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What is FinTech?

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FinTech or financial technology is one of the pillars of our modern financial system. You can think of FinTech as any software and algorithm designed to improve financial services. In most instances, these protocols include automation and other streamlining technologies. Importantly, FinTech developments usually represent a shift from traditional systems over to more inclusive or efficient alternatives.

Today, FinTech is at the forefront of our modern economics. In fact, a recent study revealed that one-third of all consumers utilized some form of FinTech in their daily lives. Notably, that number is set to increase in the coming months as the digitization of the economy continues.

Back-End Systems in Financial Institutions

Originally, FinTech was purely for use in back-end systems of established financial institutions. ​At that time, this technology was primarily thought of as a tool for companies seeking more efficient financial operations. However, it wasn't long before these innovations made their way to small business owners. Eventually, consumers were privy to these upending developments.

Over the last decade, the FinTech sector has seen a shift to more inclusive consumer-oriented services. These services spanned the gambit of the financial sector including retail banking, fundraising, education, and investment management. Nowadays, it’s nearly impossible to not use some form of FinTech in your business transactions.

History of FinTech

In its simplest form, FinTech represents innovative solutions that enable businesses and consumers to interact in a way that was previously unimaginable. As such, FinTech far predates the internet and even computers by hundreds of years. Innovations such as double bookkeeping are a perfect example of early FinTech developments that changed the financial sector forever.

Luca Pacioli - Inventor of Double Book Keeping Method - Early FinTech

Luca Pacioli – Inventor of Double Book Keeping Method – Early FinTech

Internet age

The introduction of the internet took FinTech development to the next level. Inventions such as digital money leveraged the current technology to introduce higher levels of interoperability and financial access to the markets. Today, FinTech is everywhere you look. Consequently, the term encompasses a broad range of personal and commercial finance.

Examples of FinTech

FinTech can be seen in nearly every financial transaction today. In most instances, it’s used to facilitate a wide variety of unassisted financial activities. Specifically, tasks such as money transfers, loan applications, and investment management interfaces remove the need for personal interaction with bank employees. Consequently, the bank and the client save money and time.

Another perfect example of FinTech in today's market is Smartphone check cashing systems. Many banks allow their clients to cash checks simply by taking a photo of the check. In most instances, the financial institution will provide some form of an app to streamline the process. Considering that many people don't live close to their bank, this strategy enables more people to utilize banking services.

Digital Assets (Cryptocurrencies)

Despite its relatively small size in comparison to traditional markets, the term FinTech is often associated with digital assets such as Bitcoin. There's a good reason for this association. The advent of cryptocurrencies ushered in a new era in FinTech development. For the first time in history, a reliable form of decentralized currency was available to the public. Additionally, the underlying technology of the cryptocurrencies known as blockchain enables new and exciting functionality in the sector

Bank Focused Cryptocurrencies

Soon after the introduction of cryptocurrencies, the market began to shift from an anti-banking sentiment over to an institutionally friendly approach. At this time, a variety of bank-focused cryptocurrencies began to emerge in the market. Cryptocurrencies such as Ripple seek to provide banks with access to blockchain technology without the need to invest in research and infrastructure to support the upgrade.

Recognizing the upside potential of blockchain technology, many banks decided to construct their own blockchains. This Distributed Ledger Technology (DLT) allowed traditional financial institutions to gain the advantages of blockchain tech without relinquishing any of their control over the monetary system. This new form of digital currency is known as Central Bank Digital Currencies.

CBDCs differ from traditional cryptocurrencies in many ways. In fact, they have more in common with their fiat counterparts than their crypto relatives. One of the primary differences is that CBDCs are centralized currencies. Their issuance is controlled by a central organization rather than a mathematical equation such as with Bitcoin.

Digital Securities (Security Tokens)

Along the same line of thought, developers began to create cryptocurrencies that followed the strict securities guideline set in place globally. These new forms of compliant cryptocurrency are known as digital securities, and were formerly known as  security tokens. Digital securities play a critical role in the market because they enable firms to utilize blockchain-based crowdfunding strategies without the risk of running an unregulated securities sale.

Security Token Market Analysis via Security Token Group

Security Token Market Analysis via Security Token Group

FinTech Future

As data transmission rates continue to climb, and internet penetration hits new heights globally, the stage is set for a FinTech revolution to occur. Already, inventions such as Bitcoin provide the market with a more inclusive approach. It’s also important to point out that cryptocurrencies spawned the development of new hybrid financial tools such as Bitcoin ETFs (Electronically Traded Funds).

Bitcoin ETF

A Bitcoin ETF combines two of the most interesting types of FinTech in the market today – Cryptocurrencies and ETFs. An ETF is a financial instrument that is pinned to the value of an asset or a group of assets. In this way, they are very similar to mutual funds. The main difference between the two funds is that an ETF is traded daily.

Importantly ETFs are used by investors to participate in unregulated markets via the regulated ETF market. For example, a large financial firm could trade Bitcoin ETFs and gain access to the profit potential of the crypto market without having to go through the still-developing crypto investment registration and legal framework. In this way, a Bitcoin ETF bridges the gap between the crypto sector and traditional investment firms.

FinTech – A Disruptive Force

One of the main characteristics of FinTech startups in the market today is their approach to the sector. FinTech firms need to challenge the status quo. They need to introduce new and exciting concepts to the market and challenge the current business systems.

To accomplish these tasks, today's FinTech firms need to remain more efficient, inclusive, and flexible than their large counterparts. Thankfully, the digitization of the market and further expansion of Smart devices sets the stage for a FinTech takeover in the coming years.

David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including