Background
From the tap-to-pay credit card system you use to buy your morning coffee, to the budgeting app that helps you determine whether you should’ve made that coffee at home instead, “fintech” is a broad term that stands for “financial technology” and refers to technological innovations in the financial services sector.
The roughly $340B fintech industry encompasses everything from mobile banking apps and robo-advisers to digital payment software. Examples include buy-now-pay-later apps like Klarna, payment processing technologies for businesses like Stripe, cryptocurrency innovations like crypto exchange Coinbase, and peer-to-peer payment services such as Venmo and PayPal.
But despite the industry’s breadth, fintech companies all have something in common: They aim to make various aspects of financial transactions more efficient and user-friendly.
The global fintech industry is growing quickly—it's projected to be worth about $1T by 2032.
History
Innovations in financial technology can be traced back to the transatlantic cable’s rollout in 1866, and, later, the pioneering of electronic funds transfer. But the word “fintech” typically refers to more modern innovations.
Many trace the term’s origins to a 1967 (the same year the first ATM was installed) Boston Globe article titled “Fin-Tech New Source of Seed Money,” about a venture capital firm that invested in companies focused on improving financial technology. But the word “fintech” didn't gain widespread use until the early 1990s, when financial services company Citicorp rolled out its Financial Services Technology Consortium (which was abbreviated to “The Fintech Project”), a group of financial experts who aimed to utilize technology in the financial world.
PayPal’s 1998 launch is considered by many to have ushered in the modern fintech sector. At the time, online banking was relatively new, and PayPal demonstrated how digital payments could be both secure and viable.
But ultimately, it was the 2008 financial crisis that accelerated the fintech industry’s emergence. As the public’s trust in traditional banks declined, smartphones appeared in their pockets and gave fintech companies the opportunity to put banking and other financial transactions into newly skeptical hands.
Soon enough, the industry was off to the races: Square’s mobile payment solution and card reader were introduced in 2009, and Apple debuted its Apple Pay “tap to pay” technology in 2014, for instance.
Why It Matters
Some proponents of the fintech industry’s growth argue that fintech can help democratize finance on a global scale (roughly 1.4 billion adults worldwide currently do not have access to basic banking services). Critics are wary of the potential for predatory lending practices among fintech companies, as well as the risk that the industry’s rapid development may outpace existing legal regulations.
Venture capitalists have been bullish on the industry’s future in recent years, too. Global investment in fintech increased by an astronomical 12,000% from 2008 to 2020, from about $930M to roughly $121.6B.
Fintech companies can be attractive to investors for several reasons, including their lower overhead costs compared to traditional banks, their ability to scale quickly, their tendency to experience fairly rapid adoption among businesses and consumers, and their popularity with the younger generation.
Future
Many of the fintech startups of the 2000s are now maturing into more stable and profitable corporations. As of this writing, the fintech industry has more than 272 companies with valuations of more than $1B each. Collectively, those companies were worth roughly $936B.
Additionally, experts predict that artificial intelligence will significantly change the fintech space in the coming years as companies start to use AI to help with fraud detection, optimize investment portfolios, and more.
