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Fintech entrepreneur Michael Zetser sheds some light on Fintech industry.
The world is changing, and the rate of change is accelerating. This truism is particularly apt for financial technology (fintech) which has undergone rapid evolution since banks finally took the plunge and went online. Over the past few years, society has become increasingly cashless, with new apps and platforms replacing our wallets, credit cards, and bank tellers. Old, long-established banks have scrambled to keep up, while new banks have sprung to fulfill demands for a frictionless, online, defrayal, savings and financial investment experience.
How did we get where we are today? Did fintech burst out of the decision of banks to go online, or does it have antecedents in the brick-and-mortar world which were only waiting for the right zeitgeist to manifest themselves?
Understanding how we got where we are today, may help us visualize the shape of things to come. Because while the apps and platforms of recent years may change, the forces driving this change remain.
But first, let’s talk about definitions – what exactly is Fintech?
The standard definition of Fintech is technology utilized to improve financial services delivery. Which can equally be applied to plenty of brick-and-mortar banking establishments from the late 19th century onwards, long before Al Gore invented the internet ?. Sure, back then Banks moved money around the globe using morse code and telegrams rather than broadband internet – but the force compelling them to develop means to transfer funds without physically exchanging currency or letters of credit remains the same.
However, the term only became popularized in the past two decades, and is generally associated with cryptocurrencies, start-up banks, and online defrayal.
And there is money behind the hype – over 140 billion dollars were invested in Fintech businesses in 2021. That’s a lot of money looking for the next big thing in Fintech, and when that much money is chasing after a solution, a solution is sure to be found. But what shape will that solution take?
Before we offer any projections on the shape of things to come, let’s consider the various stages in Fintech evolution, and the systems, forces and ideas that are still driving that evolution forward:
A brief history of Fintech
Fintech can be split into three eras, each accompanied by a distinct level of market differentiation that led to changes in how consumers interacted with their funds.
Fintech in the pre-digital age (late 19th century -1967)
This stage was defined by the construction of the physical and institutional infrastructure enabling the existence of truly globalized financial services. The exact date this era began is disputed, but the laying of the first transatlantic cable in 1866 is generally recognized as the seminal event which for the first time tied together the financial systems of the Old World and the New with the then cutting-edge technologies of telegraph and morse code. Backwards by contemporary standards, it nonetheless sufficed to make capital from the world’s industrial and financial capital, the British Isles, available in the world’s number one development hotspot – the United States of America. Not too different, when you come down to it, from what contemporary Fintech is accomplishing today across the Pacific, from the United States to China.
Fintech and the digital age (1967-2008)
This stage was heralded by the installation of the first ATM by Barclays Bank in 1967. What characterizes this period is the increasing digitization of banking services and finances. During the 1970s, NASDAQ, the first digital stock exchange and SWIFT (Society For Worldwide Interbank Financial Telecommunications), a protocol enabling standardized communications and large-scale international financial transfers, were both founded.
During the 1980s bank mainframe computers became a fixture of any self-respecting bank, and then, in the 1990s, the initial movement towards digital banking began. Connected customers began to manage their own money, online, without a banker as a mediator. PayPal was launched in 1998, providing an alternative financial transfer method, a harbinger of the revolutionary online payment systems which were yet to come.
And then, on the verge of the digital golden age, the global financial meltdown of 2008 brought everything crashing down. The fintech companies which survived the meltdown, and new contenders, knew that they had to innovate – and it was this innovation which defines the current era of fintech.
Fintech in the era of innovation (2008-?)
In the aftermath of the financial crisis, there was widespread public loss of trust in banks. This loss of trust coincided with regulatory changes, which offered new opportunities to non-traditional financial service providers. The inception of Bitcoin in 2009, followed by the emergence of various other blockchain based crypto currencies changed the financial landscape irrevocably.
At the same time, the widespread dissemination of Smartphones resulted in these mobile devices becoming the primary means by which people not only browsed social media, but also engaged in purchases – and sought financial services.
This era is defined by unprecedented founding of innovative start-ups, which draw herds of investors seeking entry to the floor level of new products and services. Established banks have wised up and seek to adopt both the image of the “cool” start-ups and their embrace of innovation and creative destruction – with limited success. Indeed, the shift away from established banks to alternative financial service platforms has defined the current era – and the movement is ongoing.
This shift has created a market for technologies enabling easy creation of digital banking products, providing third-party access to financial data.
Such Banking as a service platform include Treezor and SolarisBank. This has made it easier for banks and other financial institutions to ditch anachronistic legacy systems and infrastructure and launch new, digital banking systems focused on improving customer experience.
The shape of things to come
When the first transatlantic cable was placed over the Atlantic a revolution started, that changed the way banks did business across Europe and North America. However, in spite of technological innovation which trickled to the rest of the world, almost all of the fintech developments in the following centuries had taken place in the developed world.
What has changed in recent years is that the new technologies have been developed with the consumer behavior in the developing world in mind. The countries leading the world in fintech usage are China and India – and not just the urban, modernizing enclaves on the coast. Rural populations, about as far from the digital infrastructure as one can get are increasingly utilizing their smartphones to get connected, and utilize the new platforms to perform their purchases, financial transactions, and secure banking services which would otherwise be inaccessible. In some respects, the absence of physical banking infrastructure is a positive advantage for these countries, as compared to the West, as they have proven able to adopt to the new way of doing things faster than Western countries which are still burdened by legacy technologies and massive, sclerotic institutions.
If there is one thing that will define the next era of fintech technology, it is the entry of most of the world’s population into an integrated
Are we there yet?
Have we reached Fintech 4.0? Some people think so – and quite possibly, a decade or so down the line people will point to the COVID-19 pandemic as heralding the fourth era of fintech. The very reluctance of many people to leave their home during the cyclical lockdowns and social responsibility admonitions, particularly in China, have spurred ever greater reliance on digital platforms to engage in financial transactions. Thus, although fintech investments dropped in 2020-2021, they have bounced back in 2022 and it seems likely that the blockchain and open technology banking revolutions will continue to drive innovation.
For investors, both high rollers seeking high risk, high gain ventures, and small-scale investors seeking alternatives to complement traditional saving programs in the bank, the future can seem murky at the moment. However, fintech entrepreneur Michael Zetser sheds some light on future developments. According to Michael, digital payment methods that have shown sustained upswing in 2022 include:
- Digital currency: Rapid digitalization of payments in Europe during the pandemic has fueled massive growth in Central Bank Digital Currencies. Furthermore, stable coins such as Tether and crypto currencies such as Bitcoin have also remained steady.
- Buy Now, Pay Later: projections are that by 2026 the net worth of these plans will be around 995 billion dollars. These plans allow customers to pay in digital instalments, without incurring any interest or additional fees.
- PINless payments: increasingly, it is consumers who are becoming the primary payment authentication agents. Biometrics are used to secure payments on various platforms, shifting the balance of power away from old-school pin authorized credit card transactions. As facial and fingerprint recognition software, already widely used to secure smartphone access, continues to spread and grow in sophistication, this trend will continue to gain traction, reducing the friction involved in digital payments. The future is one in which not only will you not need to drive over to your bank in order to withdraw cash, or even take out a loan, but one in which you can purchase groceries without stopping by the cashier. Indeed, that future is already here.
To summarize, the habits which emerged during the COVID-19 pandemic are here to stay. Workers and employers have discovered that driving to office every day is not really necessary, while businesses has discovered that staying in businesses requires making products and services available digitally as well as (or even exclusively!) physically.
In the words of Visa SVP and Head of Acquiring Deirdre Cohen: “businesses that deal directly with consumers must deliver experiences that consumers want. Otherwise, if they find it too difficult, they will simply go elsewhere. These experiences need to be enabled throughout the entire customer journey, from pre-purchase through to aftersales.”
The shape of things to come
The technology which seems set to define the new fintech 4.0 era is machine learning. It will likely define how we interact with both our banks and our insurance companies, strengthening customer relations by customizing offers and communications with specific customers, thereby providing them with an experience that is more relevant and useful.
Some digital banks, such as the German N26, has already begun providing custom offers to their clients. This includes discounts for other businesses emblematic of the new, digital, semi-nomadic way of life such as the online travel booking site GetYour Guide and the flexible workspace company WeWork. Other banks are developing machine learning products which are, revolutionarily, not intended not for use by the banks to analyze customer habits, but for their customers to help plan their budgets based on prior spending.
Application of machine learning have spread far and wide and is not merely restricted to the banking sector. Insurance companies are striving to use machine learning to streamline their processing of insurance claims. The Ping An Insurance Company in China is already utilizing an algorithm to settle claims by assessing the type of car involved and the significance of the damage, and then automatically sending an offer for immediate settlement.
Concluding words
We are entering a brave new world, and though many of the changes the fintech sector is undergoing seem too rapid to comprehend, the foundations for them have been underlain in centuries past. Still, the pace of change is accelerating. It took sixty years to get to the first cash machine, but consumers, businesses and investors alike are now daily bombarded with updates to existing apps and systems, or even entirely new technologies.
Still, when the hype and technological details are stripped away, the underling force driving this development forward remains constant – secure improvement of the customer experience.
As parting words, we suggest five trends to watch out for, courtesy of Michael Zetser, fintech entrepreneur:
- Increased choice on crypto exchanges
- Tightening Crypto regulation
- Cryptocurrency insurance- a growing trend.
- Crypto goes global as more and more countries adopt its usage
- Cryptocurrency adaptation for the metaverse is picking up steam
By following these, and other, trending developments, you can help secure the future of your finances and your business.
