FinTech: Before, During and After
Today when we think about fintech a hundred options whizz in our head: the new, hot digital currency everyone wants to invest in, using wallet apps to pay for your daily expenses, institutions which lend money without you ever stepping foot in a bank. And while all of these are relatively new developments, and while fintech itself is a relatively new word, none of these events represent the birth of financial innovation. If we have to chart the history of the fintech sector, it dates centuries, maybe even millenia, ago.
The Roots of FinTech: How deep do they go?
Humans have always found a way to manage their finances utilising their most advanced technology, starting all the way back to at least the third millennium BCE in Mesopotamia where humans documented the calculations on a clay tablet, the first of many financial planning tools. In fact, only a few professions have lasted as long as the financial adviser, and its longevity can, and must, be credited to the expansion of finance which in turn is attributable to FinTech.
Fintech is not an inherently novel development for the financial services industry
Technology has always played a key role in the financial sector; it would not be an overstatement to say that they go hand in hand. Every decade since the 1950s has brought to us ingenious changes; in the 1950s we were introduced to credit cards to ease the burden of carrying cash and allowing consumers to delay their payments and pay over a longer period of time. In the 1960s, ATMs were popularized, making tellers and the vexing need to stand in bank lines both obsolete. The 1970s welcomed electronic stock trading on exchange floors. The 1980s saw the rise of personal computer usage and software that improved financial agility. In the 1990s there was a boom in e-commerce business models which flourished. And ever since then, it has been an uphill road, with the first peer-to-peer payment portal released in 1998- PayPal. So, you see, this symbiotic relationship between finance and technology started much before any of us can imagine. These two industries are carefully intertwined and tightly bound together.
FinTech 1.0 v. FinTech 2.0 v. FinTech 3.0?
The path taken by fintech can be broadly divided into two phases. Fintech 1.0 refers to the emergence of technology aimed at digitizing the consumer experience and the permanent shifting of services online. Early focus was primarily on online transactions (trading, lending and borrowing) along with wealth and asset management. With the emergence of payment systems, the goal was to make the world of finance more accessible and available to larger groups of audiences. This world was largely driven by fintech startups, with minimal participation from banks. So, what started as a rather undiscovered, untapped industry grew exponentially fast, attracting considerable attention (and money, of course) to the industry.
In the 1920s economist John Maynard Keynes explained financial globalisation as:
“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in any quantity he might see fit, and reasonably expect their early delivery at his doorstep. He could at the same moment and by same means adventure his wealth in the natural resources or new enterprises, all without exertion or even trouble”.
And there exists no better definition of the spark of FinTech 1.0, a phase ushering in transparency and accessibility and ease for the consumer.
The recent developments from the 1990s in the world of fintech are what we categorise as Fintech 2.0 and its significantly different whether in terms of aims, presentation or services. It was largely fuelled by artificial intelligence and banked on the growing computing power. The aim very subtly shifted from accessibility to redefining the way individuals participate in the financial world. It is based on the ‘Internet of Things’ (IoT), smart data and frictionless processes beyond just payments and consumer credit. Its aim is to create a major disruption in the banking market, parallel to the chaotic changes digital technology has created in other industries: travel, healthcare and entertainment to name a few. Pre-digital business models are being rendered useless and banks are soon catching up to this realization. We know this because they too, just like us plain folk, are scrambling at opportunities to find a seat at this coveted table.
In this phase digital finance was restructured across the globe; not only was it the period that led to the introduction of a variety of mechanisms to control the speed of price changes (circuit breakers) in response to incidents such as the Black Monday stock market crash, but also encouraged securities regulators around the world to begin working on mechanisms to support cooperation. Regulations and Acts were also being ratified establishing global, digital markets.
Now, the age we are currently in is either the dying days of FinTech 2.0 or have we already entered the brand new Fintech 3.0? Many believe that this new phase of FinTech was encouraged when discontentment began brewing in the hearts, and minds, of bank customers. With crash after crash, The Financial Crisis of 2008 and The European Financial Crisis of 2011 (and many, many more scattered across the globe), the coveted faith consumers had placed in the banks was dwindling and which knight in shining armour came to their rescue? FinTech. FinTech soon was perceived as the more dependable, trustworthy (at least relatively) alternative as the question was asked for the first time: who should have the resources and legitimacy to provide financial services? The lack of faith and increasing disenfranchisement of financial professionals caused a revolution in the field of FinTech, and it is because of them today FinTech is a strong contender to traditional banking systems.
Who Wins, Banks or FinTech?
The question of banks can play nice with fintech is still debated. Traditional banking institutions have long looked at fintech companies with dubious looks and suspicion, however, the stance of many of these banks is evolving given the current economic climate we find ourselves in. What do you do when you can’t defeat them or become them? You collaborate, and that is exactly what banks today are doing. Many banks have identified the need to not only understand, but actively participate in, the world of fintech.
There is a brewing distrust of banks in our world, a survey conducted by Accenture in April 2020 found that just 14% consumers turned to their banks for financial advice and investments (a number that has continued to drop consistently from 2009), most mentioned that they were intimidated or dubious about the intentions. Whereas, in another survey conducted by Pew Research it was discovered that 50% of the same consumers stated that they believed tech companies had a positive impact on the economy. The Edelman Trust Barometer, another survey, also established that three quarters of people trusted the technology sector. This dichotomous relationship accompanied with the ever-growing use of mobile devices and development of the cloud only has one way paved for the banks: a collaboration with technology and fintech companies.
And this in no way is a sacrifice for them. The benefits to banks are great, for starters, 94% of financial service companies said they were confident that fintech would help to grow their company’s revenue over the next two years. The obstacles banking institutions face in their physical capacity are easily solved: they allow companies to scale quickly and benefit from reducing costs while also broadening their consumer base (the trifecta to a successful business).
What Role does Cryptocurrency play in this?
Cryptocurrency, the new, hot topic that everyone is suddenly seems to know so much about and yet, you have never felt this clueless. What is it and what implications does it have in this world of fintech? This digital currency encoded as a 16-string signature, which gains security by being stored on a vast digital ledger, that is being traded online. The virtual ledger is called blockchain where all confirmed transactions are included and broadcasted to the peer-to-peer computer network of users for validation. This decentralized blockchain system has already, and will continue, changed your life from the way you transact business or manage assets. Experts predict the blockchain could become a powerful tool for improving business, conducting fair trade across the globe, democratizing the global financial economy and helping support more open and fair societies.
So, what could go wrong?
The golden question that somehow always manages to spoil our moods. So, what could really go wrong in this seemingly perfect world? The most obvious ones are glaring us right in the face: privacy and data breach concerns. Data breaches have become a part of life, with 1196 breaches being reported in just the first quarter of 2020, companies need to find a way to keep private information of consumers and businesses private while also ensuring their consumers that their information is indeed secure.
With the rise of genuine fintech companies, there is also a rise of dubious, hit-and-run firms profiting through the exploitation of the naïve. Such firms are also creating an anxious consumer who feels bombarded by the choices offered to them while no assistance at all. Regulatory concerns and government interventions are a barrier that will just have to be accepted, each country has faced brutish regulations all to ensure that the consumer’s sovereignty continues to reign.
While this is a concern not looked at much, FinTech is relatively an exclusive industry today. The need for having stable internet connections and a device to facilitate the transactions is quite an ask, even in today’s world. While consumers in big cities around the world have these resources at their disposal, many people in developing and third world countries do not; they are not privy to the profits fintech is reaping for their urban counterparts widening the gap of wealth and resources that already exists in the world. Moreover, the growing insecurities of banks which has led them to digitize more is also creating barriers for those not as technologically adept.
Legacy economies in the West have been in power of the financial sector for way too long, however, with the development of FinTech and the concentration of skill and resources in growing economies such as China, India and other parts of Asia, these countries are claiming the reigns. Over the past decade, western economies have been slower to adopt new technologies, whereas these emerging economies are jumping at any opportunity. Banks and businesses in these markets began building infrastructure in the late 1990s and 2000s and are now reaping the benefits. For example, China’s mobile payments already outnumber cash payments, with $5.5 trillion paid through apps last year, dwarfing the $112 billion in mobile payments in the U.S. in 2016. Economies in the Southern Hemisphere such as the Philippines, Indonesia, parts of Latin America and countries across Sub-Saharan Africa have largely been under-banked or un-banked for decades, but this is changing due to the rise of mobile payment and wallet innovations. Thanks to telecommunications networks, most consumers in these markets now have easy access to smartphones, which enable them to make digital transactions. Mobile sales for these regions are anticipated to rise into the billions soon. And this is simply foreshadowing the trajectory of FinTech in the future as well, with countries who have traditionally not been in power taking charge.
The thing about disruptive technologies is, well, they’re disruptive. And in a highly regulated space like financial services, there’s potential danger in going all-in on something that hasn’t withstood the test of time or passed regulatory scrutiny. So what should you do?
Startups have a little regulatory leeway, but there’s only so far they can go, solo, with their own platforms. Forming partnerships and industry alliances is one fintech trend that can help bring new technologies to broader adoption and work out implementation kinks. Reaching out to other companies and finding areas to work on together can improve customer relationships and user experience. It can also help the technology become more mature. Organizations must figure out implementation gaps and understand customer needs. There has been a lot of hype, and only partnerships will help translate those airy promises into concrete progress.
FinTech has come a long way, and as of today, it has an even longer way to go. For the better, or for the worse; all we can do is hope it’s for the better.
Accenture. The Future of FinTech and Banking, 2014 https://www.accenture.com/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_11/Accenture-Future-Fintech-Banking.pdf
Arbor ventures. Fintech: past, present and future, 2018. https://arborventures1.medium.com/fintech-past-present-and-future-eac0f8df2722
Arner, DW; Barberis, JN; Buckley, RP. An Evolution of FinTech: A Post-Crisis Paradigm?, 2015. Hong Kong University https://core.ac.uk/download/pdf/38088713.pdf
Edelman, Edelman Trust Barometer, 2020 https://www.edelman.com/trust/2020-trust-barometer
FinTech and The Future of Crypto, 2019 https://www.compareremit.com/money-transfer-guide/fintech-and-its-future/
FinTech trends: Five insights for now and the future, 2020. Deloitte
Lovell, Kimberley. Fintech: past, present and future, 2019. Hult International Business School https://www.hult.edu/blog/fintech-past-present-future/
PWC. Crossing the Lines: Global FinTech Report, 2019 https://www.pwc.com/gx/en/industries/financial-services/assets/pwc-global-fintech-report-2019.pdf
Wyman, Oliver. Fintech 2.0: Rebooting Financial Services, https://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2015/jun/The_Fintech_2_0_Paper_Final_PV.pdf