Financial technology companies have become a significant force in the industry in just a few short years. Otherwise known as fintech startups, these companies aren't just developing new offerings for the sector; they're completely disrupting the traditional financial industry, says experienced investor Dan Calugar.
These startups can provide a plethora of options for consumers and businesses alike through the development of their advanced technological offerings. This is done using something known in the industry as the ABCD -- artificial intelligence, blockchain technology, cloud computing, and finally, big data.
This advanced technology enables fintech startups to create entirely virtual banks known as neobanks, offer digital wallets and cryptocurrency, enable faster and more effective trading, and conduct lending on a peer-to-peer basis.
There are many proven benefits of these innovative, next-generation trading platforms that investors can take advantage of. Below, Dan Calugar will discuss some of the main benefits of these platforms and examine their impact on traditional financial institutions.
What Exactly is Fintech?
Fintech focuses on developing new technologies that make the delivery of financial services easier and faster through automation and specialized algorithms. Startups in this sector tend to lean more toward the technology side than the financial side, but that gap has been bridged significantly in the last few years.
Unlike technology companies of the past, these fintech startups aren't developing a suite of tools and products for traditional financial institutions to use to deliver their services. Instead, they themselves are now all-in-one financial services companies, providing both the technology and the financial services in one place.
There are many different types of fintech startups. Some focus on providing traditional banking services digitally and with improved technology, while others provide lending services. And some even offer investment services to those who wish to trade on their own.
At the core of all fintech is an advanced technology that can power the service's back-end and provide custom-tailored solutions to consumers in ways old technology simply cannot. The two main things that power the platforms are artificial intelligence and machine learning technology, which means more automation and self-service for customers.
In other words, Daniel Calugar explains, consumers are able to manage their financial processes and operations independently, with the help of intelligence software platforms powered by in-depth algorithms. This includes things such as chatbots for customer service, of course, but also more complex processes such as robo-advisors.
When Did Fintech First Hit the Market?
The term fintech was coined only a short time after the turn of the century when the original fintech companies first hit the market. However, the term was initially used to describe the new advanced back-end systems that big, traditional financial institutions were starting to implement as part of their core offerings.
In the last 20-plus years, the term has obviously taken on a completely different meaning.
About 10 years ago, fintech began to explode as an entirely independent sector of the financial services industry. Startups in the sector received investment from venture capital firms in droves as new technologies, and digital offerings were all the rage.
Now, the sector has become a full-fledged industry expected to grow exponentially on its own merit.
What Services Fall Under Fintech?
Many different services fall under the umbrella of fintech. Some of these include:
- Robo-advisors: Algorithms can automate the financial advising process so consumers can get investment advice quickly and automatically based on their personal information and risk tolerance. This removes the need for one-on-one investment advisors.
- Insurance and Lending: Similar algorithms can get quotes for insurance products and loans and produce product offerings in minutes.
- Cryptocurrency: This digital currency is available through fintech companies, as are NFTs (non-fungible tokens), smart contracts, and general blockchain technology.
- Money Management: Plenty of fintech startups enable banking to be open, which means that financial institutions can easily connect with third-party financial providers.
- Neobanking: These fully-virtual banks don't have any physical location, so they can offer traditional banking services with better rates and lower fees.
How are Fintech Startups Different from Traditional Financial Companies?
There are three main ways that fintech companies differ from traditional financial companies. Dan Calugar describes these three areas in more detail below.
The most obvious difference is the technology that the companies provide.
Traditional financial companies have always seen technology as a support service rather than an integral part of their operations. In other words, they use the technology to support the services that they already provide to their customers.
In this case, the technology isn't designed, created, or developed by the traditional financial companies -- though their information technology experts may have some input on features they need -- but rather by outside technology companies.
In contrast, fintech companies are technology-centric. This means that technology is at the heart of what they do. In fact, they use it to solve the problems they see in the financial industry.
Because of this, technology isn't simply a tool for fintech companies but the actual service offering itself.
Many traditional financial companies provide one-stop-shopping. They perform a wide range of banking services, from checking and savings accounts and personal loans and mortgages to investment options and currency exchanges.
These companies were built on the belief that consumers should be able to do anything they need financially in one place. That's how these companies grew to be so big.
Almost all fintech companies take the exact opposite approach, focusing on just one specific subsection of the industry or product.
Their goal isn't to become the be-all, end-all of financial services. Instead, it is to put all of their time, energy, and effort into one product so that they can provide the best offering in that product or service line.
For instance, a fintech startup may focus only on mobile lending apps where people can quickly and easily apply for all types of loans with a few taps on their phones. Then, once approved, they can get the money instantly transferred to their digital bank accounts and immediately use it to pay for any number of things through other digital means.
Fintech companies are unquestionably reducing their potential customer base by narrowing their focus. But they are also working to ensure that the products they offer are more attractive and, as a result, are more profitable for them.
It is very, very expensive to start a new traditional financial company. Dan Calugar says that opening a new operation of this type could take more than $10 million, and this could easily grow to $20 million or more.
The range in expenses comes from all the different items you need to run a traditional financial company. For example, not only do you need the financial backing to offer services and the technology and people who can help you deliver them, but you also need brick-and-mortar branch locations for consumers to frequent.
On the other hand, fintech companies are much less expensive to get off the ground. On average, a new fintech startup may require anywhere between $50,000 and $300,000 to get started.
The main reason for this is that the biggest line item for fintech startups is the technology itself. Because there's no brick-and-mortar location, there are next to no costs related to real estate since even the office space a fintech startup requires can be quite small in the beginning.
Benefits of Fintech Platforms
By using the three main differentiating factors above, fintech platforms are able to provide many benefits to consumers and businesses alike.
Below, Dan Calugar lists some of the main benefits that these next-generation platforms are providing and explains how they are disrupting the traditional financial industry.
The most significant benefit that fintech provides consumers is financial inclusion. Because everything is available online, literally at the tips of your fingers, anyone in the country with access to the internet can utilize these products.
The United States still has a ways to go to bridge the digital divide when it comes to high-speed internet access -- particularly in low-income and rural areas of the country. That being said, fintech platforms make it easy for people in the middle of the country to access the same high-powered financial services as those who spend their day-to-day on Wall Street.
People no longer have to travel hours by car or public transportation during normal business hours to meet a banker in a branch for something as simple as opening a new checking account or transferring money to a friend or family member. They can even do much more complex financial transactions such as changing currency, sending money to someone overseas, or applying for and receiving a personal loan.
In the same vein, fintech platforms allow everyday users to access enhanced services that were traditionally only available to the experienced, the wealthy, or those in business. One of the prime examples of this is robo-advisors.
This is not the case with fintech companies, though. Dan Calugar says that with their advanced technology platforms, fintech companies can provide nearly everyone with the services of a robo-advisor, which can help guide their investment decisions -- no matter how much money they have to invest.
This provides a significantly increased level of service to customers, who are now able to receive the education, support and guidance they want and need to make a better financial life for themselves. And this is all made possible through AI and machine learning technology that enables automated and personalized services for individual consumers.
In this sense, access is the consumer's ability to access the finances they need when they need them-- whether that is the money they already have or applying for loans.
Traditional financial companies often have strict lending standards, which can negatively impact people with less-than-stellar credit or no credit history. This can also impact small businesses trying to get off the ground.
There are many people and small businesses that simply can't access the capital they need because traditional financial companies don't think they're worth their time. However, fintech companies usually have looser lending standards, which means better access to money around the country.
In other words, fintech companies are easier going, thanks in large part to the fact that they don't have an enormous customer base -- and shareholders -- to worry about.
In many ways, flexibility goes hand-in-hand with all of the above sections. Because fintech services can be fully accessed anywhere at any time, people can do what they want with their money whenever they want to. There are literally no restrictions on when people can access their money, which has not been the case with traditional financial companies.
If you need to apply for a loan at 3 a.m., with a fintech app, you can do it instantly the same way you can at 3 p.m. The same goes for initiating a stock trade, getting investment advice from a robo-advisor, or contacting customer service through one of the company's many chatbots.
This flexibility is one of the biggest draws to fintech companies, as nowadays, people don't live their lives based on the typical 9-to-5 weekday operating hours of traditional financial companies.
Ease of Use
One of consumers' biggest consistent complaints about traditional financial companies is that their technology -- even when considered "advanced" -- is clunky and hard to use. Fortunately, this is not at all the case with fintech startups.
Since these companies are tech-focused, the apps they produce are the heart and soul of their offerings. As such, they are sleek looking, fast-loading and operating, and extremely user-friendly.
This is a key component of fintech companies: They are making it easy for people to conduct any and every wanted or needed financial transaction.
The ease of use also contributes to the increased speed of transactions. Many of the digital financial offerings process instantly or not long after initiation, which is a far cry from the multiple-business-day waiting time associated with traditional financial companies.
Increased Security and Transparency
Fintech firms use advanced security operations that help to safeguard people's sensitive information. Additionally, they often use more advanced user authentication processes, such as biometric authentication, which helps to significantly lower fraud risks -- both for the user and for the company.
Not only that but fintech products provide people full transparency into what their money is doing and when. The advanced metrics that fintech investment firms offer, for instance, give people a real-time look into how their money is being spent, why it's being spent that way, and when it's being spent. All of this allows them to make more informed financial decisions.
Ways That Fintech Startups are Disrupting the Traditional Financial Industry
Through the use of advanced technology and by leveraging the power of the advantages that it provides, fintech startups are completely disrupting the traditional financial industry -- in a number of ways.
Daniel Calugar says fintech companies are taking a customer-centric approach, which significantly improves the customer experience and, as a result, customer satisfaction. A recent report from Salesforce, for instance, pointed out that nearly all fintech executives (90 percent, in fact) believed that customer experience was a major priority for their company.
Traditional financial companies often get a bad rap for their approach to customer service or lack thereof. And poor service simply doesn't cut it with today's consumers.
And this is only one small example.
Fintech services are becoming so commonplace today that cash has almost completely disappeared. While cash used to be king, nearly 88 percent of all financial transactions in the United States today use cashless methods.
And this doesn't just mean credit and debit cards. It also means shifts to other financial services that fintech startups are offering.
Finally, fintech startups focus on something that many other technology companies are known for and that traditional financial companies definitely aren't known for -- cool branding.
Dan Calugar says that fintech companies invest in solid marketing teams to develop messages that convince people all over the country to use their products over those of traditional financial companies.
Some have even been so successful that their company name has become part of everyday conversations. People use the word "Venmo," for instance, as a verb, telling others to "Venmo" the money to them.
This is just one example of how fintech startups are using powerful marketing messages to their advantage and another way the sector is completely disrupting the traditional financial industry.
About Daniel Calugar
Daniel Calugar is a versatile and experienced investor with a computer science, business, and law background. While working as a pension lawyer, he developed a passion for investing and leveraged his technical capabilities to write computer programs that helped him identify more profitable investment strategies. When Dan Calugar is not working, he enjoys working out, being with friends and family, and volunteering with Angel Flight.