Fintech and blockchain are two of the hottest technologies transforming the financial services industry. Often used in tandem, fintech and blockchain also have distinct differences. In this comprehensive guide, we’ll examine what each technology entails, their relationship to one another, use cases, major players, and the future outlook.
What is Fintech?
Fintech is an umbrella term for financial technology that is used to improve and automate the delivery and use of financial services. At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and smartphones.
Fintech covers a broad range of innovations designed to improve everything from banking, investing, fundraising, and money transfers to personal financial management and insurance services. Fintech also includes the development and use of cryptocurrencies like bitcoin.
Some of the most common fintech categories include:
- Digital & Mobile Payments: Services like Apple Pay, Google Pay and Cash App that allow swift and seamless money transfers between parties.
- Blockchain Technology: Distributed ledger technology like blockchain enables peer-to-peer transactions without intermediaries.
- Wealth Management: Automated wealth management services like Betterment and Wealthfront that provide automated investment allocation and portfolio management.
- Crowdfunding: Platforms like Kickstarter and GoFundMe that allow the raising of capital from a large pool of investors.
- Insurance Tech: Insurtech innovates and streamlines the insurance application and claims processes. Companies like Lemonade and Oscar Health are leading the way.
- Robo-advisors: Automated financial advisors like Betterment that provide investment advice and portfolio management online with minimal human intervention.
The biggest benefits of fintech include automating manual processes, cutting costs, improving security, increasing transparency, and providing faster and more convenient services. Fintech is able to develop these improvements through advanced technologies like blockchain, artificial intelligence (AI), big data analytics and more.
For example, the traditionally slow and cumbersome process of applying for loans and credit cards can now take minutes instead of days with integrated digital solutions. Wealth management services and transactions that once required human advisors and brokers can now be handled digitally 24/7 with sophisticated robo-advisors and payment systems.
Overall, fintech innovation is helping streamline and modernize the financial services sector. Financial institutions that fully embrace fintech solutions and developments will be best positioned for the future. According to research firm IDC, global spending on fintech solutions will reach $309.6 billion in 2024 versus $115.3 billion in 2019. This represents a compound annual growth rate (CAGR) of 24.8%, highlighting the growing importance and adoption of fintech.
Key Fintech Companies & Innovations
Some of the biggest and most disruptive fintech companies include:
- PayPal: Digital payments pioneer and fintech giant with over 400 million active user accounts worldwide. Allows online money transfers and serves as a digital alternative to traditional payment methods.
- Square: Provides software and hardware payments solutions for businesses with products like Square POS and Square Cash.
- Stripe: Develops payment APIs and technologies for e-commerce sites and mobile apps to accept online payments. Processes hundreds of billions in transactions annually.
- Affirm: Offers installment loans to consumers at the point of sale to break up payments.
- Robinhood: Leading financial services platform offering commission-free stock, options, and cryptocurrency trading.
- Ant Financial: Major Chinese fintech company that operates Alipay, one of the world’s largest mobile payment platforms with over 1 billion users.
- Kabbage: Provides small businesses with fast and convenient access to lines of credit up to $250,000.
These companies represent a fraction of the fast-growing fintech landscape that is delivering innovative solutions across nearly every aspect of personal and commercial finance. Incumbent financial institutions are also diving head first into fintech with major investments, partnerships, and in-house technology development.
What is Blockchain Technology?
Now that we’ve covered the basics of fintech, let’s examine blockchain technology and how it relates to fintech innovation.
A blockchain is a distributed ledger database that maintains continuously growing records stored across a decentralized peer-to-peer network. One of the defining features of blockchain technology is that data on the ledger is stored in blocks that are linked together via cryptographic validation to form an unalterable chain.
Instead of being managed by a central authority, blockchain networks rely on distributed consensus mechanisms to validate transactions, thus eliminating the need for intermediaries. Transactions on a blockchain network are also immutable, which helps prevent fraud and tampering.
Blockchain was first pioneered in 2008 as the underlying distributed ledger technology enabling Bitcoin digital currency transactions. However, blockchain technology has evolved significantly since Bitcoin and has endless potential applications across industries.
Some key capabilities and differentiators of blockchain technology include:
- Decentralization: Data is distributed across nodes on a peer-to-peer network instead of being held centrally. This avoids a single point of failure.
- Transparency: All participants on a blockchain network can view and verify transaction data. Confidential data can be restricted while maintaining transparency of activity.
- Immutability: Transactions cannot be altered, ensuring a verifiable record of activity and enhancing security.
- Smart Contracts: Self-executing programmable contracts on a blockchain that automatically execute when conditions are met. Enable automation of processes.
- Consensus Mechanisms: Mathematical algorithms like proof-of-work and proof-of-stake that allow for agreement and validation of transactions on a blockchain network.
- Enhanced Security: Cryptography like hashing and digital signatures are used to secure transaction data and combat fraud. Multi-signature requirements can also be enforced.
These technical qualities enable blockchain technology to facilitate trusted peer-to-peer transactions while streamlining business processes, reducing costs, and enhancing security. Blockchain networks can also be either public and permissionless like Bitcoin and Ethereum, or private and permissioned for enterprise needs.
According to Allied Market Research, the global blockchain technology market was valued at $3.67 billion in 2020 and will reach $393.16 billion by 2030. This highlights the surging popularity and demand for blockchain solutions.
Major Blockchain Platforms & Cryptocurrencies
- Bitcoin: The first and most well known cryptocurrency and blockchain network responsible for pioneering the technology in 2008. Manages a decentralized public ledger for bitcoin (BTC) transactions.
- Ethereum: An open-source blockchain platform that runs smart contracts and allows developers to build decentralized applications on top of it. Ether (ETH) is its native cryptocurrency.
- Ripple: Enterprise blockchain and digital payment network designed for fast global financial transactions. Processes averages 1.5-2 million transactions per day across its global network.
- Hyperledger: Open source community focused on developing private enterprise blockchain frameworks like Hyperledger Fabric and Hyperledger Sawtooth. Managed by the Linux Foundation.
- Corda: Distributed ledger platform designed specifically for finance and enables institutions to transact directly with legally enforceable smart contracts. Developed by R3.
- Stellar: Fast and inexpensive blockchain network that connects financial institutions for the purpose of seamless cross-border transactions and remittances.
These leading blockchain platforms represent the diversity of potential blockchain applications across payments, finance, supply chain management, healthcare, real estate, and more. Both fintech and blockchain firms are leveraging these blockchain networks to develop game-changing solutions.
How Fintech and Blockchain Relate
Now that we’ve provided an overview of fintech and blockchain independently, let’s discuss how they relate to one another.
While they are distinct technologies, fintech and blockchain have a complementary relationship and are increasingly intersecting:
- Blockchain is a Key Fintech Innovation: As covered earlier, blockchain technology like Bitcoin and Ethereum falls under the fintech umbrella and represents one of the most transformational fintech innovations.
- Fintech Firms Adopt Blockchain: Many leading fintech firms are incorporating blockchain technology into solutions for payments, investing, lending, insurance, banking and more.
- Blockchain Facilitates Fintech: The capacities of blockchain technology enable new fintech innovations that were not previously possible or efficient.
- Advancing Financial Inclusion: Both fintech and blockchain solutions promote greater financial inclusion of underserved populations with seamless, secure, and affordable financial services.
- Decentralizing Finance: Blockchain technology allows the development of decentralized finance (DeFi) platforms and peer-to-peer financial applications without intermediaries.
- Automating Processes: Fintech and blockchain can automate traditionally manual, paper-based financial processes like insurance claims processing via smart contracts. This reduces frictions and costs.
- Enhancing Transparency: Distributed ledger technology grants all parties increased transparency into transactions, capital flows, ownership records, and other financial data.
- Improving Security: Cryptographic encryption, immutable distributed ledgers, and consensus mechanisms strengthen data security and help prevent fraud.
- Generating New Assets: Blockchain enables the creation of digital assets like cryptocurrencies and tokenized assets that can be programmed with fintech solutions.
Clearly fintech and blockchain go hand-in-hand, which is why financial institutions and technology firms are strategically embracing both to remain relevant and gain a competitive advantage.
Let’s take a closer look at some real-world examples of fintech and blockchain technology intersecting.
Fintech and Blockchain Use Cases
There are already countless examples of fintech leveraging the capabilities of blockchain technology across the financial sector:
Digital Payments
- Ripple – RippleNet blockchain network provides financial institutions with a real-time gross settlement system that uses XRP cryptocurrency to facilitate faster cross-border payments and transactions. Over 150 clients including Bank of America and Santander use Ripple.
- Square – Allows merchants to accept bitcoin for payment. Also launched a cryptocurrency division and custody offering.
- PayPal – Enables US users to buy, sell, and hold bitcoin and other cryptocurrencies within their PayPal digital wallets.
Lending & Fundraising
- SALT Lending – Blockchain asset-backed lending platform where borrowers can collateralize blockchain assets like Bitcoin to obtain financing.
- Figure – Leverages Provenance.io blockchain to provide home equity lines of credit. Records each customer payment on the blockchain.
- WeTrust – Peer-to-peer lending circulum built on Ethereum blockchain and governed by smart contracts. Automates payments and interest distribution.
Investing & Trading
- Robinhood – Offers commission-free cryptocurrency trading on desktop and mobile devices through its Robinhood Crypto platform.
- eToro – Leading social trading and multi asset brokerage that allows buying and selling of major cryptocurrencies.
- Securrency – Turns traditional assets into blockchain-based securities that can be traded, settled, and recorded efficiently.
Insurance
- IBM & AXA – Partnership to provide flight delay insurance where smart contracts automatically process payouts based on flight data. Reduces claims processing time and costs.
- Etherisc – Develops decentralized insurance applications on the Ethereum blockchain. Allows members to collectively take out insurance policies and get paid based on smart contract outcomes.
Identity & Security
- Civic – Secure identity platform that allows consumers to authorize the use of their identities in real time using blockchain and biometrics.
- Hydrogen – Enterprise fintech platform by IBM that uses blockchain to enhance security, reduce friction points, and unlock data silos.
- Bitfury – Full service blockchain firm that develops hardware, software, and security solutions for enterprise and government clients.
The applications of fintech and blockchain will only continue to expand as more opportunities arise to streamline financial services and processes with greater security, transparency, automation, and speed.
Major Industry Trends
Both the fintech and blockchain spaces are rapidly evolving. Here are some of the major trends that are emerging:
- Embedded Finance – Financial services like blockchain payments and robo-advisors are increasingly being directly embedded into non-finance digital environments like shopping, freelancer marketplaces, and messaging apps.
- Open Banking – Technological and regulatory developments like PSD2 in Europe are enabling open banking where consumers can more easily share financial data and leverage third-party fintech apps and services.
- Decentralized Finance – Also referred to as DeFi, uses blockchain and smart contracts to provide financial instruments like lending, trading, and investments in a decentralized architecture outside of traditional financial intermediaries.
- Digital Currencies – Central bank digital currencies (CBDCs) are under development while privately developed cryptocurrencies like Bitcoin and stablecoins continue seeing increased demand.
- Cloud Services – Financial institutions are increasingly adopting cloud-based infrastructure, tools, and services to enable fintech and blockchain innovation with improved scalability, flexibility, and costs.
- Artificial Intelligence – AI and machine learning technology is being incorporated into nearly every aspect of fintech from credit underwriting to investment advisory and fraud prevention.
- Cybersecurity – With the growing frequency and severity of cyber attacks, enhanced security measures like biometrics, distributed ledgers, and end-to-end encryption are critical for fintech and financial institutions.
Financial services are undergoing a technology-driven metamorphosis thanks to these developments. Both fintech startups and incumbent players are preparing for this new future or risk obsolescence.
Organizations must foster company cultures that embrace innovation, leverage modern tech stacks, attract top tech talent, and deliver an optimal customer experience both digitally and physically. Companies able to master this balance between legacy banking and modern digital innovation will determine the future fintech and blockchain landscape.
The Future Outlook
The outlook for both fintech and blockchain moving forward remains highly positive:
- Investments in fintech globally are forecast to soar from $135 billion in 2021 to $315 billion by 2025 according to Accenture.
- Deloitte anticipates blockchain will replace legacy ERP and CRM systems as the core digital platform for companies.
- Cryptocurrency usage continues expanding at a rapid clip. There are over 300 million crypto users worldwide today versus 150 million in May 2021.
- New financial applications of blockchain and enterprise adoption will drive blockchain market growth from $5.9 billion in 2021 to $67.4 billion by 2026 says Fortune Business Insights.
- Advances in artificial intelligence, Internet of Things, 5G, data analytics and APIs will enable more advanced fintech capabilities.
- Younger demographics like millennials and Gen Z will propel mass adoption of digital financial solutions given their preference for technology.
- Developing countries with large unbanked populations present major opportunities for fintech and blockchain to deliver financial access and inclusion.
While the COVID-19 pandemic created some temporary headwinds for the financial sector, most industry observers agree it accelerated the transition to digital banking, mobile finance, online investing, and cryptocurrency adoption by compressed years’ worth of change into a short time frame.
This paradigm shift won’t be reversed even as the world emerges from the pandemic. Consumers now have a taste for the conveniences and advantages of digital financial services made possible by fintech and blockchain innovation. These technologies undeniably represent the future.
The most successful financial services firms will transform their customer experience to meet new expectations while leveraging intelligent automation, APIs, cloud computing, AI and blockchain technology to provide hyper convenient, secure and personalized offerings with transparency. Companies that cling to legacy systems and banking approaches will quick fall behind emerging neo banks, challenger banks, and agile fintech competitors.
Financial institutions must also comply with continuously evolving regulations in areas like data privacy, shifting AML/KYC requirements, cryptocurrency legislation and decentralization. Policymakers creating this regulation must find a balance between protecting consumers and fostering innovation.
Businesses looking to leverage fintech and blockchain must ensure solutions comply with both current and pending regulation. Some degree of future uncertainty is inevitable. However, the overall regulatory environment is steadily becoming more transparent and favorable.
Conclusion
Fintech and blockchain represent two of the most important technologies transforming how financial services are delivered, consumed and managed. While they have distinct technical differences, fintech and blockchain also have a synergistic relationship driving innovation across the financial ecosystem.
Financial institutions that strategically adopt fintech and blockchain solutions will be best positioned to provide the seamless, secure and personalized experiences demanded by modern consumers and businesses alike. The future remains bright for these game-changing technologies redefining finance for the 21st century.
