By definition, Fintech is the use of technological advancements, to provide ease of financial services through automations. It is viewed as a merger between the concepts of financial services and the developments in technology. The fintech industry has been in the making for a long time. In fact, one can say that the installation of the Trans-Atlantic cable in 1858 marked the beginning of Global Fintech.
The last global financial crisis of 2007-2008 caused heavy investments in the fintech industry. The lack of trust in the traditional banking methods played a major part in driving these investments. It would be an appropriate assumption that these were desperate attempts to cover the drawbacks of their predecessors in the world of financial services.
Attention was drawn to companies whose ideas were previously laughed at, simply because they wished to change the existing techniques of catering to the already-served customers.
Covid-19 has had a similar impact on the financial world, with the launch of hundreds of fintech companies in the period between July ’20 and July ’21. The only difference between the crisis of 2007-08 and the recession of 2020-21, was the decade of developments adding support to the recovery.
How blissful is the future of fresh startups in the new world of post-pandemic recovery?
Emergence of the Fintech Industry
The 90’s. The internet started making its way into homes and offices, on a large scale, around the world. This was the period when banking platforms decided to go digital. Not only did this mean ease of managing transactions, but customers could feel more in control of their own money.
PayPal launched in 1998, with an online payment system, the likes of which had never been even considered before.
In the year 2009, at the start of the recovery (from the financial crisis) period, Bitcoin is introduced. The new system of payments was backed by the boom of blockchain technology.
2009 also witnessed the launch of Venmo, which allowed customers to make transfers through their smartphones. Venmo was acquired by PayPal in 2013.
In 2013, Plaid was launched, wherein apps were directly connected with customer bank accounts. This proved to be a major step in the field of internet banking.
Fast-forwarding to 2019, right before Covid-19 took the world by surprise, the number of unicorns in the fintech industry noticed a sharp spike, with large credit to developments in Artificial Intelligence (AI) and Robotic Process Automation (RPA). The integration of AI and RPA into the existing fintech platforms, offered better and easier access to cash, improved security and drastically enhanced process efficiency.
To view a flowchart of Fintech timeline, click here
Pioneers
Keeping aside the Trans-Atlantic cable and the issuance of credit card by the Diner’s Club, PayPal was the first fintech company to go global. The idea of online payment systems was ridiculed because it was to compete with the existing traditional techniques of major players like American Express, MasterCard and VISA.
But, due to its ease to use, the customer base grew consistently. And once the company decided to go public in 2002 (just 4 years in the market), it grew by 55% almost immediately.
This was when eBay decided to take PayPal seriously and acquired a controlling interest in it.
PayPal went on to buy various other companies, whose technology and models were incorporated into its own platform, allowing it to grow at a steady rate.
In 2014, PayPal was spun-off from eBay and its valuation shot up, yet again.
Today, PayPal is available in 202 counties, accepts more than 100 currencies and is used by over 750,000 websites around the world, making it a true pioneer in the fintech industry.
Developments over the years
There have been various developments that led the fintech industry to where it stands tall today. Some slow, while others made an immediate impact on the boom of fintech. But, as we saw, overall, fintech took around two decades to become a part of our daily lives.
Some developments listed below, assisted the rise of the fintech industry.
Blockchain – advancements in blockchain allowed security at lower costs, while improving efficiency of transactional processes. Furthermore, it boosted the speed of transactions, making it an endearing contributor to the rise of fintech.
Adoption of Artificial Intelligence – the integration of AI aided financial systems to collect, store and analyse data with greater ease. With that, they can provide better products to customers (as per needs), while customers have further clarity on investments.
Payment Modes – the traditional payment modes of cheque deposits or swiping cards seem to have been replaced by the scrolling and tapping of fingers on our touchscreens. Whether it is contactless payments or mobile wallets, transfer of funds from one account to another has been simplified beyond what one could comprehend at the onset of the fintech era.
Reduction in use of physical money – while the use of physical money was already declining, the Covid-19 pandemic has added fuel to fire. With restrictions on contact, physical transactions have swiftly been replaced by newer payment modes, even in parts of the world where they were expected to reach almost half a decade later. Banking institutions have started emphasising on the use of online banking, to further promote their financial products.
Online Banking – a boon for banks because it saves them the cost of acquiring or renting new spaces for branches. It also allows them to showcase their financial products, and update their campaigns with time, specifically targeting customers according to their preferences collected in data. The option of online banking saves customers, their valuable time, and grants them the ease of managing their money (and their accounts) at their convenience. This means, no more extensions on lunch breaks to visit the bank, no more standing in long queues for managing investments.
Big Data – the major contribution of Big Data to the rise of fintech, was its ability to forecast fraudsters and defaulters, which could be overlooked by their human counterparts. Institutions use Big Data in analysing the transactional patterns of customers, and easily segregate the ones who could be a potential threat to their platforms.
Biometric ID – Passwords uniquely set by customers, fingerprint scans, and now, facial recognition – online banking security has come a long way in the past few years itself. With each step towards uniquely identifying the customer, security of data and funds has increased manifold.
Regulatory Technology – With, governments updating compliance protocols at regular intervals, businesses within the financial industry need to keep up. Whether it is Know Your Customer (KYC), Anti-Money Laundering (AML), Data Management or Tax Management solutions, businesses use the Regulatory Technology to keep at pace with the changes in federal regulations.
Some other Fintech developments and trends can be viewed here
Largest Markets
With a massive chunk of transactions and developments taking place in the western hemisphere, North America (USA and Canada) remains the largest market for fintech.
It should be noted that the APAC region (Asia-Pacific), consisting of India, Indonesia, Japan, China, and South Korea, is on the rise. The fact that these are developing markets, contributes to their rapid growth.
India and Indonesia, combined, make up a whopping 40% of the global fintech market. These countries have a large un-served and under-served market of customers, constituting of a potentially untapped future for fintech.
Future of Fintech
In the past decade, investments in fintech have boosted drastically. Bigger investors are trying to cater to the millennials (a long bet, wherein they will be able to squeeze better business in the coming years, based on services provided now).
Technology developing companies and websites drive traffic to their fintech partners, in an attempt to benefit both sides.
Without a doubt, fintech has become a part of our daily lives – from the checkout cart of an ecommerce website to trading stocks online. Newer platforms offer it all – account opening, fund transfers, trading, settlement of claims, among others. This makes competition to get customers to switch to different platforms, higher.
Fintech has helped (and continues to help) re-shape various industries, which transformed their older, traditional ways, by adopting leaner financial methods.
Moving ahead, regulations and laws need to be remodelled to accommodate the fintech of the future. As long as old laws apply to the ever-changing fintech industry, individual economies will only limit their potential benefits.