Fintech is short for financial technology, referring to the integration of technology with the various financial services consumers demand today. Fintech is bringing about change by making it easier for under- and un-banked populations to obtain financial services. Access is democratized at a level that simply doesn’t exist today with traditional banking methods. Technological innovations are now available to improve your financial transactions with new efficiencies, easy accessibility, offering far more convenience.
Fintech Services Offered Today
- Personal finance: Applications such as YNAB (“you need a budget”) help individuals manage their finances, track their spending, and set up a new budget.
- Digital payments: PayPal, Apple Pay, and Venmo provide easy, fast, and secure online (and mobile) payments.
- Insurtech: Transforming the insurance industry with their technology-driven solutions are companies such as Lemonade and Oscar.
- Lending: Online lending platforms, such as LendingClub and Upstart, use algorithms to measure consumer creditworthiness to provide loans.
- Blockchain (and cryptocurrency): Blockchain technology enables decentralized financial transactions.
- Robo-advisers: Automated platforms such as Betterment or Wealthfront provide investment advice and services for managing your investment portfolio.
- Neobanks: Digital-only banks such as Chime and SoFi offer banking services without an address or place to go (no so-called “brick-and-mortar” address).
Fintech Strengths
Fintech provides access to financial services to underserved and “unbanked” people. It offers faster, more convenient ways for those with basic digital skills to manage their own finances. In addition, it can reduce the fees and costs associated with legacy, traditional financial services.Innovative new online finance apps, driven by new business models, have resulted in financial products changing the legacy financial landscape in a truly revolutionary way. It is reshaping finance by leveraging technology to enhance service delivery and delight its users. With Fintech still evolving, a great many people haven’t yet seriously investigated switching to it or even trying it.
Fintech Weaknesses
Fintech, however, comes with its own set of risks, so let’s look at some of them.- Cybersecurity: Because they have in their possession a lot of sensitive financial data, they are prime targets for cyberattacks. While cybersecurity measures have been built in for the most part, they must continue to evolve and be continuously upgraded into more robust and resilient hacker-resistant databases that will protect against data breaches and fraud.
- Operational weaknesses: Fintech companies face operational risks due to the complexities inherent in new technology. Since even newer and changing technology is rapidly adopted to increase the speed of processing and efficiency, the efforts can result in errors, system failures, and other issues.
- Regulatory compliance: From the Dodd-Frank Act to a bevy of a continuous number of banking regulations, fintech must keep up with the latest as fast as they become required lest they are assessed legal penalties and suffer reputational damage.
- Market risks: Market-risk exposure is ever-present, as interest rates, exchange rates, and other financial variables are changing and oftentimes volatile.
- Data privacy: Personal data must be treated as private and unlikely to be misused. This goes back to the cybersecurity point and the need to fend off hackers.
- Fraud: Given fast transaction speeds, criminals can engage in money laundering and fraud, creating opportunities to essentially and virtually “smash and grab.”
The Synapse Story
Ten years ago, venture capital company Andreessen Horowitz formed a new platform called Synapse to allow fintech companies (e.g., Yotta, Juno) to offer banking services without the requirement or need for banking licenses. (You probably already sense trouble coming.)Synapse shut down and filed for bankruptcy in April 2024, in the process, freezing the funds held at their partner banks. This left customers unable to access $265 million. Six months later, the customers still can’t get their money. Along with that disaster, $90 million appears to have simply gone missing.
At this stage, the Federal Deposit Insurance Corporation (FDIC) typically steps in to take control of the failed financial institution, insuring customers up to $250,000 for each account holder.
But these platforms were not backed by the FDIC. Instead, they had partnered with FDIC-insured banks to hold company customers money in a state termed FBO (“for benefit of”). This was meant to allow the fintechs to manage funds even as the money was stored elsewhere. The reason was to avoid the costs and the paperwork required to form a new bank.
To make it all work, a middleman is needed for the bookkeeping transactions, but Synapse wasn’t maintaining accurate ledgers, so there is no way now to determine how funds should get distributed. The FDIC has proposed new rules around recordkeeping of the deposits to fix this weakness.
Summary
I recently moved a small amount from my legacy Citi checking account into a new SoFi account. SoFi is an American online personal finance company and an online bank. It offers financial products, including loans, refinancing, mortgages, credit cards, banking, and investing through its mobile apps and on your computer desktop. As I dabble and experiment in this new and exciting financial sector with its innovative new products, I will steadily move out of my old banking legacy system and into a brave, quick, simple, convenient, less-expensive world featuring more services and a better customer experience.
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
