Technology | 07-06-2021 | Divya Srivastava
Financial Technology, aka the Fintech industry, has gained exponential popularity in the past years. FinTech refers to the banking and financial institutions that use technology to automate processes and financial services.
This technology serves both consumers and businesses by enabling mobile banking, InsurTech, cryptocurrency, and investment apps. People use these applications for financial activities like Money Transfer, Raising Money for Startups, or Depositing a cheque. Financial Technologies vary from application to application. Using technologies like Data Science, Blockchain, and Machine Learning, banking and financial players, can improve operational efficiency and revenue growth.
So, you understand what FinTech is and Why it is important. Now let’s move forward with the types of FinTechs and How FinTech makes money.
Types of Fintechs
1. Credit Assistance
Alternative credit assistance is similar to traditional scoring, but the difference is the criteria they use to determine the borrower's scores. Credit scoring using outdated measures like Transaction History, Credit utilization ratio, Current Debts, Size of Credit History, and many more makes conventional lending inefficient.
Many self-employed people cannot pass the conventional bank loan process with their fixed income because of these criteria.
For coming out from strict credit rating, FinTech companies such as Nova Credit have taken innovative measures by considering alternative data points like percentile scoring amongst the same kind of borrowers group and social signals.
2. Insurance Underwriting
Life Insurance Premium is often given to everyone, whether they are of the same height and weight, have the same smoking and drinking habits. Insurance premium calculations happen because of normalizing, not because of the quantifiable factors.
Like credit assessment, FinTech companies like Carpe Data, combined with some intelligent and self-learning algorithms, make insurance underwriting effective. They developed variable premium computing mechanisms by utilizing some data points like social signals and medical history.
3. Peer-to-peer Lending
P2P lending is used when one person borrows money from another person. Whereas P2B, aka peer-to-business lending, is when a business borrows money from one or multiple individuals. This model of borrowing makes it easier for investors to get a better return on investments.
4. Personal Finance Management
"Data is the new oil" is the most common phrase in today's world. Management of the data effectively can give you an immense perception of the customer's needs and wants. FinTech startups have started making free products, like money management apps, conducive to collecting customer's personal data and then merging individual's data with the rest of the customer's data to know the customer's aggregate potential to pay premiums.
5. Small Ticket Loan
Small ticket loans have meagre margins and high costs involved in setting up and recovery. Hence, banks and other lenders don't want to underwrite them. Fintech companies such as Affirm deliver impulse buy mechanisms like BNPL (buy now & pay later). These types of loans are underwritten at 0% interest rate so that users can purchase anything with the option to pay in instalments.
6. Payment Gateways
Several payment methods are available today, including credit cards, digital wallets, credit cards, and cryptocurrencies. These payment methods allow shoppers to pay for a product or service on a merchant's website. Banks charge an enormous amount to handle transactions by using these methods. On the other hand, FinTech companies provide businesses with the convenience to integrate payment gateways into their websites. Online merchants can easily afford these payment gateways as they cost less than banks.
7. Digital Wallets
A digital wallet is a combination of payment gateways and a no-hassle bank account. Users can pre-load a precise amount of money into their Digital Wallets. Later, they can use this virtual money for transactions with merchants who accept digital wallet payment mechanisms.
8. Asset Management
Fintech companies like Robinhood permit investors to trade without paying any fees for stock trading. These apps collect data that they forward to the high-frequency traders, who can then easily influence the asset's cost.
9. Neo Banking
Neo banking means the banks go online-only. There isn't any need for a physical infrastructure with no office, no mail, and no bank tellers. Some banks like N26 are offering no-hassle individual and business bank accounts via complete digital infrastructure.
Likewise, Digital Banks and Financial Technologies are also transforming the insurance industry by migrating traditional insurance services towards the digital world. Now, FinTechs have started offering life and health insurance with better underwriting practices.
With personalized marketing, these types of InsurTechs can create new business possibilities that traditional insurance companies have only begun to explore. Lemonade is the best example of InsurTech in the house insurance space.
FinTechs are thriving recklessly in the digital world by using these business models.
How FinTech Make Money?
1. Fintech charges the user a certain amount for their services. Subscriptions are a flat fee and also known as the transactional approach.
2. Why is FinTech so popular? The answer is Data. Fintechs can gather the data and offer more personalized services to users by tracking information like where people are spending money more, receiving salaries, etc.
3. API’s, aka application programming interface, also can work as a revenue stream. It allows companies to build products through partnerships, but it doesn’t allow data to flow more securely.
4. Advertising is the oldest and most common form of monetization. This model works a lot because users don’t need to pay money for using the services. Advertising means simply putting up ads and selling the attention of your users to other companies.
5. FinTech integrates with third-parties that offer some value in a different way to the customers. Credit Assessments Tools, Accounting systems, Health insurances, and many more are examples of it. It’s a revenue strategy for FinTechs.
6. Robo-advising is a platform that permits users to get stock market advice by paying low fees. In this, users don’t have to pay hefty money to investment advisors. This platform uses algorithms and machines to manage portfolios. It makes money by charging a certain amount of total assets around 0.25%, which is cheaper than what investment managers charge.
Now you have got the answers to your questions like How does a FinTech work, how fintech makes money, what is the future of fintech, etc. So far, we’ve learnt that FinTech is rapidly increasing and that FinTech app development is significant for every banking and financial service provider.