There are three generations of fintech developments taking place.
The first generation – FinTech 1.0, if you like – was when the first wave of startups appeared in the mid-2000s. I saw them fall into four camps: renewers, wrappers, replacers, and reformers.
Renewers were the fintech startups offering improved access to existing bank services, and their target clients are the banks themselves. Most of these fell into the personal financial management (PFM) camp and were working with banks to innovate around mobile and online access. Stripe, Square, and other payment firms, including PayPal, also fall into this camp. Over time, these renewers extended beyond PFM and payments into analytics and artificial intelligence.
Wrappers are very similar to renewers, as they wrap themselves around existing bank structures, but instead of working with banks,this group chooses to work against the banks. They see the banks as competitors and claim to be better because they are not a bank. The wrappers are firms like Simple and Moven, wrapping themselves around a bank partner that provided their licence but offering a revolutionary idea of managing money. Interestingly, most wrappers have become renewers because they have ended up either working with banks (Moven now works with TD in Canada and Westpac in New Zealand, providing an improved user experience for existing bank partners) or were acquired by them, as is the case with Simple.
Replacers is a group that want to get rid of banks. These make up the real disrupter crowd and include peer-to-peer lenders, roboadvisors, and crypto and digital currencies. Again, this group has ended up being slightly different in outcome to outset.
For example, most lenders in the U.S. have found that their lending comes from institutions rather than individuals. Roboadvisors are taking off, but their assets under management are peanuts right now. And the bitcoin and Ethereum projects have hit issues time and time again, from hacks to forks to splinters; where they go next remains to be seen. In fact, this group appears to be more focused on serving markets that are underserved or unserved, rather than replacing banks. Bitcoin now has its focus on the underbanked and unbanked; many peer-to-peer lenders are focused upon serving small businesses that are too high-risk for banks to lend to; and several of the roboadvisors appear to be focused upon advising the mass affluent, who have no advice, rather than the high net worth who are happy with their existing providers.
Finally, we have the reformers. Reformers are an extension of the replacers, but they have broken free of even looking at the banking system, as they see themselves serving new markets. These are the mobile network operators offering mobile wallets in Africa. They are the variations in currencies being trialed to offer low-cost value exchange in these mobile wallets. They are the new banks like YesBank and WeBank in China, which have combined mobile with payments and gamification through Red Letter Days to generate a whole new way of thinking about money. Equally, these are the companies embracing the open sourcing of financial services and leveraging bank application program interfaces (APIs) to create new services.
So renewers, wrappers, replacers, and reformers were the first generation of fintech startups, and while they have made a dent on the banking system, in most cases, they have been absorbed by the system or act outside the system.
The second-generation fintech world, FinTech 2.0, appeared at the start of the 2010s. This is when banks woke up to the fintech opportunity and started to engage with them. Banks began to invest in them, partner with them, and help them grow.
Much of this came around because banks could see that most fintech startups didn’t have the banking knowledge to do what they were trying to do. A peer-to-peer lender doesn’t have the capital but does have the credit risk algorithms to be effective, so banks start to help them with their capital needs.
A payments innovator like Stripe is building amazing API capabilities, so Citi launches its own APIs to compete. Roboadvisors are offering an interesting way of serving the mass affluent, so Charles Schwab creates its own. Banks see that the development of new services around cloud, analytics, and blockchain is worthwhile, but they don’t have the bandwidth or technical talent to deal with this, so they open incubators and accelerators and run hackathons.
Meanwhile, many of the larger banks decide that if the new fintech startups might eat their lunch, they might as well feed them, so they open venture capital funds of their own to provide seed money to those with the best ideas. Within months, a whole new ecosystem has arisen, where the banks themselves are at the centre of creating the new generation of financial system, investing and working with startups globally. The result is an explosion of ideas on how to use technology to change the financial system.
In the blink of an eye, FinTech extends to RegTech and InsTech, and all parts of the financial markets are being reinvented through open-platform developments. Front offices are being adapted by mobile social and the Internet of smart things; middle office is a marketplace of widgets that can be plugged and played through APIs; the back office is redeveloped using cloud, analytics, and artificial intelligence; and binding counterparties together globally, the financial infrastructures are reimagined through shared ledgers on financial blockchains.
But all this takes time, and there’s an awful lot of legacy out there, so what then happens is FinTech 3.0. FinTech 3.0 is a hybrid system that integrates traditional banking with the Internet. In doing so, banks become renovated and refreshed with technology, and use the fintech joiners to the party to renovate their in-house systems. Legacy hardware gets its data cleansed into the cloud, and separating content and processing allows the banks to replace their processors.
Cloud-based data is heavily analysed and leveraged through artificial intelligence to create digital relationships in the front office that are automated and personalised. Bank processes are packaged through APIs such that any third party can plug a financial transaction into their operations. And branch-based advice and service, mainly for corporate and small business clients, allow banks to retain a physical presence, albeit a much lesser one than ever before. For every five branches a bank operated in 2005, only one is required in 2025.
In FinTech 3.0, banks have become fintech firms themselves, but massive ones. Transitioning millions of customers and centuries of operations to the Internet age has not been easy, but a two-decade change cycle enabled by fintech partners has allowed it to happen.
Meanwhile, this does not mean that there aren’t other services now available in this third FinTech age, as FinTech firms have also found new services and new niches. Many are flourishing in servicing markets that could not be served before. Crowdfunders like Indiegogo and Kickstarter illustrate the new market niches well. It used to be that a startup had to go to a bank to get money to get started. It also had to spend a considerable part of that money on marketing to reach their target audience via media. Crowdfunders collapse that startup structure into one process, where your market and your customers provide you with the funds direct to get going.
Many banks would not fund startup SMEs because they don’t have the data to take the risk. Crowdfunders turn that on its head, as the amount of funding in a crowdfunded business is directly reflected by the demand from the marketplace and customer. In other words, the unknown data the bank is dealing with – what is the demand for this product? – is sourced up front, before the business gets started through sites like Kickstarter, Indiegogo, Crowdcube, and Seedrs.
That’s a great illustration of a new financial market created by FinTech. Others include digital identities through mobile wallets and low-cost shared databases across global blockchains, a project being actively developed by the United Nations. The United Nations recognises that success in just a few years of mobile wallets. One in three Africans who have a mobile subscription actively uses a mobile wallet. In most Sub-Saharan African countries, more people now actively use mobile wallets than bank accounts. The amazing thing is that once you have a mobile wallet, you can start creating a credit history. Once you have a credit history, you can get a bank account.
So the mobile reformation for financial inclusion is another powerful story of the fintech revolution. The fact is, FinTech has created a way for everyone on earth to trade, transact, and transmit. Just ten years ago, that was a luxury limited to the developed world. Now it’s a basic human right.
In conclusion, FinTech’s developments have moved from destruction and disruption in its first phase, to partnering and mentoring in the second, to a whole new world of finance and trade in its third. Banks and FinTech startups are working hand in hand to generate that new world. On the one hand, banks’ archaic back-office systems and structures are being regenerated by FinTech 3.0; on the other, markets and citizens that could never be serviced or reached are being served by FinTech 3.0.
It’s a whole new world of trade, and a better one for all. Welcome to the age of Internet-based financial service: It’s fast, it’s free, it’s direct, it’s one-to-one and peer-to-peer, and it’s here and now. Enjoy.
For more insight on the future of banking and fintech, see Blockchain: Be Prepared.