Technology has always worked to change the way we interact with the world. But it seems that the growth of financial technology –also known as FinTech – has caught the attention of people around the world. Complex occurrences, such as getting approved for a personal loan, have been immensely simplified thanks to companies like GreenSky. Also, making investments has become notably more accessible to the average person because of robo-advisors.
And everyone is eager to know what’s next. They’re waiting to see which startup will launch the next innovative product. Are the banks going to swim or sink? But, before we can talk about the future of FinTech and what’s affecting it, we need to understand what it is.
What is FinTech?
Financial technology is used to describe any type of technological innovation used to make financial services more advantageous to consumers and businesses. People assume that FinTech is a relatively new concept, but that’s far from the truth. Humans have always looked for ways to make finances more accessible.
In the 1870s, the first signs of FinTech were born via the wired money transfer. Then, in 1918, the United States Federal Reserve Bank started a system to move funds electronically. It’s known as the Federal Reserve Wire Network – or FedWire. Then, in 1950, Frank McNamara created the first credit card called the Diners’ club card. Although there were charge plates around for nearly 30 years, you could only use those plates with the merchants who gave them to you. McNamara’s card was so intriguing because it allowed people to use their cards wherever they wanted to. And shortly after it started gaining popularity, companies like American Express created its own.
In 1967, the first automated teller machine –or ATM –was placed next to a Barclays bank in London. The concept of an ATM transformed how people interacted with their banks. They didn’t need a teller to withdraw money from their account anymore; now they could do simple transactions like that themselves. While the dot-com era was still new, Wells Fargo started offering their customers an online checking account in 1995. In that same year, Security First Network, the first virtual bank, was born. Over the course of one year, the more innovative forms of technology had merged with banking.
It wasn’t until the financial crisis of 2008 that FinTech propelled the banking industry into the era we know today. When people started to distrust banks and demanded more safety for their finances, they turned their attention to FinTech startups. To clarify, before the crash of ’08, FinTech companies such as GreenSky were already around. They just started getting more attention around this time. And they were already looking for more innovative and affordable ways for consumers and businesses to access and use financial services. So, to everyone, this was the most logical next step.
It wasn’t just the crash that influenced the changes in FinTech, but also the invention of the smartphone. Smartphones made resources and people from around the world more accessible. Its constant evolution means that FinTech is always evolving because of more access to big data.
Some of the most recent introductions to the FinTech world were Bitcoin in 2009 and Google Wallet in 2011.
Common Uses Today
The way we use financial technology is different from how we used it a decade ago. We don’t have to bring our credit cards with us everywhere because of apps like Google, Apple, and Samsung Pay. Now we can pull our phones out and pay for dinner by pressing a few buttons. Mobile banking is also a common form of FinTech used by more than 60% of Americans. With the ever-changing landscape of FinTech, consumers expect to access their bank accounts on their smartphones. But it’s not just payment and banking options that have investors so curious about FinTech. Its come a long way, but it’s also rushing in a new era of fast, convenient, and cost-effective financial services. Here’s how companies such as GreenSky, robo-advisors, and blockchain are changing the way we interact with financial services.
While no one can accurately predict where FinTech is heading, it’s safe to say that it’s already impacting the finance industry. It’s also providing immense data to financial providers, which they can use to help better serve consumers.
GreenSky is a financial technology company that offers instant online lending to consumers at the point of sale. Unlike other FinTech companies, what makes GreenSky so remarkable is that it isn’t trying to replace banks. Instead of using its own capital to fund loans, the company simply acts as the link between banks, consumers, and merchants. It partners with banks such as SunTrust, Regions, and Fifth Third to match customers’ profiles to the bank that best fits their needs.
Why It Matters
When you need money from your local bank, the process is often long and strenuous, no matter what type of loan you’re trying to get. It often takes anywhere from days to weeks before you hear back about whether you’ve been approved. Not to mention the endless paperwork and time wasted before you even find out what the bank is going to offer you, if they offer you anything. The combination of all these factors makes getting a bank loan a stressful and tiresome event. However, getting a loan with GreenSky is a fast and easy process. You don’t have to wait days to find out if you’re approved. Within minutes you’ll know if you were approved, and within days, you’ll have your card with the money already on it.
How It Works
You can get a loan from GreenSky in two ways. However, in either scenario, customers need to have good to excellent credit to be approved. The first option works if you apply for a home improvement loan on their website. You’ll need your driver’s license, social security number, and annual income. Once you’ve filled in all the information –which takes around 90 seconds – you’ll find out instantly if you were approved for a loan of up to $55,000. Then, with the money, you can go to any home improvement contractor you’d like. To increase your chances of getting approved, you can apply with a cosigner.
The second way you can get a loan is directly at the point of sale with interest rates as low as 4.99%. The types of loans you can get are applicable to home improvement projects, elective surgeries, veterinary costs, retail purchases, and e-commerce purchases.
Let’s say you have to get dental implants and your insurance policy won’t cover it because it’s considered a cosmetic procedure. If your dentist is a GreenSky merchant, you can apply for a loan on GreenSky’s mobile app and find out if you’ve been approved in minutes. Similar to applying for a home improvement loan by yourself, you’ll need the same information for the app. Once you’ve been approved, you can set the terms that fit your budget, and your dentist can take the money he needs for your procedure. It’s the same scenario with home improvement contractors, orthodontists, veterinarians, and retail businesses, where they offer financing options for you. You simply apply, get approved, and – with your new credit –can proceed to get exactly what you want immediately.
Before accepting the offer, you can decide on your repayment schedule plan. You’ll have between six and 24 months to pay back your loan interest free. If you don’t pay the loan in full before the promotional period ends, you’ll have to pay for the interest it incurred during the promotional period, on top of the interest for the remaining balance.
If you know that you won’t be able to pay back the full amount before the promotional period ends, you can choose to get a reduced-rate loan with repayments and rates up to 12 years and 13.99% APR, respectively. From the day you’re approved, you have six months to use your loan money. Anything you didn’t use once that period ends will return to the bank, and your repayment plan will start.
Power doesn’t come from trying to replace banks. GreenSky proves that you can contribute more to your bottom line while helping more consumers and businesses by partnering with them.
Not only is GreenSky molding the way startups see and utilize bank partnerships, but it is also changing the way consumers are borrowing. Because of companies like Greensky, consumers are borrowing with more speed and less friction, and banks are accepting and merging with the new era of FinTech.
Robo-advisors are computer-generated algorithms that create an investor’s portfolio for them, so they can help you allocate your investments based on your needs.
Why It Matters
Wealth management firms have typically been associated with the rich, who have more complex investor portfolios. So, if someone wanted to start making small investments, they’d be intimidated by these firms. In the past, it normally resulted in consumers either learning the basics of investing and doing it themselves, or giving up because they concluded that investing was only for the wealthy. Now, with the rise of robo-advisors, it’s possible to start your investor’s portfolio for as little as a couple of hundred dollars.
How It Works
When getting started with most robo-advisors, you’ll fill out a questionnaire, during which you’ll answer questions about your age, risk tolerance, goals, and how long you plan to take to reach those goals. Then, your answers will run through an algorithm, which will be used to assess and determine your portfolio.
From that point, you’ll either be determined to have a conservative, moderate, or aggressive portfolio, and will allocate your investments into exchange-traded stock or bond funds. Someone who’s a conservative investor will have an investor profile with majority bonds. On the other hand, an aggressive investor profile will consist of mostly stocks.
Besides investing your money into plans that best fit you, robo-advisors also rebalance your investments, offer retirement calculators, and help you with tax-loss harvesting. Similar to an investment advisor, they’ll buy and sell shares for you. Or, to reduce your tax bill, they’ll help you sell investments at a loss.
Robo-advisors are making investment more accessible and tangible to the general public. They are also cutting out human error. But that doesn’t mean financial advisors fear this growing development. Instead, they’re merging the automation of robo-advisors with the personalization of human interactions to provide higher quality portfolio assessments. Can you blame them? By 2020, robo-advisory is expected to reach up to $3.7 trillion in assets.
Blockchain was invented by Satoshi Nakamoto in 2008 to serve as a digitally shared ledger for Bitcoin. However, blockchain is far more valuable to FinTech as a whole, rather than for its original purpose.
Why It Matters
The future of blockchain will alter how we exchange data. Since blockchains are a decentralized, distributed ledger, we’ll no longer need a middleman to share our data. Instead, we’ll be able to share securely peer-to-peer. Since not one bank or company houses everyone’s personal information, it’s impossible for a hacker to alter the material without everyone knowing about and rejecting it.
Blockchains also reduce the cost of having a third party verify that the information being exchanged is valid for each financial transaction. It updates itself every 10 minutes to make sure that everything is still running smoothly. Since anyone in the chain can see changes made to it, it’s a transparent financial system. In addition, nothing that’s been recorded can be altered, because all records are permanent. So, everyone in the chain can be confident in the information stored. Besides being more secure and cost-effective, blockchain also processes transactions faster than wire transfers.
How It Works
A block is the combination of a timestamp, hash, and digital signature, which consists of a private and public key and any relative information. Since these blocks aren’t operated by a centralized system, a network of people known as miners control the blockchain. When someone requests a transaction, it’s broadcasted to computers in that network. Once this occurs, the miners’ computers solve complex mathematical puzzles to verify and validate the transaction. And this is called proof of work.
That’s why it would be impossible for a data breach to occur. For the blockchain to accept the fraudulent changes made to previous blocks in the chain, a hacker would have to change all the blocks and redo the proof of work for the majority of the peer-to-peer blocks. And, although technology can process billions of pieces of data in a millisecond, this type of hacking would take far longer than if the blockchain was running on a centralized ledger.
After the transaction or record is verified, it’s combined with previous transactions, which then create a new block. This block is then permanently added to the blockchain, and the transaction is complete.
As mentioned before, blockchain is making peer-to-peer transactions a harmonious occurrence. It’s significantly reducing the amount of paperwork that banks and other financial institutions have to do every day, which results in less human error. And since blockchain processes transactions quickly, you won’t have to worry about delays.
Let’s not forget that crimes and fraud in the finance industry have always been on the rise. Since regulatory cost is becoming more expensive, banks have also increased prices for consumers. Blockchain technology is making transactions more secure and cheaper, so consumers can stress less for half the cost.
And banks aren’t ignoring this development, specifically when it comes to international payments. Currently, when someone is trying to make an international transaction, there’s often money lost, high fees to be paid, and unnecessary time spent waiting for the money to reach its destination. So, to avoid losing their customers to more streamlined solutions like blockchain, banks such as Santander are adopting blockchain.
With blockchain, consumers have more control over how their personal information is shared, and they also have the confidence to know it’s being shared securely. Also, it gives people who can’t get a bank account an opportunity to have one. No one can deny how quickly blockchain is growing. In fact, 77% of firms expect to adopt blockchain into their processes by 2020.
We don’t know where the FinTech landscape will take us next. Startups in the lending industry might follow GreenSky’s example and make partnering with banks a necessary step. Consumers might change how they perceive investing. And more banks might see how blockchain can benefit their and their bottom line.
While no one can accurately predict the future, it’s safe to say that FinTech has been steadily growing over the past decade, and it shows no signs of slowing down. With the current innovative financial technology we have now, wherever it takes us will prove to drastically affect the financial and surrounding industries.