As the world’s connectivity has improved and technology has become cheaper and more advanced, the emergence of “fintech” was bound to happen. This technology has made financial management cheaper and less time-consuming, improving the lives of millions.

But what exactly is fintech, and how does it work? We’ll explore that question and break down fintech’s benefits and drawbacks. Fintech is likely here to stay, which means we should understand exactly what it is and how it will change the financial landscape going forward.

What is financial technology (fintech), and how does it work?

“Fintech” is a blend of the words “financial” and “technology.” As this combination suggests, fintech refers to using digital tools, software, or technology to manage financials or make transactions. Fintech can take many forms in the real world, including everything from mobile banking to peer-to-peer (P2P) payments to cryptocurrency.

Fintech allows customers to quickly log in to their accounts, often supporting biometric logins on their mobile apps. To keep customer accounts safe, fintech companies typically support strong security measures like 256-bit encryption and two-factor authentication (2FA).

With fintechs, most transactions and account analysis are digital, with few in-person interactions. Similarly, support is often provided via email or online chat, but some fintechs may provide phone support.

What is a fintech company?

A fintech company is a business that uses technology to provide financial services. Instead of relying on the traditional banking model, they use software, algorithms, and technology to innovate and improve the customer experience.

Fintech companies provide services by using connected mobile applications and software rather than through brick-and-mortar banks. This often reduces the cost of providing these services for companies and lowers customer fees. Fintech companies can also save customers time since they can access their accounts and conduct transactions from anywhere.

Often, fintechs don’t provide services directly but act as a middleman or marketplace. For instance, a banking fintech may not hold customer deposits. Instead, they may partner with local or regional banks that provide deposit services. This makes it easier for fintechs to offer their services in the banking sector.

Examples of fintech

Although fintech is relatively new in the financial world, it has already begun to revolutionize how businesses and customers interact. As a result, we can find examples of fintech in many sectors. For example, you can see fintech companies in banking, payments, lending, and insurance, to name a few.

Specific examples of fintechs include:

• Payments and transfers: Includes fintech companies such as PayPal and Square.

• Banking: Includes companies such as Chime and SoFi, which provide these services without physical branches.

• Lending: Includes companies such as LendingTree and Better.com, which provide online lending services.

• Insurance: Includes companies such as Lemonade and Policygenius.

As more people can access internet-connected devices, fintech examples have only increased. This has generally made financial services more accessible to customers worldwide.

How are financial technology companies regulated?

Financial services is a heavily regulated industry, and financial technology companies may be subject to these stiff regulations. To further complicate things, these companies may have to comply with different state, local, and federal regulations.

Because fintech companies operate in many different sectors, several governing bodies may regulate and oversee their operations. These include the Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission (SEC), and Office of the Comptroller of the Currency (OCC).

Because fintech includes many new technologies, there have been concerns about a potential lack of oversight in some areas. For example, while there have been efforts to introduce regulation around cryptocurrency, federal regulatory efforts on crypto have generally stalled.

Bills like the Financial Innovation and Technology (FIT) for the 21st Century Act and the Blockchain Regulatory Certainty Act help define crypto’s status as a currency or commodity, increase industry oversight, and clarify various bodies' roles in managing cryptocurrency. However, these bills have yet to be signed into law.

How do fintech companies make money?

Fintech companies make money in many ways. One selling point is that they eliminate monthly fees, minimum balance requirements, and other nuisances. However, they must make money to stay in business. Often, they generate revenue with fees, selling financial products, or charging interest on loans.

Investment apps may generate revenue through transaction fees, a percentage of assets under management (AUM), or a payment for order flow (PFOF). Payment apps may charge a small percentage of each transaction or fees for express transfers.

Because many fintech types exist, these companies make money in many ways. However, interest and fees are among the most common revenue-generating strategies.

Benefits and drawbacks of fintech

Fintech has transformed the financial services industry, forever changing how customers and businesses interact. While this is a testament to fintech’s usefulness, it is not to say it is without its downsides. Here are some of the benefits and drawbacks of fintech.

Benefits

• Accessibility: Fintech allows people to access financial services 24/7 from any location.

• Lower cost: Fintech companies often have lower overhead than traditional financial institutions, a benefit they may pass to customers through lower fees.

• Better user experience: Fintechs often have modern software and apps with slick interfaces. Further, they often have convenient features like automated investing and AI-powered investing.

• Innovation: Fintechs often face steep competition, forcing them to continuously innovate with newer and better products.

Drawbacks

• Security risks: Although fintech companies typically implement advanced security measures, having everything online can increase the risk of cyberattacks, data breaches, and fraud.

• Regulation: Financial services is a heavily regulated industry, and this can make it more difficult for fintechs to do business.

• Customer support: Fintechs are often online-only, meaning they usually don’t offer in-person service. Some may not offer phone support, either.

• Reliance on technology: Fintechs generally require customers to have a smartphone or computer and an internet connection. While that is not a significant issue in the U.S., it can be a barrier to adoption in other parts of the world.

Financial technology represents the culmination of accessible technology like connected computers and smartphones and the development of financial algorithms and technologies. While this has made it easier for many customers to access financial services at a lower cost, it can be vulnerable to securities risks and regulations. It can also be difficult to access in less developed parts of the world, and customer support options can be lacking in some cases.