In Simple Terms, What is FinTech?

FinTech is a term that’s thrown around a lot, but surprisingly few people understand it, so I’m going to define the term and categorize the industry in a simple and easy to understand way.

Simply put, Finance + Technology = FinTech.

While this sounds reasonable, FinTech is a huge field, and covers a lot of different startups. Broadly, FinTech companies can be divided into 5 categories, with each category solving a different problem.
1. Lending
2. Payments
3. Wealth Management and Personal Finance
4. Cryptocurrency
5. Banking

Broadly speaking, for each problem category, FinTech companies can improve a product or service in one of two ways:
A. Make it cheaper and easier to use.
B. Make it available to more people.

As a disclaimer, this document is very US-centric – there’s also a lot of innovation going on in Europe and Asia, but I’m focusing mainly on the US.

1. Lending: how can we allow more people to borrow money at a lower interest rate?

Background: Traditionally, people deposit money with their banks, earning very low (< 1%) interest rates.  Meanwhile, the banks lend out the money through business loans, mortgages, and personal loans, charging high interest rates (>5%) interest rates.  Can this be done better?

Peer to Peer Lending: If I want to borrow money, and a somebody else wants to invest money, can he lend directly to me?
Lending Club and Prosper make personal loans.
Funding Circle makes business loans.

Crowd-funding: if I want to launch a big project, can I raise a little bit of money from a lot of people?
KickstarterGoFundMe, and Indiegogo raise money for projects.
CircleUp does crowdfunding for equity.
Tilt helps groups of friends collect money for events.

Payday loan alternatives: There are a lot of people without access to bank loans, who must use payday loans charging >400% interest rates.  Can we offer them anything better?
LendUp provides cheaper loans to people with bad credit scores.

Microfinance: People in developing countries need loans, often of <$10.  How can make these loans?
Kiva makes small loans to borrowers in developing countries.
Givology makes micro-donations for education in developing countries.

Mortgage lending and re-financing: Can we improve the buying process and help people re-finance existing loans?
SoFiCommonBond, and Earnest refinance student loans.


2. Payments: How can I more effectively transfer my money to somebody else?

Background: Traditionally, we’ve relied on cash, banks, checks, and credit cards to transfer money.  These things are often slow, hard to use, or charge high fees.  Can things be done cheaper and faster?

Remittances and Currency Exchange: If I’m working abroad, how can I send money home to my family?
TransferWise lowers the cost of exchanging money and sending money internationally.

Institutional payments: what are faster ways of transferring money between banks?
PayPal does money transfer as well as payments.
– Most banks currently use ACH and SWIFT, which many companies want to improve.

Consumer payments: how can I send money to my friend, to pay my share of dinner or rent?
Venmo helps you split bills and pay friends.
Mpesa is a Kenyan company that does mobile payments and banking.

Purchasing: if I want to buy something, how can I do so, either in-person or online?
Visa issues credit cards.
Klarna, Adyen, Stripe, and Braintree help e-commerce sites process payments.
Affirm allows people to make installment purchases.
Square lets offline sellers easily accept credit card payments.
Apple Pay, Google Wallet, and Samsung Pay are some major players in the mobile payments world.


3. Wealth Management and Personal Finance: How can I better invest or manage my money?

Background: Finance and managing money can be very complicated, and financially illiterate people often make bad investing or budgeting decisions.  How can we help people make better financial decisions?

Budgeting and saving: how can we help people save money, either helping them become financially literate or helping them automatically save money?
Mint helps individuals track expenses and budgets, pulling data from banks.
LearnVest helps people with financial planning and budgeting.
Credit Karma helps people track their credit scores.
Acorns helps people automatically save money.
– Nerdwallet provides a selection of tools for understanding personal finance.

Finance for small and medium-sized businesses: can we design tools for small businesses to help them manage their finances and help their employees?
Xero helps small businesses do accounting.
Gusto helps small businesses with payroll and benefits.

Automated wealth management [Robo-advisers]: can we design an automated system to invest money for people, in a way that is best for the investors?
WealthfrontBettermentFutureAdvisor, and PersonalCapital all help people save better by investing their money in low-cost ETFs.


4. Cryptocurrency: Instead of relying on the government-controlled Dollar, Euro, or Yen, can we create a new currency without a central bank?

Background: All major currencies – the Dollar, the Euro, the Yen, etc are under the control of a government and central bank, which can issue money and regulate usage.  Instead of using of these government-controlled currencies, can we design a currency that is outside of government control, and make it useful?

Bitcoin is the original cryptocurrency, inspiring many exchanges such as coinbase
The Blockchain is a distributed ledger that is useful for fighting fraud.
Etherium is an ambitious popular alternative crytocurrency that wants to completely change the way business is done on the internet, through ‘smart contracts’.


5. Banking: Can we redesign the banking experience for the next generation?

Background: Traditional brick and mortar banks were established over the last couple decades and centuries.  With Generation X and Millennials used to different technologies, can banks and other financial services be re-designed for them?

Banking and financial services APIs: can we provide banking-related services, such as stock data and trading services?
Yodlee / Envestnet and Plaid provide provides data from banks to apps.
Xignite provides financial market data, such as stock prices.

Online-only banks:
OnDeck and Kabbage make business loans.
Avant makes personal loans.

New trading services:
Motif allows users to create their own ETFs.
Robinhood allows people to trade stocks with no commission.


In conclusion, FinTech is a very large and daunting-looking field, but it can be divided into five simple categories and simply explained: lending, payments, wealth management and personal finance, cryptocurrencies, and banking.

This is not an exhaustive list of FinTech companies, nor is it intended to be.  Instead, it is a general guide to the FinTech industry, with major players and the problems that they’re solving simply explained.


As an experiment, I’m starting to post to Medium and LinkedIn.

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