What is FinTech and What Does it Mean for Small Businesses?

Business.com / Finances / Last Modified: February 22, 2017

FinTech, or Financial Technology, is the newest creation of Silicon Valley experiencing $12 billion worth of investments in 2015.

FinTech, or Financial Technology, is the newest creation of Silicon Valley.

In 2014, Goldman Sachs  claimed the FinTech market cap to be over $4.7 trillion with $12 billion worth in investments that year alone.

Now in 2015, there have been $12 billion going towards these companies in the first six months alone. Even though many established financial institutions are transitioning to a more technologically savvy system, they don’t come close to being labeled FinTech.

What is FinTech?

FinTech’s definition by the Wharton School of Business is “an economic industry composed of companies that use technology to make financial systems more efficient.” The key to this term is that most of these companies are technology companies at the core.

This is how they differ from the traditional financial institutions. The only problem with this definition is its broad wording. The result is a sector with tens of subcategories ranging from payments to data collection to lending to security.

Fundraising

The subgroup of FinTech that possibly has the largest impact on small businesses is the emerging fundraising platforms. Most notably, crowdfunding sources like Kickstarter have grown in popularity and are now seen as a viable route for initial business funds.

kickstarter

Image via Kickstarter

Two other types of fundraising, small business loans and P2P lending, have also been revolutionized through FinTech startups. For small business loans, startups like OnDeck allow for loan transactions to be completed overnight, without the help of a bank.

For small businesses, these loans are vital to their survival. Many times, the loans come just in time to stop the company from going out of business. Ensuring fast and secure transactions can allow owners to focus more on the operations of the company than the bank’s filings.

Related Article: Does Crowdfunding for Startups Actually Work?

Accessibility of Transactions

Since the dawn of the credit card, transactions have been dominated by the use of technology. Now with the introduction of Apple Pay and other mobile payment systems, the electronic transaction is going through a type of transformation.

The three main changes are

  1. The introduction to higher levels of cybersecurity,
  2. The accessibility of electronic payments, and
  3. Data collection for businesses.

Square Reader; FinTech example

Image via Square

One of the most notable FinTech companies in the world is Square. Square created a device that hooks up to any apple product and allows you to swipe your customer’s credit card. This means that retailers that may not be able to afford a traditional card reader or work in a unique space have the means to use electronic payments for their goods.

Cybersecurity and Data Collection

Cybersecurity is one of the biggest issues in the world. It seems each day there is a new hack of a major corporation and millions of people are affected. That’s why many of these new FinTech companies are focusing on keeping their customer’s information secure within their heavily guarded servers.

cybersecurity

New data collection strategies for small businesses have also raised concerns for cybersecurity. A couple companies came out with platforms for businesses to track their expenses and budgets through their mobile devices.

These types of companies will revolutionize how small businesses manage finances. With systems that can easily show where your money is going, small business owners will spend less time on finances and make decisions regarding purchases much more efficiently.

Related Article: Data Breaches Hurt 43% of Businesses in 2014: Do You Have a Cyber Security Plan?

Effect on Traditional Financial Institutions

Although the young founders of FinTech believe they can, many experts agree that the financial technology industry will not replace traditional banks anytime soon. But that doesn’t mean they won’t zap banks’ margin of profitability. In general, banks have a loss leader pricing strategy.

This means that they run a small loss on accounts and a large profit on loans. So what happens when a bunch of fundraising companies come along? The banks’ profits take a dive. This will probably result in an increase in account prices which could become their primary source of profit in the future.

There is no doubt that there was a need for the FinTech startups. The frustration with low cybersecurity and slow transactions is at the forefront of most financial debates. With their technological foundation, these companies specialize in catering to the consumer’s needs.

As a small business, the FinTech industry will revolutionize how we loan and buy products, as well as how we track our business’s budgets and accounts. FinTech is creating a culture of transparency and efficiency that will only help small business owners.

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