Fintech is short for ‘financial technology’ which refers to any piece of technology utilised for financial purposes. The purpose of fintech is to rival traditional financial methods. Open banking and fintech are both types of technology that are trying to move the finance sector forward, giving more power to consumers and creating greater levels of trust.
Distributed ledger technology
Arguably the biggest type of fintech is ‘distributed ledger technology’ (DLT). DLT is a database which can securely record and transfer information. Blockchain technology is one of the biggest examples of DLT. Blockchain has proven to be pivotal in the financial space. It has enabled the facilitation of peer-to-peer transactions. Since blockchain is fundamentally about the storage and transfer of information it is also a useful tool to track information.
This means that all financial transactions can be recorded – leaving a trail of all funds spent which can also help prevent fraud. This also grants users the ability to choose who they conduct business with. This is very similar to open banking – which allows users to choose which businesses and services can see their financial information. Blockchain differs slightly because dependent on what blockchain is being used, financial information is made private through special encryption algorithms. So what are the different types of fintech, how do they compare to open banking, and what are the benefits?
There are fintech start-ups which specialise in lending money. This can be useful for customers since they no longer need to seek out banks or credit unions to borrow money. Consumers are able to request loans online and get them approved quickly as the lender is able to risk assess the borrower, based on their historical information.
Another aspect of fintech is to facilitate payments without needing a central bank. Banks tend to charge incredibly high fees on all transactions – something which is removed in fintech. This is because many financial technologies are decentralised.
Sending money internationally can often be a slow process and involve high transaction fees. International transfers are not the only ones that can be slow. Sometimes it can take banks 1-3 business days to facilitate a transaction. Fintech aims to counter these slow transaction times. Payments will eventually get to a place where they are instantaneous, even cross-borders.
Fintech companies have also entered the insurance market. The focus here is often distribution. These fintech companies utilise apps to offer insurance to customers who might need more flexibility than what’s provided by traditional insurers. However, many of these companies will partner with traditional insurance companies because the insurance market is highly regulated – though this helps consumers know they are safe to take out insurance with these fintech companies.
Open banking, on the other hand, allows users to retake control over their financial data. Open banking is to counter the privilege banks hold over our financial data. If you are registered with a bank, they completely control any information you have given them. With open banking, you can select which companies can see it and in turn, those companies can offer you deals on mortgages, overdrafts, insurance and broadband deals. Choosing open banking is still choosing the banks – but you can now control what banks do with that information.
Fintech is ambiguous but it doesn’t have to be
Fintech is an ambiguous term because it encompasses a lot of technology. Both DLT and open banking are incredibly popular types of fintech at the moment – and yet there are so many more types. The key thing to remember about fintech is that, ultimately, it wants to disrupt traditional financial institutions and redefine how we conduct our financial business.