It is obvious, technology is a game-changer for financial services, from payment systems to trading platforms. FinTechs primarily work by focussing on one specific offering by traditional financial service companies and create new markets for this specific service.
However, only 12,2% of FinTechs are female-founded. FinTech solutions are being largely designed by men, for men. FinTech founders overlook that women have different needs, approaches, or expectations when using financial services.
What exactly is FinTech
FinTech is used to describe new tech that is designed to automate the delivery and use of financial services. FinTech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives with specialized software and algorithms. FinTech can be used on computers and smartphones.
The term’s origin can be traced to the early 1990s. Originally FinTech was referred to as the computer technology applied to the back office of banks or trading firms. Today it is a broad variety of technological interventions for personal and commercial finance. However, the sector only attracted the focus of attention of regulators, consumers, and investors in 2014
FinTech now describes a variety of financial activities, such as money transfers, depositing a check with your smartphone, bypassing a bank branch to apply for credit, raising money for a business startup, double-entry bookkeeping, or managing your investments, generally without the assistance of a person.
Since the internet and the mobile internet/smartphone revolution, financial technology has grown explosively. One-third of consumers utilize at least two or more fintech services and those consumers are also increasingly aware of fintech as a part of their daily lives.
North America and Asia produce most of the fintech startups. Overall global fintech funding across M&A, PE, and VC deals soared to a new high in Q1 in 2021, according to KPMG’s Pulse of Fintech, a bi-annual report on fintech investment trends. Cash reserves, increasing diversification in hubs and subsectors, and strong activity across the world contributed to the record start to 2021, with funding increasing US$98 billion in Q1 of 2021.
The Evolution
The interlinkage of finance and technology has a long history and has evolved over three distinct time periods. FinTech is revolutionizing financial services, from payment systems to trading platforms. FinTechs primarily work by focussing on one specific offering by traditional financial service companies and creating new markets for this specific service.
Fintech 1.0 (1866 – 1967)
1866-1933: First age of financial globalization – first transatlantic cable (1866), Fedwire (1918)
1945-1967: Early post-war period – Diner’s Club (1950), telex (1966)
Fintech 2.0 ( 1967-1990)
- 1967: First ATM (Barclays), handheld calculator (Texas Instruments)
- 1968, 1970: BACS, CHIPS
- 1971: NASDAQ
- 1973: SWIFT
- 1981: Bloomberg
- 1983: Mobile phone
- 1987: Program trading
- 1981/2018: Online banking is introduced by 2018 online banking is widespred
Fintech 3.0 (2000-2010)
- 2008: Wealthfront provides automated investment services
- 2009: BitCoin launch.
- 2009: Square is created, mobile payments solutions
- 2009: Kickstarter a crowdfunding platform is founded
- 2011: Transferwise offers people to people direkt money transfers
“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his door-step; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble.”
John Maynard Keynes (1920)
Initially, the term applied to the technology employed at the back-end systems of established financial institutions. With the start of the 21st century, however, there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition. FinTech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management just to name a few.
FinTech also includes the development and use of crypto-currencies such as bitcoin. The big money, however, still lies in the traditional global banking industry and its multi-trillion-dollar market capitalization.
The Purpose
FinTech start-ups seek to disrupt the traditional finance industry by expanding financial inclusion and use technology to cut down on operational costs. They are designed to challenge, and eventually eliminate traditional financial services providers by being faster, more serving, and addressing underserved segments and eventually be champions in their niche
Financial Inclusion
FinTech can be used anywhere, by anyone after a short learning period and so becomes accessible to people who may never have taken advantage of financial services before. Continents like Africa are particularly benefiting from FinTech, as providers like M-Pesa and Tala revolutionize how people manage their money. Through access to basic financial services such as mobile money and e-wallets. FinTech solutions are helping lift people out of poverty and create a more financially inclusive world. M-Pesa has already helped lift an impressive 194,000 households, or 2% of Kenyan households out of poverty.
Cost-efficient
FinTech companies can deliver the same solution for a lower price compared to traditional financial institutions. The specialized technology used automates tasks, so FinTechs save money on employing people to do the work. They do not need physical branches so, they save money there too. Overall, fintech companies usually have relatively low overhead costs, which allows them to pass the savings on to their users.
Financial Education
Whether it’s personal finances or investments, FinTech helps to simplify how we manage our money. Revolutionary startups claim to promote financial education and literacy. Which they should do anyway before someone starts trading as any improvement in people’s financial literacy would help more individuals understand the value of budgeting and the importance of investing for the future. A recent survey found out sadly none of the companies tested provide a satisfactory level of financial education.
Increased security
Fintech companies ensure that every transaction carried out on their platform is protected, which includes all customer data and personal information. In fact, many FinTechs have introduced revolutionary features which are protecting users more than ever. From instant spending notifications to location-based security.
Empowering small businesses
Large businesses used to have the upper hand when it came to using the latest technological and financial tools. Fast forward to today, and this is no longer the case. Now even a solopreneur can use some of the tools that the big boys use, whether it’s processing payments through Square and Stripe or efficiently managing your accounting through Xero or QuickBooks. Innovative fintech products enable small businesses to expand their services further and operate at higher efficiency and scale.
What they do
Fintech now describes a variety of financial activities, such as money transfers, depositing a check with your smartphone, bypassing a bank branch to apply for credit, raising money for a business startup, or managing your investments, generally without the assistance of a person.
Lending
Fintech companies in the lending industry simplified the way by which people borrow money. In the past, people turned to banks or credit brokers to obtain loans. Today, certain fintech companies specialize in consumer loans. all it takes is to go online and apply. And because these organizations’ processes and systems are automated, approval happens quickly.
FinTechs for lending use advanced software to assess borrowers’ creditworthiness. They have automated the underwriting process, allowing them to serve more borrowers than traditional banks and lending institutions.
Payments
FinTech companies specializing in payments let people send money to others without passing through banks. As such, they no longer need to pay exorbitant bank fees for simple peer-to-peer transfers. They typically use technologies like blockchain.
International Money Transfers
People used to pay a lot (as much as 8%) for internal money transfers. Worse, traditional transfers are slow. FinTech companies today, however, offer faster and less expensive international money transfers.
Personal Finance
Traditionally, people need to talk to financial advisors in banks to get personal finance advice. To craft their budgets, they need to use spreadsheets or an envelope system.
Today, many commercially available apps can offer advice and help with budgeting.
Equity Financing
FinTech companies in this sector are designed for business owners to raise money. Some of them connect accredited investors with vetted startups. Others use crowdfunding models and allow anyone to invest in new businesses. In sum, they simplify the business fundraising process.
Consumer Banking
In the consumer banking space, fintech companies provide consumers with better options than banks, which usually charge high fees. People who can’t get approved for credit cards or don’t want one can get debit cards instead. Insurance
There are FinTech companies that serve the insurance or real estate markets.
Speed Read
FinTech is used to describe new tech that is designed to automate the delivery and use of financial services.
Originally FinTech was referred to as the computer technology applied to the back office of banks or trading firms. Today it is a broad variety of technological interventions for personal and commercial finance.
One-third of consumers utilize at least two or more fintech services and those consumers are also increasingly aware of fintech as a part of their daily lives.
FinTech describes a variety of financial activities, such as money transfers, depositing a check with your smartphone, bypassing a bank branch to apply for credit, raising money for a business startup, double-entry bookkeeping, or managing your investments
They are designed to challenge and eventually eliminate traditional financial services providers by being faster, by expanding financial inclusion, serving and addressing underserved segments, and eventually be champions in their niche
A trading platform is software that enables the process of buying or selling financial products, they are usually tailored to specific markets such as stocks, currencies, or futures markets.
The platform needs to be checked in detail before giving them permission to execute trades and manage an account.
Without substantial knowledge about financial markets, these platforms are used the wrong way. So despite being knowledgeable about how to use the platform, the user does not know how to get the result you want in the market.
A robo-advisor uses a consumer-friendly version of the type of software that professional financial advisors have been using for many years. An algorithm helps to identify stocks that meet an investor’s stated requirements, such as risk tolerance and investment timeline
A seven-figure portfolio with complex tax and estate planning should probably not be assigned to the service of a robo-advisor, a traditional financial advisor might be a wiser solution.
FinTech has a gender diversity problem. In fact, it has three separate – but connected – problems with gender diversity
It starts to look like an industry founded for men, run by men, making products for men, FinTech brings together two of the least gender-diverse industries going.
FinTech has the exciting opportunity to close the gender investing gap – with female wealth on an upward trajectory this is a prize worth chasing
Introducing, trading platforms
A trading platform is a software that enables the process of buying or selling financial products, similar to other intermediaries like banks, the stock exchange, broker, or insurance companies and pension funds. They offer a system for buying and selling shares, the aim is to enable the use of money to generate additional income from it.
Trading platforms are usually tailored to specific markets such as stocks, currencies, or futures markets. There are two types of trading platforms prop platforms and commercial platforms. The first is being developed by large brokerage firms to suit their specific needs. The latter is for day traders and non-professional investors like you and me.
Commercial platforms are easy to use and are combined with other features, such as real-time quotes, charting tools, news feeds, and even premium research.
Choosing the right platform is crucial. Criteria are fees and features available, whether the platform excludes certain intermediaries (brokers) who are these intermediaries (broker) and most importantly what is the platforms and the broker’s reputation? Check the platform in detail, before you allow them to execute trades and manage your accounts.
Does a platform provide full and clear information about how they operate, what are the risks, are they explained in detail and? What is the platform´s business model? Investors need to find out who´s client they actually are. Investors’ data could be just as well be sold to a third party and any money from investors will actually be managed there.
Pros
Lower fees
One of the most obvious advantages of online trading is the reduction in transaction costs and high fees associated with traditional brick-and-mortar brokerage firms.
More control and flexibility
Time is often of the essence when you trade stocks, so the speed of using online trading portals is a benefit to many investors. With online trading, you can execute a trade almost immediately. Most traditional brokers require appointments, either online, over the phone or in person, just to initiate a trade.
No brokerage bias
By taking trading into your own hands, you can eliminate a broker’s bias that occurs for example when a broker gives financial advice that benefits the broker.
Monitoring investments in real-time
Many online trading sites offer stock quotes and trade information that make it easy for people to see how their investments are doing in real-time.
CONS
Too much & Too fast
Because online trading is made too easy, with every push of a button there is a risk of making poor investment choices or overinvesting.
It is important to understanding individual stocks to have ample knowledge of market developments before buying. Investors have to set up safeguards in fast-paced markets. Placing a limit order on your account is one way to control what you buy and how much of it.
No personal relationships with brokers
From getting help on how to create an investment strategy to understanding how the results of feedback mechanisms affect the market – online traders are left to their own devices. For some, this kind of autonomy can be unsettling and dangerous.
Experts often stress the importance of research, particularly for new traders. You need to learn as much as you can about the companies in which you invest.
Addictive nature
Online traders can experience a certain high when trading that is similar to what people experience when gambling, according to a recent study on excessive trading published in the journal Addictive Behaviors. The study noted that some investors choose short-term trading strategies that involve investing in risky stocks offering the potential for large gains but also significant losses. “The structure itself of the two activities (gambling and trading) is very close,” the study concluded.
Too easy
The main risk comes from the fact that online trading may seem deceptively easy. The lower costs and higher speeds of online trading can lead otherwise conservative investors to trade too frequently. That can lead to selling the best picks when they are just getting started.
Nebulous
Many of these platforms advertise as “free to use” and “commission-free,” but that might only apply to specific accounts or situations. Typically, commissions that apply in each case are described in disclaimers, often in the fine print.
Advertising “quick earns” and wealth being “only a click away” may encourage people to invest more than they otherwise would.
Financial education
There is a whole discipline of economics and a lot of research embedded in the decision-making process for investing and trading in financial markets. But the discipline and research often take a backseat within online trading, which adds another layer of risk.
Gamification
A recent study by the University of Miami School of Law states “a sharp increase” in clients who suffered losses on digital platforms using gamification, predictive data analytics, and behavioral prompts to promote high-risk strategies. It needs to be emphasized trading is no game but has consequences on peoples financial future
Too much short term trading is short term profitable but because more low- quality stock is bought that trades thinly – longterm gains are difficult. Better are high quality stocks from well established companies, holding stock is better for a portfolios overall performance.
Over- Optimization
Some FinTechs offer backtesting techniques that create systems that look great on paper and perform terribly in a live market. Over-optimization refers to excessive curve-fitting that produces a trading plan unreliable in live trading.
Margin and Leverage
Any type of credit offered by a platform means that investors are borrowing money from the broker.Trade with “someone else’s money,” at the click of a button, makes it easier to take more risks. This can instantly increase your capital and potentially help you gain greater profit. But this kind of trading can also lead to high-stakes risk.
Even though you typically need to have several thousand dollars on your account to be eligible for a margin account, once you reach that point, the possibility of multiplying your initial capital 50, 100, or even 200 times may feel tempting.
Trading as social activity
Online trading platforms have turned trading into a social activity. Millions of users who share their experience or give (unsolicited) advice in Reddit subgroups, Facebook groups, and other online communities can create unfunded hypes as quickly as a crash. Everyone has an opinion, and too few have real knowledge, deciding what is quality information and what isn’t, can be stressful.
As a trade platform user one needs to be confident about financial decision-making. Financial literacy, plenty of research prior to making an investment is crucial to avoid the risks of online trading. An online trader, should not feel anxious or intimidated. Instead, empowered by knowing the ins and outs of the financial markets, having the understanding of the system of online trading, and having the capabilities of personal money management
What is a Robo-Advisor
People who trade online have had access to robo-advisors since 2010. More than 100 platforms, including all of the big names in online investing, now offer robo-advisors. But do not be fooled it is not a fancy hands-off gadget because investing is never supposed to be hands-off.
In fact, a robo-advisor uses a consumer-friendly version of the type of software that professional financial advisors have been using for many years. An algorithm helps to identify stocks that meet an investor’s stated requirements, such as risk tolerance and investment timeline. It then automatically monitors portfolio performance and makes adjustments to keep it on track.
Online trading since the 1990s, operates this type of hybrid robo-advisor, though it avoids the robo-advisor tag.
The user who signs up takes a survey indicating a timeline for investing and tolerance for risk. Those are the two main questions that human counsellors ask, too. Based on their answers, users get a recommended portfolio made up of exchange-traded funds (ETFs), each of which was researched, analyzed, and picked by humans behind the scenes.
Then the robo-advisor takes over from day to day, monitoring performance and making allocation adjustments to keep it on track with the user’s timeline. There is a support team on call.
More than half of the investors surveyed preferred a human touch over absolute rock bottom price points. This preference was most pronounced among Millennial and Gen X investors.
Are robo-advisors for everyone?
This depends very much on the amount of advice a user needs, and the expertise needed to manage a portfolio. A seven-figure portfolio with complex tax and estate planning should probably not be assigned to the service of a robo-advisor, a traditional financial advisor might be a wiser solution.
For all others with more modest portfolios or who like to invest parts of their portfolio by themselves and need some asset allocation advice and perhaps a bit of basic financial planning help, an online advisor might just fit the bill. Robo-advisors, for the most part, construct portfolios that follow passive strategies like indexing. They are relatively straightforward investment strategies that use ETFs to optimize a portfolio’s risk versus expected return.
Some robo-advisors only allow broad-based index investing. Others are increasingly adding socially responsible portfolios for those clients who are conscious of those matters. yet only a few allow let users to customize their portfolios.
Online advisors are accessible 24/7, which might appeal to a wide range of clients. With everyone’s busy schedules, this level of accessibility might be the impetus for some to finally get the financial help they need.
Many robo-advisors are fully automated and only have limited human involvement. While some do have human advisors to answer customer questions, however, these advisors are not actually working on your portfolios or investment choices—that is done by the algorithms. Instead, these advisors are more like a coach or teacher or therapist with experience in finance.
Some robo- advisors are free others charge a small fee. It’s incumbent upon anyone looking at using an online advisor to do their homework first and understand how investment recommendations are generated. Because not all advice given is free.
Robo-advisors utilize an algorithm of one sort or another in making their investment recommendations. One does not need to be a mathematician or investment expert, yet, at the very least, questions need to be asked and the investment methodology checked – ultimately it has to make sense to the user.
The majority of robo-advisors follow investment strategies based on modern portfolio theory (MPT) in some form or another. MPT is a method of optimizing indexed portfolios by determining the best mix of asset class weights that generates the highest expected return for a particular amount of risk. Generally, the investment strategies are be found by searching their website or from FINRA filings.
To attract a younger clientele some variation of an online advisor will be offered by more traditional financial advisors. It’s becoming more common for traditional financial planning practices to “white label” robo-advisors’ platforms for their clients. This takes out of their hands the cumbersome task of choosing assets, so that the financial advisor may spend more time with their clients addressing individual tax, estate, and financial planning issues.
Rob-advisors, are successful for long-term investing strategies, allow investors to choose portfolios based on a set of personalized financial goals, and the portfolios are rebalanced by investment professionals via the robo-advisor. When markets get volatile, emotions may run high.
Robo-advisors cost less than an in-person advisor. They are typically low-fee and their services are often marketed as an affordable way to invest in the market. Most robo-advisors charge. 25% of the total assets under management. Robo-advisors are most often connected to reputable financial institutions. Robo-advisor makes disciplined decisions that are not emotionally driven, which is beneficial to long-term investments and in volatile market situations when emotions run high.
Pros
No emotions
The robo-advisor’s overriding assertion is that each company’s proprietary algorithm claims to take the emotion out of investing and will grant the investor better returns for a lower cost than traditional financial advisors
Low cost
On the plus side, robo-advisors are very low-cost and often have no minimum balance requirements. They also tend to follow optimized indexed strategies that are best suited for most investors.
CONS
Few options
On the downside, robo-advisors do not offer many options for investor flexibility. Most robo- advisors do not allow for call options on an existing portfolio or to buy individual stocks. There are sound investment strategies that go beyond an investing algorithm, that will not be covered by the robo-advisors algorithm. Sophisticated and newbie investors may want a broader investment portfolio with a wider range of asset classes than the typical robo-advisor offers.
Lack of human interaction
Users are more than just an investment portfolio. With a variety of goals, both for the near and long-term future. Some robo-advisors allow you to set and edit your goals using their financial planning software. However, other money-related issues and concerns will remain unsolved.
For someone who wants a relationship with a financial advisor, a robo-advisors should not be the choice. The robos don’t have an office where a client walks in and talks directly to an advisor
The fee
It is true that most robo-advisors have low price schedules, but not all. It’s not true that all financial advisors are expensive. There are financial advisors who charge approximately 1% of assets under management (AUM) for their services. A fee, comparable to those of several robo-advisors.
The Female Lens
The vision of leveraging technology to broaden access to financial services is certainly admirable but is it happening in practice?
FinTech has a gender diversity problem. In fact, it has three separate – but connected – problems with gender diversity.
- There’s the basic, commonly-reported problem that too few women work in FinTech companies.
- Then there’s the related problem that too few FinTech companies have female founders, or even female leaders.
- But finally, there’s the problem that females are also under-represented in the FinTech user-base. Even so data is difficult to obtain it is estimated that obly 5% of trading platforms users are women.
It starts to look like an industry founded for men, run by men, making products for men. No one intended for this outcome and it is no one person’s responsibility. But here we are, and it was, arguably, predictable. FinTech brings together two of the least gender-diverse industries going.
As a consequence women continue not investing to the same extent as men, having considerably less in retirement and parking more in cash. Due to the low-interest-rate policies in many economies around the world – this is to the disadvantage for women´s financial future. The gender investing gap results in a significant financial shortfall for women in the longer term. Women are missing out on actively using their money to create earnings.
Fintechs should use their advantages and connect and communicate with women in a different way from the past. To get there it is imperative that to employ a female lens when designing tech-based investment solutions for female clients. We need to customize investment products and services that fit best for what women are looking for today.
69% of women surveyed feel a sense of urgency to invest responsibly, they are highly motivated to think about impact first and then about financial returns in their investment decisions. This presents the industry with an important opportunity to develop tailored products and services that address this emerging trend. So, pinkwashing is not the solution.
One good thing to come out of the pandemic is that many women are more focused on their financial futures. A survey from UBS found that 63% of women felt that Covid has affected how they think about money, and they’re more likely to discuss issues such as financial reviews and investing with their spouses and children.
This requires us to listen more closely to women’s investment needs and preferences, rather than using a male lens as default, and reflect this in the tech platforms that we develop. A good start would be to have more women in the FinTech start-up scene and for existing companies to employ more women – only 30% or the workforce in FinTechs are women, and only 17% are in a senior position.
FinTech has the exciting opportunity to close the gender investing gap – with female wealth on an upward trajectory this is a prize worth chasing.
