What is a fintech and how do they work?

The growing technological changes and digitalization are also affecting the modern economy. Technological changes are likely to move faster in every industry of every economy around the world. Technological changes impact our day-to-day life and on the other hand, make our life more easier. 

What is Fintech?

The word “Fintech” describes itself. The word “Fin” refers to finance and the word “Tech” refers to technology. Fintech or financial technology is doing financial activities with the help of technology. Fintech helps companies, business owners, and consumers to do any financial transaction digitally with the help of technology. 

Fintech popped up in the 21st century. Initially, the phrase fintech was used to describe the technology used in the backend systems of reputable financial institutions like banks. But now it includes other sectors and industries like education, retail banking, fundraising, investment, and more.  

Over the last decade, people have become more influenced by digitalization and getting more used to using digital tools. Fintech helps consumers to run their daily financial activities more easily than previously. In return, fintech is getting more reliable among consumers for banking, budgeting investments, lending, and making payments for its daily benefits. 

Consumers are reportedly getting numerous benefits from using fintech in their day-to-day lives. Using fintech saves time, and cashless transactions, reduces the fare of managing money, and helps to recover financial mistakes. Also, it can help to save money. 

Advantages of Fintech

• The main advantage is greater accessibility. Anyone from anywhere at any time can use their bank account with the help of the internet.
• Services are time-saving. Do not need to go to the bank, or stand in line for a transaction. You can now operate all your financial activities by sitting at home using the internet. 
• Reduce the risk of physical theft
• Made easier loan documentation system
• It is cost-effective. You can send or receive money locally and internationally with a few clicks.
• Robo-advising will use your data to provide automated and algorithm-based financial planning and automatically invest for you.  

Disadvantages of Fintech

• Increase the risk of cyber theft
• Fintech companies often operate online with a lack of physical branches
• It relies on technology. Disruptions may occur because of technological error.

What is a Fintech Company?

A company that offers financial services through technology. A fintech company provides all kinds of banking services with the help of technology. As Canada is a technological advanced country, it has the world’s best fintech companies. 

Top Fintech Companies in Canada

1. Wealthsimple: Wealthsimple is an online investment management company, operating their services from Toronto and New York. Led by the world’s best financial experts and tech talent, the company has total funding to date of $830 million.    
2. Nuvei: A Canadian fintech payment company that offers payment solutions. Nuvei provides services in over 200 markets worldwide. Nuvei acquires locally 45+ markets, supports 150 currencies, and 580+ alternative payment methods. Currently, the company has a total funding of $830 million.  
3. Clearco: Clearco is an e-commerce investing fintech company based in Toronto. It provides equity-free capital solutions for e-commerce businesses. Over 7,000 brands received advances from Clearco totaling over $3.2 billion, including well-known names like Public Goods, Soludos, and Monos. Currently, the total funding amount is $698 million.  
4. Flexiti: Peter Kalen founded Flexiti in 2013. Flexiti is a point-of-sale fintech lender with a mission to make high-ticket purchases easier. Its large network crosses 8,000 retailers and e-commerce sites including The Brick, Wayfair, Sleep Country, and more. The total funding to date of this company is $530 million.
5. Verafin: Software company Verafin develops cloud-based financial crime management software. Verafin helps to keep companies safe online. Verafin detects and manages fraud risk, helps them dispose, and keeps them on top of high-risk customers. Currently, the company’s total funding to date is $454 million.

How Does Fintech Work? 

Fintech provides traditional financial services to consumers and businesses using technology. For example, most mobile banking apps are now providing services like checking balances, transferring funds, depositing a check, and more. Many services are now automated by fintech like real estate appraisals and loan underwriting. Combining customer data with a touch of artificial intelligence enables fintech companies to understand their target audiences better. 

There are several types of fintech apps, and they work differently. Some fintech apps work with financial account data like account balances and transactions with another account or they may allow users to track their investments over multiple platforms. Those fintech apps allow users to do things like trade stocks or cryptocurrencies. Those apps allow users to easily make a wide variety of investments. 

There are some installations that are necessary for fintech apps:

• APIs: APIs or Application Program Interfaces ensure safe and secure consumer bank account connection to fintech apps. 
• Mobile Applications: Fintech companies usually come up with a mobile app so that the users can get access to their accounts at any time and can get access to their data. No matter whether it is related to banking, financial management, or investment, mobile apps and fintech are complementary. 

Different Types of Fintech 

• Mobile Banking: Many fintech companies have made mobile banking their main focus. Because consumers are progressively demanding easy access to the money in their accounts. They want to access their funds using a mobile device from anywhere at any time. This has pushed the banks to start their mobile banking services. Though the attempt is to meet customer demands at the same time these features also aim to ensure the bank’s profitability.   
• Neo bank: Neobanks are those who do not have physical branches. Neobanks offers payment services, savings, and checking accounts using digital platforms like mobile applications or websites. Their infrastructure is completely on mobile applications or websites, with some third-party applications to access customer’s financial data. This concept is also called an open banking system. 
• Cryptocurrency: Cryptocurrency is a digital currency. It is decentralized and supported by basic blockchain technology. Bitcoin was the first and the most popular cryptocurrency until now. However, cryptocurrency has faced a strong adverse reaction for facilitating illegal activities.
• Machine Learning and Trading: Supporting credit rating processes and growing the diversity within the fintech sector, machine learning has played a key role. Besides this, fintech companies are using machine learning to analyze their large amount of customer data within the shortest period. The rapid improvement of machine learning has helped to raise the emergence of Robo-advisors. These robo-advisors are mainly used to make trading decisions and automate investment guidance. 
• Payment Fintech: Allowing users to perform transactions quickly through direct digital file-sharing. Fintech Companies make it easier for people to make transactions with their friends and family or low-fee payments to businesses. Services like this have increasingly moved towards a cashless society.
• E-commerce Payment: E-commerce websites are highly in demand for online payment methods. Nowadays, we rarely see e-commerce without installing payment methods in it. Specifically, companies like Klarna offer services like direct payments, pay-after-delivery options, and payments for online stores with installment plans.  
• Investment and Savings: Recently fintech has created an outburst in the investing and savings apps. These apps are serving differently. Each of them uses savings and automated small amounts of investment services. 
• Lending Fintech: Fintech is also improving the credit system by smoothing risk assessment, and approval processes and making access easier. Billions of people around the world now can apply for a loan by using their mobile devices. In addition, consumers can request credit reports several times a year. 
• Insurance Fintech or Insurtech: Fintech companies are jointly working with traditional insurance companies to automate the processes of insurance and enlarge coverage.
• Embedded Finance: Embedded finance refers to financial services offered to consumers in everyday life through non-financial products and services. Making it more clear, virtual balances we have in our different apps like Shopify. It helps users to pay faster and manage their business. Shopify balance is a financial product that is ‘embedded’ in a non-financial product. Non-financial companies integrated API to embed financial services directly into their product or user accounts.  

Technology Needed for Fintech

Artificial Intelligence (AI), big data, and blockchain technology powered up modern fintech. All three have completely formulated how companies will make transactions, store data, and protect digital currency. AI helps to provide valuable information about consumer behavior and expenditure habits to businesses and help them understand their customers better. Big data can help with analytical reports. It can help companies predict changes in the market and for creating new data-driven business strategies. Blockchain is a newer technology advancement within the financial sector. It allows transactions without inputs from a third party. 

Is It Safe to Use Fintech?

Identity theft and data violation is a top concern for the Fintech industry. Individuals and organizations are more worried about cybersecurity in the fintech industry. The recent findings show that fintech companies are investing about 70% of their funds in designing and implementing security to prevent cybercrime. These findings show that cybercrime is the most important concern in this industry. Companies are trying their best to make the whole system secure. Fintech companies use One Time Password (OTP) systems and other authentication systems to secure payment. Although Fintech companies are trusted by consumers. Forbes says 68% of people are willing to use financial tools that are offered by non-traditional institutions. 

Fintech companies are creating positive changes in the day-to-day life. People are getting more used to it. Fintech has made our lives easier than before. Financial companies are also trying hard to improve their system and provide the best services as well. In recent years the number of fintech users increased surprisingly. It will become an inseparable part of financial society in the near future.