Are you looking to jump fast on the Fintech bandwagon to build the next big thing in online banking or blockchain? We’ve put together a Fintech dictionary for you to understand better how financial technologies are shaping our future today and how our relationships with money will change over time.
It’s well-known that we can only see a tiny tip of the iceberg, while a huge icy rock is hidden under the murky black water. The same applies to Fintech. As a term, it refers to a combination of technologies used in the finance and banking sectors to simplify, streamline, and automate our interactions with money. Although we use banking applications every day, we have no idea how finance technologies work and how powerful they are. And, in general, we don’t suffer from lack of this knowledge.
But in recent years, it is the technologies that have made our relationships with money more diverse and straightforward, so we have created a dictionary of the most crucial Fintech definitions and tried to explain them in simple language and fun way. We’ve divided the dictionary into 3 blocks: Fintech basics (including Fintech development stack), Fintech startups, and Fintech verticals.
It is a new business domain that aims to help modernize and improve traditional financial services by taking advantage of the latest technologies. Fintech makes conservative banks more innovative and moves banks away from the monopoly on money transactions. It allows us to sign insurance contracts and transfer money within a couple of minutes and in a couple of clicks, get funding from sources other than banks, make crowdfunding possible, help automate financial assets management without human involvement (by leveraging Artificial Intelligence), assess people’s solvency, store money in electronic wallets, and many more.
2. Fintech Stack
Besides, Fintech gave a boost to the development of highly effective technologies (both new and existing) such as peer-to-peer (P2P), NFC, artificial intelligence (AI), machine learning (ML), Blockchain, etc.
P2P technologies allow us to make transfers and payments, lend money to people and insure our own children within a couple of clicks on our touch screen. Previously, we could only dream of it – the technology is commercially successful and concerns the financial market so it can be called disruptive.
AI and ML technologies have fundamentally changed the approach of financial corporations to risk and asset management. Large investment funds like Vanguard or Wealthfront have created their own AI-based chatbots for smart investments. And banks use AI-based scoring services to identify unscrupulous borrowers or assess user solvency.
PSD2 is an EU directive that makes European banking open. This openness obliges banks to provide access to client information, say, to a financial startup, so that it can create a new product. This is done through an API (Application Programming Interface).
For Fintech product development, API is like pulling a doll by the strings. In simple words, API is a way of communicating and exchanging information between computer programs. Thanks to the list of commands, queries, and responses, various apps interact by executing commands from each other.
Imagine that you want to take a loan from a bank. You’ve downloaded an application that compares the conditions of different banks. Once you have selected the right offer, you do not need to go to the bank in person. The application will tell the bank all the necessary information about you. All you have to do is wait for the money to be transferred to your credit card.
Another prospective Fintech technology is NFC which enables contactless payments – the next level of the cashless economy.
Blockchain (aka distributed ledger technology) is a revolutionary technology that has made a significant contribution to the evolution of the entire Fintech landscape. Having once emerged as a technology on which Bitcoin was built, it has gradually transformed into a significant technological breakthrough since the invention of the Internet. There’re dozens of blockchain use cases apart from the crypto world that prove to be very promising.
Without delving into the technical nuances, the very principle of blockchain is quite simple. Imagine an accounting book which is available to each participant of the event and which is updated constantly. In fact, this book can include any event – from financial transactions with cryptocurrencies like Bitcoin, Etherum, etc. to the results of voting in the presidential election.
The pages (read blocks) of this book are kept by all network users at the same time and refer to the old pages. If someone tries to deceive the system by pulling out or pasting a different page in the book, the system immediately turns to tens of thousands of other versions of the book and discovers discrepancies in the structure of blocks.
What’s all the fuss about?
All these tricks give a lot of buns to the users of the system. Transaction participants cannot fool each other. There is no need for middlemen like a bank. Nor does it have a central node that you can use to destroy the whole system. All operations are transparent for its participants as all data are entered into the same database.
According to Santander Innoventures Foundation, there are already more than 25 blockchain use cases registered in Fintech alone.
The second way of using the system is through smart contracts, which cut out a lot of legal red tape from the equation. For example, a notary startup Stampery uses blockchain to assure deals and approve of transactions.
Another interesting way to use it is in the field of copyright and personal data. Ascribe helps artists and other creative people to prove their authorship with blockchain. Startups like Civic and UniquID Wallet allow users to use blockchain and biometric security to create digital IDs that cannot be tampered with and that can replace ordinary IDs in the future.
People who still transfer money through a bus driver.
These are people who, for various reasons, do not have access to basic financial services. For example, there may be no banks or ATMs in the countryside or people may be too poor to use them (many developing African countries can be an example). These people have to pay cash, engage in physical exchange, and make money transfers from hand to hand, not through a mobile application or online banking solution.
It is these people who are the target audience for many financial startups. According to World Bank estimates, the unbanked audience consists of about 2 billion people around the world. Missing out on these opportunities would be a bummer!
4. Financial inclusion
The opposite of unbanked.
This concept refers to the availability of access to basic financial services such as money transfers, Internet payments, deposits, loans, insurance, etc. In a nutshell, if your city has a bank, you are part of a financially inclusive society.
In fact, financial inclusion is a positive result of the work of financial companies and is achieved primarily due to the spread of technologies such as mobile, NFC, p2P, etc. In this case, financial startups provide an opportunity for the unbanked to get cheap and convenient financial services through applications and web services.
Check out 8allocate Fintech software development case:
5. Fintech unicorns
Unicorns are startups that cost more than $1 billion.
In fairy tales, unicorns are horses with one horn. In business, it is a technological company or startup with the capitalization of over $1 billion. The term was coined in 2013 by venture capitalists to differentiate between particularly successful Fintech startups. In 2017, out of 53 new unicorns, 34 (64%) were involved in financial technology.
You might have heard of some old-timer unicorns, such as TransferWise (cheap international money transfers), Revolut (nonbank unicorn), Klarna (infrastructure for Internet payments), Ant Financial (this is a whole financial holding and at the same time – the most expensive financial unicorn with the capitalization of $150 billion).
Unicorn has 2 sister-terms: decacorn refers to companies with capitalization over $10 billion, and hectocorn refers to companies valued at over $100 billion.
Examples of modern Fintech unicorns are Circle ($3 billion), CoinBase ($8 billion), Robinhood ($5.3 billion), Credit Karma ($4 billion), and more.
6. Fintech accelerator/incubator
A Young Fighter Course for Fintech startups!
One thing or another, it’s like a business school. Their task is to convert a startup-schoolboy into a startup-annihilator to conquer the market as Google and Facebook did.
There is a small difference between accelerators and incubators. For example, if a bank needs a new online banking system, it can either outsource its development to a professional Fintech software development provider or it can create an internal incubator to develop the concept, assemble a Fintech development team, and build a clickable prototype or MVP to future-proof the idea. Fintech developers that go to incubators receive expert advice, as well as technical and financial assistance.
An accelerator usually helps startups that have already passed the business formation stage. Through unique methodologies and framework Fintech software development teams polish and fine-tune their product, think over a business model, and gain insights from marketing experts and experts of other domains. Afterward, startups break into the market and they can potentially become unicorns.
7. Fintech Hackathon
A coliseum for developers.
If you combine a hacker and a marathon, you get a hackathon. This is a battle of programmers, project managers, and designers against a particular problem that can be solved with a technology solution. People with different skills, from software development to business analysis to marketing, come together and solve the problem by working on the prototype as a team, sometimes for 48 hours and more, until they create a working version of the future solution. The best teams enter the hall of fame, get awards and financial incentives or get hired by hackathon organizers right on the spot. Many Fintech startups view hackathons as a good source of finding, attracting, hiring, and retaining qualified Fintech developers and architects especially now when tech talent shortage has become a critical issue globally.
As mentioned above, hackathons can last from a few hours to several days. They are often held at night, during various conferences, and exhibitions.
An easy way to get funding by offering “candy wrappers” instead of meaningful products.
During an Initial Coin Offering (ICO), the company produces tokens, i.e., a cryptocurrency that investors buy for real money. These tokens can be used for trading at a crypto exchange, getting access to specific platforms (i.e. blockchain) and using them as internal virtual memorabilia or currency within those platforms, for smart contracts, voting, etc. The number of tokens issued can also demonstrate the investor’s share in the project.
In many countries, ICO is not regulated in any way, so there is always a risk that the purchased tokens will be useless. In 2017, almost 80% of all ICOs were scams.
9. Fintech Crowdfunding
A socialist investment for everyone.
Crowdfunding is a hybrid between investments and charity.
How does it work?
Let’s imagine that you are hungry, but you’ve no money to buy food. And you want to make a potato salad. To start a crowdfunding campaign, you will need a description of the salad, its recipe, images, and possibly a teaser of how delicious it’s going to be. Next, you have to calculate how much money you need to buy potatoes, mayonnaise, and other ingredients and choose how long you are ready to stay hungry wait for the money to come.
After preparing all the promotional materials, you are ready to tell the world why they should fund your potato salad. Choose a crowdfunding site like Kickstarter and launch your campaign. From time to time you post updates, news and video on the project’s progress: e.g., today, we’ve got new competent potato peel advisors joining our salad board, they have 50 years of cumulative experience of peeling potatoes or we’ve just invented a new disruptive way to peel potatoes!
The more word of mouth you generate for your campaign, the broader your outreach and, as a result, the higher the chance you’ll get what you’re looking for. Having collected enough funds to cook your potato salad, you say thank you to all contributors for their pledges, show them the images of a ready-made salad and send a portion to everyone who donated to your campaign.
Unfortunately, or fortunately, our example is not a fiction. Once upon a time, the project of salad preparation has collected over $55,400 although its fundraiser initially asked for $10 only and started the project for fun.
A twin brother of Fintech.
Traditional insurance has a lot of issues: paperwork, complicated tariffs and conditions, the intransigence of insurance agents, and indifference to client needs. To eliminate these shortcomings, Insurtech startups use modern technologies such as telematics, machine learning, artificial intelligence, big data, the blockchain, internet of things, open API, and so on.
The industry has received $24 billion in investments over the past 3 years. Users can now compare insurance policies between different companies or send an insurance claim in a couple of clicks on a smartphone, and insurance companies now have access to new tools and programs that help better assess customer satisfaction.
According to a recent research by McKinsey, 90% of all insurance claims and cases will be processed with AI by 2030. Top Insurtech unicorns as of today are Oscar ($3.2 billion), BGI Group ($3 billion), Zhong An Insurance ($2 billion), and Clover ($1.2 billion).
A cousin of Fintech who lends money to those rejected by banks.
You want to take a loan to buy something, but the bank won’t borrow because of your low creditworthiness score? It’s not a problem anymore, as the financial startups have worked hard to invent a lot of services and applications to allow people to lend to each other. There are crowdfunding, peer-to-peer platforms, and credit markets that facilitate money lending beyond banking.
Credit startups offer loans for mortgages and higher education. By the way, one of the most successful financial unicorns, SoFi, started as a provider of low-interest loans for repayment of tuition fees.
Lending is probably the most popular area for investment in the entire financial industry. VCs have invested almost $16 billion over the past 3 years in credit scoring technology.
A relative of Fintech who helps financial corporations save on lawyers.
The essence of Regtech is to help financial companies comply with all government requirements. Hiring lawyers for this purpose is expensive. In the United States, banks spend $70 billion a year just to bring their operations in line with regulatory requirements and standards.
Regtech companies help automate many processes such as verification of customer identity and bank accounts, preparation, and submission of financial reports, anti-money-laundering initiatives, etc. Some Regtech startups specialize in data encryption, protecting corporations from cyber attacks, and evaluating employee behavior and KPIs.
The main feature of Regtech is the ability to analyze vast amounts of data, which enables more balanced and informed decision-making.
A foster brother of Fintech that makes public sector transparent and people-friendly.
Govtech is pretty similar to Regtech. But its tasks are slightly different, namely, to make public services faster, more comfortable, and of higher quality. In particular, they help us file documents with the civil register office, obtain a new passport, register a new business, pay taxes, and more instantaneously. As such, it makes the public sector more open, accountable, transparent, and less corrupt.
All well-known technological innovations are in use when it comes to Govtech: open data for the analysis of public procurements and declarations of officials, blockchain for safe auctions and the maintenance of a register of land rights, artificial intelligence to detect corruption schemes, etc.
The richest relative of Fintech that eats financial analysts’ bread.
Wealthtech startups create micro-investment platforms, digital brokers, personal finance management programs and robo advisors. These Fintech products are designed for only one purpose – to increase the capital of users.
For example, robot-based devices manage billions of dollars in assets. By 2022, the number of assets under AI management will be equal to $1.5 trillion. Digital brokers and micro-investment platforms give investment advice, create equity growth forecasts, calculate return on investment, etc. All this happens in a smartphone application and is as simple as ABC.
Expert from Juniper Research predict that by 2022, AI-driven robo advisors will manage assets worth of $1,4 billion.
No white collars, no strict ties!
These are Fintech startups that are based on more than one bank function. They open accounts, issue payment cards, allow you to make payments and transfers, and even store the balance of money from the card on deposit. Unlike traditional brick-and-mortar banks, nanobanks do not have any offices and branches, and they onlywork through a mobile application or a web platform.
In some countries like Ukraine, nonobanks can obtain their own banking license (example: Monobank). But most often they work in cooperation with existing banks.