Fintech is the name given to financial service firms whose product or service is built upon technology, commonly resulting in highly innovative, pioneering services. “Fintech” as a term is a compound of “finance” and “technology”. It is a relatively recent term and is not a buzzword. Fintech is over here to stay. Why? Put simply, fintech is changing finance as we recognize it and is already impacting how increasing numbers of individuals and businesses alike conduct their financial matters. Are banks worried? They are. But their worry does not come from the market share fintechs have currently, as it is minuscule.
The real worry comes from what fintechs could do to banks’ market share in the future. The fear is that mid- to long-term, ironically, banks could lose their sector: banking. Or a significant portion of it at the very least. Fintech growth is seemingly unstoppable. Since 2008 global investment in the burgeoning fintech sector has tripled, from $928 million to $2.97 billion and is forecast to reach up to $8 billion by 2018. The UK and Ireland currently account for over 50% of all European fintech investment. Venture capitalists around the world have diverted attention to fintech, mainly as the growth prospects of the sector are stratospheric.
London is the undisputed fintech capital of Europe. With Silicon Valley, London forms one of the globe’s two fintech capitals. Between 2008 and 2013 investment in the UK fintech reached $700 million. The investment growth percentage in London far outstrips its American counterpart, although the total amount is considerably less. The UK is now launching an initiative to position London as the main global hub for fintech, for which competition from Silicon Valley, Asia, and New York will have present sizeable challenges. However, London’s chances are good. The UK capital is the financial center of the world, already Europe’s fintech capital, attracts a highly skilled and talented workforce to the capital, and the UK government will look to make London an even more attractive option for fintechs to set up shop there, with Chancellor George Osborne recently pledging support.
Fintech is changing finance in virtually all its numerous offshoots and subsectors. From banking to international money transfers, from business and personal loans to personal investment, and much more, fintech is presenting traditional finance with unprecedented challenges through waves of new, innovative ideas which are having an increasingly sizeable impact on global finance and how as businesses and individuals, we conduct our financial matters.
The 2008 Global Financial Crisis (GFC) is credited in large part with the sudden upsurge in fintechs. Since the 2007-9 global meltdowns, fintechs have continued to spring up from all corners of the globe. The reasons are considered to be many:
- Anger at the established banking system and the primary entities that it consists of.
- Widespread lack of trust with banks post-crisis.
- After the crisis, banks stopped lending; businesses had to contend with refusals on lines of credits or bank loans and individuals were turned down mortgages and personal loans.
- The internet is transforming our relationship with money the same way it fundamentally altered both the newspaper and music industries. Fintechs have taken advantage of this and built finance services based on the evolution of the internet. People presently use their tablet computers or smartphones to conduct financial matters. Fintechs have used the internet to provide faster, cheaper services.
- Banks resisted change because it was more convenient (and profitable) to do so. They have monopolized financial services for so long, with little to no competition, thereby allowing them to charge high commissions, and often, obscure or hidden fees, such as inflated foreign exchange rate spreads or the letter of credit costs. Why would they change when such change leads only to lesser profits? Fintechs have seen this and offer an alternative, often with cheaper rates and transparent pricing.
- The GFC almost collapsed the global banking system. Since 2008 banks have been preoccupied with recovery and a wave of the new regulation with which to comply. Investment in new technology and in adapting to the changing financial landscape was not deemed a priority. For this reason banks are now playing catch-up with fintech in terms of technology. Fintechs are setting the benchmark high. This is one reason why banks across Europe keep closing high street branches. People are simply not banking in person anymore, especially generations X and Y, and banks have so far been unable to engage customers online whereas fintechs have, as their strength lies in online interaction.