Fintech is a very diverse industry that covers many areas. It should be noted that the number of such areas is steadily increasing, as more and more technologies are appearing in all aspects of life and business.
Key Categories of Fintech
Back in 2016, PwC analysts divided the fintech ecosystem into four categories:
- “A” includes large financial institutions with a good reputation, mainly large banks, such as Bank of America or JP Morgan;
- “B” is for large technology companies such as Apple, Facebook, or Google that are not part of the financial sector, but may be active in financial services;
- “C” – this category covers companies that provide the infrastructure or technologies for certain financial services, such as MasterCard or First Data;
- “D” or “Revolutionaries” are companies focused on innovative technologies or processes, for example, mobile payments, automated investing, retail banking, or insurance.
There is another subdivision of fintech companies into Categories A, B, C, and D, which derives from the first letters of the following expressions:
- Artificial intelligence;
- Cloud computing; and
- Big Data.
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Top 10 Innovative Fintech Business Models
However, this division into four categories does not provide a complete picture of the fintech industry. This market sector has a lot of directions, and over time there appears more and more of them. Here are just some of the most promising types of fintech existing today.
Alternative Credit Scoring
Many self-employed individuals who have a regular source of income cannot get a loan because they do not score enough points in the traditional scoring systems used by financial institutions. The reason is that banks and other similar organizations use outdated methods of assessing potential borrowers. Fintech credit scoring companies such as Nova Credit have developed a very different approach to assessing creditworthiness. With similar groups of borrowers, they prefer to look at alternative data points, such as social signals and percentile scores.
Over time, the use of these qualitative factors, combined with an intelligent self-learning algorithm can lead to better credit decisions. For example, if there is a way to calculate negative profiles based on pre-loan social media presence, lenders can avoid having to deal with troubled borrowers.
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Alternative Insurance Underwriting (Guarantee of Payment in Case of Losses)
In today’s world, two people of the same weight and height, both non-smokers and non-drinkers, will receive the same life insurance premium. However, one may lead an active lifestyle, go to the gym, and hike in the mountains, while the other may be a homebody and, consequently, have a high risk of dying from cardiovascular diseases due to their sedentary lifestyle. These premium miscalculations are due to averaging (called normalization in actuarial terms) because risk premiums do not currently account for factors that cannot be quantified.
Fintech companies such as Carpe Data have developed variable premium calculation engines that are making their calculations based on alternative data such as social cues, lifestyle, and medical history. Combined with intelligent and self-learning algorithms, these InsureTech companies can perform more accurate calculations that can be used to make more reasonable insurance decisions and adjust insurance terms.
Efficient data processing makes it possible to understand the needs of the client better. Fintech companies working to explore interconnected deals are creating free products like spending management apps to collect customer data. And then, having processed the information they receive through such apps, they get complete user profiles. For example, they will know how interested the users are in buying car insurance, investing in real estate, buying securities, etc.
The business model implemented by these types of fintech companies is based on commissions, such as reselling third-party financial products.
Peer-to-peer lending (P2P) is when a person borrows money from one or more other people. A similar idea is lending between individuals and companies (P2B) – that is, a business borrows money from one or more people. These lending models make it easier for investors to earn higher returns compared to the systems in the debt markets that only lend money to pre-approved and vetted borrowers.
Fintech companies (like Funding Circle) are building platforms that connect borrowers and lenders. Such legal entities usually generate income from fees for debt repayment.
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Generally, banks and other lenders are reluctant to take the time to review applications for small-amount loans because the standard procedures are generally the same for everyone, and the return on small loans is lower or non-existent. Fintech companies such as Affirm have been able to capture this market segment with their product, a one-click tool for impulse and online shopping.
Payment gateways are tools that provide the opportunity to pay for a product or service on a merchant’s website. There are countless payment options available today:
- Debit or credit cards;
- Digital wallets;
Usually, banks charge high fees for processing transactions made in these non-standard ways. However, some fintech companies have integrated all these payment methods into convenient online shopping apps. Typical examples of such companies are Stripe, Alipay, and iZettle.
Find out more about the latest changes in the EU regulations of the fintech sector.
This tool is a hybrid of a bank account and a payment gateway. Using a digital wallet, a user can exchange real money for virtual money, and then use it to pay for goods or services, or transfer it to another digital wallet or account. The advantages of digital wallets are low fees and high transaction speed. Some examples of such tools are Venmo, Square Cash, and Google Wallet.
There are some fintech companies on the market, like Robinhood, that allow investors to trade for free in exchange for their data. They pass this data on to high-frequency traders, who can then affect the price of certain assets. Even though investors may slightly overpay for the assets, they will still benefit because there will still be a positive difference between the amount of money that they save on trading fees and the small price increase.
This category of fintech companies is one of the most numerous ones. These platforms provide standard banking services remotely with no need for the client to visit a financial institution. This idea is becoming increasingly popular around the world. Naturally, with the development of this market sector, the client bases and turnovers of such neobanks as N26, Wise, and Revolut are increasing dramatically.
Similarly to digital banks, fintech companies operating in the insurance sector are transferring all the traditional services into the digital space. This way they become closer to their potential customers and reduce the cost of maintaining offline branches and staff. One of the representatives of this category is the company called Lemonade.
Not all categories of fintech companies are described in this article since there are a lot of them. However, we hope that the information above can help you realize how quickly financial technologies are penetrating all areas of life and business.
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