Fintech

Financial technology, also known as FinTech, is an industry composed of companies that use new technology and innovation with available resources in order to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services.[1] Financial technology companies consist of both startups and established financial and technology companies trying to replace or enhance the usage of financial services of incumbent companies.

Definition:
After reviewing more than 200 scholarly articles published over the past forty years which are referencing the term Fintech, professor Patrick Schueffel of the School of Management Fribourg derived the following definition for Fintech “Fintech is a new financial industry that applies technology to improve financial activities”.[2] Irene Aldridge and Steve Krawciw note several areas of Fintech proliferation, including automation of insurance, trading and risk management, just to name a few.[3]

Looked at from a procedural perspective, the term ‘FinTech’ refers to new applications, processes, products or business models in the financial services industry, composed of one or more complementary financial services and provided as an end-to-end process via the Internet. The services may originate from various independent service providers including at least one licensed bank or insurer. The interconnection is enabled through open APIs and supported by regulations such as the European Payment Services Directive.[4] These solutions can be differentiated into at least five areas.[5]

  1. The banking and insurance sectors are distinguished as potential business sectors. Solutions for the insurance industry are often more specifically named “InsurTech”.
  2. The solution with regards to their supported business processes such as financial information, payments, investments, financing, advisory and cross-process support.[6] An example is mobile payment solutions.
  3. The targeted customer segment distinguishes between retail, private and corporate banking as well as life and non-life insurance. An example is telematics-based insurance that calculates the fees based on customer behavior in the area of non-life insurance.
  4. The interaction form can either be business-to-business (B2B), business-to-consumer (B2C) or consumer-to-consumer (C2C). An example is a social trading solutions for C2C.
  5. The solutions vary with regard to their market position. Some, for example, provide complementary services such as personal finance management systems, others focus on competitive solutions such as e.g. peer-to-peer lending.

Outlook:
Finance is seen as one of the industries most vulnerable to disruption by software because financial services, much like publishing, are made of information rather than concrete goods.[24] In particular blockchains have the potential to restructure the cost of transacting in a financial system.[25] While finance has been shielded by regulation until now, and weathered the dot-com boom without major upheaval, a new wave of startups is increasingly “disaggregating” global banks.[26]However, aggressive enforcement of the Bank Secrecy Act and money transmission regulations represents an ongoing threat to FinTech companies.[27]

Challenges:
In addition to established competitors, FinTech companies often face doubts from financial regulators.[28] Data security is another issue regulators are concerned about because of the threat of hacking as well as the need to protect sensitive consumer and corporate financial data [29]. Leading global Fintech companies are proactively turning to cloud technology to meet increasingly stringent compliance regulations.[30]

The Federal Trade Commission provides free resources for corporations of all sizes to meet their legal obligations of protecting sensitive data.[31] Several private initiatives suggest that multiple layers of defense can help isolate and secure financial data.[32]

Any Data breach, no matter how small, can result in direct liability to a company (see the Gramm–Leach–Bliley Act)[33] and ruin a FinTech company’s reputation.[34]

The online financial sector is also an increasing target of distributed denial of service extortion attacks.[35][36] Marketing is another challenge for most FinTech companies as they are often outspent by larger rivals.[37] This security challenge is also faced by historical bank companies since they do offer Internet connected customer services.[38]