As originally published in Forbes.
While the word “FinTech” may often be on many people’s lips and minds these days, the truth is there’s still a bit of uncertainty and ambiguity about the different types of players, and even what constitutes a FinTech company. Part of the problem is a tendency among many of us to want to see things in binary and mutually exclusive terms. Head-to-head competitors. Winners and losers. It’s done this way or that way.
With that in mind, I’ve set out to describe what I, and others in the industry, widely consider the principal types of FinTech companies and how they interact.
What Makes A FinTech Company?
Financial technology, as the word derives from, often brings to mind images of young startups providing financial services directly to customers, usually with a greater degree of convenience. One typically imagines them as agile disruptors in direct competition with slower incumbents.
In reality, many incumbents today are themselves innovating with the help of FinTech companies that work behind the scenes via application programming interfaces, banking-as-a-service (BaaS) and other delivery models, enabling all manner of institutions and even peers, to remove frictions and provide opportunities that may be just beyond their technical and geographic reach.
Technology Or Services?
Herein comes the first and most important distinction we can make: Do FinTech companies provide technology, or do they provide financial services to an end user? This is becoming a hotly debated issue, but one that, at least in my mind, is fairly straightforward. Both are FinTech. The difference is that some enable financial services through digital platforms and others employ those technologies to offer services in a more direct fashion to a final customer.
The fact that a technology provider may deliver its product under a service model does not mean it’s providing financial services. For example, Plaid is a technology provider, and Venmo is a services company. The latter, as it happens, uses technology from the former to verify bank accounts.
The Many Faces Of FinTech
Indeed, the rise of FinTech companies has created new business models, applications, processes and products across many categories. Let’s take a closer look and try to illuminate some of these in the context of practical activities.
This is perhaps the most misunderstood area of FinTech, and it’s no surprise. That’s because the term banking itself conjures up a range of activities in people’s minds and is something that in most countries only a highly regulated and licensed entity (i.e., a traditional bank) can actually do.
For this reason, I would argue that there are few pure banking FinTech companies. Instead, there are various organizations participating in different parts of the banking value chain (e.g., streamlining the opening of accounts and getting money from pocket A to pocket B). Implicit in this concept, and a fact often lost among many observers, is the participation of a licensed entity somewhere along the chain.
The exception to this rule, and a very important one, is hybrids. These are technology companies that actually own and operate a banking entity, like GreenDot in the United States and Germany’s solarisBank. They are the most uncommon species of FinTech and for good reason: Few technology companies have the fortitude to operate a bank or a business model to justify one. What the majority of FinTech companies do is enable banking-like activities either directly or indirectly with banks.
Digital lending is another category in the FinTech space that’s bringing customers greater convenience and choice. Loan origination software today allows companies and customers to apply for and receive personal, car, mortgage or commercial loans without entering a bank or credit union. Here, too, due to regulatory frameworks regarding the kinds of entities permitted under law to issue and hold loans, FinTech companies typically work as part of a value chain where they can be disruptive. For example, they can act as faster brokers and deliverers of loaned monies.
Another area is insurance. Today’s InsureTech companies often rely on data science, such as sensors or wearables, to offer customized personal, home, car and life insurance using artificial intelligence (AI). They also use the internet of things (IoT) and real-time information gathering to identify and control risks, while also offering dynamic solutions and pricing based on unprecedented access to data.
• Personal Finance And Investing
There is also a category of FinTech focused on helping consumers make better decisions for their personal finances. This often includes comparative tools to select their next credit card, loan or insurance. In this space, there are also tools that help individuals manage their personal investments portfolio with automated investment recommendations or robo-investing.
One of the most popular FinTech segments is payments. This branch allows people to send money to one another without necessarily using traditional bank channels and make instant payments to one another, employees and vendors. This technology also enables companies to rapidly scale business operations without the need for traditional payment infrastructures. Consider Uber, Lyft and Instacart — all are able to operate digital payments for payroll and procurement, eliminating the time lag as the money moves from consumer to business to employee and so on.
FinTech companies participate in some form or another in just about every category within the financial services sector. Even beyond the list above, you can find FinTechs within cryptocurrencies, blockchain, and even crowdfunding and taxes. This list is as diverse as financial services themselves.
Some of the misunderstandings about FinTech has to do with the sheer breadth of the category, for sure, but probably more to do with the fact that few organizations publicly disclose and explain the complex cooperation that is actually taking place behind the scenes, instead simply referring to “ecosystems” and different participants. The truth is that we’re living in a much more interesting and collaborative world than we ever could have imagined. FinTech companies are no exception and operate squarely in that world.