I have gone through a few Fintech courses. They all go over all the technologies and how they work in the space of finance. These are things like electronic payments, mobile wallets, online banking, online investing, robo advisors and cryptocurrencies. I want to cover this topic not by going over endless amounts of technology that really doesn't help. I want to cover the applications and services that work in these areas and how they can help you. I am sure most of us have used the traditional banking system. We all have a local bank with a checking account. Maybe even a savings account. We probably have a debit card and even a credit card. Most of us probably access those services by online applications. We have used financial technology to some point. Here I just want to cover some of the services people might not be aware of that could help them in their journey of personal finance and investing.
Mobile Wallets are a digital form of the traditional wallet where you would put your paper currencies. Digital wallets can offer many new applications. You can use them to pay for things online, you can use them to pay you friends or family. Many of these digital wallet services offer more applications than just a wallet. I am going to cover Paypal, Cash App and Venmo under this category. You typically set up these accounts online and/or on a phone. Some of them allow you to use them in both devices. You set up the accounts and link them to a bank account through the Automated Clearing House (ACH) system using a service like Plaid. Paypal lets you link credit cards to your account to use for payment methods for online shopping. Once linked to a bank account, you can deposit money into and out of these applications. You can also set up a direct deposit to these types of applications. I don't think I ever would as they are too limited in function compared to online banking, but that is up to each user. You can use all these applications to send money to and from friends. The one thing you can't do with them is use them as a bank for other applications. You can't link them through ACH to your Binance or Robinhood account. You can get a debit card with these applications which can allow you to use them at a store or online to make purchases. Here I will look deeper at each of these applications and their pros and cons.
Paypal is the oldest of the mobile wallets applications. It has been around since 1998. I have personally used it for over a decade so it gets my highest level of trust. I love that they allow you to link a bank account and credit card. You can use it for checkout on many online websites. I probably have at least 10 monthly subscriptions paid through Paypal. I love that only 1 company gets all my credit card info. Then I just choose checkout with Paypal at any website. They offer a debit card and a credit card if you choose to apply for them. They offer a savings program through their application that works like a savings account. It tends to have higher interest rates than the national average. You can use it to send and receive money with friends and family. It even offers some crypto currencies you can buy and hold. They offer Bitcoin, Ethereum, Litecoin and Bitcoin Cash. You can use the debit or credit card at any physical stores or shops to make payments. I find it very useful and it is the one application I actually use. They don't offer any checking accounts which is similar to all mobile wallet applications.
Cash App is one that I use with friends and family to send money back and forth. I personally would not use it if it were not for them. I see a ton of risk in this application with the amount of scammers on social media with this application. They had some functions I liked, but there are other services I found that could offer all the same things but without the risk. I think it works if you make sure you only use it with people you know and trust. It offers a cash account where you can link your bank account. You can deposit money and use it with a debit card. You have to apply for their debit card if you want one. This offers you the ability to put in money and send it to friends or family. You can use the debit card for making purchases online and in stores. They offer a savings account with a good interest rate. I have never seen any checkout with Cash App options on any website. The only cryptocurrency they offer is Bitcoin. They do offer buying stocks, but they are limited with the companies they offer. I only found about half of the companies I follow on their application. They don't offer a credit card like Paypal. I found it had a little bit of everything, but not enough of the specific things to warrant use. There are better apps for mobile wallets. There are better apps for cryptocurrencies. There are better apps for mobile investing.
Venmo offers a social media component to its application. This allows you to import friends and family to send money back and forth. You can post your spending and sending money along with cool emojis. You can link your bank account to Venmo through the ACH network and make deposits. They also offer you a debit card if you apply for it. This will allow you to use it online and in stores to make purchases. They don't offer a credit card. Only Paypal offered the option for getting a credit card of the 3 mobile wallet applications. I did not see a savings account option with them. They do offer some cryptocurrencies with Bitcoin, Ethereum, Litecoin and Bitcoin Cash. I haven't seen any online sites yet that offer a Venmo checkout. I know they are now owned by Paypal, but I can't find any reason to use this over Paypal itself.
This is just my review of the mobile wallets applications. If you already use an online banking or investing app, you may find you don't have any need for these types of applications. Most people seem to use them among close friends and family they trust. Personally, Paypal is the only one I actually find a use for as I can deposit money into Paypal and use it like a savings account for things I want to buy like a new laptop. Once I have enough cash in there, I can use the debit card to make my purchase. I also use a linked credit card to do the vast majority of my online shopping. If you use Apple Pay or Google pay, you probably don't need these applications unless you are sending money to friends and family.
Most of us probably use mobile banking already. We probably have a bank with an online banking app that allows us to do most of our banking needs right on our cell phone. We all have a brick and mortar bank which is probably located near where we live and we use a combination of in bank and online services. What does fintech have to offer in the space of banking that might be of interest to us? Some banks save cost by not having brick and mortar banks. They exist only online. They use partner banks to store deposits for customers so they are FDIC insured. They have no employees since they exist only online. This allows them to offer some very attractive rates for customers along with many other services that some normal banks might not offer. They can offer higher interest on accounts along with things like crypto and stock investing. Some of them are designed well to work with other online applications for payments and investing which make them very convenient.
The first one here is Sofi. They offer all the standard banking options with checking and savings accounts. You can even order a paper checkbook if you want one. They have a debit card you can link to the checking account. They offer a credit card, loans and banking services. They even offer investing with crypto and stocks. They pretty much cover everything you would want from a bank. They allow direct deposit if you want to use them as your primary bank. They have both a website and phone app for the best of both uses. I use both of these services. They have tools built in for tracking spending and helping with budgeting. They even offer your FICO credit score from one of the major rating agencies. I haven't been using them long, but I haven't found anything I dislike about them. They seem to have it all, and it is in a very nice and easy to use application. The one drawback is they are only located in the US.
Chime is the other great alternative. They offer all the same services with a checking and savings account. They offer both a debit and credit card. They have a credit builder option that is designed to help build your credit score. They have a credit score tracker which I think uses the Advantage score. They offer the bonus of being international for those who might want to use them outside the US. The one thing they lack is the investing part of the application. If you are not looking to invest or buy crypto, this is a very attractive online banking option. Some of their banking services are nicer than Sofi, but they are more focused strictly on banking. The one thing I disliked about Chime is it tends to have a lot of limits on functions like daily deposits or withdrawals. That kind of makes it too limited for me personally.
The system I use to maximize online banks is to use it like a gateway to the digital financial life. I have a local bank where I have my checking with a paper checkbook in case I should need it. I have my Emergency savings account with them in case I have an emergency. I linked that account to my Sofi account. I push all my money from there to Sofi where I use it to spend and invest online with other online applications. It acts like a firewall so that no one knows or can access my local bank account. It is only linked to Sofi. If you are doing banking and investing online, looking at one of these Fintech banks could help boost your interest rates that you get over a standard account as many of these checking and savings accounts pay high interest rates compared to normal banks.
When it comes to investing online, I happen to be one of the first. I started investing in 1996 with a small company called Suretrade which then bought out by a bigger company which was eventually bought out by a bigger company which ended up with Merrill Lynch. I have been with them ever since. As I see all these new trading applications come out with newer technology, I feel jealous. I have been with my online broker for 25 years, and they don't offer many of the cool options like no balance limits, fractional shares or an easy to use application with crypto investing added on. Recently, I decided to make the move. I started investing with some of these newer investing applications. The biggest issue I have right now is trust. Some of them are very new, and I don't really trust them yet with any serious amount of money. If you are a new investor just getting started, I would certainly recommend them as I love so much more than the old brokers that offer outdated services. My recommendation is to spread it around like any risk management portfolio. I opted to put my money across several platform to ensure the loss of one would not dramatically impact me.
The first one here will be Sofi as they have crypto investing and stock investing built into their application along with banking. You can quickly move money between these accounts which makes it very easy to use. They offer buying fractional shares. I didn't see a huge amount of analytic tools. If you day trader who needs charts, this probably isn't going to be for you. If you are an investor looking to contribute every payday into an investing account, this is a very good option. They offer a range of retirement accounts from a 401k to an IRA. I think it would be a great place to park some of your investing money. I opted to put my Technology portfolio with them as I test out and learn the system. If I run into any issues or benefits I missed, I will come back and update this section.
The next option is Robinhood. I know they took a lot of bad press over the meme stocks from the pandemic bubble and some of the actions they took by halting some stocks. I tested out their platform with my new biotech portfolio. I love everything about it so far. It is a very simple and clean interface for new investors to get started. Again, if you are looking to be a daytrader and need advanced charts, you would probably have to do that with another application. They offer fractional shares. I did a wave of buying with my deposited cash and found it very easy to use. The notifications kept track of every trade so I could go back and look at how many shares and at what price I was able to buy. Helps me record my cost basis. I found that very useful. I think they even offer more cryptos for investing than some of the other applications up to this point. You can buy some of the more speculative coins on Robinhood. They offer an IRA with matching. I never tested it out, but I do have an IRA. I could move there later once I trust them more with my money.
Webull is a very popular app among traders as it offers all kinds of charts and options trading. I found it way too complicated for the average investor who just wants to buy and own stocks. When I found out it was Chinese owned, I stopped right there and moved on. With all the crackdown on TicTok and the risk of giving personal information to foreign entities, that was just too much risk for me. I gave it a pass.
M1 finance is a different type of investing app. This allows you to design a portfolio where you build a pie chart by selecting the stocks or ETFs you want in your portfolio. Then you set a percentage for each of these stocks. You can put 20% in a SPY ETF then spread the rest in 5% or 10% in stocks you pick. You can build your portfolio any way you wish and assign any percentage to that specific stock. You can even build multiple portfolios. Then as you invest money into a specific portfolio, the robots will buy and sell stocks to maintain the correction ratios you picked for that portfolio. I find that very interesting as it bridges some of the benefits of self directed investing with robo advising. I plan to download their app and sign up later this week to test it out. I will update this section after I have some time to test it out.
Robo Advisors are the next step toward passive investing. They tend to be cheaper than paying a human financial advisor, but they are much more expensive than a self directed investing broker. Many of the established brokers have started offering Robo Advisor applications. These are software driven investing strategies. Many of them will gather information about you and your investing goals. They ask a lot of questions about risk. This helps the design a portfolio for you to reach your long term goals with the lowest possible risk. I am not a big fan of these services as picking a low cost index fund will often outperform them once you subtract all the fees. Many of the brokers that offer these services will use them to push products on investors that make money for the broker and may not be in the best interest of the investor. Some of the independent companies are Wealthfront and Betterment. Some Robo Advisors will offer portfolio that are prebuilt for investor such as an aggressive growth portfolio or a conservative portfolio. Some even offer theme based portfolios like socially responsible portfolios. I want to mention these as an option, but I don't think I would ever use one.
Peer to Peer Lending
This is one area of lending where fintech can do well. This is about taking investors who have money to lend and matching them with borrowers who need that money through a technology platform. I never used one of the platforms outside of crypto. There are companies like Lending Club, Upstart and Prosper. The lenders here can be borrowers or privately held companies. Usually they require a certified investors status which means you have to have a large amount of money to commit to these platforms. Many of the lenders are extensively evaluated by the platforms to ensure they are credit worthy for the investors. In crypto, this is done quickly by apps that match lenders who deposit their currencies on the exchange. Then that currency is lent to a borrower and the lender gets a large portion of the interest.
This is a technology that uses a group of technologies to create an open ledger of transactions that is open to all who want to view the ledger. It is distributed across thousands of computers with them all having a complete copy of the ledger. This makes it transparent and very strong in security. The key thing to remember about blockchain is that it is a technology for handling a public ledger of transactions that is distributed and transparent. It uses multiple technologies to ensure security and limited anonymity. This includes technologies for handling identity of the participants like private and public keys, digital signatures, blocks of transaction, hashing, encryption and consensus mechanisms.
Think of the blockchain as blocks. Each block contains a group of collected transactions. They are grouped from all the available transactions in the public memory pool. They are collected and placed into these blocks. The block is then digitally fingerprinted using a Hashing algorithm. This makes it very secure as changing even a single letter or digit inside a block will completely change the digital fingerprint. The fingerprint is a long hexadecimal number that then gets placed into the next block along with a new batch of transactions. The Hashing acts as digital fingerprints that chains one block of transactions to the next. Hence the name blockchain. This is a chain of blocks that contain batches of transactions. This makes up the public ledger of transactions. It is an append only ledger. No changes can be made once the next block has been added to the blockchain. Any tampering of any block would immediately throw off every single hashed digital fingerprint and stick out very quickly. Every node would notice this hash mismatch and reject that copy of the ledger.
The blockchain public ledger is distributed across thousands of computers. Every node that is responsible for adding new blocks to the chain is called a miner, and they all have a complete copy of the entire public ledger. Anyone who wants to run a node can download the entire copy of the ledger and participate in maintaining its consensus. The consensus is a set of computer coded rules that handle how new blocks get added to the blockchain and what copies of the blockchain are valid. You can make a change to one copy of the blockchain on a single node, but every other node that has a copy of the blockchain would reject it. To take over consensus, you would have to be able to take over more than 50% of all the nodes with a copy of the blockchain at a single time. This makes the blockchain nearly impossible to hack, change or alter. There are thousands of nodes all participating in the consensus of the record of the public ledger. The ability of a hacker to take over a large enough amount of the entire system would be nearly impossible.
Anyone can participate in the blockchain by creating an identity. This is done by creating a set of private and public keys. The private key is only for you. No one should ever know your private key except you. These are usually held in software wallets that record the private key as a set of words that act as a seed phase. The private key number is translated into words using a mapping algorithm called BIP39 which then lets the user remember their private key number by just recording the 12 or 24 seed words associated with that private key. The public key is created from the private key using elliptical curve algorithms. This is a very complex set of calculations that are not important to understand how blockchain works. The important thing is to know that the private key is used to make the public key, but no one can ever figure out the private key by just knowing the public key. It is a one way algorithm. You can give out your public key like you would your email address, and people can use it to send you cryptocurrencies. Different currencies will use different public keys addresses. Bitcon uses a Bitcoin address while Ethereum uses an Ethereum address. You have to use the right public key addresses for the right currencies. Sending the wrong currency to a public key address would result in the currency being lost. Transactions get digitally signed using the person's private key then they are addressed to the receivers public address.
Security in the system is done through Hashing. This is an algorithm that takes any size of data and fingerprints it down into 256 bits of data expressed in hexadecimal. You can take the entire encyclopedia with hundreds of volumes and hash it down into a single 256 bit hash value. This is not encryption but more like digital compression and fingerprinting. There are a few key attributes to hashing. The first is that the same input data always results in the same output. That makes it deterministic. If you input the same value, you will always get the same hash output. That means you can use hashing to quickly compare 2 different sets of data to see if they are exactly the same. If even a single digit in the data is different, the entire hash value will change. Hashing is so sensitive, it can tell the difference if you capitalize a letter in one document and not in another document. Even punctuation can change the hash value. The next attribute of hashing is that it can not be reversed. You can not figure out what the data was just from the hash output. The last attribute is it is collision resistance. That is the odds of 2 different inputs resulting in the same hash output. With the 256 bit hashing, that is extremely unlikely. Some say impossible, but sooner or later a collision will be found. These attributes of hashing make it perfect for the security of protecting the data in the blockchain. Each transaction gets hashed using a Merkle root. This looks like an inverse family tree. Where many transactions are hashed together to create a tree until there is just one Merkle root hash. This becomes the Merkle root hash for all the transactions. That is combined with the previous blocks hash and the nonce to create the current blocks hash.
The next attribute of the blockchain is that the public ledger is distributed so that many computers have a complete copy of the ledger. Any leger that does not match the public record is rejected. There are a set of rules for adding new blocks of transactions to the blockchain. This is called consensus. Bitcoin uses mining. This is where nodes on the network collect transactions into a block. Then they have to take the hash of the block and try to make it be lower than a predefined number. They do this by hashing the block's hash with a random number called a nonce. This stands for number used once or nonce. These computers that run the hashing to solve the math to make the next block are called miners. The first miner to reach the right solution earns the right to post their block of transaction to the blockchain. After that block is added, it is sent out to all the nodes which have a copy of the blockchain where they verify it is valid before it is agreed upon. This is the process of consensus used in Bitcoin and it is called Proof of Work as the miners have to do computational work to find the right answer to win the right to post the next block. There are other consensus mechanisms that exist like proof of stake. This is where the nodes that want to add blocks to the blockchain will stake a large sum of the currency like Ethereum. They then get the right to participate as a validator. They are called validators in proof of stake and miners in proof of work consensus. There are different ways that validators get assigned to posting a block to the blockchain. Ethereum uses a system called GASPER. The validators are randomly sorted into groups called a pool. Each pool gets assigned to a block called a slot. The first validator in that pool will propose a block. Then every validator in that pool will vote on the validity of that proposed block. Once a consensus of those validators approves the block, it is then posted to the blockchain. There are other consensus mechanisms in this process that validate that each validator is only voting once per epoch which ensures no validator is voting twice. Any validator that does not behave will have their staked currency slashed. They lose money by having their staked currency slashed on them if they don't act properly. This ensures they adhere to the rules.
The last concept is one I think many cryptocurrency owners get confused over. When you own a cryptocurrency, you get that coin assigned to your private key as ownership. Every Bitcoin or Ethereum is minted in a coinbase transaction that is used to pay the minor or validator for posting the block to the blockchain. That coin is then assigned to their private key as their ownership. Usually they will sell it on to another person who wants to buy that coin. The transaction is posted on the blockchain that transfers the ownership from the private key of the miner to the private key of the buyer. The coins are assigned to the private key as ownership. Whoever controls the private key owns any coins assigned to that private key. Coins never leave the blockchain. They are always there recorded in their transactions. All you have as a cryptocurrency owner is the private key that gives you control over those coins. When you create a software or hardware wallet, you are making a private key and then using a transaction on the blockchain to transfer ownership to that new private key. You can have as many wallets of as many kinds as you would like, and they can all control different currencies. All a wallet does is make a private key so that you can transfer ownership of the coin to that private key. Whoever has control over that private key owns those coins. That means you have to protect that private key. Many people act like the coins move. We think like traditional wallets where we put money into them. On the blockchain, the coins don't move into the wallet. Only the ownership is transferred to that new private key associated with that wallet. This is a very important concept. You can find any coin on any blockchain, and you can follow its path of ownership from the second it is minted all the way through every owner until you reach its current owner. You can do this by following the transactions that transfer the coin from one public key to the next. That means you can query any public key on the blockchain and see exactly how many coins are in them. You might not know who owns the private key that controls that public key address, but you can know exactly how many coins are in a specific public key. If you have the public key to one of your wallets, you can look it up on the blockchain explorer and see every coin it owns and every transaction it has ever made. This is part of the public transparency of blockchain. This is why people who say cryptocurrencies are only for criminals sound so silly. You can actually trace every single coin through every transaction it has ever made and to what public key wallet owns it.
* I am not a Financial Advisor. This is just My Perspective. Please refer to your financial advisor before making any investing decisions.