Fintech: Transforming Finance, But at What Cost?

Fintech: Transforming Finance, But at What Cost?

By Cosmina Serban, Markos Televantos | Supervised by Filippo Cucchiara

Introduction

Financial technology, better known as fintech, is used to describe new technology that seeks to improve and

automate the delivery and use of financial services. This could be in any area related to finance such as

banking, insurance, investing. Although it’s a relatively new word, fintech is actually nothing new. Technology

has always changed the financial industry. However, the internet, combined with the widespread use of

devices like smartphones and tablets, accelerated the speed of this change in recent years.

In fact, the word Fintech is a shortened combination of “financial technology.”

Over the past decade, technological progress and innovation have catapulted the fintech sector from the

fringes to the forefront of financial services. The growth has been fast and furious, buoyed by the robust

growth of the banking sector, rapid digitization, changing customer preferences, and increasing support of

investors and regulators. During this decade, fintech has profoundly reshaped certain areas of financial

services with its innovative, differentiated, and customer-centric value propositions, collaborative business

models, and cross-skilled and agile teams.

As of July 2023, publicly traded fintechs represented a market capitalization of $550 billion, a two-times

increase versus 2019. In addition, in the same period, there were more than 272 fintech unicorns, with a

combined valuation of $936 billion, a sevenfold increase from 39 firms valued at $1 billion or more five years

ago.

Even though the sector has grown, so have the instances of fraud. In the last years instances of digital fraud,

peer-to-peer lending platform collapses, and borrower distress have. While some of these risks are new, many

are only manifestations of risks that already existed in financial markets. They include not only those arising

from the underlying technology enabling fintech, but also from new business models, product features, and

provider types.

This takes us to the main question: Is fintech truly adding value to everyday consumers, or is it exposing them

to risks they don’t understand?

Types of Fintech and Fintech Products

Fintech covers a wide range of use cases across business-to-business (B2B), business-to-consumer (B2C), and

peer-to-peer (P2P) markets. Some of them are:

Neobanks

Neobanks are digital-only banks without traditional physical branches. They are one of the most central

components of the financial system. They provide banking services predominantly through mobile apps and

online platforms and are often known for user-friendly customer experiences. Opening and funding an

account, as well as reducing fraudulent sign-ups, are now quick and easy thanks to technologies like Plaid’s

Authentication and Identity Verification. In turn, neobanks like Varo offer flexible personal checking accounts,

high-yield saving accounts, and even secured credit cards—all without the traditional fees that can inhibit

people from achieving their financial goals.

Digital Payments or Paytech

Payment technology aims to smooth and enhance payment processes for both consumers and businesses. This

includes digital wallets, P2P payment platforms, contactless payment products, and buy now, pay later

services. Cashless payments are on the rise. Since the onset of the pandemic, cashless payments have surged,

with 41% of Americans saying that all their payments in a week are digital, up from 29% in 2018. Payment

apps and services have become more and more common. That’s because receiving payments via direct bank

transfer is significantly less expensive than using credit cards, and getting users signed up and authenticated

has become faster and easier. In the United States, Plaid allows consumers to instantly connect their bank account to an app or service to carry out digital payments (Shift, for example, aims to take the hassle out of

buying a used car) via the ACH network. On the B2B side, apps like Wave help businesses pay bills, do

bookkeeping, and send payroll—also digitally and via ACH.

Personal Financial Management (PFM)

Personal Financial Management apps help users consolidate financial information from various accounts into

a single dashboard, making it easier to stay up-to-date with their finances. These services help people to

manage and budget their money. Examples include Dave and Brigit, another leading PFM app is Copilot, which

helps its users build an accurate picture of their financial health and net worth.

Wealth Management or Wealthtech

Wealth technology focuses on modernizing wealth management and investment processes. This sector

includes robo-advisors, personal finance tools, and digital brokerage platforms. Fintech tools help financial

advisors and wealth managers gather information from different accounts to increase assets under

management (AUM) and provide better overall financial advice. Atom Finance, for example, offers a suite of

products and features to help users research and track all their investments in one place. Stash is a

subscription platform that gives customers easy and affordable access to investment, education, and financial

advice products.

Fintech Lenders or Lendtech

Lending technology platforms offer online loans, P2P lending opportunities, and alternative credit assessment

methods, making the lending process more transparent and accessible. Lenders often struggle to gain a full

and accurate picture of their applicants due to the amount of work and time it takes to collect income

information, account balances, and asset history. In addition, it can be an unmanageable process to get

borrowers to connect their bank accounts to receive and repay loans. Top fintech lenders like SoFi, Prosper,

and SoLo are using technology to overcome these issues in the lending process while also providing more

consumer-friendly loan choices. Plaid also helps by simplifying the loan process for borrowers while giving

lenders access to the user-permissioned bank, payroll, and other data they need to make informed lending

decisions. In this way, it becomes fast and easy to verify borrowers’ identity, assets, employment, and income,

as well as authenticate their accounts, check balances in real time, and verify financial obligations.

Embedded Finance

Embedded finance refers to financial services offered flawlessly in consumers’ everyday experiences through

non-financial products and services. For example, Shopify Balance provides business checking accounts for

Shopify users that help them get paid faster and manage their business, but it's important to note that Shopify

isn’t a financial institution, and Shopify Balance is a financial product ‘embedded’ in a non-financial product.

Embedded finance use has grown in recent years and is expected to continue to increase in relevance. It’s

estimated that these services will produce $230 billion in revenue in 2025, which is 10 times more than in

Insurtech

Insurtech is where technology meets the insurance industry, with companies investing in innovations like

generative AI and blockchain technologies to provide more tailored insurance products, efficient claim

processing, and risk management solutions.

Regtech

Regulatory technology companies create tools that help financial institutions comply with regulations more

efficiently and at a lower cost. They utilize technologies like big data analytics and AI to monitor transactions,

detect anomalies, and ensure compliance.

Fintech Company Examples Examining examples of fintech companies helps us understand how fintech is changing the financial industry.

For instance, Chime has disrupted the traditional banking model by offering no-fee banking services and

features that help customers avoid overdraft fees. Likewise, Brigit is an app that helps build financial health

by offering members budgeting tools, automated alerts, interest-free cash advances, and a centralized view of

their money. Qapital provides automated savings tools to help members spend confidently while achieving

their financial goals.

Other companies offer targeted solutions to specific markets. Placid Express enables customers to securely

and affordably send money abroad while reducing the historically high risk of fraud associated with such

transactions. Prosper aims to advance financial well-being by giving borrowers access to affordable credit as

the first peer-to-peer lending marketplace in the United States. Another prominent peer-to-peer lending

platform, SoLo Funds, is designed to help people solve short-term cash flow challenges without having to

resort to predatory financing options like payday loans.

Companies like these and others are driving innovations and evolutions in the market, to the point that some

innovations—no-fee banking services, for instance—are becoming table stakes across the sector. As fintech

companies create positive change, legacy financial institutions are becoming motivated to improve as well.

For example, Wells Fargo provides its Extra Day Grace Period program that gives customers an extra day to

make a deposit to avoid overdraft fees. Fintech banks create a standard where overdraft fees are more

avoidable and financial institutions follow suit—helping create a financially healthier environment for all.

Fintech’s Double-Edged Sword: Innovation vs. Consumer Risk

Fintech has undoubtedly revolutionised financial services, making payments, investing, and lending more

accessible than ever. However, rapid innovation often comes with unintended consequences. While these

technologies empower consumers, they also introduce risks that many may not fully understand.

BNPL: Convenience or a Debt Trap?

Buy-Now-Pay-Later (BNPL) services have surged in popularity, with the global BNPL market expected to

reach $680 billion by 2025. By offering instant, interest-free instalments, BNPL platforms like Klarna,

Afterpay, and Affirm appeal to consumers who might not otherwise use traditional credit. However, this

convenience comes at a cost.

Many users fail to recognise BNPL as a form of debt, often accumulating multiple instalment plans across

different providers without realising their total financial exposure. A 2024 study by the UK’s Financial

Conduct Authority found that one in three BNPL users struggles to keep up with payments, with late fees and

compounding debt adding to financial strain. Since BNPL loans often don’t appear on credit reports, users

may overextend themselves, taking on obligations that aren’t visible to banks or lenders.

Despite these risks, regulation remains inconsistent. Unlike credit cards, BNPL providers often operate in a

gray area, avoiding strict consumer protection laws. Governments are now considering intervention—

Australia, for instance, recently announced plans to regulate BNPL services as credit products. If fintech truly

aims to democratise finance, ensuring responsible lending and better consumer education must be a

priority.

The Gamification of Investing: Encouraging Participation or Recklessness?

Retail investing platforms like Robinhood have made stock trading more accessible than ever, but their use

of gamification, such as confetti animations and instant trade execution, has raised concerns. A study

published in The Journal of Behavioural Finance found that users on gamified trading platforms are 40%

more likely to make speculative, high-risk trades than those using traditional brokerage accounts. Inexperienced investors, drawn in by the engaging interface, may mistake high-frequency trading for

strategic investing. This was particularly evident during the 2021 meme-stock frenzy, where thousands of

retail traders incurred massive losses after being encouraged by viral online trends. In response, regulators

have started cracking down; Robinhood was fined $70 million in 2023 for misleading customers about

trading risks.

This raises a key question: Are fintech firms prioritising financial literacy, or are they simply optimising

engagement for profit? While some companies have introduced educational tools, many still thrive on

transaction-based revenue models, which benefit from frequent user activity rather than long-term financial

health.

The Unseen Threat

As fintech platforms process vast amounts of user data, they become prime targets for cybercriminals. In

2023 alone, global fintech firms suffered over $1.5 billion in cybersecurity breaches, with incidents ranging

from data leaks to large-scale ransomware attacks.

Unlike traditional banks, which have decades of experience managing cybersecurity risks, many fintech

startups lack the infrastructure to protect against sophisticated threats. Additionally, the rise of open

banking, where third-party fintech apps connect to consumer bank accounts, introduces new vulnerabilities.

If a fintech app is hacked, attackers can gain access to sensitive financial data, leading to fraud and identity

theft.

This issue is exacerbated by weak regulatory oversight. While banks must comply with strict cybersecurity

regulations, many fintech firms operate with fewer constraints. Governments are now debating whether

stricter compliance measures should be imposed on fintechs to ensure consumer protection.

Regulating Fintech

The fintech industry thrives on rapid innovation, but this often outpaces regulation. Unlike traditional

financial institutions, which operate under well-established legal frameworks, many fintech startups exist in

regulatory loopholes. This has led to inconsistent consumer protections across different fintech sectors.

BNPL services: Often excluded from traditional lending regulations, leaving users vulnerable to hidden debt.

Trading apps: Face scrutiny for promoting high-risk behavior without sufficient disclaimers.

Crypto and DeFi: Still largely unregulated, exposing users to fraud and volatility.

Regulators now face a dilemma: How can they implement safeguards without stifling innovation? Countries

like the UK and Australia are actively developing new fintech-specific regulations, while the EU has

introduced stricter consumer protection laws for digital financial services. However, the challenge remains

in striking a balance between enabling financial inclusion and preventing consumer exploitation.

Conclusion:

Fintech has revolutionized financial services, simplifying and enhancing sectors such as banking, investing,

and lending. However, its rapid growth has brought significant risks, such as debt traps in Buy Now, Pay Later

(BNPL) services, cybersecurity threats, and reckless investing promoted by gamified platforms. Even though

fintech offers convenience and financial inclusion, the lack of proper regulation and consumer education leaves many people vulnerable to unexpected problems. In the future, it will be crucial to balance innovation

with responsible control to ensure fintech benefits consumers without exposing them to unnecessary risks.