Why Fintech Startups Matter

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Brian Ferdinand has over 15 years of experience in advanced trading methodologies and technologies. Apart from working as COO for Vacation Rentals LLC, he is also an entrepreneur.

Are you unsure about what the word “fintech” actually means? Sure, you know it stands for “financial technology”, but what does the term cover? You’ll be surprised, but a lot of tech-savvy people and companies are not sure either.

By definition, fintech covers industries that deal with finance and technology, such as mobile payments, money transfers, crowdfunding, and even loan application and approvals. If you have ever made a purchase online through PayPal or made a donation through GoFundMe, you might have already used fintech without even being aware of it.

A narrower definition of fintech involves the startup scene. As most of the larger banks are slow to come up with mobile payment solutions due to financial regulations and a poor grasp of consumer behavior, small startup companies have stepped in to fill the void. For example, WePay, a solution that processes credit card payments, is used by crowdfunding platforms such as CrowdRise, which is also a fintech startup in itself.

The agility that these new players bring into the market have made them leaders in large yet untapped industries such as loans for small businesses and online installment payments. Kabbage, a small-business lender, counts beauty salons and local clothing retailers among its biggest client bases, and has raked in more than US$40 million in revenue as of 2015. The reason it is able to tap into the SME market is that it has a very short repayment period, while offering substantial loan amounts. While there is a risk of clients defaulting on their loans, the incidence of default is low compared to traditional brands.

Banks are already starting to take notice of this trend. In fact, Goldman Sachs believes that, for all their infrastructure and brand recall, large banks are slowly losing their competitive edge. The so-called “third wave” of fintech is seeing banks collaborate directly with fintech startups in order to leverage their speed to market while backing them up with massive war chests. These startups are focusing more on business-to-business (B2B) models rather than the traditional business-to-consumer (B2C) transactions. This trend tends to expose the fintech startups to a larger customer base that they would otherwise have difficulty accessing.

Pretty soon, I believe, the major banking players will have their own products based on solutions offered by fintech startups, such as online loan restructuring and peer-to-peer lending. This will be done either by bringing in fresh talent from fintech startups, drawing up exclusive partnerships with the same startups, or establishing dedicated fintech divisions. And the trend will not be confined to banks alone, as other financial establishments, such as insurance companies, are also starting to take notice. There are already mobile apps which help users find an insurance policy that fits their needs and budget, and it can only get bigger from here.

Truly, fintech and fintech startups are interesting to look at. If you are an investor, chances are you might want to take a close look into these up-and-coming players. You’ll never know when you will stumble upon the next PayPal.

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