If you haven’t yet been introduced, now is a great time to get to know financial technology – better known as fintech.
Fintech describes new technology with a purpose to improve and automate the delivery of financial services, everything from how you pay for things, manage your money, and get a loan, to stock and bond investing, crowd-funding, data collection, and more.
And while technology has been disrupting financial services for a long time (think of the humble ATM machine), right now it is an industry on fire, accelerated by a pandemic that has made us all reluctant to touch physical money and to venture outside our homes to do financial transactions.
“In general, the pandemic expedited the process of taking financial transactions online,” notes Itay Goldstein, a finance and economics professor at the Wharton School. “With people staying at home, online banking grew and other online transactions, as well. This probably sped up the process that would otherwise take longer to develop. These are changes that will persist beyond the pandemic.”
With that, we give you 3 tech trends that are likely to affect your financial future.
Investing. The ability to invest in the stock market has never been more accessible. Companies like Robinhood have burst on the fintech scene, offering commission-free trades of stocks and other securities through mobile apps. The investing story of the pandemic was GameStop, which looked like a hot investment and prompted lots of new investors to get in on the action through their Robinhood apps, only to lose money when GameStop’s stock price plummeted.
In general, we see this “combination of technology and increased interest from small investors who have money to invest and more free time during the pandemic,” says Goldstein “It brings to the surface a fierce debate. On the one hand, it brings increased participation to the stock market, which is a goal that was always deemed important. On the other hand, we all saw the kind of trading frenzies it can generate. I think there will be more scrutiny looking into the costs and benefits of having such easy access, and maybe some attempt to throw some sand in the wheels so that markets don’t go out of control.”
By the way, adds Goldstein, the cryptocurrency bitcoin “continues its wild ride.” The digital form of currency has captured the interest of high school students worldwide. People can choose to pay for things using their bitcoins and/or they can invest in the bitcoin currency as they would invest in the stock market or in gold, and earn a return on their investment as the price in U.S. dollars per bitcoin rises.
“Given the general inflation in asset prices and concerns about increased money creation by central banks, Bitcoin attracted a lot of investors thinking it is an attractive store of value and an opportunity to generate returns,” says Goldstein. Prices skyrocketed for a time, but more recently tumbled after negative remarks from former Federal Reserve chief Janet Yellen about the lack of efficiency in Bitcoin as a currency for transactions. “Overall, I expect volatility to continue in the coming months,” notes Goldstein. “There are many speculations about what Bitcoin can and cannot do and what the ultimate source of value is. This leads to volatility.”
“Ultimately, we want to produce an app that will help you think through your borrowing decisions.” — David Musto, Wharton Finance Professor
There’s an app for that. According to the Mobile Finance Report 2020, a global benchmark of banking, payment and investment apps, COVID-19 “considerably accelerated the already exponential growth of fintech apps in 2020.” That is to say that when it comes to managing your finances, it’s likely there’s an app for that – in fact, several. And this is truly changing the way you interact with money. Venture capital firms that finance start-up businesses are pumping money into young fintech companies, many of them promising to make financial services simpler and more accessible to everyone. And even companies that you don’t think of as providing financial services are trying to capitalize on the pandemic-driven spike in digital money services. For example, Walmart recently announced it is entering banking with Ribbit Capital.
“A lot of the financial services that seemed stable when I was growing up, like banking, insurance, lending, and money management, are completely changing,” observes David Musto, a Wharton finance professor and faculty director of the Stevens Center for Innovation in Finance at Wharton. “We’ve moved to a world where you can Venmo people and never touch the currency.”
The explosion of financial-services apps has inspired the Stevens Center to focus on using technology to improve a personal-finance pain point, taking out a student loan to pay for college. “Ultimately, we want to produce an app that will help you think through your borrowing decisions,” says Musto, whose colleague Nikolai Roussanov, along with his MBA students, is also teaching an “Essentials of Personal Finance” course for high school students during this spring’s Wharton Pre-Baccalaureate Program. “There’s a whole complicated thing you’re getting yourself into by taking out a student loan. It could be a good idea to do that to finance your higher education, but you need to go into a loan with your eyes open and to understand the consequences.”
For an overview of fintech startups hitting the scene globally, check out this blog from Wharton Fintech, a student-led fintech initiative that has its fingers on the pulse of the industry.
Big data-driven decision making. With technology comes data, and more specifically, data analysis and decision-making. In many ways, the ease of collecting data through technology is transforming the financial landscape – and your life — in profound ways.
Musto points to two key examples: providing loans and insuring new drivers. “Typically, you would have the three credit agencies and a credit file on you at each of these agencies that would help determine how credit-worthy you are to lend money to,” says Musto. “Now lenders are using big data [pulled from different sources], and I don’t necessarily know what sources they are going to look at when they make a decision about lending money to me.” Data, he adds, is also influencing the rates you will pay for insurance as a new driver. “A lot of insurers these days will track your driving in different ways potentially by putting a device in your car or by putting out a signal or tracking your phone,” he says. “This is a lot more information than an insurer ever got about my driving when I first got a car. Now they’re watching and can see if you’re reckless. The upside of that is that safe driving means better rates.”
And with data, comes great responsibility, as we’ve seen when private data is breeched by hackers. A lot of energy is going into data protection and privacy, from both big institutions as well as small startups. For an interesting innovation snapshot, check out Shane Curran, a 20-year-old from Ireland who started his data-privacy business while still attending his Silicon Valley, California high school a few years ago. His company Evervault helps software developers provide data privacy for their customers without hiring a lawyer. The company raised $16 million in financing in 2020.
The explosive growth of fintech is putting money and all its related services at your fingertips. An important takeaway, say the experts, is to appreciate the accessibility, do your research and proceed with caution.
- Stevens Center for Innovation in Finance
- K@W: Can Fintech Make the World More Inclusive?
- K@W: Why Fintech Is Disrupting Traditional Banking
- K@W: Are Cryptocurrencies Ready to Break Out of Their Niche?
- Industry Leaders: Walmart Poaches Goldman Honchos to Run Ribbit Capital
- Forbes: Meet Shane Curran
- Whitney M. Young Memorial Conference
- Wharton Fintech
Do you use an app to invest in the stock market? What are your thoughts on the risks and rewards of this streamlined approach to placing trades? Share your story in the comment section of this article.
While technology is changing the way we handle finances, it is also often making cash a thing of the past. Do you think we should be a cashless society or are too many people, especially those who aren’t part of the traditional financial system, reliant upon physical cash to survive? Where do you stand on the cash debate? Check out the Related Stories tab for an article on this topic.
What is your favorite fintech app and why?
It is very interesting how our current generation is applying technology to nearly every service in the business industry. Fintech aims to authorise people to complete financial transactions services through computing so we won’t be needing to visit a ATM every time we want to withdraw or send money. Fintech will continue developing significantly beyond the pandemic, allowing for investments, whether it is in the stock market or in cryptocurrency, to be a lot more accessible to anyone and it will surely help with big data analysis and statistical analysis for the future. As we innovate with ‘Fintech’, we will no longer have the need to run to a bank because of an issue with our credit card or we may not need to hire private bankers. Although, there still seems to be a lot of doubt about this topic, everyone is trying to come up with the fresh ideas about how we should advance technology even more. Who knows, soon we may no longer need to bring our wallets around ever again, as “mobile wallets” may be the new trend.
Changing the landscape of the financial industry, fintech has garnered attention for its efficiency and effectiveness. However, weighing the tailwinds and headwinds is essential to leverage its implementation across the globe. While it is true that the pandemic has accelerated our shift towards a cashless and digitized society, several people are left behind on the opportunity of gaining actual benefits. While a cashless economy will improve savings in financial assets benefitting the intermediaries, the question is that if it is pragmatic for a society to adapt as well.
Especially in developing countries, there is a major proportion of people who are unbanked and underbanked. Taking the example of a daily wage worker, daily cash is the guarantee of his survival. Indirectly, literacy plays a crucial role in determining the level of technology a country can adopt. Moreover, the level of existing technology has a prodigious impact on the inclusiveness of a cashless society. Even today, while a part of the metropolitan population may have gone cashless in several everyday activities, others find it difficult to manage and budget their income. A report found that 17% of adults or 8 million would struggle in a cashless society.
A cashless society brings with it lower risk of violent crime and fewer cases of tax evasion but not everything is greener on this side. Privacy issues are often stimulated in the prime of technology, prompting several people to think twice before giving their personal information. Especially, in matters of finance, more caution is inevitably taken. Then, Looking at the example given by Musto, not everyone would be comfortable with how data will be sourced. Moreover, the world’s volume of data is growing exponentially year after year, giving cybercriminals a greater opportunity to expose massive volumes in a single breach.
It will be interesting to watch us tread towards a digitized society, but it is too extreme for us to say a complete obliteration of cash is definite in the coming years. More time is required to address the potential impediments, make the right use of technology, and take all the countries at the same pace. Thus, a move towards a cashless society only arrives for a person when he or she is already a part of the traditional financial system.
I thought this article was fascinating since it helped me realize that we, as a society, are becoming much more reliant on technology. A year ago, I wouldn’t have understood this article, but during quarantine, I started to get involved in and learn about the fundamentals of the Stock Market. I am, like the article mentions, one of the many retail investors who gained interest in the stock market during quarantine. Since there was more cash flow in the market, many stocks skyrocketed, especially the tech and EV stocks. All this was made possible by apps like TD Ameritrade’s Thinkorswim, Webull, and the infamous Robinhood. Now investing is merely two swipes making it more accessible to everyone. I personally use both Thinkorswim and Robinhood since each app offers different experiences to trading stocks and crypto. Of the two popular apps, my favorite fintech is Thinkorswim. This is since Thinkorswim offers 0 trading fee while also providing many useful charts and indicators such as simple moving averages, RSI values, Bollinger bands, and much more that I utilize to make each decision in the stock market.
The most memorable event, I think, was the pump and dump scheme of GameStop. Though I personally didn’t get involved since I believe in investing in companies that are stable and have the ability to support their stock price, it was still fascinating as the events unfolded. I hope that big investment firms and hedge funds learn that the development of websites that have millions of users, like Reddit forums, makes it easier for users to create massive schemes that can drive the price of a stock in any direction they please without a legitimate reason for investing other than the hopes to help push the stock price higher. Personally, I would like to see regulations or laws that will discourage this kind of trading activity because many families and hedge fund companies suffered great losses.
Another hot topic covered in this article is cryptocurrency, and blockchain technology. As we dissect the topic we see that the real debate will lie in Fiat currency versus Decentralized currency. This topic was partially raised when the United States government printed up to $4.2 trillion for the two covid relief bills and showed how the decisions made at The White House can inflate the value of the US dollar. Americans, who distrust the U.S dollar, can invest in decentralized currency, not controlled by anyone. For instance, there will forever be only 21 million bitcoins, a decentralized currency, to be mined. No one can “print” more bitcoin-like how the US government prints more dollars. I personally think that there should be a balance between the existence of Fiat currency and Decentralized currency. There should not be a cashless society, nor should there be a society where fiat currency is the only currency. With two systems, the world will have a currency to fall back on just in case one of the two systems collapses due to an unforeseen circumstance. Again, thanks to this article, I was able to reflect on how much our society has adapted to utilizing fintech throughout the pandemic, and hopefully, the SEC will pass new regulations to prevent trading activities like Gamestop Chaos, which was caused by the age of new technology.
Thank you, Raymond, for this wonderful insight. I love and agree with the idea about our reliance on technology. You even mention how apps like TD Ameritrade’s, Thinkorswim, Webull, and Robinhood are commonplace in investing. I haven’t gone into depth about these apps, but 0 trading fee from Thinkorswim seems extremely compelling. Something impactful you mentioned about websites with millions of users is that companies have to be wary and adapt to the people so that people don’t go on Twitter rampages that will drop the value of their company deep into the ground, or the opposite, which we saw with Gamestop. Companies that fail to adapt to this toxic environment might fall. I also find your opinion about the value between decentralized currency and fiat currency amusing.
By amusing, I mean disagreeing. I strongly disagree with your point on the balance between fiat and decentralized currency. I believe that DC (decentralized currency) should be weighed higher than FC (fiat currency). Indeed, we shouldn’t sway too far from the U.S dollar, as it still holds its purpose, but DC is the future for banking, specifically its blockchain system. Not only is blockchain banking safer because of its decentralized network, but it costs less money. Switching over to blockchain would save $17 billion dollars in global trades annually. Even, so our current banking system isn’t secure. Banks are prone to manipulation by the bank itself or a third party. The future of finance should not rely on an old corrupt system. Rather, it is best if we changed over to a blockchain network that is safer, cheaper, and immune to inflation. The world where we can rely on two currencies also is extremely risky. On a surface level, it makes sense, and I commended the idea. However, the world isn’t so beautiful to let there be two equally existing currencies. There would be competition between both sources of currency. Competition would end up with one currency inevitably falling, which would probably cause the market to crash. The U.S economy might end up like Japan after its bubble collapse in 1992. Fiat currency should be held at a lower standard as we enter the Technology age while decentralized currency should be held at a much higher standard.
I acclaim your opinion and insight about the significance of fiat and decentralized currency. The importance of having two existing currencies is undoubtedly going to happen, and it is in our best interest to choose the currency that would benefit our economy. As we enter a new Age, we must be prudent of which currency will benefit our countries’ shortcomings.
Technology has clearly had an immense effect on a wide variety of financial services, from investing to financial transactions. It has also greatly improved decision-making and data analysis for many companies that deal with loans and drivers insurance. Apps such as Robinhood offer commission-free trades of stocks, making investing way more convenient and accessible for everyone, and has greatly helped expand the financial market. Before these convenient apps existed, people had to go through a broker to invest, which would take up a lot of time and come with extra fees, such as commission rates. Although the author mentions some negatives about technological advancements in finance such as security issues and a crazy market, technology has revolutionized the world of finance in an overwhelmingly positive way. Before apps, such as Robinhood and Venmo existed, it was hard for many people to get into investing and exchange money. Nowadays, people around the world can send over any amount of cash with a click of a button, and Robinhood has become increasingly popular among us teens, as more people start immersing themselves in investing at an early age. Additionally, most banks have developed apps that provide transactions to accommodate for an easier and more convenient experience. Technology has completely revolutionized many aspects of human life for the better, as financial services have never been more efficient and convenient.
I don’t invest in stocks because i don’t know much about investing so If I were to do so I would wait until i’m fully informed about everything.