Bitcoin, NFTs, Robinhood, Coinbase. Besides constantly being in the headlines like Paris Hilton in the 2000s, what do all of these things have in common? They’re all new developments in the world of Fintech and are revolutionizing an industry.
Financial Technology, or Fintech for short, has been taking the financial industry by storm, but what exactly is it, why is it so popular, and how will it change our lives in the future? Grab your popcorn. We’re going to answer that.
What is Fintech?
Fintech is used to describe any new technology that is intended to improve and automate financial services. This includes anything from backend software that’s used to make your experience with a company or product more seamless, to physical goods like the Square Reader that made it possible to accept credit card payments right to your phone.
Many of the early innovations in fintech have evolved into things we now take for granted. Things like being able to deposit a check using our smartphone instead of having to go to the bank, opening a HYSA with an online bank like Citizen’s Access instead of going to a brick and mortar, or being able to download an investing app like Public and start trading immediately. We can now keep up with our finances the same way we keep up with the Kardashians, right from our smartphone.
Some of the newest innovations in fintech include crypto currencies, two of which, Bitcoin and Etherium, have become quite mainstream. As more companies like PayPal and Tesla start to offer Bitcoin payment options, these groundbreaking financial innovations will become more and more commonplace in the runnings of our daily lives. But since Bitcoin itself doesn’t actually have any tangible value, what is making these fintech innovations so popular?
Why is Fintech so Popular?
Since the turn of the 21st Century, fintech has been booming. 2019 was fintech’s biggest investment year on record with global investment reaching $168 billion, before dropping slightly in 2020. The US is the leader in fintech investment and makes up almost 80% of all dollars invested in the sector. So what’s driving US investors wild about fintech?
The obvious first reason why Fintech companies are so popular with investors and with consumers like you and I, is because they make our lives easier. I had to actually go to the bank for something recently and was super annoyed that I couldn’t take care of what I needed to using my Chase app. Fintech has conditioned me to do all of my banking through my phone because it’s so much more convenient. While the convenience economy is ballooning as fast as Billie Eilish’s popularity, there is another more powerful force behind the rise of Fintech and that’s democratization.
Traditionally, it has been difficult to invest in the stock market unless you were close to Kardashian level wealthy. There were high investment minimums, more fees, and no fractional shares trading. In fact, fractional shares trading didn’t become available until as recently as 2019! Without the ability to invest with smaller sums of money, pretty much everyone below the upper middle class was unable to build wealth through stock market investing. Then came the fintech revolution.
In the last few years, commission free trading apps like Public and Robinhood have been popping up like pimples before your period, which has made millennials and gen z flock to stock market investing. In a little over a year, we’ve seen TikTok become the default medium for investing advice, and watched young people use Reddit forums like WallStreetBets to “stick it to the man”. An entire new class of investor has been born.
But investing isn’t the only area fintech has democratized. It’s also helping out entrepreneurs. Square’s phone plugin made it possible for small businesses to travel to any location and accept credit card payments, and crowdfunding websites like GoFundMe have allowed startups to skirt the traditional fundraising methods like venture capital and angel investing, and raise money in a new way.
Without crowdfunding, many small businesses never would have been able to get a first meeting with a venture capital firm, let alone an investment. That’s because these investors are looking for the next billion dollar company, and one that can make it there fast. Crowdfunding websites help smaller businesses pitch their product to future customers, and raise money directly from their end users. This significantly increased the capital available to startups, and allowed more new businesses to enter the market.
The Future of Fintech
The latest disruptor in fintech is cryptocurrency. Bitcoin started the trend and revolutionized the way we store and transfer data through the development of blockchain technology. Think of Bitcoin as the Kim K of crypto. None of the other coins would be where they are without her.
Then came Kylie, aka Ethereum. Ethereum changed the crypto game by introducing easy to use smart contracts. Before this, crypto consisted of fungible tokens, where one bitcoin is the same as another bitcoin. It’s just like a US dollar. If you exchange one dollar for another one, you can’t distinguish the difference. If you acquire more dollars, your balance increases, but you can’t differentiate any individual dollar from the others.
Smart contracts added a new layer to this so non-fungible tokens, or NFTs, could be created. This meant you could create a completely unique element, sell it on the internet, and back it with a contract that was virtually unhackable.
Currently, investors are using NFTs and crypto currencies as a store of value, similar to gold and tangible art. If you have too much money lying around, you can invest in digital art or crypto, and hope to combat the effect of inflation on your money while diversifying your portfolio. But since most of us don’t have an extra $69 million hanging around to spend on a Beeple NFT, the future for us peasants is in the application of smart contracts to the things we buy.
Smart contracts are the virtual paperwork behind one of a kind items, and normal people buy one of a kind items all of the time. Your house is a great example. It has its own address, features, amenities, problems, and good or bad, it’s unlike any other house in the world. The same is true of your car.
The first way smart contracts can help everyday folks is by simplifying the buying process. All contracts can be signed securely on the blockchain network, and ownership can be easily transferred digitally. Again, like early fintech, making financial transactions more convenient.
The more revolutionary way smart contracts can be used in the future is by, you guessed it, democratizing the ownership of expensive assets. For example, let’s say that a developer wants to build a 300 unit apartment building in Miami. Traditionally, they could get some wealthy investors to give them money for the project, and would have their lawyers review contracts with their investor’s lawyers until they came to an agreement.
With smart contracts, these agreements can be drawn up digitally, and once all conditions are met, ownership can be transferred. That means fewer attorneys involved, which opens the door for projects worth tens of millions or more to have hundreds or thousands of smaller investors instead of only a few larger ones.
Past the conceivable concepts of how smart contracts can be applied are all sorts of other ideas that seem completely out of this world. Will college students start selling their career in tokens to potential employers? Will hospitals start selling tokens to the public that offer varying levels of services? It’s impossible to understand or conceive of all of the ways blockchain technology and smart contracts will affect our future going forward, but I predict the innovations will have two features. They’ll create convenience, and promote democratization.