The Fintech Evolution From the 1950s to the Present
Fintech is a very broad sector with a long history. Most people hear Fintech and think about the latest mobile app, which can help them pay for their morning coffee like Zelle without ever swiping a card or using cash.But technology has always played a key role in the financial sector in ways that most people take for granted and might not ever see. In examining the timeline of Fintech developments, the last 65 years paint a picture of continued innovation and evolution.
The 1950s brought us credit cards to ease the burden of carrying cash. The 1960s brought ATMs to replace tellers and branches. In the 70s, electronic stock trading began on exchange floors. The 1980s saw the rise of bank mainframe computers and more sophisticated data and record-keeping systems. In the 1990s, the Internet and e-commerce business models flourished. The result was the introduction of online stock brokerage websites aimed at retail investors, replacing the phone-driven retail stock-brokering model.
Five decades of development has created a financial technology infrastructure, which most people never think about, but use almost everyday. It’s also important to note that throughout that 50 year period, Fintech development was also creating more sophisticated risk management, trade processing, treasury management and data analysis tools at the institutional level for banks and financial services firms. While these systems are not apparent to retail banking customers, they make up a multibillion industry aimed at supporting the needs of the financial services sector. Bloomberg, Thomson Reuters TRI +0%, SunGard and Misys MUSJY +0% are just a few of the players that make up the existing set of large Fintech companies that have built this institutional infrastructure.
What is striking about the last 65 years of development in these technologies is that while they became mainstream and widely used by banks and their customers, the banking sector was not threatened. On the contrary, banks grew. In looking at the U.S.’s FDIC data, from 1950 to 2014, the number of bank branches in the country grew from approximately 18,000 to over 82,000.
Fintech Services Today
Now retail financial services are being further digitized via mobile wallets, payment apps, robo-advisors for wealth and retirement planning, equity crowd funding platforms for access to private and alternative investment opportunities and online lending platforms. These Fintech services are not simple enhancements to banking services, but rather replacing banking services completely. So, Fintech can be thought of in two broad categories, consumer facing and institutional. It is these consumer-facing Fintech services, which are quickly gaining customers and competing with banks.
The Role of Banks
Questioning or predicting the demise of banks boils down to understanding the role that banks play in different markets and regions. At a basic retail and consumer level, banks collect deposits and make loans, while also facilitating payments and currency exchange. In most developed countries, the majority of households have at least one bank account, which they use as their central hub for receiving paychecks, making payments and saving money.
In the U.S., Fintech apps such as Venmo and Apple AAPL -4.42% Pay provide convenient and secure payment methods. They are faster and cheaper than transferring money between bank accounts and using checks. Millennials are habitually paying each other or making purchases with such apps. Lending platforms such as Lending Club and Prosper, provide lower interest rate personal loans with a maximum limit of $35,000. Robo-advisors are providing an alternative to traditional financial advisors. Companies such as Betterment or Wealthfront provide a data driven automatic investment plan for retirement planning and wealth management. All of these Fintech companies are strong contenders that are increasing their market share and competing with retail banking services.
But in reality, banks accounts are still where paychecks get deposited. The deposit base sits with a bank, where it funds payment apps, loan payments and investment accounts. Banks provide a level of insured safety when deposits are too large to practically sit in mobile wallets. Eventually, as people buy homes, buy cars and pay for college, their financial needs become more complicated and require larger borrowing limits. At some point, consolidating services through a bank account becomes an attractive option. While there is no doubt that consumer focused Fintech startups are capturing market share through the efficiency and speed they offer, it is difficult to imagine a future where banks completely disappear in developed markets.
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