Financial technology

Financial technology, often called fintech, is about using new technology to make money services better and easier. It includes things like using your phone for mobile banking, getting loans through online lending platforms, paying digitally, and using computer programs called robo-advisors to help with investments. Some fintech also uses blockchain technology for things like cryptocurrencies.

Fintech companies can be small new businesses called startups or big technology and money companies. They work to make traditional banking and financial services faster, simpler, and more helpful for everyone. This technology helps people manage their money, send payments, and invest with just a few taps on a screen.

Evolution

Financial technology has changed over more than a hundred years with new inventions that have shaped the money world. The idea of "financial technology" started in the late 1900s and became popular in the 1990s.

The first time the term was used was in 1967 in an article in The Boston Globe. It talked about a new company started by people who used to work at Computer Control Company. This company wanted to help new businesses in the financial technology area.

The term became well-known in the early 1990s when John Reed, the leader of Citigroup, used it to describe a group called the Financial Services Technology Consortium. This group, started by Citigroup, aimed to help different companies work together using technology in the money world.

Financial technology includes many types of companies. There are new companies creating new money tools, big tech companies moving into money services, and old money companies using new technology. These changes have brought new ideas to banking, insurance, investment, and payment systems. Examples of financial technology include digital banking, mobile payments and digital wallets, peer-to-peer lending platforms, robo-advisors and algorithmic trading, insurtech, blockchain and cryptocurrency, and crowdfunding platforms.

Financial technology has also helped more people get access to money services. Things like digital payments, mobile money, and online money platforms make it easier for people in places without many banks to send and receive money safely and cheaply.

History

Foundations

The late 1800s began with new ways to send money across long distances using the telegraph and special wires under the ocean. These tools made it faster to send money between faraway places. In 1918, a big bank group in the United States started the Fedwire system. This was one of the first ways to send money electronically between big banks using telegraph wires.

The 1950s brought a big change with the first credit card made by Diners Club International in 1950. This helped people spend money more easily. Soon after, American Express and Visa cards started too.

Digital revolution

The 1960s and 1970s saw more changes from old paper money to digital money. In 1967, Barclays Bank in London created the first ATM, letting people take out cash without going to a bank. In 1968, banks in the UK started a computer system to send money between each other.

In 1971, NASDAQ started as the world’s first digital stock exchange, using computers instead of people shouting to trade. In 1973, SWIFT was created to help banks talk to each other around the world for sending money.

The United States also started the ACH system, which let people send money electronically for things like paying bills or getting paychecks, instead of using paper checks.

Rise of digital financial services

The 1980s and 1990s brought more digital banking. Michael Bloomberg made a tool called the Bloomberg Terminal that helped people see stock prices and news quickly. In the early 1980s, the Bank of Scotland let people bank online using televisions and telephones.

In 1994, a small bank group started the first Internet banking website, letting people check their money online. By 1999, the first bank that only worked online opened.

Dot-com era

The late 1990s and early 2000s saw many new ways to trade and pay online. E-Trade let people buy and sell stocks on the stock market from home. PayPal, started in 1998, made it easy and safe to pay online, helping many new companies grow.

Post-2008 financial crisis

The big money problems in 2008 made people trust banks less, so new technology-based banks grew fast. This time also saw the start of digital money like Bitcoin, invented in 2008. Bitcoin used special computer tricks to let people send money without banks.

New ways to let websites take payments easily helped many online businesses grow. Banks also started working with tech companies to make new kinds of banks called neobanks, which only worked on computers and phones.

Accelerated growth of digital finance

The world health crisis in 2020 made everyone use more digital ways to send and receive money. Many people started using apps to trade stocks, pay friends, and do banking online. Tech companies were quicker to help people during this time than old banks. Investors put lots of money into these tech finance companies, and many grew very fast.

During this time, more people started using digital money and special computer tricks, with some countries looking at making their own digital money. Africa, especially Nigeria, is also growing fast with new finance tech companies.

Industry landscape

The financial technology industry has many different parts, each offering special services and using new technologies. Companies often work in several areas at once or find new ways to serve people, making it hard to separate everything clearly.

Revenue models

Financial technology companies use different ways to make money, often using more than one method at the same time.

Many of these companies earn money by charging a small fee for each transaction, especially when processing payments or handling digital money trades. Some also charge extra for quick access to funds. Another way to earn money is through special fees for payment cards.

Some companies offer basic services for free but charge for extra features or better service levels. This is common for online banks and tools that help manage money. For businesses, prices may depend on how often they use certain services.

Banks and lending services often make money by earning interest on money that customers save or invest. They may also sell parts of their loans to other institutions.

Some companies sell information about their users to others, but this has raised concerns about privacy. A safer way is to use this information to suggest products or services to users, earning money while keeping services free.

Certain trading platforms have special ways to earn money that are still being watched closely by regulators to make sure they are fair.

Infrastructure

Modern financial technology relies on a shared technical system that helps different services and banks share information and process payments safely. Special tools called application programming interfaces (APIs) let software talk to each other without sharing their private details. Safety rules like OAuth 2.0 and OpenID Connect help protect this sharing, especially for money-related tasks.

Open banking is a big rule that says banks must let approved outside services see account details and handle payments, but only if the customer says it’s okay. This idea started in the European Union with rules called PSD2 in 2018 and in the UK in 2016. Many places around the world now have similar rules, like the Financial Data Exchange in the United States and the Consumer Data Right in Australia. By 2024, this open banking market was worth about $31.6 billion and is expected to grow to $135 billion by 2030.

Controversies

Some financial technology companies have faced criticism for focusing too much on growing quickly instead of making sure they follow rules, keep information safe, and protect customers.

One big example happened in November 2022 when a cryptocurrency exchange called FTX stopped working. This happened because of accusations that the company did not tell the whole truth, did not handle money properly, and did not have good safety plans.