The Evolution of the Fintech Sector

New digital technologies are changing the financial sector as we know it today. But how deep is this transformation? Where it is going? Where does it come from? What does it bring? Is it safe? In which sectors does it operate? There are many questions we ask ourselves and will try to answer throughout this post.

Due to the proliferation of online financial systems, there are more new business models whose objective is to expedite economic transactions through platforms based on financial technology. We can talk about a phenomenon called fintech, which seems to have arrived to our society to stay.

Let's see what it is about and its evolution!

What is fintech?

This concept arises in the early 90s because of the project of the financial company Citicorp, known currently as Citigroup. The acronym fintech is the result of the union of two terms: finance and technology. In other words, it refers to financial services through technologies. 

Many businesses use financial technology to simplify clients' payment processes and offer a more efficient service on the Internet. The term made up of finance and technology integrates numerous types of the latter: from technology applied to individuals and companies to financial advice, fund transfers, and payments and collections through Smartphones and other devices.

Its evolution

Although it seems a relatively new term, it has more than 25 years of history. As some economic portals have pointed out, “it is widely debated whether fintech is a type of company, a type of service or a series of people”. However, it seems that these options are not incompatible, since some startups offer exclusive technological-financial services, which are provided by other traditional companies as additional services.

For example: payments and transfers from a Smartphone or a computer, loans and credits via the internet with crowdfunding and crowlending services, trading platforms and robots, personal finance through mobile applications, blockchain technology to increase the transparency of transactions, currency exchange with other web surfers, etc.

In short, the constant technological advance and the arrival of the Internet have created new possibilities for users, changing their purchasing methods and, therefore, forcing companies to also adapt its ways of selling. Fintech development is having an impact on the lowering of some costs of certain financial services, which implies speed, transparency and security. We can say firms in the sector have gone through two main stages:

1. The first fintech companies were born in the second decade of the 90s with the revolution in the use of the internet and electronic applications without intermediaries, such as PayPal.
2. 2008 marked a turning point in the evolution of financial technology companies with the development of digital IT and the launch of smartphones. Since then, new financial business models emerged:     
3. Crowdfunding or collective funding. 
4. Payments, transfers and electronic money.
5. Personal finance management.
6. Development platforms.

At that time, financial technologies began to overcome important challenges, such as: agility, sales via digital channels, customer focus and use of ICTs to increase transparency in the services offered to consumers.

Fintech and financial entities

What initially seemed a technological advance for the financial sector would soon begin to be seen as a threat in some banks. They believed the new phenomenon could put almost 25% of its business at risk, as PwC España collected in 2016 from 544 surveys carried out to industry executives worldwide. Results:

• Fintech companies put downward pressure on the margins and profitability of financial institutions, according to 67% of respondents.
• The biggest market transformations are taking place in retail or consumer banking, in payment methods business, as well as in asset and wealth management.

At that moment, it was said these phenomena would be radically changed in the next 5 years. It was also envisaged the appearance of new online platforms to grant direct loans between companies and clients without intermediaries, new payment systems through mobile applications, Contactless cards, etc.

Currently in the middle of 2020, we can point out that expectations have been met. The fintech phenomenon has become an opportunity with numerous advantages for firms: greater efficiency, added value compared to the competition, reduced costs, customer retention, higher additional income, and companies' approach to digital transformation.

Main conclusions about the fintech phenomenon

The innovation proposed by financial ICTs has produced a strong impact on the traditional system. Advances in digital technologies have facilitated the birth of numerous businesses, which offer a wide range of products and services to consumers via technological platforms: payment gateways, Physical and Virtual POS, payments without integrations, transactions through interactive voice response (IVR), etc.

These new improvements have enabled the processing of payments in electronic commerce, which has already broken the historical record of 12,000 million euros in Spain, according to the National Commission on Markets and Competition.

Regarding its geographical distribution, the majority of fintech businesses are located on the American continent, above Europe and Asia. The application of digital technology is rapidly opening new areas of opportunity for both physical and digital trade, a phenomenon resulting in greater efficiency and competitiveness.

Would you like to know new data about the finance-technology? Do you use any financial technology in your business? How do you think it will evolve from now on?

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