Whether you’re an investment expert or someone just beginning to research new financial options, chances are you’ve probably heard of FinTech. Short for financial technology, FinTech is a term that is generating serious buzz.
This new, innovative financial technology can impact your investment choices and your financial future. It’s important to understand FinTech as you diversify your assets and look to alternative choices to traditional financial services.
What is FinTech?
FinTech is exactly what it sounds like: Technology for the financial sector. FinTech can mean the new technologies that major banks and lenders are using, but it can also mean the new forms of technology that startups are creating.
In decades past, there were only a handful of ways that a person could handle any financial transaction. You needed to go to a bank, fill out an application, and wait to see if your loan was approved. Whether you wanted a new credit card or a small business loan, the process was largely the same. Even with the addition of the Internet and banking websites, the process followed the same basic steps.
With FinTech, there is tremendous disruption to this process. If individuals can’t qualify for a traditional loan in their own community, offshore or international options might be considered. They could also head online to find investors for seed capital using an app designed for that specific purpose.
There are also small-money lenders and repayment apps that are never associated with a bank at all. With cryptocurrencies and blockchain technology on the rise, more and more of these transactions are open to the public and completely transparent.
Peer-to-Peer Lending and Crowdfunding
While FinTech is impacting all areas of the financial industry, it is truly making waves when it comes to peer-to-peer lending and crowdfunding. Never has it been so easy to get financing outside of traditional financial channels.
Scroll through most any social media platform, such as Twitter and Facebook, and you’ll probably see some type of crowdfunding. Some users hope to raise money to pay down debt, to afford a college education, or to pay medical bills. While there are certainly pros and cons to this form of financing, there is no denying that it has changed the game.
Peer-to-peer lending is a global phenomenon, but it may be making the biggest impact in developing nations. People in the United States can provide financing for individuals and small businesses across the globe, and it can all be done outside of major lenders and financial channels. While banks may not make substantial profits on a $100 loan in Sub-Saharan Africa, it has the potential to improve lives.
Crowdfunding also makes it easier for startups to grow. An entrepreneur with a great idea or product might not be able to secure a traditional business loan due to bad credit or no collateral. With access to one of the many crowdfunding apps and online websites, however, that entrepreneur can access large amounts of capital in a matter of hours. This opens up opportunities to people who otherwise wouldn’t be able to explore their ambitions, but it also means that the people who fund the venture are exposed to the risk themselves.
Mobile Payment Apps
When a group of young professionals goes out to dinner and is ready to split the tab, it’s rare to see anyone pull out their wallets. Instead, expect to see everyone pull out their smartphones instead. That’s because FinTech has led to a staggering increase in the number of mobile payment apps as well as the number of daily transactions.
Mobile payment apps essentially transfer money from one account to another, and they can be used to give a friend $5 or as a way to pay bills or finance a small business via crowdfunding. Some mobile payment apps are more traditional, and they rely on existing bank accounts. However, others are not reliant on any major banks. Instead, the apps themselves hold the value and transfer funds from one user to the next as directed.
This cuts down on costs in many ways. Some of the most popular mobile payment apps include the Cash App, PayPal, and Venmo, but there are dozens more used around the world.
While mobile payment apps tend to use the local currency, there is also another FinTech development that relies on a totally virtual currency. Cryptocurrencies, like Bitcoin, aren’t tied to any regional currency, and they have no physical, tangible form. Instead, they are completely digital forms of currency that exist thanks to blockchain technology.
Virtual currencies, or cryptocurrencies, are gaining popularity at a rapid pace. In addition, blockchain technology is being used in a range of major industries. Anywhere that data needs to be stored securely, blockchain technology can generally be found.
FinTech also brings the arrival of investment algorithms that can adjust in real time to meet a client’s preferred level of risk. That means that some individuals, rather than relying on a human advisor with years of financial experience, are relying on robo-advisors. They trust their assets and their financial future to technological formulas that aim to replicate a financial advisor but avoid risks like human error or embezzling funds.
While this might be a revolutionary concept, many worry about the safety or long-term profits that can be obtained through robo-advising.
Is Disruption in the Financial Industry a Good Thing?
FinTech is undeniably a positive thing. New technology is nearly always a step toward progress, and many forms of financial technology are improving and transforming the world of finance.
Lower costs, more accessible financing, and easier banking are just some of the benefits of FinTech. However, FinTech is a vast area of new technology. While certain aspects of it might be disruptive today, we’ll have to wait to see how it plays out in the long term.
Going beyond traditional domestic banking can be beneficial for many reasons. If you’re interested in learning more about FinTech and other financial options to diversify your investment portfolio, contact Caye International Bank today for further information.