The Impact Of Fintech On Financial Markets

Fintech plays a major role in the financial markets of today and heavily influences the importance of the financial markets in the economy and society. The definition of Fintech is technology that enables financial solutions and is commonly seen as the relationship between information technology and financial services (Arner, Barberis, Buckley, 2015). Financial markets are “markets in which funds are transferred from people who have an excess of available funds to people who have a shortage” (Mishkin, Frederic S., and Stanley Eakins, 2018).

There are four roles of the financial markets that fintech has advanced since its introduction. As described by John Kay (2015) they are; matching lenders and borrowers, a payment system, enabling the management of personal finances and risk management.

FinTech plays an integral role in each aspect of a financial market; most key is that it allows effortless facilitation and execution of financial processes. Through fintech, a loan application is a five-minute form filled out on your phone and approved within 24 hours. This is not the only way that fintech comes into use, it also allows the greater use of data, aiding risk management as lenders can now compile data, from a multitude of sources, to build a picture of risk and credit worthiness (Drechsler, 2019). Without fintech’s use timescales of approval are greater, and financial institutions would need to rely on less information when lending, increasing unknown risk. The largest use of fintech is as a payment mechanism, as fintech also includes advancements such as contactless payment. Where “Tap and pay accounted for more than 40% of all card transactions in 2018 and total UK contactless spend reached £69 billion over the course of the year, according to industry figures.” (Sillitoe, 2019)

Due to fintech’s many applications in financial markets, it has increased the importance of financial markets more than ever. Such as, the increase of ease in matching borrowers and lenders. As financial organisations are more willing (due to greater information) and able to lend to consumers or businesses resulting in greater amounts of investment and consumption, that feeds into the circular flow. Which combined with the multiplier effect causes the injection of funds to grow larger and larger overtime, increasing GDP causing economic growth. Without such facilities the benefit gained would be greatly reduced and therefore shows just one way that fintech has increased the importance of financial markets on the economy. This relationship was acknowledged by kay (2015) when he wrote “Even modest initiatives in facilitating payments and providing small credits in poor countries can have substantial effects on economic dynamism.” An example of this is the rise of mobile banking, and how its allowed loans to be readily available and easily obtained.

Moreover, another way that fintech has facilitated a growth in importance of financial markets, is through the effect that it has on society. Such as resulting economic growth, as when the economy grows it is likely that incomes rise across the country, as incomes rise the living standards of the population rises, benefiting society. Also, greater investment may lead to an increase in jobs, resulting in a fall in unemployment, increasing societal benefit. But fintech has not only aided in this way, but through the greater facilitation of matching borrowers and lenders, more community projects have been invested in, increasing the financial markets effects. The best example that can be observed of this is the rise in the number of crowdfunding websites, such as GoFundMe or Indiegogo. Crowdfunding opportunities have allowed the facilitation of investment in emerging markets.

According to GoFundMe (2019) “Over $5 billion raised for inspiring campaigns by incredible people”. Many of these projects are for community benefaction, and the start-up of new businesses, aiding society and the economy through new enterprises, which can “have a positive and lasting impact on society and society’s goals” (Shiller, 2013). Outlining the growing importance that FinTech produces.

Alternatively, Kay (2015) described economic importance as; tax paid by the industry, the employment it provides and the incomes that are learnt from it. This would also show the increased importance of the financial markets due to FinTech. In employment this can be derived by comparing current statistics (2018), with the start of FinTech as we know it today 1967 (Zigurat, 2019). Employment in the sector from 1960-1979 accounted for only “2.45%” (ONS, 2019) of total workforce. However, this increased to “3.4%” of the workforce in 2018 (PWC, 2019), showing the effect fintech has on the growing percentage of jobs within the sector. Another observable contribution is total tax contribution at an estimated “£75bn” (PWC, 2019), the highest that has been recorded since 2007, again showing how the use of fintech is growing market prevalence in the economy.

However, the effects that fintech has depends upon the effects of associated issues with increased use. One such issue is the threat of Cyber-attacks, negatively affecting the market in many ways. With increased use of fintech in the industry it becomes growingly more susceptible. Cyber-attacks can heavily disrupt the use of fintech, such as ransomware. Most notably the WannaCry virus in 2017, locked down ‘200,000’ NHS computers cancelling ‘1900’ appointments ‘over the course of a week’ (Field, 2018). This shows the potency of a potential cyber-attack on fintech, as the greater the market relies on its use, it also relies on its functionality. As, if its non-functional then all benefits outlined previously wouldn’t be obtained, as lending and financial trading would halt, as so much is reliant on the use of fintech. The other side is that with the growing threat of cyber-attacks more people may become cautious about the use of fintech, such as mobile banking, due to the threat of having data or money stolen. Once again decreasing the benefits that would be reaped from the use of fintech.

Overall the role and effect that FinTech has had on financial markets is a major one, and will continue to be integral in the growth of financial markets. However, this judgment depends on the true value of the effects that FinTech has, for example as FinTech grows it may lead to a digitisation of job roles, leading to a decrease in employment, decreasing societal benefit and the impact it has on the economy. It also depends upon the practical disadvantages of use, and to what extent that they affect the financial markets, such as cyber-attacks, as they could be very uncommon or null. However, from observations of the market, Fintech’s use has only increased market importance substantially.