Jambo builders. Welcome to episode #2 of Building Fintech by Jeremy Code Podcast. Building Fintech is a podcast series for fintech nerds.
In this episode, you’ll get into the basics- the very basics- of what Fintech is about. Let’s get started.
When I was a kid, my dad used to go to the bank to send us money, and we normally went to a nearby bank branch (same bank) to withdraw it as cash. But today I sent money to my dad from my phone, and he received it and spent it with his debit card. But I don’t use a bank. I use a fintech.
What, exactly, is FinTech?
FinTech in full is financial technology. Two words: financial and technology.
Fintech is a technology that makes financial services faster, cheaper and easier to use.
Technology today is mainly software. Software can be a mobile app, a website, a chatbot, or a digital platform.
Financial services are mainly payments, loans, savings and investing.
FinTech means using software, mobile apps, websites, chatbots or digital platforms to make payments, loans, savings or investing cheaper, easier and faster.
We use fintech every day. The app on your phone that lets you send money, pay a bill, or buy crypto is a fintech.
It is not a bank
Most people think of fintech or define fintech as a bank. But they see it as a bank with an app. This is not correct, and it is also misleading.
FinTech is not a company or organisation. It is a technology that we can use to access financial services faster, easier and cheaper.
The app on your phone that lets you send money is a fintech, but the app might be developed by an individual, not necessarily a company. The app might also be developed by X Bank, but if the app is open-sourced, even if the bank shuts down, the app will continue to serve people.
Describing a company as a fintech is like describing Jeremy as a fintech. Even if I build an app that lets you send money, you won’t say I’m a “Fintech”. You’ll refer to me as a Fintech developer or operator.
For instance, Bitcoin is not a bank. Bitcoin is a financial technology. Bitcoin is fintech. Satoshi Nakamoto, the creator of Bitcoin, is not a banker. And Bitcoin does not have any banking or investment license. But millions of people around the world invest and send money home with Bitcoin. FinTech is built by individuals and companies that usually don’t hold a banking license. So you see, Satoshi Nakamoto is not a banker. He doesn’t even own a bank license. But he was able to create software that is used to move billions around the world every single day.
I’ve built dozens of fintech apps. I’m not a banker; today, I still don’t have any physical banking experience. But I was able to build an app that let millions of people send, save, borrow, and invest.
However, a situation where I named my app Jeremy - then you will mostly know Jeremy as a Fintech.
Which is why the average person can refer to a company or bank as FinTech when the name of the app is also the name of the bank.
The major reason people think fintech is a bank is that fintech is not only technology, but technology plus finance. As I explained earlier, fintech is short for financial technology. And it’s usually connected on top of an existing banking service, which makes it faster, cheaper and more accessible than the underlying banks.
Without fintech, I would have to go to a bank building to send money to my mum and wait for hours or days. But because my bank created an app that allows me to send money more easily, faster, and cheaper.
Five Categories of FinTech
The most successful fintech companies are payment companies.
But fintech is not just payments. It is a set of distinct things, and each of those things is solving a different problem.
When Bob sent $100 to Alice from his iPhone, it’s a payment. When Alice buys Bitcoin and holds for a future return, that’s wealth and investing.
Since you are going to be building fintech, here are five categories I want to talk about:
The first is Payments
Payment is a financial technology that moves money from one person or business to another. You can think of PayPal, Stripe, and M-Pesa.
This is really where beginners start. If you’re jumping into fintech, I always recommend you start with payment, because it’s at the core, at the centre of anything that you will ever build.
You have to touch payment. Doesn’t matter what fintech you’re building, you’ll find a way to touch payment. So building a payment app is where you should likely start.
Payment apps are the most decorated fintechs; nearly all fintech app, every fintech software do payment. And building a business around payment is not that complicated. The business model is usually transactional.
That’s why payment companies are the most valuable companies in fintech in the world. Payment companies were the first unicorns in the world:
PayPal, Worldpay, Alipay, and Wise and all these guys- they are the biggest fintech companies in the world today, M-Pesa and all. So arguably, fintech is generally seen as payment technologies because nearly all fintech touches payment.
Banking Infrastructure (BaaS)
The second kind of fintech category is banking infrastructure, or in this case, banking as a service.
It is like the plumbing that lets a company offer bank accounts, cards or mobile wallets without becoming a licensed bank itself.
This is the least visible category and arguably the most important one to understand as an engineer.
Once you start building around payments, you want to move further; if you really, truly want to become a fintech nerd, try to build a banking infrastructure; try to build a banking service that allows other fintechs to issue virtual accounts, cards, access bank accounts, and make payouts; a good example would be building a global fintech such as Stripe, Rain.xyz, Bridge, and regional examples such as Flutterwave, Mono, and Sudo.
Most BaaS can still fit in as a payment fintech because they enable payments for other payment fintechs, but they heavily use existing banking infrastructure. Their system is connecting directly to a bank.
It is important that a BaaS is not to be confused with a fintech reselling APIs of another BaaS, or a BaaS aggregator. For instance, Bridge, a stablecoin infrastructure company, issues accounts and payment rails by connecting directly to banking partners and card networks. Then there is OnePipe, a Nigerian fintech that pools APIs from multiple banks and BaaS providers into a single unified gateway. The former is BaaS; the latter is an aggregator, not BaaS.
Building a Banking as a Service infrastructure gives you an experience the average fintech nerd lacks as things get low-level. You are not just building a payment system; you are building what powers an ecosystem, from treasury management to ecommerce.
I would liken Crypto Wallet as a Service infrastructure as a new kind of BaaS. Remember, crypto is an end-to-end financial technology. In a hyper crypto world, we don’t need a bank. We can send, receive, lend, and invest without ever touching a traditional banking service.
Building a Crypto Wallet Infrastructure is tedious, just like building a traditional BaaS. It is what powers crypto exchanges, stablecoin apps, and crypto payment gateways. Building one puts you in a position where you can build anything in crypto.
Lending
The third one is lending, which basically is assessing risk, assessing credit risk and disbursing loans digitally, often to people that can’t really get a loan from a bank.
You might have heard the whole idea of financial inclusion. Actually, the core of it is that you build a system that is able to provide a loan to someone who, without the system, will not be able to get that loan from a bank.
From 2017 to 2022, many fintech startups were trying to solve financial inclusion across Africa. Basically, they built an app that lets anyone access a loan.
Today there are so many fintechs in Nigeria offering loans, so many loan apps across Africa, even if they’re loan sharks. But they make it easy so that with only your bank statement, you can be able to get access to a loan. You don’t need to own a business; you don’t need collateral.
These loan apps scan your bank statement, contact list, and public record of your credit/loan default history and quote an amount you are eligible for.
It’s an important fintech category and easily profitable when default is low. Operating a loan app won’t just teach you the technicalities of lending but also consumer behaviors and how the ability to pay is different from willingness to pay.
Wealth and Investing
Then we have wealth and investing apps that let ordinary people invest, save, or trade. It lowers the barrier that used to require a broker.
Prior to 2015, if you wanted to buy a stock, you had to go to a broker's office.
A senior friend told me he bought stock in 2010. And they gave him a paper, a certificate, and he has been keeping that certificate for a long time. If he wants to liquidate his stock, he has to take that paper to the company again. So there’s a lot of manual process in between.
Today people use their phone to buy and sell stock. They invest in GOOG, AAPL, AMZN, TSLA without going to a broker's office.
We invest in Gold, Bitcoin, Crypto, and precious metals from our Laptops. We even bet crypto on Polymarkets and lose a lot of money.
Fintech that allow us to do this are in the wealth and investing category.
Insurtech
There are fewer fintechs in this category, but they apply the same “unbundle and rebuild digitally” concept; they apply the same concept with all those categories we’ve mentioned, but then they apply it to insurance.
I subscribe to health insurance from an app, and everything took less than 10 minutes. In my dad's generation, he would take two weeks.
Fintech made this possible.
Payments, Banking as a Service, Lending, Wealth, and Insurtech are the five major categories in Fintech.
Nearly every fintech company you can name fit into one or a combination of these five buckets. When you’re evaluating a company or a job, the first question worth asking is which of these five are they actually solving? Are they solving payments? Are they serving banking infrastructure? Are they lending? Are they enabling investing? Are they selling Insurance?
Do the problems that they are solving fall within the five categories? If they don’t, chances are they are not a “FinTech”.
Building a FinTech is not the same as building an app or working in a Bank IT Department
There are a hundred and one things that make building fintech a genuinely different engineering discipline from typical software engineering, and also from traditional banking.
I’ve a friend who works as a software engineer in a bank; all he does is build and manage their websites and portfolio sites.
If you work in a bank as a software engineer or in the IT department, it doesn’t mean you are a fintech engineer or operator. FinTech is different.
The mindset to have, the principles to imbibe, is different when it comes to building fintech.
3 Fintech Principles you should read every day
The first principle is money can’t be “mostly correct”
Mostly correct in quotes.
For instance, a social app can ship a bug that shows the wrong follower count, and it’s embarrassing; but a fintech bug that shows the wrong balance is a fire alarm.
PayPal cannot afford to wrongly credit a customer; account numbers and balances must be correct and correctly assigned.
This changes how you write tests and ship code.
If you’re building an app for, let’s say, e-commerce, and you show a higher price, it might affect customers’ willingness to buy, or it might mislead the customer, but the impact is not as high as if you show the wrong balance in a banking app.
So you can’t say, okay, there are times customers' balances will not be correct; and it’s fine so long as we fix it. Or there are times when our services, our system, will wrongly give customers value.
no!!!
It always has to be ONE HUNDRED PERCENT CORRECT AND AT ALL TIMES, because a single mistake can shut down your company.
There are so many businesses that have gone under just because an “experienced software engineer” did something wrong. So balance can’t, money can’t be mostly correct.
If a customer sends $50 from your app, ensure that customer has enough funds to debit that fifty dollars, and ensure the money goes to the beneficiary, not excess or less. I know a fintech in 2021 that shut down because the developers commented out the line of code that checks if a user has sufficient funds during a test, and they forgot to remove the comment tag before going live.
It might be a fail-safe if your app sends less than what the customer expects. But the point is, if it is less, the customer will complain, and they might stop using your app.
So money can’t be mostly correct. It has to be correct, ALWAYS.
The Second principle is that Regulation is a Core Constraint, not Paperwork.
In most software businesses, you build a product first and worry about legal later.
In fintech, what you are legally allowed to build often determines the architecture before you write a line of code.
Many fintechs skip regulations, and they hardly succeed. There are a few exceptions, such as Bitcoin and other open-source fintechs.
However, if you truly want to do a fintech business, try to be a regulated fintech; try to go through the regulatory paths; it’s a competitive advantage. There’s no successful big fintech company today that is not regulated. Check any region anywhere. As long as you’re building a fintech company, an entity, become regulated, or else you won’t be big, and you will fail.
The third is, you will depend on infrastructure you don’t control.
Your app might be perfect, right? You might build the perfect app, use the Rust programming language to code it, even if you use the Fable 5 AI model to build it end-to-end with a strong backend human review.
But if the bank rail, mobile money infrastructure, payment system, or crypto api you are connected to is not reliable, your service too will not be reliable.
Let’s say you’re building an app that allows Nigerian UK immigrants to send money home, just like LemFi, and you are using Flutterwave Bank Transfer API to process payouts to Nigerian bank accounts.
If Flutterwave is down, your app too will be down. If NIBSS ( a bank-to-bank settlement service in Nigeria) is down, your app will be down.
So your app is great, but because your partner is down, you are also down.
The fintech space is more about dealing with downtimes: how do you deal with an offline partner or a hacked crypto api?
So you have to consider these things. You depend on infrastructure you don’t control. Your underlying third-party banking api makes or breaks you.
FinTech engineers spend a lot of time designing for failures that happen entirely outside their own system.
You must take into consideration that the customer will get a good experience or a bad experience based on your underlying partners.
So you want to choose the right banking partner; you want to choose the right fintech partner to use. To be resilient, you want to use multiple partners, especially for settlements, so if one is failing, you switch to another. Many successful fintechs don’t rely on one banking service on their settlement leg.
Where switching gets complex is Collection ie Deposits.
Several neobanks use Bridge.xyz to issue a global dollar account to customers. This allows their customers to receive foreign payments. Bridge is in partnership with Lead Bank. If Lead Bank is doing maintenance on account issuing, Bridge and all the neobanks using Bridge will have to pause deposits.
The neobanks can’t just decide to switch to a new partner immediately. They mostly have to wait for Lead Bank to restore their services, and Bridge notifies them.
As you build and design your fintech, also build and design an effective customer notification system so that if any of your partners is down, you immediately notify your customers; this will allow them to make the right financial decision.
Lastly, when it comes to depending on infrastructure, you need to have excess liquidity. Liquidity is simply money available to use. You can’t easily succeed in fintech without excess liquidity. Even the right partner can one day go down for two weeks, and all your money will be hanging with them. Without excess cash storage you have elsewhere that you can move to a new partner, your app can’t function, and all your marketing spend is vanity.
Not all markets are the same
Where does fintech matter more?
Fintech is needed everywhere. But there are regions where fintech is critically needed. And there are region specific fintech are more needed.
In the US or Europe, the banking system works. FinTech in this region is largely about making an already functional banking system faster and more convenient.
In Nigeria, Kenya, Egypt, Pakistan and South Africa, fintech is frequently solving a more fundamental problem for a huge share of the population: there was no convenient banking system to begin with in these markets.
That is why mobile money, a phone-based wallet service that does not require a bank account, became such a big deal in East Africa. It is why agent banking networks, human agents who handle cash in and cash out, remain central to how money moves in West Africa.
If you go to Kenya today, people use the M-Pesa mobile money service everywhere. M-Pesa allows you to send, receive, and even get a loan without having a bank account. It worked out; it’s been used heavily since 2009.
Today in Nigeria, you find OPay, Moniepoint, and PalmPay POS agents everywhere. They succeeded because existing banks were not reliable and easy to access.
FinTech in Africa and the Middle East regions isn’t just optimising an existing banking system; in a lot of cases, it is the system.
If you are going into these local markets, to succeed you are most likely going to be building your own rails; otherwise you are just another unreliable service.
Building fintech in some markets can be a genuinely different engineering problem than building in other markets. In London, you might be solving a niche fintech problem such as providing bank accounts for older immigrants above 60, because the general financial system works well.
But in Africa, you might be building a general-purpose payment system just like Wave Mobile did in Senegal in 2018.
The fintech rules are different in each market, the constraints are different, the scale of impact is different.
To succeed in each market, you must know what is needed.
What does a fintech engineer actually do day to day?
This is going to be the next episode.
Now that you know what fintech actually is, the next thing worth knowing is what a fintech engineer does day to day.
As a fintech nerd, you’re either a fintech engineer or work with one. The engineers are the building talent block in this space; nearly every other function can easily be picked from other industries.
Before you move on, if you know that friend who would love to get into fintech, consider sharing the Building Fintech show with them. The more people listen and read this, the more I’m encouraged to make more content.
Thank you. My name is Jeremy ‘Code’ Ikwuje. Talk to you soon.
