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How does Fintech affect e-commerce?

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Technology is at the root of many traditional financial practices, Dwolla, for example, provides an API to facilitate ACH payments.

Fintech is the practice of applying technology to the financial services sector. Traditional financial institutions use it primarily to manage accounting services and other back-office services. More recently, thanks to the progress of startups, Fintech applications are modifying established financial services and threatening the very institutions that initially adopted them.

Fintech moved from the banking sector to the insurance, real estate and health sectors. This affected loans and fundraising for businesses. Crowdfunding, ePortfolios and mobile payments are examples of fintech applications. Crypto-currencies like bitcoin are another example of fintech.

Conventional financial service providers tend to focus on larger companies because they derive greater profits from them, leaving small and medium businesses with fewer options. Fintech companies typically focus on SMEs and start-ups by providing non-traditional credit and financing arrangements. Online loan providers and crowdfunding equity platforms use financial technologies to finance businesses often ignored by traditional lenders.

Fintech and Ecommerce

Fintech's biggest contribution to global e-commerce has been to change and improve the online payment system. In countries where consumers do not have a credit or debit card or bank account, fintech has provided other payment methods. Without fintech, cross-border e-commerce would be almost impossible.

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The emergence of payment platforms such as Dwolla, Stripe, WePay and BlueSnap that integrate with e-commerce platforms has improved the efficiency and security of e-commerce. International money transfers are accomplished with much less friction. When consumers use PayPal, Apple Pay, or Google Wallet, they use FinTech.

Block Chain Technology

Blockchain was one of the most successful applications of fintech. Developed in 2009, blockchain was originally designed to send payments digitally and anonymously between two parties without the need of a third party to verify the transaction. It has been designed to facilitate the transfer of bitcoins and other crypto-currencies. Blockchain can be seen as the cryptocurrency trading system.

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We looked at blockchain technology, most recently in "Blockchains 10 Ways Can Benefit Traders."

How does blockchain technology work? Blockchain is a public electronic "big book" or relational database that can be shared with dissimilar users and creates an immutable record of their transactions, timestamped and related to the previous transaction. Each digital record or transaction in the thread is called a block and it allows an open or controlled set of users to participate in the e-book.

Each block is linked to a specific participant and the activity log is tamper-proof. Blockchain can only be updated by consensus between system participants and when new data is entered, it can never be deleted. The blockchain contains a true and verifiable record of all transactions made in the system.

"The blockchain is an incorruptible numerical register of economic transactions that can be programmed to record not only financial transactions but virtually anything of value," say Don and Alex Tapscott, authors of the book Blockchain Revolution .

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Blockchain's conceptual framework and underlying code is useful for a variety of financial processes as it provides businesses with a secure digital alternative to traditional processes. It eliminates the need for paper-based transaction paths. This allows traders and customers to conduct transactions using cryptocurrencies and record transactions for future reference. Blockchain technology can be used to store digital documents and exchange digital resources.

For example, leading online vendors in China, such as Alibaba and JD.com, are now using blockchain technology to give physical products their own electronic passport via QR codes to record their movement from source to customer. This protects against counterfeiting by ensuring that there is no substitution in the supply chain.

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The Future of Fintech

A few years ago, developers predicted that fintech agile start-ups would completely disrupt the traditional banking system, making traditional financial institutions irrelevant. Banks, late to adopt fintech beyond the back office, are now fighting, mainly through start-up acquisitions. This week, J.P. Morgan Chase agreed to buy WePay as part of the first major acquisition of a financial technology company by the bank. The bank plans to deploy WePay's technology to JP Morgan's four million small business customers.

The venture capital investment in Fintech companies has stabilized, so that start-ups are more willing to enter into partnerships with large financial institutions or to be acquired. The number of fintech companies acquired by banks now exceeds the number of fintech IPOs. In the first six months of 2017, institutional investors – mainly financial institutions – participated in more than 20% of VC fintech transactions, according to KPMG, the accounting and consulting firm.

In other industries like insurance and health, the same thing is happening. Large companies acquire or invest in fintech start-ups. Like most other innovations, FinTech will likely become part of the traditional business structure in each of the industries that it touches.

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