What Are Fintechs?
"Fintech," which is short for "financial technology," refers to companies that have infiltrated the financial services industry. Typically, they offer electronic banking, investments, payment and budgeting services and products to consumers and businesses through the internet and mobile phones, and not through traditional brick-and-mortar branches. Fintechs that offer banking products such as checking and savings accounts and debit and credit cards are also called "challenger" banks, particularly in the U.K.
Fintechs have sprouted up since 2010 or so for two main reasons:
- Many consumers were looking for an alternative to large traditional banks that were blamed for causing the 2008 financial crisis.
- Improved technology enabled these upstarts to break into the business and improve their products, which has answered the demand by consumers to do more of their financial business remotely.
Traditional banks, such as JPMorgan Chase in the U.S. and Barclays Bank in the U.K., offer these same online and mobile services—often in order to fend off competition from these upstarts. However, for the purposes of this article, we will only cover the newer fintechs.
Fintechs and traditional banks have actually joined forces in some cases, especially in those instances where the fintech offers superior technology but does not yet have a banking license. In this case, it must offer accounts through a partner bank in order to be able to provide deposit insurance.
In November 2020, for example, Citigroup announced the launch of the Citi Plex Account, a digital checking and savings account that will be offered through Google Pay starting in 2021. Google doesn't have a banking license.
Here are some of the most popular services and products offered by fintechs and the best known companies in those areas.
Traditional Banking Services
Tandem is a fully licensed digital U.K. bank that offers insured savings accounts and mortgage loans.
Starling Bank is also a fully licensed digital-only bank based in the U.K. It caters to both consumers and businesses, offering consumer checking accounts and personal loans, business accounts and international money transfers.
Originally a finance unit of General Motors, called GMAC Bank, Ally changed its name in 2009 and is now a standalone U.S. digital bank. It went public in 2014. The bank offers a wide gamut of banking, lending and investment services and products, including checking and savings accounts, certificates of deposit, home mortgages, and trading and investment accounts.
N26 is a German-licensed company that offers banking products and services in the U.S. and eurozone, with services offered depending on the country. In the U.S., its banking accounts are offered through Axos Bank, a San Diego-based digital bank.
Based in the U.K., where it is a fully registered bank, Monzo says it has close to five million account holders. The digital-only bank offers both consumer and business accounts, including checking, credit and debit cards and loans. Monzo opened in the U.S., but it has yet to acquire a banking license. Banking products are offered by Sutton Bank, a small Ohio-based bank.
Money Transfer Services
Several fintechs offer users the ability to send money to other individuals through their mobile phones or to share payments, such as a restaurant bill.
Venmo is owned by PayPal, and it's a mobile app that enables users to make payments or to send money electronically. The company claims that more than 60 million people use its app. Venmo links to the customer's debit or credit or bank account, where the money is sent from or deposited to. Most money transfers are free, although Venmo does charge a 3% fee for sending money from a linked credit card.
Zelle is similar to Venmo except that it is owned and operated by its member banks, which include hundreds of banks and credit unions in the U.S. Using their bank account or the Zelle mobile app, users add their email address or mobile number so that they can send or receive money. The sender enters the amount they want to send and the recipient's email address or mobile number and the funds are then deposited into their account within minutes.
There have been several new entrants into the online lending business. These companies say their technology enables them to make faster credit decisions compared to human underwriters and their lack of physical offices reduces their overhead, enabling them to offer cheaper loans.
Social Finance, better known as SoFi, started out making private student loans but has since graduated to all types of financial services. They include personal loans, mortgages and home equity loans, credit cards, homeowner and renter's insurance, small business loans and investment and retirement accounts.
LendingClub makes unsecured personal loans. Created in 2007, the company says it has made more than $60 billion of loans to more than three million members. It also makes small business and automobile refinance loans. It offers investment and retirement accounts as well.
Kabbage, which was acquired by American Express in October 2020, primarily makes small business loans but also offers online checking accounts and money transfer services.
The companies below are mainly "robo advisors." This means they create investment portfolios consisting of a selection of mutual funds and exchange-traded funds designed by a computer—not a human—based on the client's age, income, risk tolerance and other factors. As a result, they charge a fraction of what traditional financial advisory firms charge. In addition, each offers a different set of other products and services. In response, traditional, old-line investment firms have begun offering their own robo advisor accounts.
Betterment was one of the first robo advisors. In addition to creating investment portfolios for clients, the company also now offers checking accounts and debit cards through a partner bank, nbkc bank.
Wealthsimple is a robo advisor that offers investment accounts in the U.S., U.K. and Canada. It offers savings accounts that are guaranteed by the Securities Investor Protection Corp. up to $500,000 in case of the company's insolvency. Generally, bank deposits in the U.S. are guaranteed by the Federal Deposit Insurance Corp., a government agency.
Like Betterment and Wealthsimple, Wealthfront offers robo-designed investment accounts. It also offers a Cash Account in partnership with Green Dot Bank, so it is eligible for FDIC insurance. Wealthfront offers a Portfolio Line of Credit backed by the securities in the customer's account, too.
Mint, which is owned by Intuit, isn't a bank or investment firm and as such doesn't offer those kinds of accounts. Rather, customers can track all of their accounts held elsewhere, along with their spending and credit scores, to keep track of their financial lives to make sure their financial planning is on track. Based on the customer's finances and credit scores, Mint provides suggestions on appropriate credit cards, loans, insurance products, and bank and investment accounts. Mint doesn't charge a fee for this service and instead earns commissions from financial services companies.
Credit Karma helps people track their credit scores and provides a marketplace for loans and other financial products, much like Mint, based on their scores. However, unlike Mint, it doesn't enable users to track all of their financial accounts. Credit Karma also offers a free tax service and an FDIC-insured savings account through MVB Bank.
Fintechs are companies that offer a range of financial products and services to customers remotely, including banking and investment accounts, online and through mobile phones. These companies sprang up following the global financial crisis in 2008, when many consumers began distrusting existing banks, hastened by more sophisticated technology.
In addition to greater convenience, fintechs generally offer lower-cost products than traditional players because they don't have the expense of physical offices. In response, traditional players have created similar products of their own, or partnered with fintechs.