Demystifying Fintech: an Industry Snapshot
With unprecedented change, shifting consumer demands and constant redefinition, there’s never been a better time to explore fintech’s past, present and future. Also published February 28, 2023 on LinkedIn.
By Jagathi Gururajan & David DiNicola
It may seem a little passé to “demystify” fintech. After all, the term “fintech” has been represented in several phases of the Gartner Hype Cycle for a decade or more, but it continues to find relevance based on its consistent alignment with emerging technologies. In fact, just type “demystify fintech” into your Google search bar, and you’ll get over a half-million entries.
So why are we adding another one?
The last few years have been dramatic for fintech. Whether we’re talking rapid innovation, unpredictable macroeconomic factors, shifting consumer preferences, technology adoption rates, regulatory changes or continued growth projected across several sub-sectors, an industry primer has never felt more timely.
What is fintech?
In the broadest sense, fintech lives at the intersection of finance and technology. More specifically, fintech companies deliver products or services that help organizations, leaders and individual consumers more effectively manage financial operations, transactions and decision-making.
Most fintech solutions — from start-ups to established firms — can effectively be described as “disruptors.” Continue that Google search, and you’ll quickly find that the deeper you go, the more impossible it becomes to formally categorize every fintech company or app. One primary reason for this is because so much of the tech actively disrupts the status quo by blurring the lines between traditional fintech sectors.
One way to demystify this otherwise complex landscape is by looking at what these fintech solutions seek to accomplish or even disrupt in relation to our modern finance ecosystem. With this lens, a few core areas tend to emerge:
- Banking: solutions offering eBanking and account management
- Lending: solutions that drive efficiency in the lending process for everyone involved; in particular, lending tech often aids lenders with data-driven risk assessment and decision-making
- Wealth Management: solutions that help improve personal and professional asset management and investment
- Personal Finance Management: solutions that consolidate personal financial information to aid in account oversight and decision-making
- Regtech: solutions that help financial institutions improve regulatory governance in areas like reporting, compliance and risk management
- Embedded Finance: solutions that enable the seamless integration of financial processes into everyday transactions (e.g., branded apps and cards that facilitate payment)
- Enterprise Software: solutions that support organizational operations across functions and industries, such as enterprise resource planning (ERP)
Why it matters
Growth and success within the fintech industry is closely tied to consumer adoption and trust. Fintech isn’t just some elusive technology leveraged solely by financial institutions or bleeding-edge investors. These are tools that impact the average consumer every single day.
In their 2022 “Fintech Effect” report, financial services company Plaid identified that budgeting, saving for retirement and simply keeping up with financial information had risen significantly as leading financial challenges for American consumers.
On the flip side, current users see significant value added by these fintech companies:
These reported benefits are among the driving factor for rapid adoption, and while real or perceived knowledge gaps still exist, they provide rich opportunities for connection between fintech companies and their customers.
What’s in store for fintech in 2023?
We’ve already seen massive transformation in terms of how both organizations and consumers conduct their business. The origins of this change predate the COVID-19 pandemic, but social distancing and remote work introduced new necessities and increased urgency for alternative solutions. While we are undoubtedly seeing a trend toward “reopening,” it’s clear that behaviors, priorities and expectations have shifted over the past few years — including increasing focus on value, newfound willingness to experiment with alternative brands or shopping methods and an unsurprising but markedly high adoption of digital channels.
This all begs the question: what does the future of fintech hold?
We don’t have a crystal ball, but we can look at a few key trends across sectors, as well as insights from industry leaders.
Banking
With the significant rise of non-traditional challenger banks, the industry is fragmenting. In order to fend off competition, address economic uncertainty and more effectively align with changing customer demographics and expectations, many banks are reinventing their core operating models. This includes further segmentation and a higher reliance on data, the integration of new and expanded digital toolsets, a push for greater operational efficiency and distributed banking strategies — comprised of open banking, banking as a service (“BaaS”) and embedded finance.
The industry has also seen increasing adoption of newer technologies and more streamlined infrastructures, such as artificial intelligence, cloud computing and low / no-code solutions. At a macroeconomic level, we are likely to see a boom in B2B fintech, a movement toward green banking, and offerings that promote financial wellbeing in the face of inflation and a potential global recession.
Lending
Across most financial sectors, the issues surrounding inflation and the looming threat of global recession are likely to play a central role in strategies for the coming year. For lending institutions, preparedness is the name of the game, and that means a mix of offense through innovation and a little defense in the form of contingency planning and operational flexibility.
On the innovation side, there is a definitive opportunity to invest in new technology—in particular, ID verification services. The field is growing and can augment lender capabilities around Know Your Client (KYC) standards, while creating a more seamless customer experience and reducing the risk of fraud. As with banking, embedded financial payments have also become central to service delivery — especially as the market has become increasingly open to alternative lending.
On the contingency front, existing financial policies worldwide have fallen under scrutiny for being outdated or deficient. It is likely that the industry will see new regulation, and many stakeholders seem to acknowledge this: in 2022, 62 percent of respondents in a Cost of Compliance survey said they expected compliance-related expenses to increase at least slightly. Unsurprisingly, cryptocurrency is central to this discussion. While the use of blockchain and cryptocurrency continues to generate headlines, some observers see recent developments as an opportunity for transformation rather than a death knell.
Wealth Management
With geopolitical tensions and aforementioned macroeconomic factors, some providers are anticipating additional pressure on wealth management firms due to a decline in assets under management (AUM). This puts wealth managers in a double-bind as external competitive pressures intensify and client demand rapidly evolves toward new products and services such as private markets, personalized advice and seamless omnichannel experiences.
In their top trends report for 2023, Capgemini highlighted some potentially transformative changes to the wealth management landscape as the sector copes with uncertainty in this economic environment. This has led to a number of key developments: behavioral analytics are increasingly becoming central to digitization strategies, many investors are embracing new portfolio strategies, the appetite for digital assets is evolving beyond cryptocurrencies, demand for outsourced Chief Financial Officers (OCIO) is expected to rise and hybrid advice models are becoming more widely adopted as firms seek to innovate. Additionally, the report highlighted that women are increasingly controlling more wealth, but many firms are faltering when it comes to winning mindshare and share of wallet.
“Capturing the mindshare of women and next-gen customers is about developing a new communication approach, advanced engagement channels, and emotional connections.”
Personal Finance Management
Personal finance management has evolved rapidly — so much so that this particular subset of fintech has entered our everyday vernacular. For example, in just a few years, Venmo has become a verb in its own right, and public microtransactions have become a social affair.
As a general rule, personal finance fintech is built with a spirit of consumer-centric innovation, making aspects of everyday life just a little bit easier. In terms of emerging opportunities for 2023, the industry has started to see growth in alternative payment models (such as buy now pay later, or BNPL) and neobanking.
However, this particular sector isn’t just about tech. It’s about information. As new tools empower consumers to take their financial lives into their own hands, publishers like NerdWallet and Investopedia are working to level the playing field and provide insight and guidance around some of the most complex and sensitive financial topics.
Regtech
Since the onset of the Covid-19 pandemic, Regtech has witnessed a period of growth and new challenges to accommodate shifts across the fintech landscape. As companies were forced to invest in digital technologies in order to keep their doors open, the regtech sector saw an influx of funds and widespread adoption. More growth and new challenges are expected to come in 2023.
Regtech enables regulatory alignment and empowers organizations to adopt a culture of proactive compliance, helping to address a wide range of processes — from handling reporting and monitoring to driving cyber resilience and business continuity planning. In addition to these central functions, we are also seeing opportunities to leverage AI and automation to automate risk and compliance functions, as well as opportunities for improved insights to identify risk factors and prevent adverse events (such as financial crimes).
Regtech ultimately impacts many sectors, both within fintech and across other industries. However, in all cases, the “tech” side of regtech is only one piece of the puzzle. As financial institutions are forced to adapt and evolve, they must also build the organizational and regulatory infrastructure to support digital transformation:
“Technological solutions offer the possibility to deliver tremendous benefits and we should be ready to harness them. But any technology solution needs to be buttressed by three pillars: an appropriate regulatory framework, sufficient supervisory oversight and […] a deep understanding […] not only of the potential but also the limitations and risks of new technologies.”
— Elizabeth McCaul, member of the Supervisory Board of the ECB
Embedded Finance
According to multinational e-commerce company Shopify, “Unexpected is the new normal… The only constant in commerce is change. And the only way forward is to adapt.”
As online shopping jumped 77% year over year at the outset of the pandemic, technical innovation and consumer adoption of digital commerce rapidly accelerated. While the world starts to open back up, shopper expectations and purchase patterns remain impacted in both physical and digital spaces. Even pre-pandemic, so-called “digical” models were replacing more analog operations, and brands continue to see value in the evolving world of content-commerce.
From contactless payment to loyalty programs, social commerce to omnichannel eCommerce, embedded finance may seem transactional, but it’s shaping the way we buy and transforming the way we live.
Enterprise Software
Enterprise software might not be the most obvious entry. In fact, it’s often left off of similar lists. However, a strong enterprise tech stack is critical to the success of any business, and without streamlined “back office” operations and effective Application Programming Interfaces (APIs), many of these other sectors could not effectively function.
At their most basic level, technologies like Enterprise Resource Planning (ERP) solutions track and facilitate transactions across a business, feeding corporate financials and informing both long and short-term strategies. As business functions become increasingly dynamic, many of these platforms have made steady moves out of the back office and onto our mobile devices. In addition, we’re seeing companies shift their systems off-premises and into cloud-based environments.
This modernization of corporate back offices (as well as related customer and employee interfaces) isn’t just making life easier for users, it’s also enabling businesses to generate better reporting and increasingly adopt intelligent tech. This ultimately allows organizations to foster more holistic change by setting a foundation for operational transformation and opens the door to emerging tech — such as robotic process automation (RPA) — that can reduce repetitive tasks while simultaneously offering opportunities for upskilling and advancement among staff that currently own those responsibilities.
While the fintech sector is known for its complexity (and, let’s face it, gatekeeping), we find ourselves at an exciting juncture. Despite what you might hear on the news, the industry is actually on the precipice of a revolution and, in many cases, has already begun to integrate transformative change, materially altering the ways in which we conduct business both personally and professionally.
As we look toward these shifts, there is opportunity—and among the most important of these opportunities is connection. This includes literal, technical connections between systems, networking between individuals or organizations and the connection of ideas in the service of innovation.
As we seek to move through this admittedly chaotic period, we must remember that fintech itself is a connection of otherwise disparate ideas. If we continue to make these connections and work toward collaborative growth, we find significant opportunities for greater productivity, ingenuity and return on our investment.
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