The financial world is continually changing. A number of markets that barely existed a few decades ago are now trillion-dollar businesses. In some cases, the innovation may be nothing more than someone spotting an untapped demand; in others, it may stem from new economic ideas. But change may also be a result of technological advances. The application of technology to financial markets is commonly known as fintech. Here are four ways that fintech is changing financial practice.
Payment Systems Not that many years ago, cash or checks were the principal way to pay for purchases, but in many countries, cash is fast disappearing. For example, in Sweden cash transactions make up barely 2% of the value of all payments. You can’t use cash to buy a bus ticket or a ticket on the Stockholm metro, and retailers are not legally obliged to accept coins and notes. The majority of Sweden’s bank branches no longer keep cash on hand or take cash deposits— and many branches no longer have ATMs. Instead of cash, Swedes use either a card or a mobile phone app to transfer money from one bank account to another in real time.
Peer-to-Peer (P2P) Lending Peer-to-peer lending platforms directly link individuals willing to lend money with people seeking to borrow. For example, in the United States would-be borrowers can apply to Lending Club for a personal loan of up to $40,000 or a business loan of up to $300,000. The company then assigns a credit score to that customer, and on the basis of this score, potential investors can choose whether to participate in the loan. Thus, Lending Club cuts banks out of the lending equation entirely. It does not lend itself; instead, it verifies the identity of borrowers and lenders, uses the credit score to set the interest rate for the loan, and services the loan.
Robo Advice Providing investment advice to individuals and tailoring portfolios to their particular needs can be a costly business. Robo advisers seek to reduce these costs by automating the process. You will first need to complete an online questionnaire describing your personal situation and your risk tolerance. The robo adviser will then recommend a portfolio, usually a basket of low-cost funds. Then, once you deposit money in the account, the robo adviser will buy the investments and rebalance your portfolio to maintain your ideal mix of assets.
Blockchains A blockchain consists of a network of computers that simultaneously update a ledger of transactions or other data. This ledger doesn’t exist in one place but is distributed across many participants in the network. Many believe that the technology offers a major advance in the speed and security of financial record-keeping. Stock exchanges around the world have begun to experiment with blockchains as a method for companies to list and trade their shares, and to ballot their shareholders. The effect should be lower costs of trading, faster transfers of ownership, and more accurate records.
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