What is Fintech?
Financial Technology (now often referred to as Fintech) has been with us since 1865 when Giovanni Caselli invented the Pantelegraph. This is what a 2016 study from the universities of Hong Kong and New South Wales found. The study divides the evolution of financial technology in three eras. We are living in the third one, which started in 2008.
The term Fintech emerged in the years after the financial crisis that started in 2007, the Credit Crunch. Which reached its most dramatic moment with the collapse of Lehman Brothers in 2008.
Arguably, Fintech is a series of responses to the failings of the “traditional” financial system.
Financial services consumers (individuals and organisations) no longer trust finance people. Fintech is giving them tools to deal with their financial matters in a much more direct way. These consumers, using their smartphones, tablets and personal computers connect directly to online platforms which execute the service they require. They do so in an automated way, with very limited or no human interaction. In some cases, the customer is still dealing with a financial company. In other cases, financial companies are removed from the process.
Threat and opportunity
According to Wikipedia there is actually no consensus on what Fintech is. A recent study published in the Journal of Innovation Management attempted a definition of Fintech, drawing from a review of over 200 scholarly articles: “Fintech is a new financial industry that applies technology to improve financial activities”.
It has emerged at this point in time for at least two reasons: 1) the traditional financial system failings in 2007/8 and 2) technology innovations which reached a mature enough stage, around the same time. These technologies include Open APIs, Big Data and Artificial Intelligence.
Although Fintech started as a series of independent projects aimed at working around (or even replacing) the traditional financial system, it is now partnering with established institutions. To some extent, at least.
It remains a small fraction of the trillions of dollars that change hands every day around the world. Now, however, venture capitalists, banks, market regulators and even central banks have all established programmes to invest, support and (lightly) regulate these projects. Some got involved because they see Fintech as a long term market share or even existential threat, some because they see it as a competitive advantage opportunity with a huge potential.
There is no consensus on what the key areas are, but most sources covering the sector would generally include the following areas:
- Crowdfunding (equity and debt)
- Digital payments
- Cryptocurrencies (Bitcoin and others)
The list above covers areas whose players started post 2008. However, Fintech 3.0 should also include areas such as Automated Trading, which by 2008 were already established. Since then, these have further developed and adapted with variations such as Social Trading (e.g. eToro).
Some of Fintech projects have received a lot of attention, from businesses and media, but are far from delivering their promised benefits. Some have already been making an impact for a few years.
Crowdfunding is helping people and businesses raise finance which was otherwise out of their reach. Especially post Credit Crunch and consequent higher capital requirements imposed on banks and other institutions by regulators.
Innovative payment systems allow people and businesses in countries forgotten by big banks, Visa, Mastercard and other financial services corporations to enter the global financial system.
Fintech is getting traction. But it is still in the early stages of a long and uncertain journey which will bring a better financial system. Before it gets there it needs to address many challenges, from cyber crime to (bad) regulation.
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