Many people today use Netflix, Spotify or Sky Sports, to watch movies, listen to music, or enjoy their favourite games. All this can be done from the comfort of your sofa or perhaps on your daily commute to work on the bus or train.
In the past, in order to enjoy the same entertainment options, you would have had to pay cash to go to a football game, or physically enter a shop to buy music or films on a disc or even a cassette.
Unless the shop assistant and you got into a discussion about music and your favourite bands, you probably wouldn’t get any recommendations.
Now all this is available at the click of a mouse or the scroll of a screen, and behind the scenes, algorithms are tracking your preferences across all kinds of activities. The creators of music, video and other content get paid when someone downloads their product.
Furthermore, you can invest globally via wealth apps, you can move money in seconds to pay bills, a whole range of complex financial services can now be delivered online via your tablet or smartphone; none of which was possible before the internet revolution.
All this is happening now because of the advance of financial technology or Fintech as it is now known.
The evolution of Fintech
Originally, Fintech was focused on updating the antiquated infrastructure of the financial system such as cheques, transaction ledgers and stock certificates. That has all changed.
A wave of technology has disrupted banking and overhauled all types of business activities: from foreign currency trading to consumer lending, as well as creating an entirely new currency ecosystem, known as cryptocurrencies, led by Bitcoin.
Harvard Business School Professor Clayton M. Christensen appeared to anticipate and capture this sense of radical change in his book The Innovator’s Dilemma. He invented the term disruptive technology to describe this evolution. He looked at technology innovations and suggested that they could be defined as sustaining or disruptive.
Historically, conventional businesses tend to favour incremental, or sustaining advances to develop their businesses. However, disruption is becoming the new normal.
Wikipedia, for example, took over the market for printed encyclopedias and drove them out of business in much the same way that crowdfunding is challenging the lending models of conventional banks.
The scale of innovation means that Fintech today includes a large number of financial activities: from money transfers, to smartphone banking, raising finance for business, and managing your investments.
What each activity has in common is that they use digital technology platforms instead of traditional intermediaries, such as a stockbrokers or financial advisers.
The Fintech market is estimated to grow to $30 billion (£23 billion) in 2020.
Fintech innovations
- Digital currencies, including Bitcoin and newer cryptocurrencies, and digital cash
- Blockchain technology, often called distributed ledger technology (DLT) that maintains records on a network of computers but has no central core
- Smart contracts, which use computer applications, usually blockchain-based, to automatically execute contracts between buyers and sellers
- Open banking which is a connected network of financial institutions and third-party providers. An example is the one-stop money management tool Mint.
- Insurtech, which brings new technology to innovate and streamline the insurance industry
- Regtech, which aims to help financial service firms meet industry compliance rules, especially those covering Money Laundering and Know-Your-Customer regulations which are intended to mitigate fraud
- Robo-advisers, such as Nutmeg, utilise algorithms to automate investment advice to lower its cost and increase accessibility
- Unbanked or under-banked services that seek to serve disadvantaged or low-income individuals who are poorly-served by traditional banks and mainstream financial services companies, particularly in developing countries
- Cyber-security and Fintech increasingly go hand-in-hand as financial services data can be a honeypot for unscrupulous individuals or groups.
What is happening in Fintech today?
Fintech innovation has led to a paradigm shift in our relationship to money and investment. Existing financial services products are being re-invented for the 21st Century and are now being rolled out on a regular basis.
Examples include Investment Apps such as Robinhood, which charges no fees for share trading; and eToro which allows you to “copy-trade” the investing strategies of experienced investors in real-time.
Retirement planning and individual pension fund management is being transformed by the emergence of a whole new raft of Pension Apps such as PensionBee and Penfold.
In addition, peer-to-peer lending sites like Lending Works are increasingly used as an alternative source of funding for individuals and small businesses.
The established and conservative insurance industry, with its high premiums and late pay-outs, is being challenged by innovative start-ups like Tractable – a UK car insurance company that uses artificial intelligence (AI) analysis of smartphone images to calculate damage and pay-outs.
Fintech uses AI and computer learning as well as user behaviour to facilitate this new wave of technology. AI chatbots, for example, are often utilised in Fintech products, keeping the cost of servicing customers to a minimum and ultimately reducing user charges.
What is the future of Fintech?
Blockchain applications will be significant. For example, many people who take up jobs in overseas locations, need to send money home to their dependants. However, conventional banks continue to take relative high transfer fees and payments can take several days to arrive.
Cryptocurrency transfers, on the other hand, are virtually immediate, have a fraction of the costs and act as a precursor as to how money will be transferred in the future.
In the meantime, AI-enhanced Fintech investment apps continue to be rolled-out to your smartphone; new global banks like Revolut, Robo-advisers like Betterment, or insurance companies like Ping An are already growing at an exponential rate.
Automation is being applied to the process of assessing, acquiring, and serving the customer with the aim eventually of improving customer interactions and streamlining operational processes.
Fintech today, is where the internet was in the early 1990’s. The continuing development of the Fintech industry will be significant, disruptive and disintermediating.
Product innovation will proliferate at a faster rate and it is unlikely that the sector will take as long to mature as the internet did. This means we can continue to expect rapid change and exciting new developments in the near future.
Open banking
Fintech has driven innovation across the financial,services sector and has been instrumental in the advent of open banking. To learn more about open banking, please click here.
