How the fusing of finance and technology has changed the world
The rise of financial technology (fintech) may seem to be a rapid one. For those outside of the sector it appeared that, out of the blue, we suddenly had new ways of processing payments, investing in stocks, as well as challenger banks to sign up with. It’s like we’ve almost seen it evolve before our very eyes. From online banking and movement toward a cashless society, to a new way free from outdated and antiquated institutions.
As you’d perhaps expect, the reality is somewhat different. Yes, there has been an evolution, and we’re maybe on the cusp of a revolution, but what has evolved didn’t do so overnight. By understanding the journey that has taken place, it becomes easier to consider the future of fintech and where it may lead to next.
With that in mind, we’re going to explore the origins of fintech. We’re going to examine the journey it has taken to reach where we are today and then consider why it’s such an exciting investment opportunity in the future.
What is meant by fintech?
The reality is that the term fintech is not a complicated one. It is used as a way of referring to technology that is utilised to improve the delivery of financial services. While it seems like a modern day term, one that has certainly taken off over the last decade or so, the reality is that its roots can be traced back much further.
Today, when we think of fintech, we think about the kind of things that get investors excited, so much so that by 2021 investment in fintech totalled more than $210 billion. We’re talking about the likes of new technologies that lead to developments with cryptocurrencies and even start-up banks. However, the early days would probably not have done so well in terms of motivating today’s investors. Back then, we’d have been looking at examples such as moving funds around via a telegram!
So, how did fintech reach the dizzying heights of $210 billion? Let’s explore the key stages of its evolution.
Fintech phase one – 1886 to 1967
For those looking to invest in modern fintech, you may be surprised to see the dates above. If you look at the definition of what is meant by fintech, it becomes apparent that this really did start back in the 19th century. It was during these years that there was heavy investment in communications infrastructure. The likes of the telegraph and transatlantic cables allowed for the transmission of financial information across borders.
It was 1918 that saw the establishment of the Fedwire, a centralised funds transfer service while the 1950s saw the advent of credit cards. Perhaps these don’t sound much like fintech by today’s standards, but they certainly set the tone for what was to come.
Fintech phase two – 1967 to 2008
Perhaps one of the most outstanding, and then progressive, events during phase two was the introduction of the ATM. The first of these was seen in 1967 and launched by Barclays. The importance of the first ATM can not be understated: its creation is what saw the first moves towards finances being digitised.
As the world edged into the 1970s, we saw SWIFT being launched. Standing for Society for Worldwide Interbank Financial Telecommunications, this became the protocol between finical institutions to facilitate cross border payments.
It was during phase two that we were introduced to online banking. The rise of all things online marked a major shift in regards to peoples’ perceptions of financial institutions.
Fintech phase three – 2008 – present
Looking back to the world financial crisis of 2008, it can perhaps be viewed as the event that kickstarted the growth in fintech that we recognise today. It was a time when record numbers of people lost all confidence in traditional banking organisations. This coincided with a dramatic rise in the use of smartphones and set a perfect scene for fintech to take off like never before.
In 2009, we saw the launch of Bitcoin, and other cryptocurrencies soon followed and challenged the world view on financial institutions. As time has gone on, we have witnessed the birth of fintech companies offering new banking services, alternative approaches to credit scoring, digital wallets, and loans.
What does fintech have to offer?
The reason that investors turn to fintech companies is that they hold appeal to a mass market. With numerous services already on offer, the demand is ever increasing. Just some of these services include:
This sees fintech companies adopting a similar business model to traditional banks, but without the need for a physical presence. By saving on premises, and the number of staff needed to operate, these banks can be highly competitive in their offerings and test people away from the usual way of banking that they have known for so long.
Alternative credit scores
The number of unbanked, and even underbanked, people across the world is staggering. Fintech companies have provided a new approach to credit scoring that sees this significant part of the population being able to access financial products. It sees scores being reached by considering social signs and percentile scoring among similar borrowing groups. This taps into a huge marketplace that has largely been ignored, until now.
These allow users to load a wallet with virtual money that can be used for both online and offline purchases. There are growing numbers of merchants that recognise digital wallets as a payments method. Fintech companies profit here by charging a small fee for transactions. Given the uptake of digital wallets over recent years, this has proven to be a profitable business model for many companies.
Fintech companies have forged a place in the buy now pay later phenomenon. With simple one-click buttons on e-commerce sites. these companies have been able to appeal to those who buy on impulse. The process sees transactions being completed at speed, without the need to enter card details or to repeatedly verify identity.
The tech behind fintech
What we are witnessing now in terms of fintech is quite different to those early days. The technologies being relied upon were, not so long ago, almost unimaginable. Some of the key technologies being utilised include:
As the backbone of most cryptocurrencies, and introduced to the world on the back of Bitcoin, blockchain is used to securely store transaction records, as well as sensitive data. Blockchain technology sees every transaction being encrypted. The level of encryption means that it is almost immune from cyber attacks.
Machine learning and Artificial intelligence
Both ML and AI have come to the fore in recent years and have seen great strides being made interns of development. FinTech companies are one of those that have seen significant benefits in light of this. This has led to ML and AI being utilised for credit scoring, compliance, wealth management, and the detection of fraud.
We have seen big data providing vital contributions to sectors as diverse as healthcare and retail. FinTech is one sector that has certainly benefited by embracing what it has to offer. It allows FinTech companies to learn about the likes of consumer spending adits, preferences, and investment behaviours. On the back of this, they are then able to develop predictive analytics.
Robotic Process Automation (RPA)
While many will be familiar with the use of robots to undertake manual tasks in place of humans, the use of RPA is able to streamline work processes within financial institutions. Examples of this in practice include:
- Transaction management
- Data collection
- Regulatory compliance
A look into the future
Fresh on the back of a pandemic, it is perhaps not the best time to attempt to predict the future. However, what can be said for certain is that, over a century down the line, fintech is only now really getting going. As we have shown, the fintech industry didn’t emerge overnight or out of nowhere. It took a slow and steady path, but every step has been taken with the same aim: harnessing technology to make the customer experience better, and more secure.
With blockchain and open banking, driving innovation in the financial sector, we are going to see fintech companies evolve once more. Moves will be made to strengthen relationships with each and every customer. How? By targeting each individual with bespoke offers and support. These offers will be based upon their behaviours and will ensure that any experience with their financial institution, is relevant.
It’s not just individual customers who are set to benefit from the developments in fintech. Businesses too will reap the rewards as the use of integrated payment providers grow and change how money is both collected and managed.
One thing that is for certain is that fintech companies are future-proofed. With the aim of putting the customer experience at the heart of all innovations, FinTech companies will continue to evolve and leave traditional financial institutions consigned to the past.