12 Changes Brought About By Investment Technology

Learning Objectives:

• Identify benefits of financial technologies as used by financial services companies and institutions.
• Know about problems that can occur due to use of some of these technologies.
• Be able to assess any fintech app.

The Technology

If you’ve ever ‘Venmoed’ money to a friend to split the restaurant check or contributed to a Kickstarter campaign, you’ve used fintech or financial technology! The most recent Global FinTech Adoption Index (Ernst & Young, 2019) reports that 64% of digitally active consumers surveyed in 27 markets around the world have adopted two or more fintech services. (Jardine, 2021)

Fintech is “new tech[nology] that seeks to improve and automate the delivery and use of financial services” (Kagan, 2023). The term also encompasses the world of cryptocurrency (see “Speculating in Alternative Investments” chapter). Often seen as a disrupter to more traditional banking and brokerage services, fintech uses software, apps, and algorithms to help consumers, small businesses, and large companies manage their finances. More recently, however, established banks and finance companies have introduced their own fintech, which dilutes the image of fintech as challenging Wall Street’s more established financial firms. For example, after the mobile stock-trading app Robinhood offered commission-free online trading, a number of traditional investment brokerage firms, such as E*Trade and Charles Schwab followed suit (Farley, 2022; Jardine, 2021).

Fintech includes a broad array of companies and technologies, including:

• Support services for traditional financial firms.
• Alternatives to traditional banking and financial services firms.
• Additional financial services for consumers.

(Han, n.d., slide 4)

A sample of the technologies being used in fintech products and services includes:

Chatbots
In fintech, chatbots are often used by financial service companies to handle basic customer service interactions.

Internet of Things (IOT)
In fintech, you can see the Internet of Things at work in contactless payments, where sensors enable paying for goods and services by waving a credit/debit card or smart phone with enabled payment app or digital wallet above a store’s payment reader.

Virtual & Augmented Reality
An example of virtual reality in fintech comes from banks using it to train employees in handling the more difficult customer service conversations. Augmented reality can be used by customers to find nearby banks and ATMs by checking the area with their phones.

Artificial Intelligence (AI) & Machine Learning
AI powers robo-advisors, automated digital platforms that use algorithms to provide investment and financial planning advice with little-to-no human intervention. 

Biometrics
In fintech, biometrics can provide added security when a person has to use a fingerprint to unlock their cellphone in order to access an investing app.

(SMEX, 2021)

Cloud Computing
Fintech apps based on cloud computing allow users to manage their money and accounts remotely (Oxford, 2015).

(Gensler, 2020)

The Promise

Fintech has the potential to democratize financial services and promote inclusion with products and services that are easier for consumers to access and use. It leverages technology to:

• speed processes;
• improve convenience; and
• lower costs.

Many fintech products and services are finding underserved niches in the present financial system, such as the unbanked (people who don’t have a bank account), low- and middle-income customers, and younger people just beginning their financial journeys. Fintech often supports consumers in the important areas of saving and budgeting in ways that regular banks don’t. Their products specialize in a particular service for people who don’t need the wide swath of offerings of brick-and-mortar banks or the fees that come with those buildings and products. And fintech apps are known for engaging users with slick design and fun elements to help users reach their goals.

(Jardine, 2021)

View this text and video to learn about using robo-advisors (Frankenfield, 2023). 

The Challenge

Customer service may be more difficult for consumers if they can’t call or visit a branch office to talk to a person. For example, the inability of investing app Robinhood’s users to reach customer service for help, especially in 2020 and 2021, revealed the growing pains that fintech startups can face. Fintech companies can also be challenged by unexpected growth and activity, such as the problems with the influx of federal stimulus payments during the pandemic on the banking app Chime.

An important aspect of fintech is data security and privacy so that customers’ sensitive financial information and banking account logins are not exposed through cyberattacks.

(Jardine, 2021)

Handout: learn more about keeping your personal financial data private and secure from unauthorized access (Consumer Action, 2021).

Finally, some of the investing fintechs have been criticized for their game-like elements (Walden & Foreman, 2021), which may encourage some users to make inappropriate investments as they get caught up in the game.

How to Choose

Deciding whether to dive in and use a fintech app or service—or choosing which one, if you’ve made the decision to take the plunge—depends on your financial goals and needs. Do you want to save more money? Do you need help tracking spending across multiple credit and debit accounts? Do you want to dip a toe into the investing waters?

• Is there a minimum account balance you must maintain to use the service?
• How will the app connect to your financial accounts? Does it work with any financial institution accounts?
• How does it secure your personal information?
• Is the service platform mobile only or can you use it through a website on a computer if your phone is lost or doesn’t work?
• What fees does it charge and under what conditions? An app may advertise overdraws with no penalty, but there may be a limit to the number of times or amount that you can overdraw without paying a fee.
• What options exist to get help when there’s a problem? Is there a phone number you can call with a person on the other end, or are you limited to Tweeting the help desk?
• Finally, how does the company behind the app make money from this? Is it selling your personal information?

Seek out reviews from actual users to see what their experiences, both good and bad, have been and if those experiences will be relevant to how you’ll use the app or service. Do your research and treat your hard-earned money with the care it deserves.

(Jardine, 2021)

Activity: Read pages 1-10 of the FINRA/CFA Institute report Gen Z and Investing: Social Media, Crypto, FOMO, and Family (FINRA & CFA,  2023). If you’re interested in data from China, the UK, or Canada, you can read any of those sections as well. Focus on data about your own generation as defined on page 1. Discuss or write a reflection: Which data surprised you the most? Why? What data do you think shows your generation is on the right track financially? Is there any data you saw that may indicate a problem for your generation reaching its financial goals?

Please Provide Feedback

What is one tip that you learned from this chapter?

References

Consumer Action. (2021). Share financial data with care: Privacy and security when using fintech apps. https://www.consumer-action.org/downloads/english/FinTech_privacy_tips_2021_EN_v1.1.pdf

Ernst & Young [EY]. (2019). Global FinTech Adoption Index. https://www.ey.com/en_us/ey-global-fintech-adoption-index

Farley, A. (2022, September 30). Is there a catch to free stock trading? Free stock trades have a few problems. Investopedia. https://www.investopedia.com/investing/free-stock-trading-whats-catch/

FINRA Investor Education Foundation, & CFA Institute. (2023, May). Gen Z and investing: Social media, crypto, FOMO, and family. https://www.cfainstitute.org/-/media/documents/article/industry-research/Gen_Z_and_Investing.pdf

Frankenfield, J. (2023, September 1), What is a robo-advisor? Investopedia. https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp#mntl-sc-block-callout-body_1-0

Gensler, G. (2020, March 30). Class 1: Intro and Key Technological Trends Affecting Financial Services. FinTech: Shaping the financial world (MIT 15.S08, Spring 2020). MIT OpenCourseWare. https://ocw.mit.edu/courses/15-s08-fintech-shaping-the-financial-world-spring-2020/pages/intro-and-key-trends/

Han, Meng. (n.d.). Introduction to fintech [PowerPoint slides]. Kennesaw State University, College of Computing and Software Engineering. https://view.officeapps.live.com/op/view.aspx?src=http%3A%2F%2Fksuweb.kennesaw.edu%2F~mhan9%2FALG%2Fit4603%2FClass%25200.pptx&wdOrigin=BROWSELINK

Jardine, E. (2021, September 20). What’s up with fintech? Moneyboss: Your guide to personal finance and entrepreneurship: Moneyblog. https://guides.laguardia.edu/moneyboss/blog/Whats-Up-with-Fintech

Kagan, J. (2023, April 27). Financial technology (fintech): Its uses and impact on our lives. Investopedia. https://www.investopedia.com/terms/f/fintech.asp

SMEX. (2021, January 27). The future of biometrics and digital ID in Lebanon: Assessing proposed systems for elections and social assistance [Report]. https://smex.org/the-future-of-biometrics-and-digital-id-in-lebanon-assessing-proposed-systems-for-elections-and-social-assistance-report/

Walden, S., & Foreman, D. (2021, April 16). How gamification can help you meet your financial goals. Forbes Advisor. https://www.forbes.com/advisor/banking/how-gamification-can-help-you-meet-financial-goals/