The 4 Categories Of Fintech
The four categories of Fintech are digital lending, payments, blockchain, and digital wealth management. These areas have experienced a rapid pace of growth, technological disruption, and regulatory risks.
The first category of Fintech is digital lending. Digital lending refers to technology-driven nonbank lending. Technology-driven nonbank lending companies enjoy access to expensive data, sophisticated algorithms, and considerable computing power. These new companies are equipped to compete with traditional banks through new and appealing offerings to consumers and small businesses. Within the digital lending space, consumers and small businesses are the borrowers, whereas those providing capital are individuals and institutional investors. Digital lending offers consumer loans, student loans, small-business loans, equipment-financing loans, and lines of credit.
The second category of Fintech is payments. The payments industry is an indefinite system of banks, financial technology firms, social media companies, and retailers. This system has been experiencing a significant shift in payment initiation and processes through the emergence of mobile payments, and blockchain technology. This shift has unlocked innovation in the three areas of the payment system: person-to-person (P2P) payments, in-store retail payments, and credit and debit card transactions. P2P payments use an Automated Clearing House (ACH) system to process fund transfers between two people, which are cheaper than credit and debit card transactions. In-store retail payments are improved using near-field communication (NFC), quick reference (QR) codes, or barcodes to initiate payments.
The third category of Fintech is blockchain technology. Blockchain technology refers to a decentralized technology using a shared ledger of transactions. Transactions in blockchain are between three main components, such as nodes, digital ledgers, and third parties. The third parties are the ones submitting entries or payments to the ledgers. Entries or payments are approved or rejected by nodes that work together with no central authority. The central authority’s absence in blockchain technology eliminates the need to trust one party as the payment processor. The payments in blockchain technology are timestamped and protected by cryptographic signatures or complex algorithms for data integrity in transactions. Transactions are fully unchangeable and irreversible once submitted.
The fourth category of Fintech is digital wealth management. Digital wealth management or Robo-advisers are retail-focused, automated wealth management services. Automated wealth management services use algorithms that evaluate risk tolerance and manage assets in low-cost portfolios of exchange-traded funds. Funds are allocated and rebalanced automatically, which allows investors to manage portfolios at a distance.