Since joining HPD LendScape almost a year ago, I’ve been hearing opposing views on whether we are a FinTech or not. Depending on who you ask in our company, you will get a positive answer, a negative answer or a confused look. So, what is this FinTech about?
Financial Technology is a relatively new term, and its definition is somewhat cloudy and ambiguous. For me, the simplest definition is: Applying technology to improve financial activities. And for those who want to go into a bit more detail, we have to add the words ‘end-to-end process’ and ‘via the internet’. But don’t take my word for it, this is according to a 2017 study entitled ‘Taming the beast: A scientific definition of Fintech’.
It’s important to know that there are many types of FinTech: Banking, Payments, Investments, Financing, Insurance and Infrastructure & Enabling Technologies. And from here on, it gets a bit muddy. According to some, a true FinTech must replace at least one aspect of traditional banking. For example, a customer who needs to send money abroad might do it via the traditional method and go to the bank. For some, however, this might be too time-costly. Instead, they can use apps like Azimo, that enables the speedy transfer of money with a one-click application. This new company is an example of a true FinTech, because it offers a product that is in direct competition with a traditional bank.
Now that the definition is a bit clearer, we ask: where are we in terms of the FinTech timeline? As FinTech is such a young sector, it is easy to assume we are witnessing it in its first stages. But perhaps we are in phase two, or even phase three. Well, according to Chris Skinner, considered as one of the most influential people in financial technology, we are actually in phase three.
Bear in mind that here we are referring to the strictest of FinTech definitions, because if we’re not too strict with the definition, its roots could be traced back to the early 1900s, with the likes of Fedwire, a system that could move funds electronically. We could then continue to talk about the first credit card (1950), the first stock-market quotes on an electronic screen (1960), first ATM (1967), first online-banking (1983), etc.
Phase One: Disruption (1999-2014)
It is accepted by many that the modern era of true FinTech started with PayPal in 1999. For Chris Skinner, phase one began in 2005, with the emergence of the first platform designed to connect people who have money with people who need money (peer to peer), through a software algorithm called Zopa.
FinTech began with the aim of disrupting or even destroying the banking system.
That was a good idea, but a little naïve. Banks exist for a reason, acting as a regulated intermediary of trust with money. Without that regulated structure, the system would collapse. That’s why disintermediation has been talked about for years, but has never happened. You can decentralise finance as much as you want, but it will always need some form of supervision from a trusted authority.
The FinTech community, therefore, realised it needed to work with banks, rather than to compete with them. Equally, the banks realised that the FinTech start-ups were providing useful services and began to talk to them, work with them, invest in them and showcase them.
Phase Two: Discussion (2014-2017)
The start of the second phase of the FinTech wave could be seen when deep discussions began, and banks did hackathons and innovation theatre. There wasn’t much tangible connection into the banks for FinTechs, however. Banks still preferred to build rather than buy or partner, but at least a conversation was being had.
Phase Three: Partnership (2017-2022)
Encouraged by regulatory sandboxes and seed-money investments, banks have now realised that not all FinTechs are a threat, and FinTechs have found that not all banks are old-fashioned.
The evolution of FinTech has moved fast. In less than 18 years, FinTech has evolved from disrupting and destroying the banks, to discussing and ideating with the banks, to collaborating and partnering with them. This is where we are now; the third phase of FinTech: partnerships.
Phase Four: Integration (2022-2027)
It should get interesting in the next 10 years, as we move from partnerships to fully integrating FinTech capabilities into the banking system through the likes of Open Banking and Open APIs. This is out there under PSD2, but it’s not really out there. PSD2 has been a bit of a damp squib, with many banks resisting being open. Equally, third parties haven’t really grasped the mantle of change yet. And some would say we need a PSD3 before real change will happen. PSD2 mandates that banks must make payments-data available to third parties through an Open API. PSD3 will mandate that third parties must make data available to banks through an Open API.
Phase Five: Renewal (2027+)
When we get to truly open platforms and markets of APIs, apps and analytics, then we can start to fully integrate banking with FinTech and Big Tech. Once this is complete, we will no longer need to talk about banks versus FinTech or even banking and FinTech. We will just talk about finance over the network, as it will be fully integrated as one seamless, frictionless system: internet-enabled, global and in real-time.
That’s the future! But going back to the present, what do we answer when someone asks whether HPD LendScape is a FinTech? That really depends on our audience.
Article Written by: Antony Blaszak, Market Research Analyst