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What is Fintech? And Should You Get Involved?

If you’re not familiar with the word, “Fintech,” you need to be. Given the impact it’s having on the financial industry (and on small businesses, in particular), it is quickly becoming the way the modern user has come to understand money.

The word is a mashup of two terms: “financial” and “technology.” It refers to financial services powered by technology and the Internet and centered on customer relations, creating a bold, new world beyond traditional banking. Experts call it nothing less than “revolutionary,” for its potential for positive change, especially in lending practices.

Contributing factors in the rise of fintech

The financial crisis of 2007 caused many Americans to lose faith in the banking system. Indeed, long after the Great Recession had shown signs of recovery, banks had scaled back on granting small business and personal loans. As homes foreclosed, consumers sought to take charge of their finances

Enter technology.

Just as it has changed the industries of publishing and music, the internet provided faster service at a low cost to those seeking financial assistance. From there, the industry exploded with innovative ways to become more money savvy. Now the fintech landscape has a plethora of sites and apps that promote crowdfunding (like Kickstarter), digital wallets (like Apple Pay), POS services (Square), personal finance (Mint) and business lending (Quote2Fund).

The difference

Banks make loans by borrowing heavily and/or using deposits. Their application process is often arduous and lengthy. Fintech companies, on the other hand, don’t take in deposits. Instead, they simply use the power of the Internet to match borrowers with savers – i.e., investors – directly. The software functions as an efficient “go-between,” using technology to automate the loan-approval process by analyzing thousands of data points to assess risk and provide personalized quotes, often in a matter of minutes

In effect, the digital financial platform enables small business owners to get the funds they need quickly and more easily. Unlike banks, they don’t have to contend with operating brick-and-mortar branch offices or legacy IT systems, which means their operating costs are much lower than a bank’s. And because of that, they’re typically able to offer better deals to borrowers.

Bye-bye banks?

Since 2008, global investment in fintech has tripled and is forecast to reach up to $8 billion by 2018. But even with such incredible growth, it’s not likely that it will replace traditional banking any time soon. With deep pockets, big data, sales force and marketing infrastructure, and a long history, banks will continue to serve as the backbone of the financial industry for some time to come. But it’s probably safe to say that consumers will be the ultimate beneficiaries of the new world of lending that financial technology has pioneered.