Fintechs use technology to provide financial services. Some offer alternatives to banks, financial advisors, insurance companies, and other established businesses. Others launch entirely new financial services. Fintechs can also form partnerships with established financial institutions, helping them gain customers and expand their service offerings. While some fintechs offer unique products, many startups in this niche fall into a few major categories. Here are some of those categories.
Several types of fintechs use blockchain technology. Cryptocurrency exchanges are similar to other types of currency exchange businesses. Instead of trading dollars for Euros, you can go there and trade dollars for bitcoins. Neobanks, fintech stock brokerages, and other types of fintechs that offer currency and stock trading may offer cryptocurrency trading as well. Investors may buy coins to speculate or make long-term investments in them.
Other fintechs use blockchain technology for supply chain management. They set up distributed ledgers where network members can see transaction records. The platform might only show members the information they need, while hiding other information. Participants can’t modify trade documents unless the network accepts their edits. In trade finance, providing these verified records to banks can speed up loan approvals.
Fintechs also use blockchain platforms to verify product authenticity. They can show shoppers that a bottle of wine came from a specific region and deserves a premium price tag. They can show shoppers that chocolate wasn’t made with cocoa that was harvested by children. These services are similar to other third-party environmental, social, and governance verification services.
Crowdfunding platforms can help their users invest directly without going through traditional financial intermediaries. For example, an investor can use a crowdfunding platform to lend to borrowers directly instead of buying bonds at a stock brokerage or bank. Investors earn more interest than what they’d get from a bond, and borrowers pay lower interest rates. Instead of going through the standard underwriting process, the crowdfunding platform analyzes the borrower’s data. The platform assesses the risk level of the loan and suggests an interest rate.
Real estate crowdfunding platforms provide another way to achieve higher-than-usual returns. They pool money from individual investors to purchase apartments, houses, and other properties that generate income. Like REITs, they provide a way to collect rent and lease payments without direct involvement in property management.
Crowdfunding platforms also allow investors to buy stock directly from startups. They don’t have to wait for the startups to go public and can invest at early stages, like venture capital firms and angel investors. Some types of crowdfunding are only available to accredited investors. These investments are much riskier than the securities available at brokerages and banks, so regulators want to ensure that investors can afford to lose money if these deals don’t work out.
Insurtech platforms can provide alternatives to traditional insurance policies. They offer features such as faster policy approval, flexible coverage, and adjustable pricing models. Some may insure personal property such as your home and car while others sell life insurance policies. They also offer custom policies that support emerging business models. For example, if you rent out your apartment on a sharing platform or provide ride sharing services, insurtechs offer specific policies for these sectors. Insurtechs also develop policies that cover gaps in coverage provided by traditional insurers.
Standard property insurance policies protect you up to a specific loss value and last for a fixed period. For example, a policy may reimburse you for up to $1 million in losses over the next year. But insurtech platforms may allow you to adjust your coverage on demand. You can purchase insurance coverage for a day, or log into the platform and increase or decrease your total coverage. This can be useful if you’re traveling and only need to cover specific items during a trip. Insuretech platforms can track and insure specific personal assets, such as smartphones and laptops. They may have automated appraisal features, such as valuing an object after you take a picture of it with your smartphone.
For life insurance policies, insurtech platforms can consider alternative data to give you better prices. These platforms may give you a discount if you walk a certain number of steps per day, if you ride your bike to work, or if you go to the gym a lot. They might also reduce your insurance premiums if you’re an athlete or participate in other fitness programs.
Mergers and Acquisitions
Fintechs make platforms that manage documents for mergers and acquisitions. These platforms are similar to virtual data rooms. They’re useful for large companies that buy lots of startups. A mergers and acquisitions platform can speed up planning, due diligence, integration, and other steps in the acquisition process.
They can track document access so the acquirer can see if managers at the target company have seen a relevant document. They include access controls, so you can only show technical documents to engineers and only show legal documents to lawyers if you want to. Documents and messages are stored within the platform, so they’re easier to find than email messages. This also makes audits and regulatory compliance easier.
Mergers and acquisitions platforms also come with templates that show you the processes you need to carry out to make sure the merger succeeds. Many mergers don’t succeed because acquirers pay too much attention to steps that aren’t as important. For example, platforms can help you keep track of highly skilled employees who you’ll want to keep around after the merger.
Neobanks are banks that only operate online. They don’t have a branch network like traditional banks do, reducing their operating costs. So they can offer more interest on savings accounts. They might also charge lower monthly fees for checking accounts. Neobanks may also offer specialty services. These can include lower currency exchange rates than traditional banks, commission-free stock trading, or faster notifications for account transactions.
Fintechs need banking licenses to offer checking and savings accounts. If a platform doesn’t have this license, it might still be able to provide prepaid debit cards to its customers. But that won’t allow it to offer other banking services such as making loans. With a banking license, a neobank can offer a mortgage or a car loan through its app. These fintechs can also offer wage advances, helping account holders receive their pay checks a few days early. Wage advances are similar to payday loans but are regulated differently.
Payment platforms are more advanced versions of payment gateways. They often support many currencies and payment methods. For example, they might allow foreign shoppers to use e-wallets that aren’t recognized by U.S. platforms. Or they can automatically route a transaction through a local bank, instead of a bank in the merchant’s home country, so the customer’s bank is more likely to approve it.
They can also help customers transfer money directly between bank accounts so they don’t have to pay credit card fees. This process is called an ACH transfer in the United States. These transfers are harder to set up than credit card payments because the platform has to send transaction data in the format the bank prefers. But the customer will pay a near-zero fee for an ACH transfer instead of the 3 percent fee that banks charge when customers use credit cards.
Personal finance platforms help you organize your accounts. They provide a central location where you can see the balances of multiple accounts, including checking, savings, and investment accounts. They also track your loans, including mortgages, car payments, and student loans. With a personal finance platform you don’t have to log into ten different accounts to see how much money you have and what payments are coming up.
A personal finance platform can also use your account information to suggest other financial services. They could provide roboadvisor services if you have money to invest. They can also show you loan consolidation and refinancing services if you’re short on cash. Some personal finance platforms can even help you get a mortgage; unlike banks, they can show you offers from many different mortgage lenders. And since they have your personal data already and can share it with the mortgage lender, they can also speed up the underwriting process, helping you buy a house faster.
Regtech platforms help businesses comply with financial regulations. They help businesses perform compliance checks on their vendors, track security incidents, and send the correct documents to auditors. They automate banking processes such as know-your-customer (KYC) checks, helping banks open new accounts quickly. Regulators frequently pass new laws requiring banks to keep more records and track more metrics, so regtech platforms are gaining importance. It’s hard to manage financial compliance data using spreadsheets alone.
Regtech also includes SaaS platforms that protect data privacy. If banks and personal finance platforms send customer data directly to third-party analytics firms, this could violate privacy laws. So these platforms can help businesses share insights from the data without transferring data directly. They can convert financial data into tokens and then send the tokens to other companies. This is safer than relying on encryption alone because more powerful computers may be able to decode old encrypted messages in the future.
Roboadvisors are platforms that provide automated personal financial advice. Like human financial advisors, they typically earn revenue by charging fees based on a percentage of the assets they’re managing. But these platforms can charge lower fees than human advisors because they’re automated. A roboadvisor platform may also offer a premium tier where investors can receive answers from human financial experts.
These platforms typically invest in exchange-traded funds (ETFs) such as mutual funds and bond funds. Like a human advisor, they can adjust the proportion of stocks and bonds in your account to fit your risk level and your age group. A roboadvisor might offer several default portfolios at various risk levels. Instead of talking to a human advisor, the platform might have you answer a series of questions to determine your risk level.
Roboadvisors also provide tax loss harvesting and portfolio rebalancing. They’ll sell shares of your mutual funds periodically. This ensures that you have the right level of exposure to each sector, the best balance of domestic and international shares, and the right balance between growth stocks and value stocks. They’ll use your tax data to schedule these stock sales in a way that minimizes your taxes. And they can allocate your investments across all of your accounts to minimize your taxes, including tax-shielded retirement accounts and regular brokerage accounts.
Supply Chain Finance
Supply chain finance platforms speed up invoice payments. Instead of sending an invoice to the buyer and waiting for the check to arrive, a supplier can upload its invoice to a supply chain finance platform. If the buyer approves the invoice, a third-party bank will then offer to pay the supplier immediately in exchange for a fee. The fee is lower than the interest rate the supplier would normally pay for a loan, because the bank’s offer is based on the buyer’s credit rating. This works best when the buyer is much larger than the supplier.
Another service provided by these platforms is dynamic discounting. Invoices often include terms such as a 2 percent discount if the bill is paid within 30 days. This is called an early payment discount or a cash discount. The buyer would pay the same price if it paid on the first day or waited until day 29. Dynamic discounting replaces fixed discount terms with a variable discount rate. This encourages buyers to pay their suppliers more quickly.
Vendors receive early payments from customers. Meanwhile, buyers can delay invoice payment so they have more working capital available. And supply chain finance platforms have found ways to provide invoice payments even faster. By analyzing invoice records, they can predict whether a buyer will pay off an invoice before it’s approved. With this data, a third-party bank can send a payment to the supplier before the buyer actually approves the invoice.