It’s very true that Fintech is a lot about tech, as per the little war for talent happening in the industry. So it’s obviously helpful if you have tech skills like coding. However, let’s not forget that we are talking about finance here. Without finance, there is no financial technology. Maybe it seems obvious, but it is worth noting that more often than not, people put a stronger emphasis on the technology side of things when talking about Fintech. Although very important, remember that technology is deployed to support financial services, and therefore the finance journey is central. Knowledge of finance is key to understand the big picture. If you need to pick a few, what are the top 5 finance skills to better understand fintech? But not only, the top skills and principles that will more generally help you thrive with your personal and business finances?
Budgeting is one of the most important finance skills for both individuals or a business. It is high on the list of the top finance skills to better understand fintech. It is all about knowing what money is coming in and what money is going out. So long as you do not have a grip on that, you will not be able to really invest or build wealth. That’s also valid for a company: control over expenses will be how you will improve your bottom line. Get on with it, get your bank statements and try to come up with a budget.
It can seem daunting or boring, but knowing how to budget and plan your expenses is really important. It will help you not get into bad debt. You will be able to invest the extra cash. Fintechs have understood that: there are lots of tools like personal finance management (PFM) embedded within current accounts or in standalone apps, or cashflow forecasting feature that can facilitate the work and help you get better at budgeting.
Avoiding bad debt
Firstly, why make the distinction between good and bad debt? Because in itself, taking on debt is not a bad thing. From a financial optimisation point of view, it is actually technically a good thing to use debt to maximise your returns, called financial leverage, and it is very common in the corporate world. Think of good debt as a mortgage with a low interest rate or a business loan with an interest rate lower than your internal rate of return (IRR).
What’s bad debt then? You will have guessed, everything that carries a high interest rate. Credit cards are a good example. You can easily max out your credit limit and then end up making the minimum repayment, which is basically just paying interest, forever (literally for decades in some instances). You need to avoid bad debt as much as you can because it will hurt your prospects at being able to get good debt and you will diminish your ability to save and thus invest. But more fundamentally, why paying someone so much for their investment if you cannot get the same return on your investment? Does not sound very logical.
Fintechs have targeted these use cases through smart ways of carrying out credit assessment and providing much cheaper alternatives to customers.
If you are budgeting and avoiding bad debt, you will start to build your credit worthiness. If you are an individual, that will be with the various credit bureaus and credit scoring companies. While a business will build its credit with rating agencies or the lenders themselves. It is more a consequence of the two firsts than a skill in itself but it is key to understand why it is important.
Credit worthiness ends up resulting in the ability to borrow, and at a good interest rate. The former will mean investing for purchases where it’s hard to come up with the cash upfront (house) or it is not wise to do so (financial leverage). By being disciplined, your credit profile improves and it is easier to make sound financial decisions. And like a rock rolling on a hill (rock’n’roll), your personal or business finances will get much better.
You’ve been budgeting and optimised your debts, so now what do you do with the extra cash? Well, you invest it. That’s a key technique to master over time. And one of the top finance skills to better understand fintech.
At a personal level, you invest to build your wealth (more on that below). There are various ways to do it and asset classes that you can target, from real estate investments where it is the easiest to use financial leverage, to equity stocks or even cryptocurrencies. What you chose will depend on your investment horizon and how much you are able to invest. As you invest over time, it will grow through compound interest. The main reason why you need to invest is that cash loses value with time due to inflation (the time value of money). Having $1 million now is not the same value as 50 years ago and will not be the same in 20 years from now. That’s what it means.
At a business level, you invest to grow your company. That can be investing into equipments, buying another business, or building a factory. Even if you do not intend to grow tremendously, you will need to invest to replace things to carry on with your business because they become obsolete or break down (e.g. computer). You therefore invest to either maintain or for the continuous development of your company. If you don’t, ultimately your business will falter one way or another.
Last but not least, building wealth. It is last because without the first four, it is very hard to build wealth. If you do not know how much you spend, you will not be able to invest as much. With bad debt and without a good credit score, you will find it hard to borrow to invest. Ultimately, this will limit your ability to build wealth.
Let’s take a step back, what do we mean by wealth? We are usually talking about “net wealth”, that is the difference between what you own (assets) and what you owe (liabilities). If you own a flat worth $100,000 and have a $50,000 mortgage with a bank, your net wealth is $50,000. It is important to understand that your wealth has nothing to do with how much you earn. Sure thing, it might be easier to build wealth if you earn a six-figure salary, but if your expenses are also in the six figures, at the end of the year your net wealth will be zero. It is building your wealth through controlling what you spend vs what you earn, and investing, that will develop your financial security.
This principle is the same for a business, where you could take the shareholders’ equity or capital as the wealth of the company. It can generate billions in revenues, if the bottom line is nil or negative, the company’s value won’t improve. Businesses tend to focus more than individuals on growing their value because more often than not outside shareholders ask you to do so.
You need to develop a mindset of continuous learning and skills development to be able to join the dots in fintech and the business world more generally. It’s about understanding key principles that drive fintechs to develop business models to tackle specific use cases. This is obviously a short overview. There are others to consider top finance skills to understand fintech. There are also plenty of good books that you can read if you want to go a bit further on your journey to better understand fintech and learn more about finance.