Fintech has roots in the late 19th century when payment could be transferred using telegrams and morse code, though this certainly wouldn’t excite many investors today. Today, we associate fintech with cryptocurrencies and startup banks.
With $137.5 billion invested in fintech startups in 2019, many businesses are trying to create the next big thing in fintech, so there is still much for investors to be enthusiastic about on the Market.
So FinTech or financial technology refers to financial solutions; it is the union of financial services and information technology. The combination of finance and technology seems new, but it has evolved over distinct eras.
Before examining how fintech might develop in the future and the systems and concepts that will fuel its evolution, let’s first look at each key development stage.
History of FinTech
Fintech can be divided into some distinct periods by a paper by Arneris, Barberis, and Ross. Each of these three (and a half) periods experienced unprecedented market differentiation, which changed how customers interacted with their money. Let’s investigate the following periods:
FinTech 1.0(1886-1967) is about infrastructure
It started with technologies like the telegraph, railroads, and steamships, allowing for the first rapid transmission of financial information. During this period, transatlantic cable 1866 and Fedwire in the USA 1918 were the main highlights of this period. It was the first electronic fund transfer system.
FinTech 2.0(1967-2008) is about Banks
The first handheld calculator was launched during this period, and Barclays Bank installed the first ATM.
The establishment of NASDAQ, the world’s 1st digital Stock exchange, marked the beginning of how the financial markets operate today. SWIFT bank was also established and is used till today.
The world introduced online banking, and by the start of the 21st-century bank’s internal processes, interaction with outsiders and retail customers became fully digitalized.
FinTech 3.0 (2008-2014) is about startups
People started not to trust the traditional banking system; this led to a significant shift in the mindset of people and paved the way for a new industry.
One of the Major highlights was the release of Bitcoin in 2009; another one was the usage of smartphones that allowed internet access for millions of people. We saw the introduction of Google Wallet and Apple Pay in 2014.
Fintech 3.5 (2014-2017) is about globalization
Fintech 3.5 denotes a shift away from the Western-dominated financial industry and considers the global spread of digital banking due to advances in fintech technology.
It focuses on customer behaviour and how people in developing countries access the internet. For example, in China and India, markets that never had the opportunity to create Western levels of physical banking infrastructure were more open to new alternatives.
This era is distinguished by a growing number of new participants and their first-mover advantages.
Fintech 4.0 (2018-today) is about disruptive technologies
Blockchain technologies and open banking are driving the future of banking and finance growth. Neobanks are the game changers in this space, challenging traditional banks’ price and complexity while earning consumers’ trust through more straightforward, digital-only experiences and low-to-no costs.
For its part, Machine Learning is changing how individuals engage with banks and insurance firms, allowing them to receive personalized offers and support. N26, for example, revamped its premium account in 2019 to cater to its customers’ unique demands and likes, including discounts at coworking spaces and online travel booking sites.
ML also has security implications: in 2018, British Revolut launched a novel AI system to combat card fraud and money laundering, providing deep insights and predictions surrounding consumer behaviour to discover new card fraud trends without human interaction.
Another significant occurrence during this period is the emergence of a new wave of integrated payment providers, with systems that can deliver payments as an additional strand to an existing comprehensive company management system.
Recently, widespread use cases for NFTs have emerged, such as producers increasing their earning potential through digital representations of their content, artists assuring royalty distributions, and NFTs as tickets or membership cards.
One thing is sure: Fintech is rapidly expanding. And fintech innovation is permeating more and more sectors of digitalization.
The growing number of unicorns (privately held startup enterprises valued at more than $1 billion) is evidence of this.
As technology has been used in the finance industry, we see banks and FinTech startups as opposing forces fighting for their share of the Market, but the reality is both need each other just as much as they need to compete.
FinTech startups have started taking funds from banks. On the other hand, banks have invested in fintech firms to use new technology and methods of thinking to improve their current operations and offers.
Hopefully, this look back at the growth of fintech will serve to summaries how far we’ve gone and put the hectic times ahead of us into perspective.