Fintechs are bridges connecting traditional financial functions with modern consumer-centric technologies. How did these companies emerge and what role do they have to play in a rapidly changing world?
Every cloud has a silver lining. During the financial crisis of 2008 — when the banking sector was shocked by the bankruptcy filing of Lehman Brothers, a part of that silver lining saw its origin in a new swell of financial innovation that transformed the financial services industry by bringing about a fintech revolution. A range of new innovative companies emerged following the recession as a response to the needs of clients who had lost trust in the shaken and broken financial institutions.
By the end of 2021, the number of fintech start-ups was abounding with 10,755 firms in the Americas region, 9,323 in Europe, the Middle East, and Africa, and 6,268 in the Asia-Pacific. EY 2017 FinTech Adoption Index estimated for 20 large markets, ranging from China and Brazil to Europe and the USA, showed an average fintech adoption rate of 33% — meaning one-third of the digitally active population was users of two or more financial technology services. The expected increase in mobile transactions in 2022 is more than 120% making this particular type of fintech service 88% of all financial transactions in the banking sector.
With a revolution happening at light speed, it is relevant more than ever to understand what the term ‘fintech’ exactly entails.
‘Rising Out of the Ashes’ of the Financial Crisis
The name ‘fintech’ stands for financial technology. It refers both to an evolutionary process in the financial sector, where innovative new technologies are developed and applied to support financial functions of a more traditional nature, and the actual financial service providers who embrace this revolution. Whatever the context, fintech captures two fundamental problems that new players had to deal with in order to survive and prosper in the aftermath of the global financial crisis. First, they needed to envision traditional financial services in a novel way. Second, these companies had to commit to the application of disruptive technologies in delivering the former.
With the unprecedented technological developments, the conditions were ripe for the entrance of innovative financial entrepreneurs and start-ups. However, some fundamental elements of the financial industry also needed to change, namely consumer behavior, increased investments, and new regulations.
The switch in consumer mentality following the global financial recession was characterized by a sense of frustration with the long-established banking sector that, for several decades, had faced basically no competition from alternative financial service providers. This change fueled demand for faster, more cost-effective, and transparent management of financial assets opening the doors for innovative fintech entrepreneurs.
The second factor enabling the thriving of these companies is the massive increase of investments channeled into the fintech market. Investments in fintech services reached a peak of $98 billion in the first half of 2021, thanks to a COVID-related surge in digitalization among other factors. As part of this trend, it is estimated that 82% of traditional financial institutions want increased collaboration with financial technology businesses in order to avoid losing market share to those innovative fintech firms.
Finally, the emergence of new regulatory frameworks such as the UK Electronic Money Regulation and EU General Data Protection Regulation in relation to the rapidly changing financial ecosystem is something that is driven by and drives the sustained expansion of the fintech market. Some experts raised alarms regarding the next financial crisis that can be caused by the insufficiently regulated proliferation of fintech businesses. To prevent such global disruptions, address increasingly threatening cybersecurity issues as well as protect consumer privacy generally, fintech-driven regulations are and will be even more crucial in the coming years. A recent launch of the EU Digital Finance Platform aiming to foster coordination between the supervisory authorities and entrepreneurs is a perfect indicator of the importance of adequate fintech regulations. The continual progression of financial regulatory instruments, in turn, along with the impetus to bring down compliance costs, mobilizes increased investments for regulatory technologies or ‘regtech’ — a branch of fintech services providing easy regulatory compliance solutions for any business. This is evidenced by, for example, the $2.7 billion acquisition of Verafin, a platform for fraud detection by Nasdaq.
Crucial Role of Fintech in a World of Global Challenges
Today, fintech solutions are present in virtually every aspect of our lives with major investment sectors being payments, Insurance Technology (insurtech), regtech, Wealth Technology (wealthtech), blockchain and cryptocurrency, and cybersecurity. By applying the latest technological advances such as blockchain, AI, and machine learning to traditional financial business areas of transactions, insurance, personal wealth management, and others, innovative fintech companies are revolutionizing our relationships to money, data, and how we experience the above-mentioned services.
However, besides its benefits in normal times, fintech takes a powerful and crucial role during global crisis periods. We have already mentioned how the shifting financial landscape after the 2008 global crisis was responded to by the very emergence of fintech solutions. Moreover, challenges posed by COVID-19 were swiftly answered by innovative fintech entrepreneurs — from mitigating pandemic risks related to cash exchange, supporting micro, small and medium-sized enterprises (MSME) to enabling financial inclusion in developing countries and more.
What is of even more significance, however, is that in a time when science is warning us about the biodiversity loss and climate change leading to the sixth mass extinction on Earth, technological disruptions including fintech have a vital role to play in changing our traditional lifestyles fundamentally. This role will be felt increasingly in the coming years. As with any major transition on a global scale, the fintech revolution bridges traditional with innovative and it needs to be properly regulated to achieve a balanced and safe customer experience.
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