience while leaving the core capabilities and infrastructure to a bank."