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What exactly is Fintech ? part 1

• 2022-01-24
• Maciej Szczerba

This is a post for people who have heard about fintech in the media, but don't know what it's all about. I'll warn you in advance - if you work in fintech, or even finance, this text is probably too simple for you and you'll think you know most of these things.

However, even though the text is aimed at people who are not familiar with fintech, I think that also for those who are familiar with the topic, the text can be at least partially interesting.

How to define fintech?

One of my friends, a banking industry veteran, told me about 2 years ago sarcastically: "Fintechs are all those companies that try not to submit to the banking and insurance regulations of the relevant supervisory authorities".

However, this is not the truth, or at least not the whole truth. Rather, only a smaller part of the truth.

How would I briefly define what fintech is? They are innovations in the financial sector that are based on the latest trends in information technology.

We can understand fintech even better if we categorise these innovations:

1.Digital innovations in various areas of traditional banking and insurance, streamlining through digitization the business processes of traditional banks, insurers and other financial market participants like fund management companies, wealth management etc.

2.Use of Machine Learning/ AI (machine learning and artificial intelligence) technologies in digital products dedicated to the financial industry.

3.Blockchain technology and the creation of virtual currencies like Blockchain or Ethereum.

The origins of the fintech idea go back to the financial crisis of 2008/2009. Regulators in most Western economies were, as a result of the crisis, interested in deregulating the market - allowing many smaller players in the financial industry to enter the market and compete with traditional banks (consumer, corporate and investment banks) as well as other financial market institutions.

Indeed, at least in my opinion, regulators (similar to the Polish KNF, like the US SEC, or the UK FCA) have been "turning a blind eye" to regulatory issues (more on that in a future post) in order to create more competition in the financial sector and motivate traditional financial players to be more transparent.

The development of fintech was also supported by the explosion of cloud technologies (around 2010) and the huge increase in computing capabilities of computers, available to start-ups on an "on-demand" model. This has meant that fintech start-ups have been able to start competing with much larger organisations.

n 1994, Bill Gates said: "Banking is essential, banks-not necessarily".

Whether we agree with Bill Gates or not, the future of the financial industry seems to be absloutely determined by the development of technology. Most traditional bankers would agree with this. Many experienced bankers already see their banks as technology companies.

The first phase of fintech involves innovations such as:

1.The development of digital payments - other than traditional transfers or debit/credit cards, such as mobile wallets. This has resulted in a huge increase in cashless transactions in general. Also among the traditional players. At this point, it is worth noting that the Polish market was from the beginning in the 21st century much more advanced when it comes to digital payments and e-banking than mature Western markets.In 2018, Sweden was the country that overwhelmingly got rid of cash transactions and was put as a model in the adoption of cashless transactions. Today in 2020, China, which has adopted large-scale, government-supervised virtual currency, is leading the way as the country that will be the first to become cashless.

2.Fintech solutions have contributed enormously to the development of financial services. They have significantly reduced the cost of financial services, such as consumer loans and personal insurance.

3.In 2020, about 3 billion people in the world did not have access to traditional banking (let alone any other financial services). In sub-Saharan Africa, a trip to the bank can cost up to one month's salary. Fintech has also seen a huge growth in mobile payments and the transfer of money via the mobile phone network, without a bank in poor countries. Most people, even in very poor countries, have access to even the simplest mobile phones, which they can use to make simple financial transactions.

Blockchain is a topic for one, or rather two, of our next posts. And there will be some next week :) Blockchain is a system of data storage supervised by a closed community. It can be used for various purposes (more in the next entry), but its main use are the so-called cryptocurrencies, i.e. currencies created by the community, which do not require a central register of currencies, a role which until now was played by the central banks of individual countries (such as the Polish National Bank). Both the amount and the security of the available virtual currency are managed and monitored by the community. There are various techniques for community verification of the amount, security and possible inflation of the currency, they are called "consensus methods", such as "work of proof" or "state of proof". (the newer one). I assume that new methods will also be developed. For now, stay tuned for an article on blockchain, where we will dig deeper into blockchain issues.

Today, in 2022, most fintech solutions are based on machine learning and artificial intelligence solutions. We have written about artificial intelligence and machine learning on this blog more than once. However, in an absolutely telegraphic nutshell: these are solutions where the algorithm "learns" itself, capturing patterns and, as a result, starts to make decisions on its own.

There are many interesting examples of ML/AI applications in the financial industry:

1.improving investment decisions in financial markets (transactions on stock exchanges/ Forex etc.)

2.examination of creditworthiness based on data other than traditional financial statements, income history (such as data from current bank accounts, payment history, and even data from social profiles).

3.Individual tailoring of insurance solutions, e.g. on the basis of driving style data collected from sensors gathered from cars (the more cautious you drive, the less you pay).

In the next episode (next week) more on blockchain !

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