Fintech: a new challenge for financial institutions
Lately there is much talk of Fintech. The word is used with different meanings. It seems worthwhile to try to make a classification.
At the basis of Fintech there is always the pairing of financial services and technology. Some might think that the technology must be necessarily advanced. In reality, it is not so. Some Fintech companies use technologies relatively old and not necessarily those of the last hor. Of course, FinTech companies use technology in innovative ways. Fintech are not alone in using digitization, which is one of the most pervasive solution even invented. The reason lies in its intrinsic flexibility and agility, due to its combination of hardware and software.
This post aims to start providing some theoretical basis that will help to develop a Fintech business model for enterprises by investigating the current status of Fintech corporations and their specific business models.
FinTech enables companies to gain the best-in-class methodologies without requiring organizations to devote additional internal technological resources or personnel. Many of these solutions reduce costs, while dramatically improving service levels. Ever variable trends in the economy, aggressive demands from customers, new and disruptive technologies, and continuous regulatory changes have increased competitive pressure for companies. Companies must seek to lower costs, improve productivity and increase profits while complying with constantly evolving regulations and especially provide values to their customers. FinTech provides financial services companies the capability to exploit value-added, customer-centric functions while reducing resources (such as for instance investments) in operations.
Let’s go back to the classification.
FinTech applications and services can be classified into four groups:
- Customer Service: processes and services that deal with the customer at the user interface level as well as at the back end level;
- Financial Service: applications and processes;
- Compliance: methods for a company to comply with external and internal regulations;
- Business Processes: technology a company uses to maintain and access critical information and data
Fintech can be classified into two categories, in accordance with service characteristics and types
- Traditional Fintech; and
- Emergent Fintech.
The existing Fintech companies hold five business models:
- Supplement type;
- Deferred payment type;
- Escrow-based type;
- Cash transfer type; and
- Credit purchase type.
One possible classification is based on the ownership of the Fintech. As a consequence Fintech can be divided into:
- Start up
- Owned by traditional financial services, such as banks and insurance companies.
This classification tends to blur up, since in a certain number of the cases, traditional financial institutions buy start-ups or even set up a separate division or separate company (most of the times fully owned) to foster the birth of start up ideas.
Another possible classification would be based on the technology. So Fintech are active in:
- Mobility (e.g. mobile banking);
- Big Data Analytics;
- Internet of things;
- Cloud Computing;
- Artificial Intelligence;
- Social networks;
- And so on
Another possible classification would be based on the financial services product. It is then possible to talk about:
- Loans (e.g. crowdfunding)
- Payments (e.g. virtual currencies, such as Bitcoins)
- Electronic transfers and remittances (e.g. Instarem);
- Mortgage (e.g. MortgageBot);
- Insurance (e.g. Insurtech)
- Trading (e.g. robo)
- And so on
Another classification can refer to the function. FinTech companies provide a wide range of finance related software and processes for companies such as:
- Decision support;
- Financial data analysis;
- Risk management;
- Portfolio rebalancing;
- Performance attribution;
- Systems integration;
- And so on.
Another classifications is connected with the type of innovations. It is possible to define, Fintech based on:
- Product Innovations
- Process Innovations
- Organization Innovations
- Business Model Innovations
Is one of these classification be preferable to the other ones? Not necessarily. Very much will depend on the use of the classification. At the end, all these classifications are useful, for instance to evaluate the risks or the probability of survival, or the need of funds, and so on.
The classification I prefer is one based on the types of innovations, since at the basis of each Fintech there is an innovation. Not coincidentally one of the most ‘interesting conferences on Fintech called Finovate. Indeed and the pairing between services and innovation is the most important category of the Fintech.