Finance & technology have been intertwined ever since the start of the modern society. The earliest days of finance hundreds of years ago was in the context of keeping records for things like government finances, payment of taxes & agricultural production. The first physical financial technology developed was money in the form of coins which later transformed in to paper money. Much didn’t change till the later part of the 19th century when the seeds of the modern FinTech Era were sown.
The pioneering step in this regard was the laying of first trans Atlantic (under sea) telegraphic cable in 1867 (also called the Victorian Internet) connecting western Europe to North America. This enabled instantaneous communication between the major financial markets of London & New York possible, which extended to other financial centers of Europe & Asia in the decades to come. This telegraph cable also has the distinction of why we call the GBPUSD forex currency pair as the “Cable” since most of the transactions earlier on were taking place between the Pound (GBP) & Dollar (USD).
With the growing needs of financial centers around the world, the past 5 years have seen more sea-cable being laid than the previous 150 years combined. This was necessary to hold the massive amounts of data moving around the global financial centers. 1867–1914 was the first period of financial & economic globalization marked by the laying of the technological infrastructure. First World War & the Stock market crash of 1929 followed by the Great depression impeded further development for the next 25 odd years. Next milestone ironically was the onset of the Second world war — when significant efforts were undertaken to develop codes (and code breakers) for secure communications primarily for military operations. One such example was the Enigma machine which was developed by the Germans but successfully used by the British to decipher the German communications. This invention eventually led to an early end to the war.
The second major Era of modern FinTech began in 1967 when the digitization of analogue systems into digital environments began to take shape. This was the time when we saw the Progressive development of early FinTech & RegTech technologies that we see today. The pioneering invention was the Automated Teller Machine (ATM), the first of its kind which was placed by the Barclays Bank in the UK. This of course changed the relationship of people with money & their financial institutions in the years to come as ATMs became more common place. Second was the launch of a handheld calculator TI 2500 Data Math by Texas Instruments manufactured in 1972 which is the Ancestor of today’s smartphone.
From these early days we saw 3 significant trends taking shape from early 70’s to late 80’s
- The first & the most commonly used in the banking channels to this day is the establishment of domestic & international payment systems e.g. SWIFT (Society For Worldwide Interbank Financial Telecommunications) – which was established in 1973, by 239 banks from 15 countries with its headquarters in Belgium. SWIFT provides the communication protocol between financial institutions thus facilitating large volume of cross border payments among them. SWIFT is now the standard in the Global payment systems serving more than 200+ countries & 11,000 institutions around the world.
- 1971 marked the establishment of NASDAQ — world’s 1st digital stock exchange. This marked the beginning of how the financial markets operate today where there is almost no human interaction. A prime example of this is the Forex market doing 5.5 trillion dollars worth of business every day of the year — none of which is in the form of physical cash, rather being conducted in the digital book entries of major financial institutions. Of course all this digitization had its downsides too marked by the Major market crash of 1987 . This market crash happened due to programmed trading – which involves preset computerized Buy & Sell orders – that means when stocks prices drop to a certain level computer algorithms kick in with the programmed orders to further exaggerate the move & causing flash crashes.
- 1980s marked the beginning of internet banking in parallel to the emergence of internet & lots of banks had over a million customers by the beginning of 21st century . Online banking brought about another major shift in how people perceived money & their relationship with the financial institutions.
1999 marked the high of this Era with the beginning of dotcom bubble & eventual crash in 2000. But this market bubble burst was marked by the survival of internet giants like Amazon, Google & PayPal today. These companies would not only go on to redefine the online experience in the future but would also cause a major paradigm shift in the FinTech space leading the way with Numbers, Volume & trans formative potential.
2008 – marked the onset of the Global Financial Crisis which started in the sub prime markets of U.S & quickly spread to all over the world. Four things resulted from this financial crisis which impacted the development of FinTech going forward.
- The crisis caused massive Job losses specially in the financial sector causing people to look for new opportunities. This ushered in a new age of FinTech startups headed by these highly skilled by unemployed individuals.
- Next was the wave of regulatory changes that were introduced to avoid the problems that led to the collapse of 2008 – this caused a significant decrease in the profitability of these financial companies. In most cases these changes could be addressed by technology which led to massive investments by these companies in IT.
- The third impact was something that was already under way before the crisis struck – the distrust of the people in the financial institutions – the crisis just provided the tipping point for the people (specially younger generation) who were much more comfortable dealing with the technology companies like Facebook, Alibaba, Tencent, Google or Amazon rather than traditional brick & mortar financial institutions like JPM, MS, HSBC or Barclays.
- And finally the most important of all was the launch of smart phone – iPhone in 2007 to be specific – selling over a billion devices by now & literally putting the world in the palm of your hands. Anybody with one of these devices knows what I am talking about.
The advent of the smart phone has led to an explosion in Startups. Post 2008 crisis we entered into a new phase of FinTech revolution with the advent of Blockchain technology (or distributed ledger technologies) & Cryptocurrencies. This has the potential of causing yet another paradigm shift in the FinTech space where the concept of traditional Fiat currencies is going to be taken over by a new wave of digital tokens & currencies working on a transparent & decentralized system.
This new wave of technology has also led to alternative forms of lending like P2P lending & crowdfunding. Emerging markets & developing countries are the flag bearers of this new transformation – with the exceptionally high mobile penetration rates but no access to traditional forms of finance. One such example is M-Pesa launched in 2007 – is the mobile based phone payment-based system which provides access to a large portion of the population of Kenya to finance. M-Pesa now offers services in Albania, the Democratic Republic of Congo, Egypt, Ghana, India, Kenya, Lesotho, Mozambique, Romania and Tanzania. Alibaba, Tencent & WeChat & others are examples of such successful startups in China. No doubt that these markets have leap-frogged over their western counterparts as far as embracing the new technology is concerned.
The traditional barrier between the developed world & emerging markets is shrinking fast thanks to the rapid digitization & revolution in the FinTech industry. I think we are heading to a completely digitized, transparent & decentralized global financial system much sooner than previously thought.