Technology has transformed the way we do pretty much everything from shopping to socializing and it’s also turning the financial services industry on its head. Over the last few years, a crop of fintech startups has emerged, using technology to make it easier for people to invest, make payments and even get a loan.
For millennials, it’s particularly appealing because they grew up with mobile devices and want to conduct financial transactions the same way they would share pictures or apply for a job. The technology companies recognize that and have capitalized on it. “[Millennials] see financial services as a consumer product which is a much different way of looking at it,” says James Wester, research director at IDC, the market research firm.
But it’s not only their fresh perspective on financial markets that is making this industry possible. It’s also a convergence of technology and big data, enabling all sorts of companies to harness and analyze information in new ways, whether it’s coming up with a personalized investment plan or approving a loan through a different underwriting process.
What Is Fintech?
Fintech, or financial technology, encompasses a wide of companies using software to provide financial services. Financial technology companies are generally characterized as being startups created to disrupt existing financial models and the larger financial corporations that are less integrated with technology. Though, larger corporations are increasingly recognizing the need for software solutions and are turning to fintech to increase and improve their financial service offerings.
Global investment in financial technology has exploded in recent years. Fintech now makes up a multi-billion dollar industry, still dominated by startups offering technological solutions to financial services and products.
What Are the Advantages of Fintech?
Fintech has also leveled the financial playing field for everyday people, giving them access to services previously reserved for the wealthy or individuals of a certain economic stature. Take investing for one example. Technology and data make it much easier and cheaper to bring investment advice to the masses, which means something that was geared toward a certain asset level is now open to everyone.
Or consider lending. In the past, underwriters only had a few data sets to rely on when assessing risk, which meant lots of people were turned down or charged a higher interest rate for a loan. Fintechs are relying on different information when underwriting consumers, looking at things traditional banks have never considered and providing more people with access to personal and business capital. All of that could never happen without powerful computer systems and software and data scientists who can make sense of it all.
When it comes to fintech, the number of players and services are plentiful, largely in the more basic aspects of financial services including banking, investing, borrowing and saving. It’s also finding its way into applying for mortgages and even purchasing insurance, thereby giving consumers a lot of new options.
With that in mind, here’s the lowdown on the good, the bad and the ugly when it comes to fintech:
Robo advisors are one of the largest areas of fintech. These online investment services put users through a series of questions and then rely on algorithms to come up with an investment plan for them. Many don’t have requirements in terms of investable assets or the amount you need to open an account. Often, they choose low-cost investments such as index funds or exchange traded funds to keep the fees investors pay at bay. They also handle rebalancing and asset allocation automatically, giving customers one less thing to worry about.
“Robo advising takes what historically required a meeting with a person in an office and moves it to an automated or crowd-enabled, mobile-enabled device, making the experience much more familiar and less intimidating,” says Joy Schoffler, Executive Board Member for the FinTech Professional Association and Principal of FinTech focused Leverage PR. “As millennials begin to plan for their retirement futures, it’s likely that a majority of investments will be made without ever talking to a person.”
Some of the big names in the robo advisor market include Wealthfront and Betterment, although there are a slew of others that require a low amount of money to open an account and keep it simple by doing everything for you. It’s a natural area for technology since it doesn’t require too much involvement to create a basic financial plan based on risk tolerance and time horizon.
“There are certain aspects of financial planning and management that can easily be put in an app and done via an algorithm,” says Lucila Williams, president and founder of LOTUS Financial Partners and registered representative of Lincoln Financial Securities. “These apps and websites are reaching a generation of people at an asset level that the average financial advisor can’t.”
These apps and websites are reaching a generation of people at an asset level that the average financial advisor can’t, says Williams.
Online Lending & Student Loans
Banks have long been the only option for borrowers, but for ones with less than stellar credit or those who want to streamline the process, fintech presented another option. After the financial crisis, banks were reticent to lend, shutting a lot of consumers out of the lending market. Fintechs, armed with a different way of assessing risk, stepped in to meet the pent up to demand.
“The rise of lending startups was in part due to the banks stepping away and also realizing how big of an opportunity it is,” says Matthew Wong, senior research analyst at CB Insights. “Millennials are open to new brands when it comes to financial services.” Online lending covers all aspects of borrowing from personal loans to refinancing student debt. Some of the big players in the lending space include SoFi, Earnest, Prosper and Ligthstream.
Student loan refinancing
One area of online lending that has been exploding in recent years is student loan refinancing and, again, it’s because of an absence of lenders. Banks balked at lending to college-bound students because the government controls the lion’s share of the market, but Federal loans aren’t the be all end all.
Lots of people need private loans to make up the difference and banks weren’t around to lend, but fintechs were. Just ask SoFi, which has lent $10 billion since 2011, or CommonBond, which claims borrowers can save as much as $14,000 by refinancing.
There are now a host of fintechs that do everything from refinance existing student loans to originate new ones. This is good news for consumers saddled with outsized student loan debt. In a lot of cases, the fees and interest rates are lower, or the borrower would otherwise be shut out of the refinance market if a bank was the only option.
Student loan repayment assistance
Student loan fintechs aren’t only in the business to refinance existing loans, they are also helping people pay them off, providing a platform that companies can offer their employees. Tuition.IO is one example. Its platform lets companies pay a portion of their employees’ student loan debt similar to how companies contribute to 401(K)s. Student Loan Genius and Gradifi are two other startups helping companies reduce student loan debt.
Everyone likes conveniences so it’s not surprising mobile payments have resonated with millennials. Who doesn’t want to whip out a mobile device to pay for coffee or press a button to send money to friends? It’s the reason eMarketer predicts there will be $27 billion in mobile payment transactions this year alone.
It’s also the reason there are so many choices when it comes to mobile payment providers. There are digital wallets like Apple Pay, Google Wallet and MobiKwik, payment processors including Square and PayPal, and money transfer services like WorldRemit and Transferwise. All of them are focused on one area: digitally paying for things.
When it comes to mobile payments, the innovations aren’t only happening in the front end but it’s also happening behind the scenes. There are those fintechs that started out providing consumers with a better way to make payments but morphed into a business-to-business (B2B) play, helping web sites power their payment features. Take WePay, which has been around since 2008. It’s the payment processor behind GoFundMe, the website that lets people fund a cause or donate to help out in a disaster or tragedy, and Care.com, the marketplace to hire caregivers. Recognizing peer-to-peer websites that enable people to kick in for a cause would be a huge business, it was smart enough to shift focus.
Fintechs for Personal Finance & Savings
Long gone are the days where the only way to save was via a bank or under your mattress. Now, there are a slew of fintech startups in the micro saving department helping people save their change for rainy days. Many of them are also rewarding customers for doing it. Wong of CB Insights pointed to Digit and Acorns as two examples of popular players in the fintech saving space. With Digit, users can automate the process of saving extra cash, while Acorns automatically invests users’ spare change.
Online Banking & Budgeting Fintech
Banking is one of those things millennials expect to do online and while all the banks generally offer online banking now and a mobile app, the fintechs have found a way to excel in personal finance and budgeting. Catering to millennials, online banks such as Chime or Simple, reward users for using automatic savings and also provide a low-cost alternative to a traditional bank. Using online tools, they help users budget and manage their money smartly to meet savings goals, all with minimal effort and right from their smartphone.
Insurance is that necessary evil that, for some, the process to get coverage can be too arduous. A handful of startups are aiming to change that, upping the customer service and reducing the costs for peace of mind. “We are seeing a lot more startups but it’s very early,” says Wong. Some are selling millennials insurance like Policy Genius while others are creating new insurance models like Metromile, which sells pay per mile car insurance and Trove, which provides on-demand insurance for customers’ personal items and will be available in the U.S. in 2017.
When Is Fintech Not the Answer?
Fintech appeals to millennials for a reason, many of the services offered are easy to understand like borrowing money or making a purchase. Even insurance can be basic when someone is young and starting out. But when things get more complicated, some of these fintechs may not be enough. “When clients get to a certain life threshold and asset level, they will want a more personalized approach and fintech isn’t going to do it,” says Williams of LOTUS Financial Partners.
If you need term life insurance, that’s a simple transaction. But when you get to complex financial products, it gets dangerous because there are so many nuances, explains Williams.
For anyone thinking about signing up with a fintech provider, there are some things to take into account. For starters, there’s the sheer number of choices. Because financial services is a big business, venture capitalists are throwing millions of dollars at lots of companies. Not all are going to survive. Millennials need to choose ones that have the staying power, but that also don’t overcharge for the service.
Schoffler of the FinTech Professional Association says millennials should also ensure the company has the proper regulatory oversight. Many fintechs partner with larger firms to manage their back office, which is something customers will want to know.
Financial Industry Giants & Big Banks Buy Into Fintech
Traditional financial institutions may be late to the fintech party but they haven’t missed it altogether. Many of them are creating their own services or partnering with established fintechs to bring services to their clients. It’s happening in every aspect of fintech from robo advisors with Charles Schwab’s Schwab Intelligent Portfolios to digital payments with Visa’s Visa Pay digital payment service.
Even heavy hitters like JPMorgan are turning to fintechs’ data to evaluate applications for loans, and Quicken Loans, the online mortgage lender, launching its Rocket Mortgage app that can churn out mortgage approvals and rejections in minutes.
All of this action on the part of the traditional financial services industry make for more choices beyond just the startups. “Fintech was developed in a large part, because of [millennials],” says Schoffler. “Millennials have demanded better experiences and technology in everything they do.” The effects, however, of fintech reach widely across the financial industry, resulting in big changes and benefits for people of all ages and economic status.