What is FinTech?
FinTech (financial technology) is a term broadly referring to software, mobile applications, and other technologies created to improve and automate traditional forms of finance for individuals and businesses. A FinTech company refers to any business that uses technology to modify, enhance, or automate financial services for businesses or consumers.1 Examples of FinTech companies include mobile banking, peer-to-peer payment services (e.g., Venmo), trading platforms (e.g., Robinhood), automated portfolio managers (e.g., Wealthfront), and the development and trading of cryptocurrency (e.g., Bitcoin).
FinTech simplifies financial transactions by making them more accessible and generally more affordable. FinTech strives to streamline transaction processes by eliminating unnecessary steps for all parties. Current trends in FinTech include:
Digital banking growth. The simplicity and convenience of digital banking is driving growth in this sector, with an anticipated growth if the global digital banking platform market expected to grow at a compound annual growth rate (CAGR) of 11.5 percent by 2026.
Blockchain. Blockchain technology provides decentralized transactions with governmental or third-party involvement. Blockchain technology is projected to continue its rapid growth trend.
Artificial Intelligence (AI) and Machine Learning (ML). AI and ML technologies reduce operational costs, increase value for clients, and detect fraud. As these technologies become more affordable and accessible, they are likely to play an important role in FinTech going forward.
FinTech is generally trusted by consumers, but many FinTech applications are new and are subjected to different safety regulations than banks. It is beneficial to consider FinTech applications’ risks and challenges as you consider using FinTech applications for yourself or your organization. Risks and challenges include:
Identity management. Financial organizations amass copious amounts of data which create data ownership and digital identity management concerns. Considerations include long-term client data retention, compliance concerns, and data compromise.
Cybersecurity concerns. Data security is a top concern in FinTech, and financial organizations collect high volumes of data containing personally identifiable information such as financial information, contact information, and health information about customers, visitors, and employees.
Regional security requirements. FinTech applications must follow KYC (Know Your Customer) practices and regional data protection regulations, which can be complicated by international regulations as well as differing international interpretations of these regulations.
The following are best practices that FinTech applications can follow to ensure that their applications are secure:
- Data encryption
- Tokenization
- Role-based access control
- Authentication technologies such as: one-time password systems, mandatory password changes, monitoring, short log-in sessions, and adaptive authentication
1 Columbia Engineering Boot Camps, 2022, “What is Financial Technology (FinTech)? A Beginner’s Guide for 2022”