What is fintech? 6 main types of fintech and how they work

Gain a deeper understanding of the fintech industry, popular fintech use cases, and the impact fintech is having on the world.

October 03, 2022

Justin Headshot
Justin Trificana

Justin has been a writer at Plaid since early 2020 and is focused on the evolution of trends across the fintech ecosystem. He’s the author of the company’s annual Fintech Spotlight report.

If you've used Venmo to split a dinner check, bought cryptocurrency on your phone, or used an app to make a budget, you've put the power of fintech to work for you.  

The percentage of US consumers using technology to manage their finances jumped from 58% to 88% in 2021—meaning more people now use fintech than social media. Fintech is now just behind the internet as one of the most widely adopted consumer technologies.

With so many people using fintech, it’s beginning to reshape our financial world. People’s money is easier to access, and there is more they can do with it. Fintech provides new ways to share, save, invest, and manage money—making life better for the people it touches and also helping those underserved by legacy financial options. 

Having reached mass adoption, it’s clear that fintech is here to stay. In this article, we’ll take a closer look at what it is, how it works, and what types of companies and services make up this ever-expanding sector.

What is fintech?

Fintech is a blend of “financial” and “technology”. It refers to any app, software, or technology that allows people or businesses to digitally access, manage, or gain insights into their finances or make financial transactions.

Over the last decade, as consumers increasingly adopted digital tools, fintech arose as a means to help consumers address financial challenges and make progress toward financial goals. In turn, consumers have come to rely on fintech for a range of uses—from banking and budgeting to investments and lending—as well as for its tangible everyday benefits.

According to Plaid’s Fintech Effect, consumers report numerous benefits of using fintech including economic and time savings and reduced stress.

In addition to time and money savings, respondents also cited softer answers including easier financial tracking, greater control, more choice, and better habits. This speaks to the many ways—both quantifiable and not—in which fintech has become an integral part of people’s daily lives.

→ Want to know how SoFi helps members save, spend, and invest smarter? Watch the Powered by Plaid story to learn how SoFi helps customers reach their financial goals.  

Fintech industry overview

The industry has seen impressive growth over the past few years. In the Americas alone, the number of fintech startups increased from 5,868 in 2018 to 10,755 in 2021. That same year, global fintech funding reached a record $132 billion, accounting for 21% of all venture capital dollars. Every major fintech category saw record funding in 2021, an indication of broad interest in the industry.

2021 also saw the birth of 157 new fintech unicorns (companies with a valuation of over $1 billion) worldwide, boosting the total number to 235—up 108% from 2020. At the close of the year, twelve fintech companies had even achieved decacorn status (a valuation of $10 billion or more).

Given these figures, much has been predicted about the industry’s next big trends, such as increased use of artificial intelligence to mitigate the risk of fraud, greater financial inclusivity, and the further expansion of embedded finance. Nonetheless, an investment downturn in the first quarter of 2022 (down 18% over the previous quarter) has tempered the industry’s long-rosy outlook, with many pointing to a necessary market correction of the pandemic-driven hyper boom of the past two years.

Plaid's 2022 Fintech Effect Survey: Stability, impact, and building for the future

Download our free fintech report for insights on building the future of digital finance.

How does fintech work?

There are several types of fintech apps, and they work in different ways. One way fintech works is by safely unlocking financial account data (e.g. transactions and account balances) with an app or service that performs an action to enhance or enrich that data. 

For example, wealth and financial management apps will aggregate financial account data from different accounts into one easy-to-read snapshot, showing users all of their financial information in one convenient place. Those same apps might also provide suggestions users can take to improve their financial position based on the available data.

Another way fintech apps work is by funding new accounts from existing bank accounts, then using those funds to do things like trade stocks or cryptocurrencies. Robinhood and Coinbase are classic examples where users can quickly and easily move funds from their bank accounts into a separate account where they can make a wide variety of investments. 

There are several types of ‘plumbing’ that are necessary to make fintech apps work:

  • APIs: Financial APIs (application program interfaces) safely and securely connect consumers’ bank accounts to fintech apps and services so they can share financial data, transfer funds, and verify their identities. 

  • Mobile applications: Most fintech companies offer a mobile app so that users can access their funds and insights at any time. Whether it be a digital banking app, a financial management tool, or an investment platform, mobile apps are nearly synonymous with fintech. 

  • Web-based solutions: On top of offering a mobile app, some (but not all) fintechs also offer a web-based solution where users can log in via a web browser and perform the same functionality they can perform on the mobile app. 

With the power of APIs to safely unlock financial data and convenient mobile apps, fintech has changed daily life for most. For example, it’s increasingly likely that friends and family who want to send money to each other would use Cash App or PayPal, rather than exchange cash or checks in person or via the mail.

The percentage of US consumers using fintech jumped from 58% to 88% in 2021.
Plaid's 2021 Fintech Effect Survey

Types of fintech

Fintech covers a wide range of use cases across business-to-business (B2B), business-to-consumer (B2C), and peer-to-peer (P2P) markets. The following are just some examples of the types of fintech that are changing the financial services industry.


One of the most central components of the financial system, banking services have been shaken up by the fintech industry. Things like account opening and funding as well as a reduction in fraudulent sign-ups are now quick and easy thanks to technology like Plaid’s own Auth and Identity, respectively. In turn, neo-banks like Current offer flexible personal checking accounts, faster direct deposits, and even teen banking products—all without the traditional fees that can hinder people from achieving their financial goals.

→ Need a faster account opening and onboarding flow? Plaid Auth provides account authentication in as little as seven seconds when users connect with their bank account credentials.


Cashless payments are on the rise. Since the onset of the pandemic, cashless payments have made huge jumps, increasing to 31% of total payments in the US and 60% in the UK. In tandem, 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)

PFM 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, budget, and make sense of their money. Examples include Dave, Brigit, and Astra.


Fintech solutions help financial advisors and wealth management platforms aggregate held-away account information to better grow assets under management (AUM) while delivering more holistic financial advice. Atom Finance, for example, offers a suite of products and features to help users research and track all of their investments in one place. Stash is a subscription platform that gives customers easy and affordable access to investment, education, and financial advice products.

→ Want to build a holistic view of investment holdings? Plaid can retrieve investment data that provides insights into all of your users’ investment accounts—including crypto.


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 a cumbersome process to get borrowers to connect their bank accounts to receive and repay loans.

Plaid streamlines 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 seamlessly 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. Shopify isn’t a financial institution, making Shopify Balance a financial product ‘embedded’ in a non-financial product. Companies like Unit and Checkout.com are helping make this ubiquitous, through API integrations that embed financial services directly into the product or user experience of non-financial companies. 

Embedded finance use has picked up steam in recent years, and is expected to continue to grow. It’s estimated that these services will produce $230B in revenue in 2025—a 10-fold increase over 2020.

The impact of fintech

By unlocking the full range of financial services that cut across use cases, fintech has carved out an important space for itself in the daily life of consumers. In fact, according to Plaid's study, 8 in 10 fintech users say it seamlessly integrates into their everyday lives, while the majority of Generation Z (66%) trust fintech with their financial information more than they do traditional financial institutions (63%).

More than just providing convenience and lowering consumer fees, fintech is also helping foster financial freedom by offering millions of underbanked people around the world access to financial products—such as savings accounts and investment services—for the very first time. It has also impelled many financial institutions to begin using non-traditional data (such as income or rent payment history) to more accurately evaluate creditworthiness, which can help consumers without established credit qualify for loans.

The same study cited above shows that fintech is making finance more inclusive and social as well. For instance, fintech use has surpassed traditional banking among Hispanic people in the United States, while 7 in 10 US consumers say fintech has made finance part of daily conversation. The same number also say the more they use fintech, the more confident they feel about their finances. 

Fintech is helping consumers change habits and obtain a fuller understanding of their financial circumstances and available options, giving them more confidence to take action and achieve better financial outcomes. It gives people the ability to take actions that were previously more difficult to take (such as investing on your phone). Because of that, it’s paving the way for a more financially free and equitable future.

→ Want to help your customers improve their financial health? Plaid’s transactions API provides up to 24 months of categorized bank transaction history that helps guide users toward investment and savings goals.

Leading fintech companies

Over the past several years, fintech companies have taken the consumer financial market by storm with a wide array of offerings. Prosper, for example, 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 such as Chime have shaken up the traditional banking model by offering no-fee banking services along with 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. Carvana allows customers to browse, finance, and trade used cars, transforming the way consumers shop for used cars and creating a bridge between fintech and the automotive market. Placid Express enables customers to securely and affordably send money abroad while reducing the historically high risk of fraud associated with such transactions.

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 recently announced 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 is democratizing financial services

Overall, fintech growth and innovation is bringing more and better financial services to consumers, including to those who have been historically forgotten. Mid-2021 Federal Reserve statistics showed that 13% of the US population remained “underbanked”, while 5% were “unbanked” entirely—numbers that increase dramatically in some other parts of the world.

Fintech democratizes financial services by making them more available to all consumers, especially those who are under and unbanked. With fintech, they can quickly open a bank account on their phones through a diverse range of fintech apps. Most fintech banks offer no-fee checking, overdraft protection, and offer no-cost early access to paychecks (as is the standard with fintech banks such as Varo and Chime). This access gives consumers alternatives to predatory financial services such as check cashing and payday loans, some of which charge over 600% interest.  

By democratizing access to financial services, fintech has created more options for consumers to improve their financial health and lives. It’s no wonder that all eyes are focused on where fintech is headed next.

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