Mark Hauser, co-managing partner at Hauser Private Equity, details the increased role of fintech in financial services, and the intersection between technology and banking.
In today’s increasingly digital business landscape, financial services and banking companies have traditionally lagged on the adoption of new technologies. In the 21st century, however, these businesses have received a wake-up call thanks to the emergence of technology-driven businesses that aggressively pursue market share. As private equity principal Mark Hauser notes, these “fintechs” are key to moving traditional financial services firms forward.
Snapshot of Fintechs and Financial Services
The term “fintech” is a catchphrase that’s short for “financial technology.” This evolving discipline involves the use of specialty software and algorithms to automate and streamline varied financial services. Through this automation, consumers and businesses can more efficiently execute common financial services and banking operations.
Alternatively, the term “fintech” also describes a technology-focused company that develops these innovative financial products and services. Most fintechs are bold, brash startups. However, others are established businesses that have identified a market problem and developed a large-scale solution.
Fintechs’ Ongoing Evolution
At first, fintech technology was limited to banks’ and other financial institutions’ back-end operations. Today, however, private equity expert Mark Hauser says fintech use has expanded to other financial services and investment functions.
Perhaps most importantly, many consumer services now incorporate a fintech component. In fact, some emerging fintech companies are entirely focused on the growing consumer sector. For perspective, approximately one-third of the consumer population regularly uses two or more fintech services.
Finally, fintech now encompasses cryptocurrency development and utilization. The Bitcoin digital currency has the most name recognition. However, many other digital currencies and digital assets are becoming part of the financial services landscape.
Newer vs Established Fintechs
Most fintechs are startup businesses that seek to disrupt (and overtake) traditional financial services companies. However, certain established fintechs have carved out their own niches in the financial services industry.
Regardless of their business stage, fintechs typically focus on underserved population segments and/or offer more streamlined services with fewer hiccups.
To illustrate, some fintechs have devised a way to shake up the home mortgage industry by offering online-only loans. Alternatively, home improvement borrowers may save on interest through a fintech that links these consumers with specialty banks. Essentially, this cuts established lenders out of the process.
5 Well-Known Fintechs Offerings
Beginning in the mid-2010s, fintechs began to accelerate in number and market influence. Hauser Private Equity’s Mark Hauser explains that startups often benefited from billions in venture funds. Existing fintechs took the opportunity to expand or acquire promising new startups.
Most fintech startups originate in North America. However, Asia and Europe are increasingly making inroads into this rapidly expanding market. These five growing fintech sectors account for much of today’s market innovation.
Roboadvisor Financial Services
These fintech products represent a more affordable way to access investment advice. Based on algorithms, roboadvisors provide automated investment guidance to budget-conscious clients. Some roboadvisor platforms also offer a la carte consultations with human advisors.
Regtech Financial Services Applications
Regtech, or regulatory technology, helps financial services companies to comply with specific industry rules. These include fraud protection tools such as “Know Your Customer” regulations and anti-money laundering protocols.
Unbanked or Underbanked Market Solutions
These applications are targeted to low-income or disadvantaged consumers whose needs are not met by traditional banks. Financial services businesses may also ignore this substantial market.
Cryptocurrencies and Digital Assets
This rapidly growing fintech class includes cryptocurrencies, such as Bitcoin and Ethereum. Digital cash, along with digital tokens such as NFTs, are also in this class. These digital assets are based on blockchain technology. Here, a computer network maintains records on a distributed ledger, but no central ledger exists.
Targeted Insurtech Applications
Insurtechs, or insurance technology applications, are designed to streamline certain parts of insurance industry operations. This industry has long been criticized for its reliance on outdated policy and customer service practices.
Many Consumers Have Embraced Fintechs
Fintech’s influences ripple across the highly diverse consumer sector. To illustrate, smartphones and round-the-clock Internet access enable consumers to obtain machine learning-driven services. Transferring funds to friends or family, or obtaining a loan, typically requires only a few clicks. Collectively, consumers appreciate these fast, secure transaction methods.
Younger consumers are more likely to be familiar with fintechs’ market influence. In fact, consumer-focused fintechs have generally been targeted to the millennial submarket. This likely pertains to the market’s sheer size along with the cohort’s earning potential.
The growing Gen Z market has also begun to appear on fintechs’ collective radar. Fintechs do not address older consumers’ pain points, so they do not typically appeal to Gen Xers or baby boomers.
How Fintechs are Changing the Financial Services Industry
Fintechs continue to successfully disrupt a wide range of financial services activities. Traditionally, a financial services institution offered numerous consumer and business services through a single access point. Traditional banking, mortgage services, and even market trading activities were accessible under one umbrella.
However, private equity investor Mark Hauser says fintechs are systematically revamping this model. A typical fintech will break these services into a group of distinct offerings. These technology-enhanced products are cost-effective and increasingly streamlined to use. Many consumers and business owners can now handle their financial services needs via their smartphones.
3 Examples of Financial Services Fintechs
Fintechs are helping to bring the traditional financial services industry into the 21st century. Three innovative offerings are changing the way consumers maintain credit scores and obtain funds.
Alternative Credit Score Utilization
Many self-employed business owners and entrepreneurs are turned down for conventional bank loans. These rejections result from outdated credit scoring models that automatically disregard applicants without income from a traditional job.
Today, however, self-employed applicants can turn to credit rating companies that use candidate evaluation methods in line with today’s marketplace. By combining several qualitative factors with a self-learning algorithm, lenders can make more accurate lending decisions that facilitate better longer-term outcomes.
Low-Dollar Consumer Loans
Historically, banks and similar lenders avoided small-ticket loans because they are expensive to process and offer little return. Fintechs have stepped into this market void, offering “buy now, pay later” options on eCommerce purchases.
Now, consumers can easily pay for their purchase without entering credit card details or other authentication data. These loans generally carry a 0% interest rate and an installment payment structure.
In turn, the customer agrees to provide their data to the original equipment manufacturer (or item supplier). This data, combined with customer demographic algorithms, enables customized marketing solicitations.
Business Crowdfunding Mechanisms
Some innovative fintechs have devised ways for small businesses to circumvent traditional bank loans. Individual entrepreneurs or small business owners can now use crowdfunding networks to receive (or send) money through mobile apps or online portals.
Certain fintechs focus on connecting go-getter startups and potential investors. Other fintechs provide a platform enabling startups to directly contact targeted investors for funding.
How Fintechs are Changing the Banking Industry
Traditional banks have taken note of fintechs’ increasing marketplace prominence. In a strategic move, many banks have made significant technology investments as they seek to mirror the fintechs’ offerings. The introduction of new consumer lending platforms and market expansions are just two examples of the banks’ tactics.
However, many industry experts say outmaneuvering innovative fintechs will take much more than increasing technology investments. Mark Hauser emphasizes that banks must completely retool their mindsets, corporate framework, and operational and decision-making processes.
After some consideration, many banks have decided that partnering with the fintechs is a better business decision. Therefore, these traditional financial institutions have begun to capitalize certain fintech startups. These innovative companies are creating products that can help the banks to enhance customers’ experiences.
3 Examples of Banking Fintechs
Consumers who engage in digital banking activities likely utilize three popular banking fintechs. These technologies have streamlined banking operations and enhanced customer service experiences.
Mobile Banking Applications
Consumers’ increasing use of smartphones has spurred banks to develop mobile banking software. These versatile applications enable users to deposit checks, check account balances and statements, and pay bills.
Biometric Sensor Verification
Consumers often withdraw cash or perform other functions at a bank’s ATM. By using biometric sensors, a bank customer can access their account without carrying their card or memorizing their PIN. Fingerprint or palm sensors, or iris scanners, can enable fast, easy account utilization.
Customer Experience Chatbots
Customer service chatbots are increasingly becoming part of consumers’ banking experiences. These cheerful digital assistants help customers to quickly process queries and access specific departments. These hands-off services enable call center personnel to focus on service upsells.
Predictions for Fintechs’ Future
As fintech technology continues to evolve, new industry advances have enhanced all aspects of the customer experience. Private equity executive Mark Hauser says financial services companies and banks should adopt a customer-centric strategy. Here, consumer expectations and needs will drive each firm’s operations and marketing activities.
Specifically, conventional banks will likely seek ways to better position themselves in a rapidly evolving digital landscape. Making strategic investments and adopting new technologies is one likely tactic. Bank-fintech partnerships are another option that should produce benefits for both parties. Collectively, these strategies should enable additional fintech innovation that moves the entire financial industry forward.