All About Fintech: History, Development, and Future
- Digital Strategy
Fintech, a portmanteau of financial technology, describes the industry based on developing digital technologies that replace, supplement, or enhance existing financial services. Fintech has revolutionized finance over the years, particularly in the consumer sphere where access to financial services and payment methods has increased sharply.
Today fintech comprises several different sectors that include, but are not limited to, retail banking, fundraising, and investment management. One of the most successful types of fintech are digital payment companies. Research has found the total transaction value of digital payments increased from $4.1 trillion in 2019 to $5.2 trillion in 2020 alone.
In this blog, we will discuss the various facets of fintech including its history, success stories, business models, technologies, and predictions for the future.
A brief history of fintech
Technological development of finance (1886-1967)
Taking the definition of fintech as ‘new tech that seeks to improve and automate the delivery and use of financial services’ [Investopedia] you could argue that the history of fintech goes back to the 19th Century. From 1886-1967 investment in communications infrastructure, such as the telegraph and transatlantic cables, enabled the transmission of financial information across borders. The Fedwire, a centralized funds transfer service was established in 1918. The 1950s brought credit cards, reducing the need for people to pay in cash. [The Evolution of Fintech: A New Post-Crisis Paradigm by Buckley, Arner, and Barberis].
It can be argued that while such types of fintech may not be regarded as such today, they were, however, relevant to their time period.
Technological development of finance (1967-2008)
During the latter decades of the 20th Century, banks took charge in the development of financial technology, marking a major shift from analog to digital. The first handheld calculator and ATM were introduced in 1967.
NASDAQ, the first digital stock exchange and SWIFT (Society For Worldwide Interbank Financial Telecommunications) was established in the 1970s. During the 1980s, bank mainframe computers started to become popular and, in the ‘90s, the concept of making financial transactions online started to emerge.
Modern fintech (2008-present)
The 21st century started with banking services becoming digitized. The financial crisis coupled with the rise of smartphone usage had a massive impact on the fintech industry. The 2008 global financial crisis eroded confidence in traditional banking institutions, and together with the broad-based rise in digitalization, kickstarted what we now recognize as the fintech industry.
The introduction of Bitcoin in 2009 for example, had a significant effect on the financial world and many different cryptocurrencies were also introduced. Various fintech business models also started to emerge, some of which included alternate credit scoring, digital wallets, and small ticket loans.
Spotlight on fintechs
In this section, we will shin the spotlight on three fintechs at various stages of maturity.
PayPal is one of the most recognized fintech companies today globally. It was founded in 1998 by Elon Musk, Peter Thiel, and Luke Nosek and is headquartered in San Jose, California. PayPal is an online payment system that makes purchasing products online easy and secure, allowing users to send and receive money seamlessly. It takes a small cut from every transaction.
Without over 361 million active accounts, the online payment processor is now available in 202 countries and enables users to draw funds in 56 currencies. PayPal’s online checkout conversion stands at a massive 87.5 percent.
Recent Fintech Unicorns
Stripe is a notable example of a fintech company that has achieved unicorn status (+1bn valuation). Founded in 2011 by Irish brothers Patrick and John Collison, the company has become one of the most valuable US fintech today, valued at $95 billion. The company provides developer-friendly codes for websites for payment processing and has processed online payments for small to large-sized businesses.
Stripe also has an in-store point-of-sales device known as “Terminal” and has created subscription-based payments and invoicing. Its customers include large tech giants like Google, Amazon, and Shopify.
Promising Fintech Start-ups
San Francisco-based company Figure was founded in 2018 by Mike Cagney and June Ou, and it has become a leading start-up in the fintech industry. The company offers consumer financial solutions for home improvement, debt consolidation, and retirement planning purposes. Its financial services include home equity release services, home improvement loans, and home buy-lease back offerings.
The company has raised $1.6 billion and is currently in series D of its funding rounds.
How are Fintech start-ups funded?
Fintech start-ups can be expensive to fund, making business owners consider different funding options. The most common are:
Angel investors are high net worth individuals who fund startups in exchange for equity. The funds they provide don’t have to be repaid, and they bring in their expertise and networking opportunities as well. However, the angel investor having a share in the equity means one will not have full control over their business.
Outrun Ventures is an example of a start-up that was been funded by angel investors. The angel investor for the company is Chris Adelsbach, who is also the managing director of Barclays Techstars London.
Venture capital is a form of private equity and financing provided to startups and small businesses. It is mainly funded by financial institutions, investment banks, or wealthy investors and is ideal for companies unable to access financial resources from financial institutions.
Crowdfunding requires posting your business idea and funding requirements on crowdfunding platforms. Interested funders then provide the required funding in exchange for a share of your equity. Some popular crowdfunding platforms include Kickstarter, Dream Funded, and Rocket Hub. A prime example of a crowdfunded fintech is Revolut, which raised money on Crowdcube.
Traditional bank loans
Traditional bank loans are one of the most common sources of finance for businesses. They are usually provided over a fixed time period and can be offered short- or long-term. They offer capital/principal repayment options and are not dependent on giving up a share of the business.
Fintech business models
Fintech founders have found all sorts of ways to profitably fuse technology with finance. A few types of business models have emerged as the most viable.
Alternate credit scoring
Alternative credit scoring takes into account data points like social signals and percentile scoring amongst similar loan borrower groups. It is ideal for individuals who are unable to pass bank screenings for loans due to strict credit scoring criterias. Not only does alternate credit scoring help in making better lending decisions, but it also gives more people access to loans.
Payment gateways allow people to purchase products on a merchant’s website. Fintech companies today are integrating different payment methods (i.e debit cards, credit cards, cryptocurrencies) into apps that online merchants can include on their websites. PayPal for instance can be regarded as a payment gateway. Payment gateways are typically used by business owners selling their products to end-users.
Digital wallets allow users to load virtual money into their wallets in advance to make online and offline transactions. These transactions are made with merchants who recognize digital wallets are a payment method. In this business model, users make payment transactions for a small fee. This is charged to businesses as an MDR (Merchant Discount Rate). Some examples of digital wallets include Venmo and Google Wallet.
This fintech business model is similar to that of a bank that has physical branches. Not only does it help save money on manpower and real estate, but consumers can take advantage of reduced rates as well. It offers bank accounts via a digital infrastructure and includes activities like money withdrawal, transfers, deposits, and bill payments.
In this fintech model, money is made by sharing customer information with the original equipment manufacturer (OEM). It includes impulse buying mechanisms such as “Buy Now and Pay Later” or one-click buy buttons on an e-commerce website. Customers can purchase quickly without inserting card details or undergoing authentication processes, and they are underwritten at a 0% interest rate. Klarna is an example of a company that provides small ticket loans.
Technologies used by fintech companies
The fintech industry uses a range of innovative technologies to carry out its complex operations. Below we mention a few:
Artificial Intelligence (AL) and Machine Learning (ML)
Fintech applications enhanced by AL and ML include credit scoring, fraud detection, regulatory compliance, and wealth management.
Big Data and Data Analytics
Data from consumers and markets allow fintech companies to know about consumer preferences, spending patterns, investment behavior, etc. This enables them to develop predictive analytics. The data also helps to form marketing strategies and fraud detection algorithms.
Robotic Process Automation (RPA)
The process of manual tasks to robotics instead of humans to streamline workflows in financial institutions. Some applications include statistics and data collection, regulatory compliance management, transaction management, etc.
Securely stores transaction records and sensitive information. Every transaction is encrypted, and the probability of cyber-attacks is considerably low when blockchain technology is employed. It is also the backbone of various cryptocurrencies.
Fintech is sufficiently well-established to have started producing offshoots.
Wealthtech refers to the use of innovative technologies that provide an alternate solution to traditional wealth management firms. It includes technologies such as artificial intelligence and Big Data. The main goal of wealthtech is to make wealth management and investment services more efficient for users. Some technologies wealthtech covers include Robo Advisers, Robo Retirement, Micro-Investing, Digital Brokers, etc.
Advicetech focuses on all the major technology tools that professionals use to deliver financial advice to customers, improving the quality of their services. It also provides tools to advisors to help them organize their data better, become more penetrating in their analysis and be time efficient.
Fintech is an industry constantly on the rise. With the influx of new technology and innovations, together with the rise of smartphones and a decline of the traditional banking system, fintech has grown immensely over time. For those new to the industry or looking to get a firmer grip on it, learning the stories behind successful fintech companies, how fintech start-ups are funded, or the various fintech business models, for instance, can be of great benefit.
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