It is a buzzword that you may have seen in the news or heard your friends, family or colleagues discuss in recent times, but what does ‘Fintech’ actually mean? To learn more about what this phenomenon is all about, continue reading the article below.
What is it?
Financial Technology or ‘Fintech’ for short, refers to the new wave of technology that seeks to improve, automate and create efficiencies in the use and delivery of financial services. Fintech assists companies, business owners as well as consumers manage their financial affairs and operations more effectively due to the use of specialised software and algorithms.
It has only emerged this century and was first used in back-of-house operations within financial institutions. However, these processes have expanded and now impact more client-facing and consumer-oriented services. Fintech is now used in a variety of sectors including education, retail banking, fundraising and investment management.
Fintech is an umbrella term and also covers the development of cryptocurrencies. Despite the use of fintech in this area attracting the most attention, it is predominantly found in the traditional banking and finance industry. These days it is often associated with an array of financial activities including bank transfers, deposits, managing investments and other transactions which can now all be conducted without engaging with someone face-to-face. Research by EY has suggested that ‘one-third of consumers utilise at least two or more fintech services and those consumers are also increasingly aware of fintech as a part of their daily lives.’
Innovation in the financial sector
The impact of these innovations have transpired across all sectors within the financial industry. This is evident through the use of mobile banking which is relied on by 73 per cent of all Australians, with the number of visits to physical banks declining by 36% over the past five years. It has also been suggested that more than two billion people globally use e-wallets, and contactless payments have now become the preferred way of purchasing goods and services.
Impacts on investors
Many investors are also reaping the benefits of the innovation and change that fintech has facilitated, with many wealth management firms implementing financial technology as it is rapidly becoming ‘a necessary part of business strategy.’ New investors are three times more likely to use mobile investment platforms which have allowed them to access different and more diverse markets as a result of improved software and trading infrastructure.
Alternative assets
The pandemic has been a significant driver of technology as it placed pressure on the need for comprehensive digital systems that allow consumers and businesses to connect virtually. This has also resulted in the rapid growth of the alternative asset industry. This is underpinned by fractionalisation which refers to the ‘act of taking an asset, digitally breaking it into smaller pieces and creating a virtual marketplace for those pieces.’
The emergence of fractionalised invest-tech platforms allow for greater accessibility for investors and removes the requirement for initial capital as it allows for otherwise illiquid assets to be traded in a liquid digital market. This occurs through the trading of fractionalised real estate and land whereby investors can lend money to small businesses to invest in these alternative assets.
Rethinking risk
A recent study found that more than 40% of institutional investors plan on increasing their exposure to alternative investments over the next five years with 60% of retail investors wishing to change up their portfolios and include alternatives, not just stocks and bonds. As these assets are not generally associated with other asset classes, they provide investors with the capacity to diversify their portfolios and arm themselves against market volatility and inflation.
Sustainable investing
As financial technology provides investors with an increased capacity to prioritise the kind of investments that matter to them, many individuals are now focused on ESG (Environmental, Social and Governance), with 66% of investors around the globe willing to pay more for sustainable products and services. There has been a societal shift led by both consumers and institutions to place a greater emphasis on impact investing, which has resulted in the amount invested into ESG funds more than doubling from 2019 to 2020. Fintech has provided investors with access to more sustainable financial products and is also often a driver in innovating and creating more sustainable and conscious financial offerings.
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