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Here's what "fintech" really means

A look into how technology is disrupting the banking industry at a pace never seen before

What exactly is fintech?

If you’ve paid even the slightest attention to financial news lately, you’ve probably heard the term “fintech.” With Canadian companies like Wealthsimple making headlines and getting significant investment from US venture capitalists, it might be time for us to take notice of what is being called a revolution.

A lot of people still don’t really understand what “fintech” means. That isn’t surprising — the shifts aren’t necessarily all on the surface, so it’s easier to start with explaining that the main function of financial services isn’t changing. You’re still going to get loans, you’re still sending money in exchange for goods, and banks are still going to need unbreakable security to protect your investments.

What is being revolutionized is how the financial industry operates behind the scenes. Banks can now use technology to make it easier to process paperwork, send money between you and your friends, and apply for financial services like mortgages and loans.

Investor attention toward Canadian fintech companies has started to ramp up in the last few years. A recent report from Reuters puts Canadian venture capital investment in fintech companies at $137.7 million (USD) in 2016 alone.

Of course, this is dwarfed by the American industry with VC investments in fintech at $4.27 billion. That could be part of the reason you see your American friends talking about sending money over Venmo and Square Cash. But that could change soon with new options coming in Canada.  

The fresh injection of funds has enabled a creation of a fintech cluster in Toronto’s MaRS Discovery District. This has allowed renewed efforts from companies like Tilt, Wave, and FinanceIt to flourish. The incredible part is, all these companies do radically different things.

Tilt is going to bring cashless money transfers between friends — that has made Venmo extremely popular — to Canada. Wave helps small businesses get the most out of invoicing, receipts, and accounting — for free. FinanceIt could change the way vendors offer any large purchase with the ability to add payment plans to products without the fees of a large banking institution.

Kirk Simpson, CEO of Wave, saw the intimidating nature of other accounting software and understood the potential of new standards in the ways we connect. Speaking to VICE Money, he explained that the costs of accounting software kept the extremely small business owners’ accounting in spreadsheets. “So our thought process is: let’s give away the software for free. There are models on the consumer side that have obviously proven this at scale like Google or Facebook.”

Wave has approached the industry with the same mindset of innovation that tech companies have brought to other markets. Wave also offers invoicing, loan and credit card processing where they take a small cut, so that they drive revenue to continue offering their free services.

But, how exactly is this different from before?

Peter Misek of the Business Development Bank of Canada thinks there are a couple of reasons why the fintech revolution has arrived.

“What’s enabling it is, really, a handful of things. Number one: effectively unlimited computing power on tap. The cloud — which is really the biggest player, Amazon Web Services or AWS — is enabling massive computing power on huge datasets at scale and at speed that was never thought possible,” Misek told VICE Money over the phone.

The other big difference that has only emerged in the last ten years is how we use technology in our day to day life: smartphones. “Our smartphones have given insight into human beings that from the outside no financial institution, or frankly, company, would ever have had,” said Misek.

Our use of social media has meant that we leave a trail of informative data wherever we go. For example, Facebook collects and stores data about us — everytime we get a new job, a new place to live, add a new friend, or like a new picture. That data is useful to banks or financial institutions which are looking to see if you’re a good match with their products. Equally so, the smartphone can now act as an interface, being able to send pictures and data between people so that banks don’t need to shepherd that info in the forms of cheques or credit card details.

“You know, everybody looks for the silver bullet or an overnight success story, and then you find out the overnight success story has been there for 10 years. I would argue that there is no one tipping point. All of those things had to happen,” said Misek.

Technology in our hands or technology in remote computing means that our traditional way of interacting with banks could be coming to a close. This has started already in the US, but Canada has taken a little longer to get going.

“The desire, the capital, the experience, the mentorship and the roots of startup development in any industry really only reignited in 2010 or 2011,” said Misek.

The days of walking into a bank branch for a mortgage or having some banker come to your house to have you fill out a mortgage application could be over.

“It can all be replaced instantaneously,” said Misek. “It took us 10 years to develop 500 fintech companies, and we’ll probably create another 200 in the next 12 months.”

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