In the first part of our short series on the coming together of finance and technology, we delved into a recent paper that traces the origins of FinTech as far back as 1866.
From the telegraph and fax machine to the installation of the first ATM, the essay terms the period from 1866–1987 as “FinTech 1.0” – an era of early innovations in which the banking industry was often first to embrace the new technology of the day.
The end of this 121-year period was marked by growing regulation around banking tech, as cross-border transactions became more commonplace. This regulatory intervention was all the more prominent during the evolution of “FinTech 2.0”, which the paper says stretched from 1987–2008.
One of the key drivers for these tighter regulations was the Black Monday stock market crash in October 1987. As the “Evolution of FinTech” essay explains; “While almost 30 years later there is still no clear consensus on the causes of the crash, much focus at the time was placed on the use by financial institutions of computerized trading systems which bought and sold automatically based on pre-set price levels.”
The crash brought about the introduction of mechanisms “to control the speed of price changes,” with a special focus on electronic markets. There was also a push to increase collaboration between regulators worldwide, given the global impact of the Black Monday.
By the time the era of FinTech 2.0 rolled around, claims the paper, financial services “had become largely a digital industry, based on electronic transactions between financial institutions, financial market participants and customers around the world.”
The most significant breakthrough of this period for financial services, however, would be a little something called the internet.
Wells Fargo offered online checking via the World Wide Web in 1995, and just over five years later there were eight banks in America with at least one million customers online. The UK – around 40 years after playing home to the first ATM – was also among the first to have banks without physical branches, such as ING Direct. The impact of the world increasingly moving online was monumental, as outlined in the paper: “By the beginning of the 21st century, both banks’ internal processes, interactions with outsiders and an ever-increasing number of their interactions with retail customers had become fully digitized, facts highlighted by the significance of IT spending by the financial services industry.”
As internet banking grew in popularity, so too did an awareness that it carried fresh security risks. However, these tended to be viewed from the perspective that “these technological innovations would be used by licensed financial institutions only.”
But, as beneficiaries of FinTech 3.0 in the here and now, we know that is not how the story unfolded. Today, multiple start-ups and tech firms are challenging incumbent institutions for the right to handle our money, and in some cases are actually considered more trustworthy than banks in the aftermath of the 2007/08 financial crisis. The paper reports that the level of trust Americans have in CitiBank, for example, stands at 37% – compared to 71% for Amazon and 64% for Google. As the essay notes, “Of course, Amazon and Google are massive, well-established corporations. Nonetheless, there is an increasing number of non-listed companies and young start-ups that are handling customers’ money and financial data.”
Perhaps the words of a leading tech figure during the FinTech 2.0 era best summarize the shifting mind-set that heralded the next stage in financial technology. Showing the type of insight that no doubt contributed to his becoming the world’s wealthiest man once upon a time, Bill Gates commented in 1994 that “banking is essential, banks are not.”
What was about to unfold in the next chapter of the FinTech story would see a flurry of start-up ingenuity designed to prove exactly that.