Believe it or not, Fintech is not something new. If you look at the definition of Fintech, it is where technology has been applied to financial services. By that definition, the first modern version of Fintech was back in 1918 when the Fedwire was developed by the U.S. Federal Reserve Bank.
The Fedwire Funds Service made the world’s first wire transfer possible and ushered in the Fintech age. It wasn’t until sixteen years later that the next advance – the cash machine – was made. It then took another sixteen years to develop the credit card.
Advances were initially slow and spread many years apart. With the advances made in technology, though, things started picking up in the eighties and then things began to snowball.
We have made more advances in this industry in the last fifty years than the total for the fifty years preceding it. And, as technology advances, we can expect to see a lot of other changes as well.
It is not so much that Fintech allows us to do daily tasks more efficiently, though that does come into it, but rather that it completely revolutionizes the industry. Think of the major advances and the impact that they have made.
The Diner’s Club credit card being developed in 1950 completely changed the way that we approached the use of credit and gave us a new way to pay for things. While easy credit does have its disadvantages, it cannot be denied that it helps boost the economy as well.
The development of the ATM in 1967 was another huge step forward. You could now draw cash whenever you liked – you did not have to go into the bank to do so.
Fast forward to 1997 when the first mobile payment became possible, and the potential for Fintech becomes obvious. It wasn’t long after that PayPal came into being.
PayPal helped to completely disrupt the payment industry and is credited with being instrumental in the wider adoption of online shopping. It offered a safe and secure way to make payments online, without you having to give out your personal financial information.
The next big advance was when Bitcoin came along in 2009. This is the one that really got traditional banks riled up because it had the potential of cutting them out of the equation altogether.
Bitcoin promised users complete anonymity online, a secure payment method, better transaction times and lower costs. The immediacy of the transactions and the fact that they did not have to be processed through an intermediary made them a lot more efficient than traditional bank transactions.
It has taken a while for blockchain-based systems like Bitcoin to gain widespread traction, though. It has only been in the last few years where traditional banks have started to take this “craze” seriously and started investing resources into developing Fintech for themselves.
While most traditional banks are still calling for better regulation of the cryptocurrency industry, they do also acknowledge that the blockchain technology underpinning it has real value in terms of security.
Banks and other players in the financial industry are acknowledging the importance of Fintech companies. 54% of bankers have already begun partnering with Fintech companies. The banking services sector is the largest investor in Fintech, with 41% of the funding.
It is not just banks that are benefiting from Fintech, though. The insurance industry is also set to become a wide-scale adopter of Fintech, with an expected 84% of insurers being expected to increase partnerships with these companies in the next three to five years.
Payment companies have also shown increasing interest with 42% already partnering with Fintech.
Why Are These Partnerships So Appealing?
Fintech companies have the expertise to find new and better data solutions. The focus with these companies is to remove friction for their clients, so they build systems from the ground up with this in mind.
Partnering with these new players gives traditional institutions the expertise that they need to stay relevant, without them having to spend time going through the learning curve on their own.
The Future of Fintech
The future for Fintech has never looked brighter. What can we expect to see in the future? It is difficult to say precisely because there are a lot of innovative solutions on the horizons.
Even older technology is getting a makeover. Take, for example, the credit card. What if it was a smart card instead? A card that you could program not to allow you to purchase from certain retailers on set days? These have already been developed.
What about smart systems that allow retailers to automatically load a voucher or promo directly to the client’s card in real time for their next purchase, thereby encouraging them to come back in again soon?
While we cannot say exactly what new and exciting developments will come out of this sector in the future, we do know what the dominant themes will be over the next couple of years.
Expect to see a 43% increase in real time payments as banks and other payment agencies start to adopt cloud and blockchain systems to allow them to reduce processing times.
Slightly lower on the list of priorities, but not by much, will be the push towards greater automation. One of the most important advances in this area is how machine learning has advanced.
Artificial intelligence has made automation of various mundane tasks possible on a level that has not been achievable before. We can expect the trend towards greater automation to expand towards other industries outside of Fintech as well.
Automation in the financial services industry is expected to increase by around 35% in the next two years alone.
It is also expected that blockchain adoption will increase by around 33% over the next couple of years. Blockchain developments should be watched as cryptocurrencies are not the only innovative idea to be based on this tech.
Another exciting area based on blockchain tech is the development of smart contracts. These are contracts that are written in code, and that will execute as soon as the right conditions are met.
You will also see a 29% increase in Fintech M&A by banks.
Fintech has a really bright future. The meteoric rise that it has enjoyed particularly over the last few years is nothing more than the beginning. It is a modern day growth industry that does not look set to slow down anytime soon.