What Is Fintech? How Financial Technology Works

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Fintech, short for financial technology, is software, data and automation used to deliver financial services: moving money, lending, saving, investing, insuring and managing risk. The term covers two things. One is the technology itself, such as mobile banking apps, payment networks, lending algorithms or a fraud-detection model. The other is the industry of companies built around that technology, from startups that sell directly to consumers to vendors that supply banks with back-office systems. A fintech company is usually a technology business whose product is a financial service, and the service often still runs on top of licensed banks, card networks and payment rails underneath.

What fintech means

In the broadest sense, any innovation in how people transact counts as financial technology. Coinage, paper money, double-entry bookkeeping, the telegraph wire transfer, the credit card and the ATM all changed finance. In current usage, the term refers to the internet and mobile era: services delivered through computers and smartphones, built on software, data and network connections rather than branches and paper.

Fintech is both a financial services business and a technology business, which is why it is hard to file under one industry. A company that builds core banking software for banks and never touches customer money looks like an IT services firm. A company that lends its own capital to consumers through an app is a lender that happens to use technology. Most fintechs fall somewhere between, and the regulated activity they perform, not their branding, decides how they are supervised.

Many people use fintech every day without labeling it: checking a balance on a phone, splitting a bill with a peer-to-peer payment app, paying with a phone at a checkout terminal or buying shares through an online broker. In 2023, close to half of American households used mobile banking, and about half used mobile payment apps such as PayPal or Venmo.

How fintech works

A fintech product usually combines four layers. Seeing them separately explains why two apps that look alike can carry very different risks.

1. The interface. The app or website the customer sees. This is where fintechs compete most visibly: fewer forms, instant decisions, clear dashboards and notifications.
2. Data and decision engines. Software that verifies identity, scores credit, flags suspicious transactions, rebalances portfolios or prices insurance. Machine learning and other forms of artificial intelligence are increasingly used here.
3. Connections, usually APIs. Application programming interfaces let one system request data or actions from another, such as pulling a bank balance, initiating a transfer or checking an identity database. Open banking builds on this idea by giving customers the ability to share their bank data with third-party apps.
4. Regulated infrastructure. Bank accounts, card networks, clearing systems and custodians that actually hold and move the money. A fintech may own a bank charter or broker-dealer registration, or it may partner with institutions that do.

Fintech often “unbundles” financial services. A traditional bank sells checking, savings, cards, loans and advice as one relationship. Fintech firms tend to pick one piece, such as payments, a personal loan or a budgeting tool, and try to do it better or cheaper. Some later rebundle into multi-product apps once they have customers.

A worked example: one payment through a fintech app

A café uses a fintech payment terminal and a customer taps a phone to pay $5.00.

• The phone’s digital wallet sends a tokenized version of the customer’s card number, so the café never receives the real card number.
• The terminal provider’s software routes the request through a card network to the customer’s card issuer, which approves or declines it in seconds after checking the balance or credit line and running fraud checks.
• Approval is not the same as settlement. The money moves later in a batch from the issuer, through the network, to the café’s acquiring bank and then to the café’s account, typically after one or more business days.
• Suppose, hypothetically, the provider charges the café 2.9% plus $0.30 per transaction. The fee on the $5.00 sale is $0.145 + $0.30 = $0.445, so the café receives about $4.56. On a $100 sale the same pricing costs $3.20, or 3.2% of the sale. A fixed per-transaction charge weighs more heavily on small purchases.

The fintech’s contribution was the terminal, the onboarding software that let the café start accepting cards quickly, and the dashboard showing sales. The card networks and banks still carried the payment. Before such products, a small business typically had to set up a merchant relationship with a card processor and install dedicated hardware, such as a card reader connected to a landline.

Main categories of fintech

Basic banking products were early targets, but the field now spans much more. The main categories:

• Payments and transfers. Peer-to-peer apps, online checkout services, mobile wallets and tap-to-pay terminals that make paying people or businesses nearly instant from the user’s side.
• Digital banking. App-first accounts, often called neobanks, many of which provide deposits through a partner bank rather than their own charter.
• Lending. Online personal and business loans, digital mortgage applications, buy now, pay later (BNPL) financing at checkout, and peer-to-peer marketplaces where many individual investors fund a borrower’s loan. Some lenders use alternative data to reach people with thin or no credit files; in developing markets, some microlenders analyze smartphone data to assess applicants.
• Investing and wealth management. Mobile brokerage apps that popularized commission-free trading, and robo-advisors that use algorithms to build and rebalance portfolios at lower cost than traditional advice.
• Personal finance tools. Budgeting, account aggregation and credit-monitoring apps that pull many accounts into one view. Credit Karma is a free consumer model funded by product recommendations.
• Insurtech. Online quoting, automated claims, and usage-based auto policies that adjust premiums based on data from a device that monitors driving.
• Regtech. Tools that help financial firms meet compliance requirements, especially anti-money laundering (AML) and know your customer (KYC) rules.
• Crypto and blockchain. Cryptocurrencies such as Bitcoin and Ethereum, non-fungible tokens (NFTs), wallets and exchanges, built on blockchain, a distributed ledger kept across a network of computers that also supports smart contracts, programs that execute agreed terms automatically.
• Financial inclusion services. Products for unbanked and underbanked people poorly served by mainstream providers.
• Cybersecurity and fraud prevention. Fraud systems compare each transaction against a customer’s payment history and flag ones outside the usual pattern.
• Automated customer service. Chatbots and AI assistants that handle routine questions and reduce staffing costs. AI chatbots surged in everyday use from 2022.

Who uses fintech

Fintech serves four broad groups:

• Banks, through business-to-business (B2B) products. Core banking software, fraud tools, compliance systems and data services sold to institutions.
• Clients of those banks. Customers who use fintech without knowing it, because their bank licensed the technology.
• Small businesses, through business-to-consumer (B2C) tools. Payment acceptance, invoicing, payroll and working-capital loans delivered online with fast decisions.
• Consumers. People using apps to pay, save, borrow, invest and budget.

Consumer fintech has largely targeted Gen Z and millennials, given their size and rising earning potential. Incumbents are users and builders too: large institutions have bought fintech startups, partnered with them or launched their own digital products. Goldman Sachs, for example, launched the consumer lending platform Marcus in 2016. Competing with faster startups has required established firms to change processes, decision-making and organizational structure, not only increase technology spending.

How fintech companies make money

Revenue depends on the product. The common models:

1. Transaction fees. Merchants pay processing fees, and consumers may pay for instant transfers, currency conversion or card funding of a peer-to-peer payment.
2. Interchange. When a customer uses a debit or credit card, the card issuer receives a fee from the merchant’s side of the transaction. App-based accounts that issue cards through partner banks often share in this revenue.
3. Interest on loans. Lenders earn the spread between what they charge borrowers and their cost of funds. The APR is the figure to compare across lenders, since some fintech loans and BNPL plans carry high rates or late fees even when a promotional period is interest-free.
4. Interest on customer balances. Payment and banking apps can earn interest on cash that customers leave in their accounts.
5. Assets under management (AUM) fees. Robo-advisors usually charge a percentage of the assets they manage. In a hypothetical example, a 0.25% annual fee on a $10,000 portfolio is $25 a year, and it rises to $250 if the portfolio grows to $100,000, regardless of how much work the account requires.
6. Payment for order flow (PFOF). Some brokerages route customer orders to market makers that pay for the right to execute them. This is one way commission-free trading is funded.
7. Subscriptions and premium tiers. Monthly fees for extra features, higher limits or advice.
8. Software licensing and referral fees. B2B fintechs license their technology, and comparison or credit-monitoring apps earn commissions when users take out recommended products.

“Free” in fintech usually means the customer is not charged directly for the core action. The provider is paid somewhere else in the chain.

A short history of fintech

The modern story starts with the electronic infrastructure of the 20th century. Wire transfers, credit cards, ATMs, electronic stock trading and bank computer systems digitized money long before smartphones. In the late 1990s and 2000s, online banking, online brokerage and internet payment services such as PayPal moved consumer finance onto the web.

In the early 21st century, “fintech” mostly described back-end technology inside financial institutions. After the 2008 financial crisis and the spread of smartphones, the focus shifted to consumer-facing startups. From the mid-2010s, startups raised billions of dollars in venture funding, several reached valuations above $1 billion (unicorns), and incumbents bought startups or built their own offerings. North America has produced the most fintech startups, with Asia a close second, followed by Europe. Bitcoin, launched in 2009, opened the crypto segment and a wave of token sales and exchanges that regulators are still addressing.

How fintech is regulated

Fintech growth has made oversight a priority for governments, but most countries have no single fintech rulebook, because fintech spans payments, lending, deposits, securities, insurance and crypto, each with its own regime. Governments have mostly adapted existing laws. In the United States, a fintech lender still faces consumer lending and disclosure laws, a brokerage app registers as a broker-dealer, and money transmitters need state licenses.

The U.S. Department of the Treasury has said that fintech creates new opportunities alongside new risks, naming data privacy and regulatory arbitrage (structuring a business so it falls outside or between regulatory regimes) as key concerns. In 2022, the Treasury called for stronger oversight of consumer financial activities conducted by nonbank firms.

Crypto has been the most unsettled area. Initial coin offerings (ICOs) let startups raise money directly from retail investors by selling tokens, and in many countries they have been largely unregulated, which made them fertile ground for scams. In the U.S., uncertainty over how tokens are classified allowed some issuers to present what were effectively securities as “utility tokens” to avoid SEC registration and compliance costs.

Limitations and risks of fintech

• The app is not always the bank. Many consumer fintechs are not banks. Deposit insurance, such as FDIC coverage in the U.S., protects against the failure of an insured bank, not the failure of the nonbank company in front of it. Whether customer money is held at an insured bank, and in whose name, determines what protection applies.
• Speed can raise costs. Instant credit decisions and one-tap checkout financing make borrowing easier, and some products targeted at people with poor or no credit carry high rates.
• Data exposure. Aggregation apps, alternative-data lending and open banking widen the number of companies holding sensitive personal and financial information.
• Algorithmic decisions. Credit and fraud models can decline applicants or freeze accounts with little explanation, and models trained on past data can reproduce past biases.
• Business-model pressure. Revenue from PFOF or interest on balances can create incentives that differ from the customer’s, and venture-funded products may change pricing or features as companies seek profitability.
• Uneven regulation. Where rules lag behind products, as with many crypto offerings, protections can be thinner than in traditional finance.
• Access gaps. Digital-only services can exclude people without reliable internet, smartphones or digital skills.

Fintech vs. related terms

Fintech vs. a bank. A bank holds a charter, takes insured deposits and is supervised for safety and soundness, including capital rules. A fintech may be a bank, partner with one, or sell technology to one. Banks also build fintech: a large bank’s mobile app is fintech too.

Fintech vs. financial IT. Financial IT traditionally means the internal systems that keep an institution running, such as core ledgers, data centers and trading infrastructure. Fintech overlaps with it on the B2B side, but the term usually implies a new product or business model, often sold to end users.

Fintech vs. crypto. Crypto is one segment of fintech. Most fintech activity, including payments, lending, investing apps and insurtech, has nothing to do with blockchains.

Fintech vs. other “-tech” sectors. Insurtech, regtech and wealthtech (investment management) are usually treated as subsets of fintech. Edtech (education) and proptech (real estate) are separate industries that sometimes include financial features such as tuition payment or rent collection.

Fintech vs. digital banking. Digital banking means accessing banking services online or through an app. It is one application of fintech, while fintech as a whole also covers markets, insurance, compliance and infrastructure that customers never see.

The Bottom Line

Anyone who pays, borrows, saves or invests through an app is using fintech, often on top of banks and card networks they never see. Before trusting a product, check whether your money sits at an insured bank and in whose name, compare loans by APR, and find out how a free service actually gets paid, since those details decide your protection and real cost.