Fintech is a relatively modern concept. It can be dated back to the first half of the nineteenth century, with the introduction of the telegraph (1838) and later with the successful construction of the first transatlantic cable in 1866. Together, these two technological innovations put the basis for the financial globalization of the late 1800s. At present, in the era of the Internet of Things, it can be difficult to think about an unlinked world, where information flows with great difficulties over regions and continents. Before the transatlantic cable was completed, communications between Europe and the Americas took place only by ship. Apart from the duration of the trips, there was a considerable risk of having delays due to possible storms and shipwrecks. The significance and the scope of that innovation, even for financial uses, are clear.
Banking as an industry was one of the primary adopters of computers. The first mainframe for commercial use was built for a bank. Banks themselves used computers to enhance and accelerate legacy processes that already existed.
What has been widely recognized as one of the greatest financial technology innovations of the last century is the automatic teller machine (ATM). In 2009, Paul Volcker, former chairperson of the US Federal Reserve, said: “The most outstanding financial innovation that I have seen in the past 20 years is the automatic teller machine (‘ATM’), that helps people and prevents visits to the bank and it is a real convenience.”
Barclays Bank installed the first ATM in the city of Enfield, UK, on 27 June 1967. It allowed people to perform financial transactions through an electronic telecommunication device. The ATM is one of the initial applications of technology to the financial area, allowing important economic savings to financial institutions by introducing automation rather than a person’s labor in the relationships between the customers and the financial institutions.
ATM innovation is interesting. It has marked the start of a new fintech era. The relationships between financial services and technology, since that date, have faded. The ATM was the first innovation that clearly showed the deep potential interlinkage between finance and technology. The way to the digitalization of the financial services industry was open. Until the end of the 1980s, this industry remained, at least from a consumer perspective, a large industry based on analog technologies.
Arner et al. (2015) have identified 1987 as the turning point for the fintech industry, referring to two facts:
- The iconic image from Oliver Stone’s movie Wall Street, picturing an investment banker handling an early mobile phone.
- The “Black Monday” stock market crash. One of the recognized causes of the crash, started in Hong Kong and immediately spread through Europe and the United States, was the so-called program trading: a computerized type of trading that involves the execution of a basket of stocks at pre-determined conditions. Briefly, a computer application buys and sells shares once the prices reach certain thresholds.
The Black Monday stock market crash highlighted the strict interlinkage and risks between finance and technology, bringing this fact to the attention of the regulators. To be specific, regulators developed new rules and reviewed compensation protocols to bring uniformity to the most relevant financial products. To adjust the pace of price variations, the New York Stock Exchange introduced circuit breakers, together with program trading curbs. Furthermore, there were continued efforts to foster cooperation.
The 1990s saw the start of a shift from analog to digital technologies for the financial services industry. The development of the World Wide Web and the first experiments of Internet banking from Wells Fargo in the USA and ING in Europe marked this decade. Also, the replacement of the telegraph first with the fax and later with the email/instant messages enhanced communications throughout the world, setting the stage for stronger financial relationships.
Starting from the twenty-first century, the internal and external processes related to the financial services industry have moved to full digitization. The significance of the investments in the ICT sector shows the relevance that this area has in the financial services industry.
Traditional financial institutions have direct competition from fintech startups. The mobile phone has radically improved the way many customers prefer to do their banking. In fact, in some parts of the world, it has allowed people to have a bank account or sort of.
Fintech initiatives are spreading very rapidly, affecting new areas and branches. In 2009, Satoshi Nakamoto introduced a modern type of money called Bitcoin. It is a form of digital currency to perform transactions without the involvement of central banks or other intermediaries.
The future is more uncertain than ever. The rate of innovation in the financial industry is very high. Not necessarily the reactions of traditional financial institutions will be successful. What currently seems to be most likely is that considering what experts, scholars, and practitioners say, fintech initiatives will continue to grow in the future.
In the 1990s, Citicorp (later Citigroup, the result of the merger between Citicorp and Travelers Group) initiated a project to promote and foster technological collaboration with outsiders. Its official name was “Financial Services Technology Consortium” and Fintech was its synthetic name. In these times, this term has changed its scope. It does not anymore identify a specific initiative or organization. It is a big box comprising also startups delivering technology-based proposition values, capable of enabling, enhancing, and even, in some cases, disrupting financial services. So, the fintech terminology includes:
• Use of innovative financial technologies in traditional financial institutions
• A collaboration of startups and traditional companies, be them financial institutions or technological firms