COLUMN: The history of fin-tech
The term “fin-tech” is a relatively new term that is being applied to the merging of finance and technology to form innovative solutions in financial services. However, unless you are an investor or entrepreneur who resides in either the financial services or technology space, you probably have never heard it. The way most people come to understanding what fin-tech is all about is when they brush their smartphone against a pay terminal in a store to execute a transaction or check their bank balance online. That increasingly common act is the epitome of the convergence of finance and technology.
As more people come to embrace the new wonders of fin-tech through smartphone payments, online banking, online trading, online lending or robo-financial advisors, they will begin to think back on the way things were done in the old days, much like some of us think of manual typewriters.
There is already a generation or two living on this planet that will never know the pleasure of reconciling a chequebook or who will never see the inside of a bank. The current pace of fintech is accelerating at such a rate that our relationship with money will be unrecognizable in a decade. In fact, fintech has completely revolutionized our relationship with lending, lines of credit and obtaining business loans. However, fintech is not a product of recent technologies. As long as technology has continued to advance, people have found a way to use it to improve the world of finance.
The worlds of finance and technology have been evolving for millennia. Their histories are the subject of college curriculums and countless volumes of academic research. Less studied is how finance and technology have converged to create advancements responsible for the evolution of the global economy and our way of life.
The early years of fin-tech
Fintech can be traced back to the invention of the printing press, which enabled countries to print paper currency as a more fluid and available source of currency. But, the biggest advancement came with the invention of the telegraph in 1866 and the laying of the first trans-Atlantic cable, which started financial globalization. In 1918, the telegraph became the basis of the Fedwire Funds Service, a proprietary communications system set up by the Federal Reserve Banks to process fund transfers among the 12 Reserve Banks. The system utilized the telegraph for bank transfers until the early 1970s.
The modern era of fin-tech
As the New York Times noted, a large part of our financial technology infrastructure was created from 1950 through 1970, beginning with the introduction of the modern-day credit card by Diners Club in 1950. In the 1960s, automated teller machines (ATMs) were introduced, but they didn’t really begin to replace bank tellers until the 1970s. In 1960, the Quotron system began to appear on brokers’ desks as the first electronic system to provide stock market quotations. They looked very much like large desktop computers.
In 1966, the global telex network was established, which sought to provide the framework for future financial technology development in the international arena. That was followed by the creation of the Clearing House Interbank Payments System, which allowed the most active banks in the world to transmit and settle payments in American dollars.
In the 1980s banks began to utilize the sophisticated data and record-keeping systems available through large mainframe computers, some of which took up whole floors. Up to this point, most of the fin-tech advancements were contained behind the scenes, in the back offices of banks and investment houses. In 1982, E-Trade brought fin-tech to the light of day for the public with its electronic trading system available for individual investors. With the growth of the Internet in the 1990s, the E-Trade model was made available through online stock brokerage websites, which were among the first true fin-tech companies. It wasn’t until 1998 that banks began to introduce online banking capabilities to their customers.
Fintech in the Digital Age
With the advent of Internet technology, fin-tech began to improve upon much of the financial technology infrastructure with more sophisticated risk management, trade processing, cash management and data-analysis tools utilized by financial institutions that were largely unnoticed by the general public. In the 2000s advancements in Internet connectivity paved the way for a host of new fin-tech companies to create consumer-facing solutions. PayPal was among the early fin-tech companies that began transforming the way people manage their money through payments. eBay was one of the first e-commerce empowerment websites that allowed consumers to create the market and establish prices for auction items. And it all began to snowball from there.
When the World Wide Web introduced Web 2.0 it began the democratization of the Internet, allowing anyone proficient in coding to create a dynamic and interactive website utilizing the Cloud as the intermediary for the exchange of data. This opened up an entirely new frontier for fin-tech entrepreneurs seeking to supplant existing banking channels and disrupt traditional business models.
Suddenly, the exchange of money between consumers and businesses, and between consumers and consumers was reduced to information bits that could be transferred instantly using a smartphone. A sharing economy has emerged, which is turning consumers into producers. Robo-advisors using algorithmic programming could provide customized investment advice and create personalized investment portfolios at a fraction of the cost of human advisors. Online lenders began to sprout, offering credit to a vastly underserved market of consumers and businesses largely ignored by traditional banks. Crowdfunding sites are opening up new channels of financing for entrepreneurs, a good many of which are embarking on their own fin-tech startups, thus creating a perpetual stream of innovation.
The future of fin-tech
Even a decade ago, few people could have imagined many of the innovations that are currently disrupting the financial sector. As for the future of fin-tech, all that is certain is that it will continue to move forward, reaching a critical mass that will force traditional institutions to adapt or die.
Many of the large banks have started their own venture capital funding departments to seek out future disruptors that could be brought in as internal innovators. Just on the horizon are new technologies in biometrics, machine learning, predictive behavioural analytics, and data analytics that will continue to shape our relationship with money, making us better spenders, savers, and investors.