Overview: Financial Technology Companies
Financial technology companies are reshaping the way we live our lives in 2016. From crowdfunding to cryptocurrency to personal budgeting, fintech startups are becoming a normal part of our daily financial lives. In 2014, investment in fintech companies reached the $12 billion mark.
Venture capitalists and institutional investors are making big bets on fintech, and some of these companies will have a huge effect on the global economy.
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This article covers the below 7 ways in which financial technology firms are changing our world:
- Fintech firms are changing the way we pay
- Cryptocurrency: it’s not just for bitcoin miners anymore
- Who needs a bank loan? Crowdsource it
- Budgeting made easy
- Retirement as a game
- Increasing diversity in the world of finance
- Fintech is making banks obsolete
Fintech Firms Are Changing the Way We Pay
The fintech firms below are covered in this section.
The first way that fintech companies are changing our world is in the sphere of payments. Did you ever think you could swipe your credit card at a flea market or a yard sale? Companies like Square are helping individuals and small businesses accept credit card payments with minimal investment. The company processed almost $16 billion in payments in the first half of 2015.
Competitors, like Stripe and Braintree, offer similar services. Now, small business owners and artists can sell their wares on their own websites or even in their driveways without worrying about customers that don’t have exact change or cash at all or getting stuck with a check that bounces.
Venmo is another fintech company that has achieved huge results in the past two years. Improving on the success of PayPal, Venmo (which was purchased by PayPal in 2013), offers an easy-to-use platform to make and share payments.
A key aspect of this financial technology has been the social aspect of Venmo. Users can comment on their own payments and view their friends’ payments and comments.
Venmo has caught fire in the past year. In the fourth quarter of 2015, the company processed $2.48 billion in payments.
On top of all these new ways to process payments, the way that we pay is not only becoming easier but more secure. There are a number of startups dedicated to protecting your information as it glides through the cloud, including Tanium, Menlo Security, and Illumio.
While maybe not as sexy as some of the other startups on this list, these fintech companies dedicated to security are the backbone of everything else that is possible in fintech. If our information is not secure, it will be impossible to fully realize the benefits of this financial revolution.
Cryptocurrency: It’s Not Just for Bitcoin Miners Anymore
The financial tech discussed:
Bitcoin burst onto the fintech scene in 2009, making a tremendous impact. This cryptocurrency promised complete anonymity in electronic payments – something that has been possible with cash since the dawn of time.
With the decreasing use of cash, there has been a demand for the ability to send currency electronically without fear of it being tracked back to a credit card or other form of identity.
These days, cryptocurrency involves more than just bitcoin miners and theoretical Reddit discussions. In fact, many financial institutions are exploring blockchain technologies and implementing these ideas into their products.
Blockchain is the technology that drives bitcoin, recording transactions in a database without a central authority figure acting as the keeper of the ledger.
In this way, the amount of currency can be tracked and accounted for but not traced to a specific user. Blockchain is not only meant for the Edward Snowdens of the world – mainstream companies like Overstock.com are also exploring the technology.
There are many exciting startups to come based around blockchain, including bitcoin marketplaces emulating eBay (OpenBazaar), microfinance platforms, databases for public records like permits and wills, and countless other applications of blockchain technology.
Blockchain technology is now being applied not only to electronic payments but also to projects like IBM and Samsung’s ADEPT program, a decentralized Internet of Things.
This program is designed to help connected devices communicate cheaply with each other.
Who Needs a Bank Loan? Crowdsource It
The fintech companies discussed:
Stepping back from the future, there is another way in which fintech companies have already changed the financial landscape for consumers. This is through the concept of crowdfunding.
The year 2015 was a huge year for crowdfunding, with companies like GoFundMe, Kickstarter, Indiegogo, and Patreon absolutely exploding in popularity.
There is a now a crowdfunding site for nearly every niche, but the sites mentioned above all offer a specific project or cause to be funded, sometimes with an incentive for the funder.
However, there is another subset of crowdsourced funding that could be even more impactful. These are the peer-to-peer lending sites, like Lending Club and Prosper. On these sites, users take a risk on a particular loan proposal based on a number of factors, including the applicant’s credit score, financial history, reason for the loan, and a number of other factors.
Applicants might need to dig themselves out of crippling credit card debt or need a few thousand dollars to start a small business. Or they might want to pay for a wedding or a big vacation.
On the other side of the transaction, the funder receives an interest rate commensurate with the risk he or she is taking on the applicant. The funder can make a small contribution to the completion of the loan, e.g., contributing $25 towards a $2000 loan.
In this way, peer-to-peer lending sites are taking the bank out of the equation. Instead of depositing their money into a savings account at a bank, where the bank uses deposits to fund loans for other customers, peer-to-peer fintech lending sites allow customers to directly fund those loans.
The best part is that users avoid the paltry interest rates offered by savings accounts and get to enjoy the fruits of a proper return on investment. While there is the very real risk of some loaners not making their payments, interest rates can easily reach into the double digits.
Budgeting Made Easy
The fintech startups discussed:
No one likes to budget – just the idea of sitting down and mapping out what to spend on everything, every month, makes most people’s skin crawl.
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However, it is important for long-term financial health, and everyone knows it. A host of fintech companies is out to make budgeting and saving easy and – dare we say it – fun.
Two of the leaders in budgeting are Mint (owned by Intuit) and YNAB (You Need a Budget), which are zero-based budgeting solutions.
These apps allow the user to set up budgets in just about any category and then sync with banks to make sure the budget is being followed. When a particular category goes over budget, these services politely and effectively tell the user where he/she went wrong.
Only slightly more enjoyable than budgeting money is saving money. Fintech startups, like Simple, which offers full bank account services, and Digit, help users to hide away those extra funds before they have a chance to spend them.
With Simple’s intuitive app, users can save toward specific goals right within the app, without complicated bank transfer confusion or any fees. Even easier to use, Digit analyzes the user’s spending habits, taking a few bucks out of the account and depositing them into savings if the algorithm says the user can afford it.
It’s a way to train people not to spend money they shouldn’t be spending.
At the end of the month, users are often surprised by how much money they saved, without even touching a thing.
Retirement as a Game
The fintech startups discussed:
Stashing money in a savings account is one thing, but if you really want to see a return on investment, you need to invest that cash. That’s where this round of startups comes in.
This is a fintech sector that has been ripe for disruption for years. Forget about leafing through page after page of financial reports and making complicated bank transfers to your investment company.
There is a group of financial services startups that are taking the confusion out of retirement investing.
Startups like Betterment, Wealthfront, and Acorns are changing the way people invest for their retirement.
These companies largely have the same premise: take money out of your account easily and quickly and transfer it into a mutual fund of your choosing. Do this every week or month for a few decades and—BOOM—you can retire.
Now, these companies are not without their faults. Some people want a little more control over their money, and these companies rely on third-party investment firms, like Vanguard or Fidelity, to actually manage the mutual funds, which increases the total cost to the user.
However, in the era of smartphones and gamified life, there are much worse ideas than spending a few extra bucks on one’s own future.
Increasing Diversity in the World of Finance
The companies discussed:
With the increasing influence of fintech companies over the world of finance in general, it is an opportunity for some progress-minded newcomers to address criticisms that have been leveled at financial companies in the past.
Two companies in particular, Addepar and ZestFinance, are looking to address diversity in the workplace. Although research seems to indicate that women typically make better portfolio managers and investors than men, a mere 23% of Certified Financial Planners are women.
In addition, microfinance companies, like Kiva, see a better return on investment and better overall business success rates from women than from men.
With the nature of financial services startups, for many, it is an opportunity to address concerns that have been around for decades or longer. With a fresh start at a company that is disrupting the way business is conducted, pioneers can also address the makeup of their teams.
In fact, studies have shown that diverse workplaces, when managed properly, can see marked increases in productivity over those with a homogeneous workforce.
Fintech Is Making Banks Obsolete
The banks were too big to fail, right? With the amount of deposits currently sitting in banks across the world, that is almost certainly still the case. However, fintech companies are founded every day, and each one seeks to nibble off a portion of the banks’ revenue.
Fintech startups are more nimble than the big banks and are able to pivot more quickly or release a fresh, new user-friendly app. The costs of switching from the banks is large indeed, but more people are shifting their retail banking needs to financial tech companies every year.
Another big advantage that fintech companies enjoy is the relative lack of regulation when compared to big banks. For years, the banking industry became more and more complex, as banks had to cope with the rigors of international regulations and then found that they could profit from the very complexity that they were creating. Bundled services were a boon for banks.
Now, however, consumers and regulators alike are demanding simplicity from the banks, which will be a long slow process to unravel.
However, fintech advisory firms believe that fintech startups, with their light payrolls and lack of regulators breathing down their necks, are in prime position to take advantage of this new era in the financial services industry.
Conclusion: The Revolution Continues
Do you need a car loan, a mortgage, or to stash your cash in an interest-earning account? Do you need to pay for your coffee with a credit card or your phone?
More and more, these problems are being solved by financial services technology. Furthermore, as we wade deeper into the ocean of mobile and online payments that decrease our use of cash, the world becomes more reliant on the companies that are processing and securing these payments.
With newer technology and lower barriers to entry, there is a fintech company out there that is looking to solve almost any issue around the way people use and rely on money. Over the next few years, these companies might come to dominate the financial world, giving the banks a run for their money.
Or will the banks merely swallow up these financial technologies and make them a part of their vast organizations?
Time will tell, but one thing is for sure. There is no going back from this boom in financial technology.
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