Principles Of Finance

Contemporary Developments in FinTech Represent a Revolution in the History of Finance

Introduction

Financial technology, or FinTech, is the transformation of traditional banking financial services. This provides cutting edge innovation, to provide consumers more efficient and customer-driven financial markets. It embodies modernism by promoting new market entrants, as well as established institutions and firms that are willing to invest in new technology to enhance the global financial system. Due to the rapid and inconsistent nature of the current financial services, it has been debated whether FinTech is a revolution or merely a product of financial evolution. This report will critically analysis this vague and controversial concept. It will be important to make brief reference to the global landscape of FinTech, as well as the developments in the history of finance. Moreover, this report will also put emphasis on the developments of the structure in the Australian financial services sector, as it has currently contributed $140 billion to GDP over the last year. (The Australian Government, 2016)

Global Landscape

The FinTech sector contains a large number of contributors that assist in designing and developing financial services and products for the purpose of benefiting businesses and consumers. As a result, FinTech is separated into multiple sub-sectors that include investment, insurance, payments, trading and lending.

Firstly, it is important to note that global investments in FinTech have seven-folded in merely a three-year period. Global investments have grown to US$20 billion as of 2015, according to KMPG and H2 Venture’s 2015 ‘Fintech 100’ report. (H2 Ventures & KPMG, 2015) In this report, it also includes other astonishing figures such as a 66% increase from 2014. KMPG also recorded the developments of the investment funding for virtual currency – the results showed that North America leads the way, accounting for US$7.7 billion, across 378 deals in 2015. (H2 Ventures & KPMG, 2015) Globally, virtual currency companies recorded an all-time high of US$13.8 billion, this is up an astronomical 106% from the previous year of US$6.7 billion. (KPMG and CB Insights, 2015). This consistent progress reinforces that the global markets are revolutionising the way they operate their financial operations.

FinTech cannot be defined solely through monetary statistics. Many industries that are innovation driven, determine their success through the number of ideas that are brought to life and accepted in the market. According to a survey by Ernst & Young, (Ernst & Young, 2017) the United Sates has the second-highest rate of FinTech adoption throughout the globe at 16.5%, preceded by only Hong Kong at 29.1%. Other notable markets for FinTech adoption rates include Singapore (14.7%), the United Kingdom (14.3%), Australia (13%) and Canada (8.2%). Some of the world’s major cities are becoming known for their developments of FinTech, these include New York and London, and more recently Sydney.

Developments In FinTech

In recent times, there has only been a select number of national banks that have dominated the financial industry in Australia, with these financial institutions offering their clients a full-scale of financial products and services. (Harker, 2017) However, these banks continuity have been continually disturbed by technological changes. As the FinTech sector has progressed, there has been a correlation with falling costs, lower entry barriers and deeper client engagement due to digitalisation, regulatory changes and a shift in consumer trust. (Alt, Beck & Smits, 2018) Furthermore, this transition has been in progress over a significant amount of time, this has resulted in multiple perspectives as to when FinTech actually began. In a study conducted by Lee and Shin, (Lee & Shin, 2017) they link the roots of FinTech to the diffusion of internet since the 1990s. Conversely, Arner and his colleagues outlined a larger perspective that financial technologies were recognised in the mid-nineteenth century. (Arner, Barberis & Buckley, 2017) Therefore, these developments of FinTech can be distinguished into three distinct eras, FinTech 1.0, 2.0 and 3.0. Although the focus on this report is on contemporary developments in 3.0 it will be important to make brief mention to the influence of FinTech 1.0 and 2.0.

Fintech 1.0 (1866-1967): Out with the Old

In a period that was characterised by economic turmoil and hardship, great developments were made in the sector of technological finance. From the beginning of this era, finance and technology had become interlinked and mutually reinforcing. Money became a revolutionary technology that is still used as evidence of transferrable values – this was assisted with further technological advancements such as the abacus that facilitated financial transactions. Many historians have reinforced that the European financial revolution in the late 1600s was crucial to the Industrial Revolution. (Arner, Barberis & Buckley, 2016).

Furthermore, many greater technological developments occurred in the late 19th century that assisted financial interconnections across borders. This includes the telegraph, steamship and railroads. In the post-World War I landscape, technology developments continued to proceed rapidly. By this time, a global telex network was in place, providing foundations of communications that is required for the next stage of FinTech to develop. (Arner, Barberis & Buckley, 2017)

Fintech 2.0 (1967-2008): Digitalisation of traditional financial services

FinTech 2.0 was characterised by the developments of electronic payment systems. Inter-bank Computer Bureaus were established by both the UK and the US in 1968 and 1970 respectively, reflecting a desire to interconnect domestic payments. This didn’t come without its conceptual difficulties as in 1987, global stock markets crashed on ‘Black Monday’, or in Australia and New Zealand, ‘Black Tuesday’. The effects of the crash were a clear indicator that global markets were technologically interlinked. (Alt, et al, 2018) As a result, financial technology had to evolve quickly. This can be examined through the introduction of ‘circuit breakers’ that were able to control sudden changes of price, this innovation allowed securities regulators worldwide create mechanism to support cooperation.

The regulatory perspective in the midst of FinTech 2.0 was that e-banking was a version of the traditional model, but came with new risks. (Campbell & Robinson, 2018) This view was encouraged by the concern of there being no need for depositors to be physically present at branches, thus the risk of electronic bank runs. In addition, financial institutions were concerned about the stress that instant withdrawals would have on their systems. However, FinTech 3.0 sought to change this.

Fintech 3.0 (2008-present): Contemporary Developments

The most important development that was made in FinTech 3.0 is in the way in financial services are provided. Start-ups and technology firms have asserted themselves by providing niche services to the public, businesses and to the banks. This feature has also there to be a rate of development in many of the markets. This has been examined through a complete shift in mindset of the consumers as to which entities have the resources and legitimacy to provide financial services. (Harker, 2017) This development has had an exceedingly important impact on evolution of our financial institutions.

In recent years, FinTech has extended from the traditional financing mechanisms of P2P lending to feature financing of technology itself. (Alt, et al, 2018) This includes the developments of crowdfunding and financial transactions that use algorithmic trading. Australia may not be the biggest market for Bitcoin (BTC) and other cryptocurrencies, but it is a growing one. As it stands, Australia is ranked 16th globally for BTC volume by currency. (Crytocompare, 2019) In 2018, the Australian government, through the Australian Transaction Reports and Analysis centre (AUSTRAC), announced tangible plans to implement new rules on cryptocurrency exchanges. (AUSTRAC, 2018) More importantly, digital currency exchange companies must now register with AUSTRAC and meet the Government’s anti-money laundering and counter-terrorism financing compliance and report obligations. (AUSTRAC, 2018)

Moreover, Australia has become a rising destination for FinTech investment and innovation for established US companies and start-ups, particularly FinTech hubs such as Sydney and Melbourne. The US is Australia’s largest source of foreign investment (stock), valued at A$860.3 billion by the end of 2015, 28.4% of the total. (The Australian Government, 2016) This has allowed Australia to develop it’s technological finances at an exceptional rate.

Revolution Or Evolution

Therefore, the question still remains as to whether contemporary developments of FinTech represent a revolution or evolution. FinTech is often seen today as the new marriage of financial services and informational technology. However, as we examined, this interlinkage has a long history and has evolved over the three distinct time periods. This perspective encompasses that FinTech 1.0 had significant developments such as the introduction of money, as a result this period could be said to be the revolution for financial technology. However, since FinTech 1.0 financial institutions have been merely modifying and adjusting the way we operate our financial transactions, therefore the contemporary developments in FinTech 3.0 can be seen as a product of a gradual evolution rather than a revolution itself.

What’s Next?

It would be unattainable in this report to feature all of the upcoming developments that the global market has in store for financial technologies. However, it is important to note some of the upcoming developments that may benefit the market very soon. Firstly, the Electronic Markets special issue in 2012 concluded that banks were only at the beginning of seeing the potential offered by mobile and internet technology. (Arner, et al, 2016) This is extremely exciting as one of the most intriguing innovations within banks at the moment is the operation of card-less banks, this has been a recent trend in banks such as Movenbank. Furthermore, one of the more significant focuses for the future of FinTech is cryptocurrency. Virtual currency institutions will remain persistent in aiming to reduce fees, fraud reduction and other consumer friendly benefits in the hope of the innovation may be adopted by the public in the near future.

Conclusion

Thus, there is an exciting future ahead in the financial market as it is soon to be overwhelmed with incredible innovations that aim to make financial institutions more efficient. It is clear from the timeline of FinTech that the only revolutionary changes occurred within FinTech 1.0. Since then, FinTech has been in a process of evolution. Although in the contemporary era FinTech has accelerated with many new innovations, it is too far-fetched to refer to FinTech 3.0 as a revolution. Nonetheless, FinTech continues to change the landscape of financial markets globally and through recent research it has shown that there seems to be no decline. Therefore, it will be intriguing as to the direction that FinTech continues to evolve.