Everything you’ve always wanted to know about fintech

The financial technology (fintech) industry is thriving globally. It is broadly defined as any technological innovation in financial services often resulting in highly innovative, pioneering services. Fintech as a term is a compound of ‘finance’ and ‘technology’. It is a relatively recent term and is certainly not a buzzword. Fintech is here to stay. 

Fintech is a relatively new term to the Sri Lankan investor community. However, we cannot undermine the importance of fintech as experts believe that it will closely integrate with the equity market in the years to come.

Common forms of fintech

Blockchain

Blockchain is a form of distributed ledger technology (DLT). This means that it maintains records of all cryptocurrency transactions on a distributed network of computers but has no central ledger.

Robo-advisor

Robo-advisors are platforms that automate investment advice using financial algorithms. They limit the need for human investment managers, thereby dramatically reducing the cost of managing a portfolio.

Peer-to-peer lending

Peer-to-peer (P2P) lending is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary.

Why is there a sudden growth of fintech companies?

The 2008 global financial crisis (GFC) is credited in large part with the sudden upsurge in fintechs. Since the 2007-9 global meltdowns, fintechs have continued to spring up from all corners of the globe. The reasons are considered to be many.

However, the predominant reason is the role of technology. The Internet is changing our relationship with money the same way it fundamentally altered both the newspaper and music industries. Fintech has taken advantage of this and built finance services based on the evolution of the Internet. People now use their tablet computers or smartphones to conduct financial matters. Fintech has used the Internet to provide faster and cheaper services.

Capital markets: innovation and fintech landscape

Until recently, fintech was mainly focused in the payments, remittance, peer-to-peer lending and equity crowd funding sectors. But, over the course of the last year, we have seen an increase in activity in capital markets: solutions to complex front-, middle- and back office problems are emerging in the form of fintech solutions.

These solutions are using technological advances such as artificial intelligence (AI), robotic process automation (RPA), distributed ledgers and cloud technologies, among others, to deliver innovation that was previously hard to achieve. Wholesale digital solutions are coming of age in capital markets and will help managers focus on delivering superior performance for their firms, clients and counterparties. 

What are advantages of fintech?

Fintech has also levelled the financial playing field for everyday people, giving them access to services previously reserved for the wealthy or individuals of a certain economic stature. Take investing for one example. Technology and data make it much easier and cheaper to bring investment advice to the less financially able people, which mean something that was geared toward a certain asset level is now open to everyone. This process can be termed as financial inclusion.

Now consider lending. In the past, underwriters only had a few data sets to rely on when assessing risk, which meant lots of people were turned down or charged a higher interest rate for a loan. Fintechs are relying on different information when underwriting consumers, looking at things traditional banks have never considered and providing more people with access to personal and business capital. All of that could never happen without powerful computer systems and software and data scientists who can make sense of it all.

When is fintech not the answer?

For anyone thinking about signing up with a fintech provider, there are some things to take into account. For starters, there’s the sheer number of choices. Because financial services are a big business, venture capitalists are throwing millions at lots of companies. Not all are going to survive. Investors need to choose the ones that have the staying power but that also don’t overcharge for the service.

Investors should also ensure the company has the proper regulatory oversight. At present there is no well-structured regulatory framework in Sri Lanka. Thus, investors should be cautious when interacting with fintech.