Fintech

Utilization of new technologies in the financial sector, IT collaboration with traditional banking, Fintech products and services

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Fintech (an abbreviation of “Financial technology”) is an independent branch of the finance industry, which uses computer technologies to improve financial services. More simply, it can be said that fintech is a certain form of automatization in finance - a replacement of manually performed tasks and services with faster and better processes that are controlled by computers. However, fintech also brings new financial services that never existed before. As a result, fintech is regarded as an innovative branch that is very interesting to financial institutions.

What specifically count as fintech services? For example:

• Applications and software (such as API - Application programming interface - instruments, internet banking, mobile banking services, etc.)
• Financial products (payment cards, contactless mobile payments, and more)
• Processes (such as straight-through processing - STP - speeding up financial transactions through reducing multiple rewriting of payment orders, blockchain technology, Regtech - automatization of upholding regulatory rules and various reporting forms, etc.)
• Business modeling (such as using historical data when measuring and managing risks, modeling portfolios, etc.)

Financial institutions and their shareholders are interested in maximizing profit - increasing their revenue and decreasing their costs. It is therefore evident that the most interesting parts of fintech for financial institutions are those that enable them to reach their clients and increase the sales of their services, such as smart applications and innovative products. The segments of fintech that save costs, such as through effective processes and appropriate business models, are also of interest.

The history of fintech

When did the era of fintech really begin? It is generally accepted that fintech is a modern branch, with a short history. Many only associate fintech with blockchain technology, cryptocurrencies or with services that use fast internet and modern computers. However, fintech has its roots in a farther past, for example the use of the telegraph or Telex system, the invention of the credit card and ATM, the creation of electronic stock markets and trading systems for financial markets, etc.

Clearly, current technical data transmission opportunities and access to fast internet, which have become an unavoidable part of modern financial services, now allow much wider use of fintech than was possible in the past.

After entry into the new millennium, finance experienced a real boom. Rapid development of financial derivatives and modern trading platforms allowed for the beginning of the first decade sophisticated products sales to a wider range of clients. However, a financial crisis broke out from 2007-2008, and clearly revealed systemic risks. It was shown that the evolution was too rapid. Though the financial crisis caused huge losses for financial institutions, the fintech industry was not affected by it. On the contrary, after the crisis, financial institutions tried to make their processes even more efficient, and used fintech to improve the creation and sales of their products.

After the financial crisis, there was also rapid growth in the regulatory demands placed on banks and financial institutions that were attempting to use fintech for simpler, more accurate, and more effective fulfillment of their regulatory requirements. This part of fintech is called regtech (an abbreviation of “regulatory technology”).

An important argument in favor of the evolution of fintech is also security - financial institutions have to digitize an innovate their outdated systems to be able to provide their clients with adequate data and information protection in the digital age.

Blockchain technology - recording data with the help of safe cryptography - became a milestone and significant impulse for the development of fintech. In 2008, an unknown author (or group of authors) under the pseudonym Satoshi Nakamoto invented the blockchain algorithm intended to create the Bitcoin cryptocurrency. Blockchain technology was used as a ledger, or record of all operations with the virtual currency. Blockchain records have the following characteristics:

• The list of records (“blocks”) grows continuously and creates a chain of records that is available to all users
• Individual records - blocks - are mutually connected. Each new record contains encrypted information about the previous record, as well as the date and time, and of course the information about the new transaction itself
• Individual blocks are secured with the help of a so-called cryptographic hash function. The better, or less decodable, it is, the safer the individual blocks and records are.

Other interesting implications arise from these characteristics of blockchain technology:

• The number of blocks is limited, because each block contains data about the previous block. The number of blocks in determined by the technology used (hash function). For this reason, even in the case of Bitcoins it is evident that their number will never exceed a certain limit.
• Blockchain is resistant to modifications of past records. This property significantly contributes to its security. Due to this, blockchain can be used not just for cryptocurrencies and financial services, but also for a multitude of other services such as land titles, and others.

• Blockchain is an open distributed ledger that allows for a permanent record of information that it is possible to re-verify. Therefore, blockchain helps decentralize some processes, or make the activities of institutions that act as a “record registrar” more effective. For example, these can be financial institutions (banks, depositories, stock-exchanges, insurance companies), as well as government institutions (e.g. various registries).

• The use of blockchain technology significantly increases the transparency of records and through this decreases system risk. 
• Though the transaction recording algorithm is very well protected through blockchain technology, individual ownership of cryptocurrency/crypto assets does not necessarily have to be as well secured - cryptocurrency owners must hold them in an electronic wallet, whose security can be better or worse.
• The development and use of blockchain technology also depends on technical hardware performance. The faster and more efficient the processors, the more records it is possible to hold in the blockchain, or the safer the cryptographic hash functions can be.

In this manner, blockchain creates a window for new products and services in various sectors, especially in financial transactional services. Multiple experts consider blockchain to be the method for innovation, and the improvement of services and security in finance. On the other hand, blockchain is not appropriate for everything; it is necessary to consider, on which product would be this technology applied. More information is in the chapter “Blockchain”.