Evolution of Fintech

Understanding Fintech

Financial technology, or Fintech for short, refers to technology-enabled financial solutions. It is often described as the union of financial services and information technology. The interlinkage of finance and technology might seem like something fairly recent but has actually evolved over distinct eras. We could actually say that finance & technology have been intertwined ever since we can speak of modern society, let’s see the evolution of Fintech.

History of Fintech

Technology has always played a key role in the financial sector, so from which point onwards can we talk about fintech? According to a paper by Arneris, Barberis & Ross the key periods in the timeline of fintech are:

History of Evolution of Fintech Graph

Following this table of eras, we can identify the key events of each period.

Fintech 1.0 (1886-1967) is about infrastructure

This is an era when we can first start speaking about financial globalization. It started with technologies such as the telegraph as well as railroads and steamships that allowed for the first time rapid transmission of financial information across borders. The key events on this timeline include first transatlantic cable (1866) and Fedwire in the USA (1918), the first electronic fund transfer system, which relied on now-archaic technologies such as the telegraph and Morse code. The 1950s brought us credit cards to ease the burden of carrying cash. First, Diner’s Club introduced theirs in 1950, American Express Company followed with their own credit card in 1958.

Fintech 2.0 (1967-2008) is about banks

This period marks the shift from analog to digital and is led by traditional financial institutions. It was the launch of the first handheld calculator and the first ATM installed by Barclays bank that marked the beginning of the modern period of fintech in 1967.

There were various significant trends that took shape in the early 1970s, such as the establishment of NASDAQ ,  the world’s 1st digital stock exchange, which marked the beginning of how the financial markets operate today. In 1973, SWIFT (Society For Worldwide Interbank Financial Telecommunications) was established and is to this day the first and the most commonly used communication protocol between financial institutions facilitating the large volume of cross border payments.

The 1980s saw the rise of bank mainframe computers and the world is introduced to online banking, which flourished in 1990s with the Internet and e-commerce business models. Online banking brought about a major shift in how people perceived money & their relationship with financial institutions.

By the beginning of the 21st century, banks’ internal processes, interactions with outsiders and retail customers had become fully digitized. This era ends with the Global Financial Crisis in 2008.

Fintech 3.0 (2008-Current) is about start-ups

As the origins of the Global Financial Crisis that soon morphed into a general economic crisis become more widely understood, the general public developed a distrust of the traditional banking system. This and the fact that many financial professionals were out of work, led to a shift in mindset and paved a way to a new industry, Fintech 3.0. So, this era is marked by the emergence of new players alongside the already existing ones (such as banks).

The release of Bitcoin v0.1 in 2009 is another event that has had a major impact on the financial world and was soon followed by the boom of different cryptocurrencies (which, in turn, was followed by the great crypto crash in 2018).

Another important factor that shaped the face of fintech is the mass-market penetration of smartphones that has enabled internet access for millions of people across the globe. Smartphone has also become the primary means by which people access the internet and use different financial services. 2011 saw the introduction of Google Wallet, followed by Apple pay in 2014.

Fintech in Emerging Markets

The way mobile phones have changed consumer behavior and how people access the internet is also the reason why in the table above they differentiate between the developed and developing countries and speak about Fintech 3.5 when it comes to the latter. As of today, the countries with the highest Fintech usage are China (69%) and India (52%). China, India and other emerging markets never had time to develop Western levels of physical banking infrastructure, which has left them more open to new solutions. In the case of China, the fintech penetration is well above the average global adoption (33%) as well as that of the average adoption across emerging markets (46%).

Fintech Today

As technology is becoming ever more central in the finance industry, we tend to consider banks and fintech startups as opposing forces fighting for their share of the market. The reality is that both sides need each other just as much as they need to compete with each other.

On the one hand, fintech startups have taken funding from banks and often rely on banking, insurance, and back office partners to deliver their core products. Banks, on the other hand, have acquired fintech startups or invested in them to leverage new technology and ways of thinking to upgrade their existing operations and offerings.

Hopefully, this retrospective look into the evolution of fintech will help to sum up the long way we’ve come until today and put into perspective the busy times ahead of us.

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