A minority of people are unaware that FinTech is an effort to evolve finance with IT. However, little is known about what FinTech is, what it calls FinTech, and what it brings to people.
Let’s take a bird’s-eye view of FinTech. Then you can see what FinTech is aiming for.
Definition: Innovative Financial Services with IT
The Bank of Japan defines FinTech as follows（※1).
● FinTech is a coined word that combines finance and technology and is an innovative movement that connects financial services and IT.
From this, we can see that mere “IT + finance” is not called fintech and must be innovative.
FinTech is said to have taken place in the United States in the early 2000s, beginning with financial ventures bringing the Internet, smartphones, AI, and big data to financial services.
The Bank of Japan cites the following as examples of FinTech.
- Remittance by smartphone
- Mechanism for connecting fund lenders and borrowers
- Payment service in e-commerce
- Distributed ledger technology including blockchain
Let’s take a look at why these are innovative one by one.
Innovation in remittance by smartphone
As an example of remittance by smartphone, we will introduce LINE Pay, a financial service provided by LINE（※2).
When you register a bank account on your smartphone’s LINE Pay app, money will be transferred from your bank account to your LINE Pay account. Just do that, and at retail stores and restaurants where you can use LINE Pay, you can complete the payment with just your smartphone.
And LINE Pay users can exchange money without going through a bank account. Select the person to send to in the LINE Pay app, enter the amount and tap it to move the money in the source LINE Pay to the destination LINE Pay.
I’m exchanging money, but I don’t need to give or receive money, and I don’t even use a bank account. If this permeates, the cost of creating and managing money and the cost of opening and managing a bank account will be eliminated.
Smartphone remittance is a revolutionary change in the exchange of money.
Innovative Mechanism for Connecting Fund Lenders and Borrowers
FinTech is dramatically changing the way we raise money. As an example, we will introduce Makuake, a crowdfunding company（※3). Crowdfunding is a mechanism for collecting funds via the Internet.
I will introduce the flow of raising funds with Makuake.
Those who want to raise money will post their project on the Makuake site. For example, register as “I want to make a new product, so I want to raise the funds of 1 million yen required for its manufacture and sale.”
If the person who reads it wants to support the new product, register the amount of investment that they can pay. When the total amount reaches the target amount of 1 million yen, the investor pays the investment, and the person who solicited the funds receives 1 million yen to make a new product. Then, we will give the investor a new product that is commensurate with the investment.
Some people have already made and published movies at Makuake, and others have developed and sold customizable watches. Makuake’s innovation lies in the fact that it does not use any financial institutions such as banks and encourages those who could not be lenders of funds to invest.
In particular, the second one can be counted as something that FinTech could do.
Innovation in Payment Services in e-commerce
Payment services in e-commerce include credit card payments and cash on delivery, so they are not new in themselves. The innovation of payment services in e-commerce is the combination of e-commerce and payment services.
If it weren’t for credit cards, e-commerce operators would have had a lot of trouble collecting money.
For example, if the only way to exchange money between two distant parties was to transfer and deposit money between bank accounts, it would have been difficult to buy mineral water from Amazon.
Consumers will send money to Amazon’s bank account, and Amazon will confirm the deposit before delivering mineral water to the home. It’s not convenient, so Amazon’s online shopping shouldn’t have been as widespread as it is now.
E-commerce operators have combined a number of existing IT, including credit card systems, to create innovative retail methods. FinTech became the basis for retail tech and enhanced the innovation of retail tech.
Innovation in Distributed Ledger Technology such as Blockchain
In terms of service novelty and system novelty, crypto assets are probably the most fintech-like fintech. Blockchain supports crypto assets. Blockchain is a type of distributed ledger technology.
Blockchain records transactions on multiple computers. After a certain period of time, transaction information during that period is organized into blocks. Then validate one block on multiple computers.
For example, suppose you want to verify one block (a block of transaction information) on three computers. At this time, if the contents of the block in one computer are tampered with, it will not match the contents of the block in the other two computers. Blockchain is a computer system that is hard to be tampered with because tampering is immediately detected.
Crypto currency assets such as Bitcoin use the blockchain mechanism. With crypto-assets, money exists only on the computer, and money is exchanged only on the Internet. And now, crypto assets are flying around the world.
This is probably the most successful case of FinTech.
Why FinTech was Needed
In 2016, the Bank of Japan launched a FinTech Center specializing in FinTech（※4). The FinTech Center raises unique questions（※5).
● Why is FinTech making noise now when finance + IT should have come a long way?
What many people are wondering about is nicely summarized in one sentence. And the Bank of Japan has such an answer.
● Because it realizes cheap and convenient finance with dramatically developed technology
In short, it’s revolutionary. In other words, the greatness of FinTech is that it is cheap and convenient.
The reason why FinTech is cheap is that it uses cheap IT. The combination of e-commerce and credit card introduced earlier is not expensive IT because it only uses the online shopping system and credit card system.
And the convenience of FinTech has been greatly improved by smartphones. With just one smartphone, you can do almost everything related to money, such as shopping at convenience stores, sending money, booking movie theaters, booking taxis, booking flights, investing, and paying utility bills.
It is worth noting that smartphones are not a tool developed to develop FinTech.
Smartphones were created with the idea that it would be convenient to install them in the functions of personal computers on mobile phones, and if apps were installed on smartphones one after another, financial services could be provided.
The convenience of FinTech has improved dramatically as information and communication tools have become financial tools.
Summary – Fintech is Still Developing
FinTech is still in the development stage. Cryptocurrencies are a great technology, and there is a fact that the economy is driven by them, but they are not as convenient as currencies yet.
I can assure you that FinTech will continue to evolve because there is no end to the demand for more convenient financial services, and IT is still evolving.
Today’s financial services face serious challenges such as obsolescence of older systems, rising operating costs, difficulty in risk management, and peaking in service quality. FinTech is expected to solve these issues.