Banks have long enjoyed a privileged position in the financial system – but now startups threaten their stranglehold.
Fintech is not new. From the 1950s, banks were early adopters of information technology such as computers and ATMs. But new technology is now creating new business models that no longer need banks at the centre.
The term Fintech was coined in 1993 by Citibank (then Citicorp) as it explored how to adopt new technology. It is a portmanteau of ‘financial technology’.
Today, Fintech refers to financial firms with new business models and services based on new technology like blockchain. Fintech is also used for payments, insurance (InsureTech), and wealth management (WealthTech).
Of course, financial technology existed before 1993.
For hundreds of years, banking was about relationships rather than technology. But starting in the late 19th century, new technology began to make an impact.
First there was the telegraph. Instant communication led to improvements in speed and verification. The pantelegraph system was invented in 1865 for checking signatures between Paris and Lyon. And the first transatlantic telegraph cable in 1866 enabled international banking.
The next major breakthrough was the introduction of computers in the 1960s. Computer databases made record keeping easier. It also improved communication (Telex and SWIFT), and helped develop automatic teller machines (or ATMs).
The advent of the internet in the 1990s provided banks and customers with greater access to their data.
But since the end of the financial crisis of 2008–09, we’ve entered a new age of Fintech. It started slowly but, since 2015, there has been an explosion in Fintech firms, services, business models and investment.
In 2010, worldwide investment in Fintech was $9bn. In 2019, it was $168bn. Meanwhile, Fintech companies like Chime, Robinhood and Paytm have become household names.
‘We have spoken about this for years, but this competition now is everywhere,’ wrote Jamie Dimon, CEO of JPMorgan Chase, on Fintechs in his 2020 letter to shareholders.
Three main developments have led to the rise of Fintech firms.
First, increased access to consumers because of smartphones. The introduction of the iPhone in 2007 was pivotal. Before smartphones, mobile phones were used for some financial innovation like the M-Pesa system in Kenya, but smartphones brought online services to people’s phones.
In countries with fewer bank branches and ATMs, smartphones have unlocked billions of new banking customers.
Second, there has been the growing acceptance of Fintech firms by consumers. Consumer adoption of Fintech has increased from 16% in 2015 to 67% in 2019, according to EY’s Fintech Adoption Index. Also, 89% of SMEs are now willing to share their data with Fintech firms.
This increase in trust is not about blockchain and decentralised financial services, whose impacts are still in their infancy. Rather, it is about how the financial crisis shook consumers’ confidence in banks. People lost their houses and jobs because of the bad lending practices of banks and their speculation with debt products.
It is also because banks themselves are trusting Fintech firms. Banks have opened up their data and systems to Fintech firms through their APIs (application programming interface). This has allowed Fintech firms to build new services that they would not otherwise have been able to.
The instant service of many fintech firms has also built trust. There is little to be worried about when you see a transfer or payment happen in the blink of an eye.
Third has been the large investment in Fintech. The first wave was largely from venture capitalists, but now banks themselves are investing in Fintech startups.
Big companies like Apple, Amazon, Facebook, Microsoft and Walmart are also beginning to invest too. Such companies pose a different type of threat to banks. Fintech is no longer just about startups.
Many governments in Asia have also provided incentives for Fintech startups as they seek to create Fintech hubs.
Fintech is still in its early growth phase. Companies like Ant Financial, Stripe and TransferWise have established themselves, but new startups keep emerging and investors remain keen. This exuberance will eventually settle down as winners emerge and consolidation takes hold. Interest in blockchain will continue as hype gives way to more and more genuine applications.
Regardless of what companies come out on top, the big winners will be consumers. Fintech has delivered new competition and services in the banking sector, not just reduced costs for banks.