So far in our three-part blog series (Part 1, Part 2) on the origins of FinTech, we’ve highlighted some of the key moments and innovations that have shaped the current financial services landscape.
Usage of the term “FinTech” can be traced back to the early ‘90s according to the authors of a recent paper titled “The Evolution of FinTech”, but only in the last few years has it cemented its place in the wider vernacular. Today, the term is most strongly associated with the tsunami of start-ups that have set out to disrupt the banking industry in the wake of the Global Financial Crisis of 2007/08.
The Evolution of FinTech essay cites multiple ways in which the crisis sparked the emergence of new financial players, including trust issues with banks, unemployment among financial professionals, and heightened levels of government funding for new businesses. With regard to trust levels, the paper says, “As the origin of the financial crisis became more widely understood, the public perception of banks deteriorated. For example, predatory lending methods targeting disenfranchised communities not only breached the consumer protection obligations of banks, but also severely damaged their standing.”
While public dissatisfaction with banks provided fertile ground for change, the effect of many banking professionals losing their jobs also played a major role in shaping FinTech as we know it: “This under-utilized educated workforce found a new industry, FinTech 3.0, in which to apply their skills. There is also the newer generation of highly educated, fresh graduates facing a difficult job market. Their educational background has often equipped them with the tools to understand financial markets, and their skills can be applied to FinTech 3.0.”
Beyond these “human” factors, another key driver behind the rise of technology-driven firms becoming financial players was the new regulations placed upon banks in the wake of the crisis. Acts such as Dodd-Frank and Basel 3 not only sought to avoid a future crisis, but also had the “unintended consequence of spurring the rise of new technological players and limiting the capacity of banks to compete.”
For example, says the paper, Basel 3’s focus on capital requirements meant SMEs were less likely to receive credit, and turned instead to emerging P2P lending platforms.
All these factors – mistrust, unemployment, regulation – are described in the paper as the “perfect storm” that led to the emergence of FinTech 3.0, and ensured financial technology “is no longer the preserve of traditional financial services.”
Of course, keen observers of the industry will be quick to point out that banks haven’t retreated into a corner amid the onslaught of industry innovation. Partnership with banks has proven itself the most attractive option for many FinTech start-ups, and the paper suggests banks have always been invested in technology: “The financial services industry has been one of the prime purchasers of IT products and services globally, with total spending at over US$197 billion in 2014. This is not a recent trend and dates back to the mid-1990s, when the financial services industry became the single largest purchaser of IT, a position it retains to this day.”
Nevertheless, FinTech has flourished not only because of the factors cited above, but also, perhaps, because so much of that spending by banks has focused on dragging legacy systems into the present day rather than the type of “risky” innovation associated with FinTech start-ups.
Banks may counter that such risky innovation is only possible because start-ups aren’t bound by the same tight regulations they are, and how FinTech evolves in the future will indeed be closely bound to how regulators choose to control new financial players. At present, claims our source paper, there is “uncertainty as to what laws and procedures are applicable to new FinTech.” For now though, what we do know is that FinTech is an industry that tripled investments to $12 billion worldwide in 2014 compared to 2013, and the upward trend is expected to continue.
That being said, it’s almost impossible to imagine where the marriage of finance and technology will lead us in the next 150 years – especially when we consider how far we’ve come since the first wire transfers were made by telegraph in the late 1800s.