Before Paypal decided to go Global, there wasn’t much talk about fintech. Even though the services were available to the local public, few people trusted fintech. Fast forward a couple of years, and we are swimming in fintechs. All around us, financial corporations are starting to realize the importance of fintechs and how they can deliver better financial services. And while the number of fintechs has snowballed in the last few years, it wasn’t always in this stage of development. Like every other piece of technology, fintechs have been subjected to countless innovations over the past years.
Fintech 1.0 (1886- 1967):
Finance and Technology have always been interconnected. The first notable evidence of this interconnectedness was when finance and technology combined to create the first wave of financial globalization during the first world war. Technology such as telegraph, railways, canals, and steamboats helped financial interlinkages across borders during the war. This allowed for fast transmission of financial information, transactions, and payments around the globe. However, developing these technologies required a substantial investment, most of which was done by the finance sector.
The 1950s saw the introduction of credit cards. Diners’ Club was the first to issue them in 1950, followed by Bank of America and American Express in 1958. This revolution was further fueled by creating the Interbank Card Association (later known as MasterCard) in the United States in 1966. By 1966, a worldwide network had been established that provided the groundwork for FinTech development’s next phase.
FinTech 2.0 (1967-2008):
The second stage in the history of financial technologies focused on improving conventional digital financial services. The invention of the ATM in 1967 began the second revolution in FinTech. Financial services moved from an analog to a digital industry starting in 1967 and continuing through 1987. The worldwide response to the 1987 stock market crash in the US marked the start of the second age of financial globalization, clearly defined by several key advancements.
The Inter-Computer Bureau was formed in the United Kingdom in 1968, laying the groundwork for today’s Bankers’ Automated Clearing Services (BACS), while the US Clearing House Interbank Payments System (CHIPS) came into existence in 1970. In 1918, Fedwire became an electronic system. In 1973, the Society of Worldwide Interbank Financial Telecommunication (SWIFT) was founded to connect domestic payment networks across borders. This was shortly after Herstatt Bank’s collapse in 1974.
The creation of SWIFT and the subsequent bankruptcy of Herstatt Bank demonstrated the dangers of expanding international financial interconnections, particularly through new payment system technology. This crisis, in turn, prompted the first primary regulatory focus on FinTech issues, as a series of international soft laws on developing payments systems.
By the late 1980s, financial services had long found their roots as an electronic industry based on electronic transactions between financial institutions, financial market participants, and consumers all around the globe. They had evolved into a primarily digital sector based on electronic transactions among financial institutions, financial market participants, and customers worldwide.
By the dawn of the 21st century, banks’ internal procedures, interactions with other institutions, and ever-increasing interactions with retail consumers had all been entirely digitized. Regulators were more reliant on technology, especially in stock exchanges. By the late 1980s, computerized trading systems and records had become the most frequent source of market manipulation information.
FinTech 3.0 (2008 – present):
From a retail customer perspective, there has been a significant shift in perception regarding who has the money and legitimacy to provide financial services. Although it’s difficult to pinpoint when or how it began, the 2008 global financial crisis may be regarded as a turning point that drove FinTech 3.0 development. Years after the fall of Lehman Brothers in 2008, market conditions aligned to promote creative market players in the finance sector.
Public opinion, regulatory scrutiny, political demand, and economic conditions were some of the reasons that led to the fintech revolution. Since 2008, the financial services sector has been hit by a “perfect storm” driven by financial, political, and public-sector sources that have allowed for the creation of a new market paradigm known as FinTech.
The history and innovation of fintech have been defined by several vital advancements, which the Inter-Computer Bureau clearly defined in 1968. In 1974, Herstatt Bank’s collapse demonstrated the dangers of expanding international financial interconnections through new payment systems technology.
Fifty years after its creation, SWIFT is used daily for more than 100 million messages between banks and their customers worldwide. The $64 trillion global foreign exchange market is built on finance, technology, and appropriate regulatory attention. Today, there is a significant paradigm shift regarding the development and usage of fintech for providing better financial services. And the ongoing discussion might be the key to triggering the fourth revolution in fintech.