Fintech Revolution: The Rising Game Changer in Banking

August 2, 2021

The Impact of Digital Disruption on Banks and Banking

Traditional banks are concerned about Fintech, and for a good reason. Banks had a stranglehold on almost everything involving money until a few years ago. And, being the giant bloated dinosaurs that banks were, there wasn't much motivation for them to innovate or remain competitive. After a few years and a few leaps forward in digital technology, it was time for smaller, more nimble players to make an appearance.

As innovation expert and Fintech advisor Arvind Sankaran puts it, “ We're witnessing the creative destruction of financial services, rearranging itself around the consumer. Who does this in the most relevant, exciting way using data and digital, wins.”   

Although it is transforming money, most people are unaware of what Fintech is. Fintech is all around us, and more and more of us are utilising it. And while Fintech companies are receiving increasing investment, according to an EY poll conducted in the United States, 63 percent of respondents have never heard the phrase Fintech before, as well as those who couldn't recall having ever heard the term Fintech. Another 21 stated they'd heard the word but had no idea what it meant, and only 16 could even try to describe it.

The word encompasses industries that you probably did not associate with Fintech. Simply put, Fintech startups unbundle all of the various sorts of financial transactions that banks normally perform. And because each Fintech tends to concentrate in only one area, they focus on executing it in an efficient, streamlined, and user-friendly manner.  As user-friendly as possible on a digital interface, and at a reasonable cost to the consumer.

Platforms that are already clearly Fintech-like allow you to make payments online or in stores are Square or Paypal, services that allow you to trade stocks like eToro or Robinhood, as well as anything digital you use to apply for a loan. Cryptocurrencies and the crypto trading platform Coinbase are also included within the Fintech umbrella, as are so-called neo banks such as Chime, Transferwise, and Revolut.

There are other players you may be familiar with but haven't thought of as Fintech. Crowdfunding is also considered Fintech, thus it covers sites like Kickstarter and Gofundme, and if you make or receive payments through Patreon, you're also utilising Fintech, as are online charity fundraising platforms. There's also Fintech for healthcare.

One thing that Fintech excels at is extending financial services to those who previously did not have access to them. Often, this implies people who did not have a regular income or a permanent location, and Fintechs that enable them to develop wealth and escape the poverty trap.

The Fintech Revolution

The introduction of the smartphone has resulted in a surge in the number of startups. With the development of Blockchain technology and Cryptocurrencies following the 2008 financial crisis, we entered a new era of the Fintech revolution. This has the potential to cause yet another paradigm change in the Fintech field, with the concept of old Fiat currencies being supplanted by a new wave of digital tokens and currencies operating on a transparent and decentralised system.

This new wave of technology has also resulted in alternate types of financing, such as peer-to-peer lending and crowdfunding. The flag bearers of this new change are emerging markets and poor countries, which have very high mobile coverage rates but no access to traditional means of finance.

The conventional barrier between the developed world and emerging countries is rapidly dissolving as a result of rapid digitization and revolution in the Fintech business. We will have a truly digitised, transparent, and decentralised global financial system far faster than previously believed.

Fintech's History

According to research by Arneris, Barberis, and Ross, Fintech can be divided into several eras. Each of these three (and a half...) eras witnessed a significant level of market differentiation, which resulted in changes in the way consumers interacted with their money. Let's have a look at these eras:

Fintech 1.0 (1886–1967)

This stage entailed constructing the infrastructure that facilitated globalised financial services. The first transatlantic cable (1866) and Fedwire (1918) in the United States enabled the first electronic fund transfer system employing technologies such as telegraph and Morse code. It was simple by today's standards, but at a period when infrastructure and transportation were developing, the capacity to conduct financial transactions over a greater distance was revolutionary.

Fintech 2.0 (1967–2008)

The installation of the first ATM by Barclays in 1967 marks the beginning of this phase, which is distinguished by the transition from analogue to digitization of funds. The 1970s witnessed the birth of NASDAQ, the world's first computerised stock market, and SWIFT (Society For Worldwide Interbank Financial Telecommunications), a communication system between financial institutions that facilitated the massive number of cross-border transfers.

This age lasted throughout the 1980s, with the rise of bank mainframe computers (and a “Gordon Gecko” sense of Wall Street flair...). and the expansion of online banking throughout the 1980s saw the way people transact business change, with the internet revolution leading to a transformation in how consumers regarded financial institutions.

The 1990s witnessed the first forays towards digital banking, with connected clients beginning to manage their money in novel ways. PayPal was created in 1998, foreshadowing the new payment methods that would emerge as the globe increasingly moved online.

Everything in the economy appeared to be in order, prompting then-UK Chancellor Gordon Brown to announce the “end of boom and bust.” However, it was this particular bust – the global financial crisis of 2008 – that brought the curtain down on this period of Fintech and drove the innovation that would be seen in the next era.

Fintech 3.0 (2008-Current)

Following the financial crisis, a loss of trust in banks, combined with regulatory changes, exposes the market to new providers. Bitcoin was the first cryptocurrency to use blockchain technology, and it was quickly followed by others. Smartphone adoption means that mobile devices will become the major way for consumers to access the internet and other financial services.

The era of the start-up arrived, with a thirst for innovation among investors and customers fueling a flood of new products and services. Now, even established banks are beginning to operate and advertise themselves as start-ups, and this shift away from the established banks of the Fintech 2.0 era has been the defining feature of Fintech 3.0.

To enable this, new technologies have emerged to make it easier to construct digital banking solutions using Open Banking, which allows third-party organisations access to financial data. Banking as a Service (BaaS) platforms such as Treezor and SolarisBank have made it easier for banks and other financial institutions to transition away from complex legacy systems and develop “neo-banks” — digital banks that have formed with the goal of improving the client experience.

Fintech 3.5

Fintech 3.5 has been established to account for changes in consumer behaviour and how people access the internet in the developing world. The two countries with the largest Fintech usage are China and India, which are about as far away from this wire as you can go. Because these countries have not been encumbered with the physical banking infrastructure of the West, they have been able to adopt new ideas more swiftly than their Western counterparts. Fintech 3.5 denotes a shift away from the Western-dominated financial industry and embraces global achievements in digital banking.

Way forward for Fintech

With the world now recovering from a massive pandemic, peering into a crystal ball and projecting the future is a little tough. As of May 2020, Venture Capital Fintech investment had declined by $6.1 billion, the lowest level since the first quarter of 2019. However, the underlying technology that has fueled the Fintech 3.5/3.5 age, especially blockchain and open banking, will continue to drive future innovation.

Machine Learning is intended to change the way we engage with banks and insurance businesses, with the goal of strengthening client relationships by building a "segment of one." By doing so, financial institutions may target individuals with tailored offers and support that are tailored to their behaviour and provide a more relevant experience for them.

German digital bank N26 is already producing personalised offerings, such as discounts with flexible workspace WeWork and online trip booking site GetYourGuide, while rival Revolut is developing a machine learning solution to assist users' budget based on their previous 3-6 months of spending. This invention isn't limited to the financial industry. Insurance companies are planning to use machine learning to speed up the way they handle insurance claims. 

These advances are fantastic for consumers, but what about businesses?

Fintech is going to transform how money is collected and managed for both online and brick-and-mortar businesses, whether they are stores, gyms, or plumbers, through a wave of integrated payment providers. Platforms such as Shopify for e-commerce, Housecall Pro for plumbers, and Mindbody for yoga studios are in a unique position to offer payments to their consumers, providing these industries with a completely integrated framework on which to conduct their business.

Whereas new digital banks can provide individuals with a unique view of their finances, these integrated platforms can offer payments as an extra strand to an existing complete corporate management system. With a single system, you can handle bookings, stock levels, and payments in a way that provides deep insights and data that provides business owners with crucial information about how their firm is functioning.

Some of these platforms previously accepted payments through a third-party provider, but as companies like Lightspeed POS begin to offer their own payment solutions (in this case, Lightspeed Payments), they are able to collect a much higher level of revenue from their customer base and grow as their customers grow.

By overlaying payments on top of a broader base of sector-specific technologies, these suppliers are able to dominate a niche, developing industry-specific solutions to meet the unique issues faced by their customers. Personalisation and automation of systems that improve the customer experience and drive the concept of the “segment of one” look likely to underpin the systems we use to manage our finances in the future.

Future of Fintech

As we have seen, the journey to where we are today has been far slower than the extraordinary rate of change that we have witnessed during the last twenty years. After taking sixty years to develop the first cash machine, applications and systems that update in our pockets on a daily basis are now poised to control how we handle our finances.

When all of the technology is stripped away, the overarching motivator in all of this innovation is how the user experience can be improved (securely). Every Fintech period has been driven by the use of technology to make banks easier to use for their customers, and as this technology improves, so do the methods in which people and businesses may handle their money.

Whatever short-term bumps on the path there may be (and there have been many since 1886), this philosophy has not changed. So, when looking to the future and deciding on the direction of your own product, putting the customer experience at the centre of it is likely to be a very future-proof strategy.

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