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What Is FinTech (Explained: All You Need To Know)

FinTech is short for Financial Technology representing technology companies looking to improve and automate different aspects of financial services.

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Let me explain to you what FinTech is and how it works!

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What Is FinTech

FinTech is short for “Financial Technology” and it is a term often used to refer to technology companies developing software solutions intended to automate the delivery of financial services.

The term FinTech broadly describes all technology companies that provide businesses software solutions intended to manage financial transactions, handle financial reporting, or deliver financial services.

Companies operating in the FinTech industry can create solutions intended for individual consumers, businesses, or government entities.

In other words, a FinTech company can be a B2C, B2B, or B2G.

Another component of FinTech is all the digital currencies and cryptocurrencies that have been developed over the course of the past years.

Although cryptocurrency is a FinTech segment that is relatively unknown to the population at large, in the next decades, it’s likely that this type of digital currency will be more common in our lives.

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What Is Considered FinTech

When the term FinTech was originally coined, people use to refer to companies that developed back-end systems for well-established financial institutions.

However, as the Internet technology advanced and smartphones became widely owned, FinTech has evolved in to include all sorts of financial products, services, and technology.

Companies in FinTech have developed money transfer services, accounting automation, bookkeeping software, stock trading platforms, investment management tools, personal budgeting tools, and more.

The FinTech sector has exploded over the years to directly target consumers, businesses of all sizes and industries, and governments.

Any software solution or technology that is deployed to provide financial services, automate financial transactions, enable financial trade, investing or exchange can be considered FinTech.

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FinTech Industries

FinTech startups and businesses looking to disrupt and transform many industries that are related to financial services.

There are billions of dollars in startup funding, venture funding, and investment capital getting pumped into FinTech businesses around the world.

As technology evolves, it’s expected that more companies in the FinTech space compete with well-established businesses and possibly dethrone them.

The FinTech industries where you see significant investment and activity are the following:

  • Smart contracts
  • Blockchain technology
  • Online banking
  • Insurance technology (InsurTech)
  • Regulatory compliance (RegTech)
  • Robo-advisors 
  • Cybersecurity 
  • NFT
  • Cryptocurrency 
  • Peer-to-peer lending
  • Personal finance apps
  • Investment apps
  • Budgeting apps
  • Accounting apps

Although there are many more industries impacted by financial technology, this list is intended to give you an idea.

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FinTech Challenges

Although financial technology has transformed the way we consume financial services, there are important challenges and risks that must be considered as well.

The most important challenge is that many companies and startups are disrupting the financial services industry at incredible speeds that the regulators cannot keep up.

The financial services industry is notoriously known for being heavily regulated.

As a result, many technology companies develop technologies and applications that regulators may not consider appropriate or in the best interest of the end-users.

Another important risk is that FinTech businesses acquire significant personal and financial data from their clients and end-users.

However, if the companies do not implement appropriate safeguards and security measures to protect their clients’ data, security breaches and cyberattacks can cause significant damage to the FinTech company and its clients.

For example, you have heard of major credit card companies and banks that were hacked and millions of customer data and records were compromised.

A third challenge in the FinTech industry is that not only software solutions are developed to provide financial services or automate transactions but digital currencies have been developed such as Bitcoin and others allowing for digital trade.

Just like a company going public in an initial public offering, you’ve seen initial coin offerings (ICO) where companies and businesses raise capital using cryptocurrencies.

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FinTech Business Examples

Let’s look at a few examples of FinTech businesses to better understand what it entails.

The Forbes Fintech 50 is a great place for us to look at what are the hottest and best companies in the FinTech space.

You have companies like Stripe that have revolutionized payment processing.

You then have Klarna, a Swedish company, that offers consumer financing for purchases made at major retailers.

You have Wealthsimple which is an online investment management service offering Canadians investment services.

Investtech is a company that allows users to round up their purchases to the next dollar and invest that amount in a diversified portfolio.

You have Robinhood which is a stock trading platform allowing users to directly trade securities without having to deal with a stock broker.

In the United States, you have Kabbage which is a company that offers small business loans using transactional data to make highly expeditious lending decisions.

As you can see, there different types of companies innovating how financial services are offered in different ways.

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So there you have it folks!

What does FinTech mean?

In a nutshell, FinTech is short for “financial technology”.

Financial Technology is a catch-all term referring to technologies that disrupt, automate, digitize, or augment traditional financial services.

FinTech companies use software systems, artificial technology, proprietary platforms, and applications to offer their services to the market.

Companies in the FinTech space are responsible for allowing e-commerce transactions, digital accounting, payment processing, financial service apps, and digital trade.

The way FinTech works is that companies develop a software solution, system, or application to innovate financial services.

Modern FinTech is primarily driven by artificial intelligence, big data, and blockchain technology.

There is no doubt that in the next years and decades, the FinTech space will continue to expand and become a much larger industry.

If you are looking to start a FinTech business, are dealing with one, or need legal support in operating one, be sure to consult with a qualified attorney who understands technology and how FinTech works.

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