Fintech, or “financial technology”, is taking the world by storm with disruptive solutions that advance IT infrastructure and change consumer behaviour. But it has actually been around for a long time, longer than you would think. Forbes pinpoints its beginning a few decades ago, in the 1950s, but the New York Times goes even further – a century further to be more exact. They place the invention of the first fintech device way back to 1865. Yes, you read that right. One thing is clear though, it’s a sector that has been evolving constantly ever since.
A short lesson in fintech history
We did our own digging and make the bold step of going even further back in history than the New York Times, to 1839 to be more exact. Take a look at the rudimentary basis of this modern sector.
1839, the device: The working telegraph was introduced by Wiliam Cooke and Charles Wheatstone. This was the basis of the first hope of transatlantic communication.
1851, the startup: Paul Julius Reuter started a financial information business, and set up camp right next to the London Stock Exchange, so he could get news quickly from the trading floor. The 19th century telegraph network is sometimes referred to as the Victorian Internet.
1858, the infrastructure: After a few failed attempts, the first functional transatlantic cable was installed. The first messages consisted in a conversation between US President James Buchanan and Queen Victoria. This victory was considered “a triumph more glorious, because it is far more useful to mankind, than was ever won by conqueror on the field of battle”, according to President Buchanan.
1865, the context: The pantelegraph, the great-grandfather of the fax machine invented by Giovanni Caselli started being used commercially. It functioned based on paper with a chemical product called “potassium ferricyanide”, which darkened when an electric current passed through it. It was mostly used to verify signatures used in banking transactions.
The infrastructure for financial globalization was now in place.
1918, the early adopters: The Fedwire Funds Service is established by the Federal Reserve Banks of the United States to transfer funds and connect all 12 Reserve Banks by telegraph using a Morse code system. Investopedia defines the Fedwire as “a real-time gross settlement system of central bank money used in the United States by its Federal Reserve Banks to settle final payments in U.S. dollars electronically between its member institutions.”
“Electronically” is the word that should stick with you here.
1950, early majority: Although the early part of the century saw an increase in individual store credit accounts, it wasn’t until the middle of the century when the first credit card was invented, to ease the burden of carrying cash. It came as a result of a dinner discussion between Frank X. McNamara, head of the Hamilton Credit Corporation, Alfred Bloomingdale, founder of the Bloomingdale’s store and Ralph Sneider, McNamara’s attorney.
1967, new devices: Time Magazine accredits the invention of the first ATM machine to John Shepherd-Barron, although the subject is quite controversial and has yet to be officially settled. An even more interesting fact is that the first ATM machines didn’t use cards but checks, which were printed with the ever so slightly radioactive isotope carbon 14. They also didn’t charge a fee for the transactions – hey, you win some, you lose some right?
1973, new context: The stock market had a major development when the Central Certificate Service was replaced by the Depository Trust Company. Consequently, stocks began being held in electronic form at a central depository, rather than in the form of physical certificates.
1980, new infrastructure: Bank mainframe computers evolved considerably and now supported graphical terminals, and terminal emulation. This meant more advanced data and record-keeping systems.
1991, innovators: After a researcher named Tim Berners-Lee from the European Organization for Nuclear Research created what he called the “WorldWideWeb”, the National Science Foundation lifted a ban on commercial businesses operating over the Internet, paving the way for web-based eCommerce.
Fintech today: the perfect storm of technology and capital markets
That was then. And even though to most of us the ‘90s still seem a decade away (I know, right?), a quarter century has passed since the invention of the Internet. So let’s take a look into the now of fintech.
KPMG dubbed 2015 the “year of fintech”, stating that “a perfect storm of conditions is brewing that makes financial technology the right solution for the right conditions at the right time. And that time is now.”
It’s easier than ever and less costly to start a fintech company and major financial institutions make the environment favourable for global software applications by opening up their existing systems through new APIs. Suddenly, banks with over a century of history are extending a helping hand to fintech startups, by creating fintech focused VC funds. Even outdated IT infrastructure is being replaced by more modern technology often born outside the major institutions to help with customer onboarding and fight money laundering, for example.
According to this KPMG study, the areas that fintech aims to solve are::
- falling cost of computing
- cost reduction
- technology innovation
- ubiquitous data
- changing customer behavior.
The same study also identifies six steps to fintech being adopted in capital markets:
- Vision and strategy: Establishing a coherent entrepreneurial vision and consider global expansion to other capital markets.
- Commitment: Getting support from the local government and regulatory agencies.
- Alignment: Coordinating activities and investments, along with exploring opportunities in adjacent sectors.
- Accessibility: Maintaining access to funds, expertise and a point of contact with the government, to minimize bureaucracy.
- Collaboration: Sharing problems and solving them in a safe environment that supports innovation, where organisations and new ventures come together.
- Promotion: Becoming known at both an industry and political level and attracting capital, investment, talent and users.
The reality though is that even if emerging fintech companies accomplish all these steps, they can still hit some potential walls like: security risks because they open doors to criminal activities, regulatory attention due to legal jurisdiction, protecting customer data, taxation, or being accepted from a cultural standpoint.
Despite all the adversity, there are more and more brave and innovative fintech companies that try to revolutionise banking, insurance, payment processing, crowdfunding – and this is just the beginning. Fintech Innovators provides a list of 50 established financial services companies and 50 emerging startups of tomorrow. Take a look at the stories of TransferWise, Avant, Robinhood, Collective Health, AngelList, Bankable, Ripple, Yoyo Wallet and more, to dive deeper into the promise and pitfalls of fintech today.
If you want to learn more about fintech, talk to startup founders and investors in this sector or just feel the vibe of the tech startups ecosystem at its best (fintech and beyond), you should not miss How to Web Conference 2016.
5 fintech startups with global potential have been selected to attend How to Web Startup Spotlight and will be pitching on the main stage of the conference. Here are the finalists that you will get to meet during the event:
- Milez – a tool for parents to reward their teen drivers with money for distraction-free driving.
- TripWithMojo – personal finance application that uses gamification to help travellers save money for traveling, while making it affordable within their current income.
- Younnify – is providing the users with the bank products they want and the banks with the users they need.
- Pago – an app for securely paying utility bills, taxes, fines and mobile recharges or sending money.
- Tier One Exchange – private marketplace that connects global investors to off-market loans, properties, and fixed assets sold by financial institutions, asset management companies, and bank wind down entities across Europe.
Join the tech community on November 1 & 2 at the National Theatre in Bucharest! Get your Early Bird ticket by October 24th!