In order to make the analysis of financial-technological terms as clear, detailed and concrete as possible, Fintechlopedia provides definitions and explanations so that the increasingly frequent terminology is understandable to everyone.
An introduction to this area begins with an explanation of the term FinTech. From the name itself, it is easy to understand that it combines two terms: finance and technology, as it refers to innovative projects, such as plentiful startup solutions that use technology to review financial and banking services.
FinTech is a term that often refers to projects that are tightly connected with information and communication technologies as they try to capture the market share of large companies that are often either not very innovative or lag behind in the adoption of new technologies.
Since when does FinTech exist?
From a broader perspective, the combination of finance and technology has been developing rapidly since the middle of the 20th century, especially in the 70s and 80s, and it has experienced expansion with the internet when online payments became available. All of this was an introduction to the FinTech we are talking about today, which in the form we are describing, in this case, began to emerge immediately after the 2008 global economic crisis.
At that time, many bankers and traders left their key financial centers – banks and stock exchanges – and decided to embark on entrepreneurial adventures in order to reconsider the model of finance through IT innovations. They decided to simplify and make finances more accessible by offering better and cheaper services.
The term FinTech is generally used today to denote companies whose main purpose is to provide financial services using new technologies. These financial services include a number of activities that are always in some sense related to money, i.e. the transfer and accumulation of some monetary value.
Where do we see FinTech?
FinTech is being developed in all areas – from savings management for the needs of lending to individuals, for the needs of lending mainly to smaller companies, to options that enable online payments to individuals and legal entities. The extent to which digital services have improved an area we have seen so far in music, media, hotel business, transportation, and many other areas, which shows that such technologies are creating a new revolution, and this time it is happening in the banking and finance sector.
What has happened is that literally all economic sectors, no matter how old and traditional they are, are today in some way aware of what the FinTech revolution brings. After seeing transformations like with Amazon for distribution, with Uber for public transportation, what Airbnb has made possible when it comes to renting accommodation, we’ve seen some industries move entirely into the digital world.
Now the banking sector is shaken by these innovations. Of course, it would be really naive to believe that FinTech will “shut down” banks the way Airbnb made the work of some travel agencies meaningless, but rather make them more innovative and that the prices of their services are not as high as they are now.
What is the relationship between FinTech and banking?
Although FinTech may sometimes seem to be in competition with banks, the traditional banking sector still has a dominant position in the market. This is shown by the fact that FinTech is actually most often based on the provision of those services that are often complementary to the traditional offer, which forces banks to improve the offer.
When we talk about banks and FinTech, in recent years the world public has often had the opportunity to hear expressions such as unbanked and underbanked. The term unbanked has a bit wider meaning than non-banked, as it includes people who literally have no connection with banks, while underbanked are those who do not have access to particular services available.
For people who do not have bank accounts or do not have access to all banking services, some FinTech solutions are of great importance because they offer key solutions for such users.
How is FinTech regulated?
Such provision of financial services raises the issue of control of such operations and at the same time requires innovation in the regulatory framework. Regulators in each country face different challenges, especially in those developing economies whose financial sector faces a number of different obstacles and whose governments have difficulty harmonizing the legal framework to adapt to the needs of modern society.
Financial innovation is a major challenge for all governments in the world and the success of their strategies depends not only on their political will to deal with protection from all that is considered a threat from the unwanted use of modern technologies but also on their ability to understand used to provide financial services.
The key financial regulators in each country are central banks, which are known as institutions that traditionally oppose both risk and innovation, so it is expected that regulating FinTech products and services will not be simple or feasible for them in the way they regulate banking products and services.
Also, it seems that, as regulators, bodies such as central banks and ministries of finance prefer stability over innovation, even in cases where there is no doubt that the use of technology could contribute to economic stability.
What administrative restrictions exist?
The governments of most countries are limited in resources and are not at risk, and in addition prefer to promote inclusion as an action designed to be their political tool, rather than reducing their own political influence as a result of technological innovation in the financial sector. In addition, governments and central banks often do not have financial technology experts in their ranks who can fully and from both aspects understand financial processes in which technology could play a significant role.
Government officials, ministries of finance, and central banks usually cannot perceive some innovations as something that can drastically improve both public finances and market opportunities, which may challenge them to go unnoticed, which does not necessarily open up space. for illegal actions, how much can it make all those who provide certain FinTech innovations be seen as something that the system does not recognize and accept.
Regardless of the level of IT literacy of a company, the government of that country is usually unable to fully follow what is emerging in the market or is in a situation to be under pressure from traditional financial service providers who are not interested in accepting innovation quickly because thus losing part of the profits.
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