Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
If you’re like most, chances are, even if a fellow named Goldfinger trained a laser on your most treasured part you wouldn’t be able to eloquently define the term “fintech.” Don’t sweat it; even if you can’t quite conjure a concise definition, if you’ve ever Venmo’ed a friend a few bucks to reimburse a bar tab, deposited a birthday check from your grannie by snapping a photo of it or ponied up money for a GoFundMe campaign to help for a friend or stranger in need, you have used fintech. You probably already instinctively understand that all of these examples were financial transactions that you wouldn’t have been able to do in a prior technological age. And whether they know to call it fintech or not, around the world, fintech adoption has been fast and vast; according to EY’s annual survey, globally, 64% of “actively digital consumers” use fintech. China is the world leader, where 75% of consumers have used fintech for a transaction of some sort, but adoption rates were also dramatic in North America, where fintech use rose 29.5 percent from 2015 to 2019.
Fintech is a portmanteau of the words “financial” and “technology” (apologies for introducing another big word into this equation but “portmanteau” is a good one to know!”) There is some debate as to who actually coined the term. According to derivation king, Word Spy, “fintech” in mass media may have first occured on August 11, 1985 in The Sunday Times (London) when referring to the title of a business newsletter produced by a gent named Peter Knight. But the official birth of the term is often said to be about five years later and came, ironically, from a big bank. In the Eighties, Citicorp, the predecessor to Citigroup, had developed a reputation for being technology averse, so it launched an internal project to signal that the company was ready to emerge from its cave and embrace coming technological trends. It called the project “Fintech,” a term short for Financial Services Technology Consortium.
The history of fintech
It’s a mistake to assume that just because the term “fintech” was born in the Nineties, technology hasn’t always been a part of the financial services world. The ATM, after all, has been rocking banking since before Woodstock; it was introduced in 1967 by Barclay’s bank. In fact, according to a 2016 paper by a trio of academics named Arneris, Barberis and Ross, fintech can be divided into three distinct eras.
The first, Fintech 1.0 (1886-1967) began with the advent of technologies like the telegraph to allow banking to begin to expand beyond local borders and globalize. Fedwire, invented in 1918, was the US’s first electronic fund transfer system. Fintech 2.0 (1967-2008) introduced the ATM, the SWIFT system for international money transfers, and then online banking. We’re currently right in the middle of Fintech 3.0, a period dominated by cryptocurrencies and the scramble to adapt and cater to the new smartphone-based economy.
Fintech was born in the California sun. Owing to its proximity to Stanford University and association with legendary startups like Apple, California’s Silicon Valley remains the dominant laboratory for technical innovation. If we want to locate a big bang for the fintech boom in the Valley, PayPal would be a good place to start. As this mini bio sets out, PayPal began in 1998, the brainchild of Ukranian born computer scientist Max Levchin, whose business idea for an encryption service attracted the attention—and money—of a rising venture capitalist named Peter Thiel. PayPal began as only as a small part of Levchin and Thiel’s company, Confinity, which aimed to provide a cryptography service to protect information and transactions made on proto-smart phones like the Palm Pilot. PayPal acted like a digital wallet to seamlessly transfer digital funds directly from handheld devices, and quickly became the most sought after technology Confinity had to offer. Around the same time, just four blocks away, wealthy startup veteran Elon Musk was starting x.com, one of the very first online banks.
Now add into this mix EBay, which in the late Nineties was the undisputed king of online commerce between private parties. Back then, if Dan in Miami found a Beanie Baby collection on EBay he just couldn’t live without, he’d have to send a check in the mail to seller Kathy in Sacramento. It was a system that obviously left a lot to be desired. Sellers needed a system to make the transactions work better. This allowed third party companies like PayPal and x.com to jump in to jump into this void and transact EBay’s sales online by linking old fashioned bank accounts to technology that could move funds around instantly. Long story short, PayPal and x.com joined forces, went public, then in 2002, EBay acquired the company for $1.8 billion. Not only did this acquisition create some very rich men (one of whom is trying to colonize Mars, and another who is said to harvest the blood of youngsters in his quest to live forever) it created a model for how outside startups could create technology that banks either couldn’t or wouldn’t—and provided motivation to a whole generation of founders by showing them that if they thought outside the box they could change the world and get extraordinarily rich if they succeeded.Grow your money with low fees and no account minimums. Invest as little as a dollar and we’ll build you a personalized investment portfolio to meet your financial goals.
It used to be that the holy grail for any tech founder was to build that rarest of companies—a “unicorn” a company, usually a private one, with a $1 billion valuation. Several years ago, Aileen Lee, the venture capitalist who coined the term, noted in an essay on the Techcrunch website, exactly how rare an occurrence this was; only .07 percent of “internet-related” companies that started between 2003 and 2013 became unicorns, or just 1 in every 1,538. (When its market cap crossed over the 100 billion mark in 2018, PayPal became a “super unicorn” or “hectocorn.”)
However the post-2008 tech boom that freed up so much venture capital has made billion dollar companies considerably less rare; Venture capitalist Jason Green told Fortune in 2015:“It used to be that unicorns were these mythical creatures. Now there are herds of unicorns.” The herd has apparently been frisky and has gone forth and multiplied since then; according to CB Insights’ unicorn list, a company that compiles a list of private startups with $1 billion or more valuation, as of November 2019 there were 415 unicorns around the world, accounting for a cumulative valuation of $1,295,000,000,000. (Please don’t ask us to pronounce that number.) 53 of those companies, or about 13%, are categorized as fintech companies, and they have a combined valuation of over $187 billion.
Here are the fifteen private fintech companies with the highest valuation as of November 2019.
|Company||Date became unicorn||Country||November, 2019 valuation, in billions|
|Circle Internet Finance||5/15/18||USA||$3|
Areas of fintech
If you look around the web, you’ll find a lot of variation in how analysts divide up the fintech taxonomy, but for a nice balance of specificity and simplicity, we’ll divide the sector into 10 sub-sectors, as identified in this CB Insights chart. They are, as follows":
Here’s what each subsector aims to do, and two representative fintech companies.
|Fintech subsector||Service offered||Notable examples|
|Blockchain/crypto||Leveraging blockchain technologies for financial services||Coinbase, Gemini|
|Capital markets||Sales and trading, analysis and infrastructure for financial services companies||IEX, Opera Solutions|
|Insurance||Digital insurance sales||BIMA, Root|
|Lending||Digital lending and underwriting||Kabbage, Fundbox|
|Money transfers/remittances||International money transfer and tracking||PayPal, Venmo|
|Mortgage/real estate||Mortgage lending and financing||Better, Roostify|
|Payments/billing||Payment processing and subscription billing||Klarna, Stripe|
|Personal finance||Tools to manage bills and credit accounts||MoneyLion, Nerdwallet|
|Regtech||Audit, risk and regulatory compliance software||Harbor, Behavox|
|Wealth management||Investment and wealth management platforms||Acorns, Wealthsimple|
How fintech is changing banking
If you’re old enough to remember the opening of the show The Six Million Dollar Man, you’ll recall that an astronaut named Steve Austin gets in a plane crash, and, rather than just sending him off to astronaut pasture, some assembled scientists dump his various body parts out on the operating table and resolve to make him “better, stronger, faster” than he was before. Fintech’s a lot like a new, improved bionic version of the financial services industry. The entrenched financial service companies have offered a lot of disappointment in the last decade. It’s a long list of disappointments dominated by high fees being assessed for substandard service. Then there’s the industry-wide greed that helped bring about the financial crisis. Confronted with this, some entrepreneurs noticed that by harnessing technology, they could offer customers a significantly better experience at a fraction of the price they’d become accustomed to paying.
In many cases, fintech has also democratized financial services, making the kind of products and service once available only to those with tons of money available to virtually anyone. In elevating the game and reducing the cost, fintech has not only been able to usurp some of the business of traditional financial service providers, the companies have forced some creaky old institutions to raise their game, to make their own services cheaper and better if they like the idea of surviving.
Here are but a few specific examples of how fintech has made the world a better place.
GoFundMe has revolutionized the way philanthropy works, allowing those who need money a venue to market directly to those who can help. Since its 2010 founding by Brad Damphousse and Andrew Ballester, who had previously founded the startup Paygr, GoFundMe campaigns have raised more than $8 billion for various efforts. Through the site, the Time’s Up Foundation raised more than $24 million from 21,000 small donors to provide legal support to men and women sexually harassed, assaulted or abused while pursuing their careers.
Getting a mortgage was never a picnic; serial founder of startups Vishal Garg took note. “It took forever,” Garg said not long ago. “It took Citibank three weeks to get me a basic preapproval.” So he aimed to change all that, and with better.com, founded in 2016 and helped to market by former Google and Spotify engineers, Garg created a business where anyone could apply for a low-interest mortgage from their couch, get a pre-approval in about three minutes, and avoid having to pay the layers of fees like loan officer commissions and larded closing costs that had become standard with the way the mortgage system was rigged against consumers.
Several years ago, a consultant named Kristo Käärmann was working in London and getting his salary in pounds but had to pay his mortgage back in Estonia in Euros. His friend Tavit Hinrikus, who was working for Skype, was being paid in Euros while living in London so had to convert it into pounds.“We each had to send money in the opposite direction and had to pay huge amounts in bank fees each time we sent it,” Käärmann said in 2015. After doing a little research, they found that $5-$10 trillion was moved internationally and banks were handling 90% of the transfers and making a killing each time by marking up exchange rates. Consumers often didn’t even realize it. “Customers lose huge amounts of money through hidden fees,” Käärmann noted. “Banks have profited off people’s ignorance for decades.” So in 2011, he and Hinrikus founded TransferWise, which promised a more reasonable way to move money internationally. They’ve since provided transfers to more than 6 million clients at rates up to 8 times cheaper than banks customarily charged.