What Is Fintech? The Uses and Impacts of Financial Technologies

“Fintech” has come to refer to an ecosystem of advanced financial technologies that has grown in the last decade to deliver fast, convenient, and secure financial products directly to individuals and businesses, bypassing traditional banks. Whether it’s splitting a bill on Venmo, browsing an online marketplace for the best savings deals, or paying bills with Google Pay, it’s all fintech. Today, fintech is extending beyond these well-known use cases and is changing the face of finance.

What Is Fintech?

Fintech is new, innovative technology that improves and simplifies financial services and the ways in which people interact with money. It is financial technology for payments, credit, insurance, and almost anything else to do with banking and finance except for traditional bricks-and-mortar bank processes. As Michigan Technological University put it, fintech’s defining feature “is that it goes far beyond the normal path of financial technology in agile, unexpected ways.”

Key Takeaways

• Fintech apps replace traditional financial services offered by banks, insurance companies, and investment firms with fast, convenient online and mobile services.
• Fintech can make it easier for people and businesses to manage their money and access financial services.
• It can increase financial inclusion where people are poorly served by traditional banks.
• Benefits of fintech include faster transaction speeds, lower costs, convenience, improved security, and transparency.
• Fintech is constantly evolving as new technologies emerge and customers’ needs change. New trends include green technology, automation, and artificial intelligence.

Fintech Explained

Fintech companies bring traditional banking and finance services into the online and mobile world, speeding up old, slow, often cumbersome financial processes and enabling people and businesses to transact directly with each other, thus eliminating middlemen. Fintech is a rapidly growing industry that is attracting entrepreneurs and investors.

It’s important to note that this has all happened before in finance—the industry’s history is littered with new technologies that have changed the way people interact with money. The humble check was originally an innovation that made it possible for people to make payments without physical cash; the telegraph transformed banking by making it possible for people to “wire” money from bank to bank remotely, without paper or coin. Credit cards arrived in the 1950s; automated teller machines in the 1960s.

The fintech industry of the 21st century began to emerge in the 1990s with the introduction of digital financial products. In 1994, Stanford Federal Credit Union launched the first internet banking website. PayPal launched its online money-transfer platform in 1999. In the 2000s, contactless and mobile payments became widespread. But fintech really took off after the Great Recession of 2007-2008, which began as a crisis of trust in traditional banks. This created opportunities for fintech firms, which leveraged new technologies to offer rapid, cheap, and secure online digital alternatives to bank accounts, savings products, and loans. With the subsequent rise of mobile devices, financial apps came to center stage. Today, people and businesses can make payments, view balances, and perform virtually any other financial task directly from their smartphones.

When it first emerged, fintech aimed to replace banks and similar traditional financial institutions. But the traditional players have since entered the fintech industry, and banks are becoming principal players in the fintech ecosystem.

How Does Fintech Work?

Three key technologies lie at the heart of fintech’s promise to simplify complex financial processes and make it easier for people to access financial services and manage their money: application programming interfaces (APIs), mobile apps, and web portals.

APIs enable fintech apps to communicate with other applications and securely access financial data. APIs also enable the end-to-end automation of processes that involve several applications. Using APIs, fintech apps can display balance information from multiple banks on a customer’s dashboard—a part of the fintech industry’s “open banking” initiative—and transmit payment transaction information to banks for settlement. APIs enable customers to initiate payments from fintech apps embedded in applications, such as digital wallets and retail websites (“embedded finance,” in fintech parlance).

Mobile appsbring fintech to people’s fingertips. Using mobile apps, customers can manage their finances directly from their smartphones, wearable technology, or other mobile devices. An enormous range of financial services are now available through mobile apps, including obtaining credit, borrowing or lending money without using intermediaries, buying and selling stock shares and other securities, managing investment portfolios, buying insurance, crowdfunding for new initiatives, and trading cryptocurrencies.

Web portalsgive customers direct access to internet-based financial services platforms, enabling them to access and navigate financial services. Portals often provide a means to communicate directly with a company online. Businesses can manage all aspects of their finances using an integrated cloud-based fintech platform accessed through a web portal.

Any given fintech service might use one or more of many other digital technologies. The list includes cloud services, Bluetooth, near-field communications, artificial intelligence (AI), blockchain, and cryptography.

The Impact and Growth of Fintech Products

Fintech companies are often described as “disruptive.” Whether they replace existing services or force traditional providers to adapt, fintech apps often change the way services are delivered. Sometimes, fintech products explicitly aim to replace an existing system. For example, Bitcoin, the first cryptocurrency, was designed to replace bank-based payment systems. But often, the most disruptive fintech products originally emerged to solve problems. For example, Venmo and Zelle, which enable millions of Americans to make near-instant payments, were created to add supplemental capabilities to the U.S.’ Fedwire and Automated Clearing House (ACH) payment systems, not to replace them.

For many people, the term “fintech” is particularly associated with mobile banking technologies. Since 2008, there has been enormous growth in mobile payments, driven by technological advances and widespread smartphone adoption. But growth became explosive in the COVID-19 pandemic as consumers turned to contactless payments and online shopping, and bricks-and-mortar banks moved services online. A study by the World Economic Forum (WEF) showed that global consumer growth in mobile payments topped 53% year-over-year (YOY) in 2021 and 57% in 2022. In 2021, the World Bank reported that two-thirds of adults worldwide were making or receiving some form of digital payment.

Payment services are not the only fintech products whose growth was spurred by the COVID-19 pandemic. The WEF’s study showed that global adoption of all fintech products grew by 55% YOY in 2021 and a further 52% in 2022. The biggest rise was in fintech insurance products—known as “Insurtech”—in which adoption grew by 76% in 2021 and 66% in 2022.

Global investment in fintech products has tailed off sharply since its peaks in 2021 and 2022. However, many of the products developed in that investment boom are only now reaching the market, and many analysts predict that there will be a rebound in fintech investment that paves the way for more innovative products and even more widespread adoption.

Examples of Fintech

Fintech now encompasses the full range of traditional financial services and has invented new ones all its own. Here are some common types of fintech applications.

• Robo-advisers: These digital platforms use algorithms to provide investment advice and manage investment portfolios with minimal human intervention. They may also be called “automated investment advisers,” “automated investment management,” or “digital advice platforms.” They usually ask questions to establish an investor’s risk tolerance and preferences, and offer investment advice and construct a prospective portfolio based on the answers. Robo-advisers are used by investors who do not wish to manage their own portfolios or lack the expertise to do so. They are typically less expensive than human fund managers, making them attractive to small investors. However, they have been criticized for being insufficiently responsive to changes in circumstances and incapable of handling complex or volatile investment needs.
• Cryptocurrency: Cryptocurrencies are digital financial assets created, stored, and managed outside the traditional financial system. They’re normally based on some form of distributed ledger technology (DLT) and cryptographic proofs. The original cryptocurrency, Bitcoin, emerged in 2008, in the aftermath of the Great Recession of 2007-2008, as a means of payment that bypassed banks and central banks. Since then, thousands of cryptocurrencies have been created and cryptocurrency-related applications, such as exchanges and lending platforms, have proliferated. Innovative developments emerging from the cryptocurrency industry include smart contracts, which automatically execute when conditions defined in the contract are met; non-fungible tokens, which are unique digital representations of a physical or digital asset; and decentralized finance, in which people use cryptocurrency technology to transact directly with each other without intermediaries.
• Investment apps: Fintech investment apps are digital platforms that enable people to buy and sell stocks, exchange-traded funds, cryptocurrencies, and other assets. They typically provide real-time price data and alerts, curated portfolios, and low deposit fees. There is a wide range of investment apps providing a variety of services; among the best known are Robinhood, Betterment, and Acorns. Traditional investment firms, such as Fidelity and Vanguard, now also offer digital investment apps.
• Embedded finance: Increasingly, fintech applications are being embedded into nonfinancial platforms. The most common examples are payment services embedded in ecommerce websites that enable users to execute financial transactions without leaving the site. For years, online stores have embedded PayPal or other payment services, making it possible for customers to purchase goods with only one or two clicks and reducing processing time and effort for businesses. But embedded finance goes far beyond simple payments. Using embedded fintech apps, customers can enter into buy-now-pay-later deals, pay for purchases in installments, or take out instant loans, for example. The embedded software uses APIs to obtain credit scores and other information so that customers can receive instant automated decisions on credit facilities and lending limits. Likewise, many online travel agents and airlines now offer travel insurance directly through their websites. Embedded fintech applications also let retail investors manage their portfolios using apps, such as Robinhood and Acorns.
• Peer-to-peer (P2P) payments: P2P fintech payment apps let people send money directly to others without using banks. Users of P2P apps open an account on the app, then link their bank accounts or credit cards to it. The app uses APIs to interface with the bank or credit card company. Well known examples of P2P payment apps include PayPal, Venmo, Zelle, Google Pay, and WeChat Pay.
• Business payments: These fintech platforms fall into two broad categories: business-to-customer (B2C) and business-to-business (B2B). They were among the earliest fintech applications, with Square (primarily B2C) launched in 2009 and Stripe (primarily B2B) in 2011. Now, there is a wide range of fintech solutions for business payments. Mobile B2C apps let businesses receive customer payments without interacting with banks or handling paper and coin. Mobile banking apps that allow customers to check balances, transfer money, and pay bills are also B2C payment apps. There is now a large market in B2B payments apps, with fintech companies increasingly competing with banks. B2B payments tend to be larger and more complex than B2C payments, so the marketplace for B2B platforms is taking longer to develop. Many businesses still rely on traditional technologies, such as ACH, charge cards, and checks. However, the marketplace for digital B2B payments is growing because of their convenience, security, and low cost. Some B2B platforms automatically link payments with invoicing, accounting, and cash management services.
• Lending apps: Fintech lending apps enable customers to obtain loans quickly and easily from their smartphones. Rather than providing loans themselves, the apps generally link borrowers with lenders that are often companies outside the traditional banking sector. Fintech lenders, such as Stripe, offer a variety of loans, including personal loans, buy-now-pay-later loans, business loans, and P2P loans. They use advanced technology, such as machine learning, AI, and big data analytics, to assess creditworthiness, thus empowering them to make lending decisions faster and more accurately than traditional banks. Fintech lending can improve access to credit for small businesses and individuals with poor or minimal credit histories.
• Open banking: Open banking makes it possible for people to share their personal financial information with third-party financial services providers. Traditionally, customers had to go to their banks to find out their account balances, transaction history, and borrowing records. But with open banking, they can use a mobile app from a fintech provider to view all of their financial information in one place. Open banking apps use secure APIs to access personal financial information held by banks. They can access information only if the customer has authorized them to do so—for example, if the customer has authorized access only to their bank accounts, the app cannot also access their credit card balances. However, open banking apps can display balances from more than one bank.
• Insurtech: As the name suggests, Insurtech is the use of technology to improve the insurance experience. Insurtech uses advanced digital technologies, such as AI and blockchain/DLT, to automate and optimize insurance processes, and uses big data analytics to assess risks more accurately than traditional human actuaries can. Insurtech companies can personalize policies for individuals, enabling them to obtain insurance that better meets their specific needs. Overall, Insurtech promises to speed up claims and deliver improved service to customers, as it lowers costs for insurance companies.
• Crowdfunding: Crowdfunding uses the networking power of social media to raise money. Crowdfunding apps use embedded fintech services, such as PayPal, to accept small donations from thousands of people. Crowdfunding is often used to raise funds for charitable causes, as well as for business startups, legal fees, school fees, and personal missions. Some crowdfunding apps place no restrictions on how the money can be used, which has led to accusations that the platforms are used by scammers. However, other apps do take steps to ensure that the money is used for the stated purpose—for example, CrowdJustice, which raises money for legal fees, sends the money directly to the lawyers. Business startups can raise money by issuing equity shares through a crowdfunding equity platform, such as Crowdcube.

Benefits of Fintech

Well-known fintech benefits include lower costs and improved security, but there are other, less obvious advantages. Here are some of the main benefits of fintech.

• Lower cost: For businesses, automating and optimizing processes eliminates bottlenecks and helps prevent costly errors and omissions. Increasing automation reduces the need for human intervention, potentially lowering labor costs, and there may also be less need for physical infrastructure, such as office space, thus reducing overhead. Improved data visibility and real-time reporting give managers better control of cash flow so they can take timely actions to prevent waste and losses. For both consumers and businesses, fintech unlocks quick and easy access to a range of financial services and typically charges lower fees than traditional financial institutions.
• Convenience: With fintech, people can access a variety of financial services directly from their smartphones. In contrast to traditional banks, whose counter services are often limited to weekdays and office hours, fintech lets people view balances, transfer money, pay bills, obtain credit, and buy insurance on a 24/7 basis from any location. Businesses can manage payments, invoicing, stock control, cash flow, and accounting on cloud-based integrated platforms. For consumers and businesses alike, the convenience of fintech means less time spent managing finances and more time for productive and enjoyable activities.
• Accessibility: Since smartphones have become ubiquitous, not merely in developed countries but across much of the developing world too, fintech has revolutionized access to finance. People who are unbanked or poorly served by traditional banks now have access to a full range of financial services at their fingertips. And because fintech uses advanced technology to assess creditworthiness, people with poor or minimal credit histories can still obtain credit, including microloans for small business startups. Investment apps also grant people direct access to trading and investment services, giving them greater control of their wealth and savings. Some people, however, such as the elderly and people with sensory impairments, may be excluded by fintech’s exclusively digital offering.
• Speed of transaction: Fintech platforms allow people to make payments and transfer money quickly and efficiently. In many cases, transactions execute almost instantly. But when fintech payments are underpinned by traditional bank settlement processes, final settlement can be slower.
• Nonrepudiation: “Nonrepudiation” is a security principle fundamental to financial transactions. It means that once someone has agreed to a contract or participated in a transaction, they cannot deny that they have done so. Fintech uses cryptography to authenticate signatures, record time stamps, and verify identities so transactions can be completed without dispute, delay, or interruption. Nonrepudiation prevents changes to the terms of a contract after the parties have agreed to them. This makes it possible for smart contracts to execute automatically, thus accelerating contract performance. Furthermore, nonrepudiation means that a customer cannot refuse to make a promised payment in exchange for goods or services. In fintech, this means payments can be fully automated. In cryptocurrency transactions, nonrepudiation ensures that once a transaction is verified it cannot be changed. The blockchain thus forms an immutable record of verified transactions.
• Accuracy: Automating processes traditionally done by humans can reduce data input errors and help prevent fraud. Smart algorithms can enable fintech lenders to assess creditworthiness more accurately, improving access to credit for marginal borrowers while reducing lenders’ risk of default. Fintech transaction monitoring can also more accurately assess risks and identify weak points than human observers, enabling businesses to respond more quickly to cyber breaches and threats.
• Traceability: Fintech can permit financial transactions to be traced end-to-end. Blockchain’s immutable record of financial transactions is a primary example of traceability. Cloud-based integrated payment, invoicing, and accounting solutions let businesses view transactions and observe their effect on the business from a single point. Traceability of transactions is particularly useful for supply chain, payment, and cash flow management. For example, blockchain-based supply chain applications can help businesses track the progress of orders and monitor payments and documentation.
• Improved transparency: Fintech improves the transparency of financial transactions in numerous ways. Blockchain technology creates a transaction record that is fully visible to the parties to the transactions and, in the case of public blockchains, to third parties as well. Open data platforms give customers easy access to data that traditionally has been controlled by banks. Communication channels on web portals allow customers to interact directly with companies. Data analytics and AI enable fintech apps to provide customers with personalized information and to tailor services to their needs. And for businesses, integrated software platforms give managers immediate visibility into all aspects of the business, from high-level overviews to detailed information on particular business functions.

Fintech Trends

Fintech is constantly evolving as new technologies emerge and customers’ needs change. The fintech products of the last decade are now becoming settled technology, and new fintech companies and products are appearing. Here are some developing fintech trends.

• Regulation technology (RegTech): Since the 2007-2008 recession, traditional financial institutions have been more heavily regulated. Fintech companies were initially lightly regulated, but as fintech gains widespread adoption, regulatory compliance is becoming a major challenge. Now, a new fintech segment is emerging, dedicated to helping traditional financial institutions and fintech companies navigate the complexity and demands of regulation. RegTech companies deploy advanced technology to streamline, optimize, and, increasingly, automate compliance monitoring, data analysis, and reporting, reducing the incidences of compliance breaches and warding off regulatory fines and penalties.
• Green fintech: As has occurred in other industries, financial firms have come under increasing pressure in recent years to make their products and services environmentally sustainable and to help finance the transition to green technologies and renewable energy. Green fintech, the use of technology to promote sustainable finance and address environmental challenges in the financial sector, is expected to be a growth area. New developments in green fintech include carbon-footprint tracking embedded into financial apps and payment systems; advanced analytics and blockchain-based carbon credit trading platforms; and AI-driven environmental, social, and governance intelligence.
• Automation: Advanced technology is increasingly automating financial processes, such as transaction processing, data analysis, and compliance. In fintech, for example, robotic process automation (RPA) is taking over tasks traditionally performed by humans, such as sending emails, resetting passwords, creating reports, reviewing documents, and moving data between systems. By shrinking the human element in fintech processing, RPA can lower costs, improve efficiency, and limit errors. Automation is also minimizing the human element in customer-facing functions—for example, replacing staffed call centers with chatbots. This can improve the speed and responsiveness of customer service while decreasing the cost. However, some customers find the lack of human interaction frustrating.
• Artificial intelligence: AI is already widely used in financial services to identify patterns and trends in large datasets, helping financial institutions to make faster and better decisions and tailor product marketing more closely to consumers’ preferences. Now, fintech has begun to use generative AI to fit financial products to customers’ individual needs, as well as optimizing payment efficiency, personalizing marketing, anticipating security breaches, and preventing fraud. AI is also transforming customer service: Chatbots that can converse with people are becoming increasingly knowledgeable and responsive to customer needs—which is beginning to curb the frustration mentioned in the preceding bullet.
• Fintech acceptance: The fintech industry is maturing and many fintech apps are now a mainstream part of the financial landscape. Millions of people manage their finances on their smartphones. And it’s no longer unusual for the chief financial officer of a small business to use an integrated, cloud-based platform to manage payments, invoicing, stock control, and accounting from a mobile tablet, and turn to fintech apps for business payments, contactless customer payments, and international payments. Next, blockchain, cryptocurrency, smart contracts, and decentralized finance are expected to see more common acceptance. And, as fintech expands its horizons, the boundaries between fintech companies and traditional financial institutions are blurring. Fintech companies are applying for banking licenses, banks are launching mobile banking and instant payments apps, and investment firms are diversifying into cryptocurrencies and digital tokens. Fintech companies and traditional financial institutions are cooperating to enable more customers to benefit from the convenience, speed, and transparency of fintech without sacrificing the familiarity and local focus of conventional banks.

Tech-Forward Financial Software for Business Growth

Fintech is revolutionizing the world of business payments and accounting. AI-driven automation decreases errors and minimizes costly human intervention, while advanced data analytics give business owners and managers visibility into all corners of their businesses in real time, enabling them to make faster business decisions and respond quickly to new opportunities and cyberthreats. NetSuite’s cloud-based financial management software with embedded AI capabilities automates core finance and accounting processes, provides detailed insights into business performance, and diminishes the risk of reporting errors, giving business owners and managers greater control of financial assets. With NetSuite’s advanced technology providing the all-important financial engine underpinning business activity, businesses can drive innovation and stay ahead of the competition.

Fintech is transforming more than payments and accounting processes. From customer services and embedded finance to regulatory compliance, fintech is fundamentally changing the way businesses interact with their customers and stakeholders. And more is likely to come. As traditional financial institutions and fintech companies increasingly collaborate and the boundaries between them blur, they could empower businesses to embed advanced financial technology into many more aspects of people’s personal lives and companies’ relationships with business partners.

Fintech FAQs

How is fintech disrupting traditional banking and finance?

Fintech is providing customers with faster, cheaper, and more secure digital alternatives to traditional banking and finance products and services. This is forcing traditional banks and financial institutions to replace old, slow, inefficient processes and embrace digital technology.

Will fintech replace banks?

Some banks might disappear as the fintech revolution advances, but many banks are already adapting to fintech’s capabilities, with some becoming major players in the fintech industry. Eventually, all banks will be fintech companies.

What are the biggest challenges of fintech?

Regulatory compliance, data security, and technological expertise are among the biggest fintech challenges.