Society has always been hostile towards financiers. There has always been tension between the have-nots and have-yachts. For millennia people have sneered at ‘parasitic’ money lenders, while admiring more ‘honourable’ professions from farming to art.
But nothing could be further from the truth. Before the ascent of finance, society was more hostile. Hunter-gatherers didn’t trade, they’d raid. Before the ascent of financial technology, there was no river of progress—there was a dam of stagnation.
Technology was first used in finance to build systems to record government finances, pay taxes, and to manage agricultural production. Those early financial innovations opened the floodgates to a river of human creativity—just as the financial revolution of the 1600s spawned the industrial revolution of the 1700s. The ascent of FinTech spawned the ascent of man.
While the ascent of FinTech is just beginning, the era of traditional banks may be ending. Despite banks like Goldman Sachs earning a revenue higher than the GDP of Croatia and Ecuador, banking expert Arvind Sankaran can see “We're witnessing the creative destruction of financial services.” Or as the Co-founder of the Bank Innovators Council, JP Nicols, puts it, “Banks have to upgrade themselves, or risk being burnt to the ground.”
Whether traditional banks are at risk or not, FinTech is definitely changing the financial industry. If you’re a financial wizard looking to master the universe or simply wanting to take care of your personal finances, it has never been more important to understand the history of FinTech.
When was money invented? How did the use of money progress?
9,000 BC: Early man would barter goods they had, for goods they needed.
1,400 BC: In China, people began using bronze to trade with. This was the start of commodity money (gold, silver, bronze, salt etc.).
600 BC: The first ever ‘official’ currency was minted in modern day Turkey.
600s AD: The banknote was used in its early form by the Tang Dynasty.
1,250 AD: The Florin, first gold coin widely accepted across Europe was minted. It encouraged international commerce.
1600s AD: The financial revolution in Europe began. It included joint stock companies, insurance, and banking.
1,661 AD: Paper money was minted for the first time in Europe when banknotes were printed in Sweden.
How did government investments and assistance pave the way for modern FinTech?
1866: The first transatlantic telegraph cable was laid, connecting New York, Paris, and London.
1918: The US Federal Reserve Banks developed the Fedwire Funds Service so they could transfer funds between them in real-time.
1938 - 1945: In WWII, resources applied to developing and breaking codes for secure communication led to breakthroughs in computer science that would later be applied to FinTech. Alan Turing began his 1950s paper with, “Can machines think?”
1946: Credit cards were invented. The first was launched in 1946 called the Charg-It card. It was followed in 1950 by The Diners Club card came out, in 1958 by the American Express, and by the Interbank Card Association was created (now Mastercard) in 1966.
After initial government resources encouraged the growth of FinTech, how did the traditional financial institutions capitalise on those developments?
1967: The movement toward digitisation began. The first ATM was invented by Barclays in the UK and the first handheld calculator was invented by Texas Instruments.
1970: The first Real-TIme Gross Settlement system was launched in America, allowing transactions between banks to happen in real-time and settle on a one-to-one basis.
1971: NASDAQ, the first electronic stock exchange in the world was launched in New York.
1973: SWIFT (Society for Worldwide Interbank Financial Telecommunication) was founded, enabling financial institutions across the globe to send and receive secure transactions.
1980: Online banking was introduced in the USA.
1981: Bloomberg was founded. It later became the world's most valuable private information services firm in the world.
1987: The first market crash occurred, caused, at least in part, by program trading.
1993: Citigroup launched the Financial Services Technology Consortium project, which is where the term ‘FinTech’ was derived.
1995: In 1995 Wells Fargo provided online account checking on the World Wide Web.
1998: Confinity (currently PayPal) is launched.
2001: There were 8 US banks that had more than 1 million online customers.
2005: ING Direct and HSBC Direct, the first completely online banks with no physical branches, were launched in the UK.
2007: Mobile money, M-Pesa, was introduced to Kenya by Vodafone. Within 3-4 years, the majority of Kenya’s GDP was flowing through M-Pesa.
How are traditional financial institutions giving way to startups? Are emerging markets seeing more innovations than developed markets? How did the GFC lead to a growth in FinTech? Which are the most significant cryptocurrencies? How did Google and Apple enter the financial system?
2008: The FinTech sector received an influx of resources following the GFC for three reasons. Firstly, many employees in the financial sector were laid off, so they went to work at FinTech startups. Secondly, after the GFC many regulatory changes were made which significantly increased the cost of compliance, so many companies looked to FinTech to provide more efficient solutions. Finally, the trust in major financial institutions decreased and people looked for alternative options.
2009: Bitcoin was launched by Satoshi Nakamoto. It helped pave the way for cryptocurrencies and blockchain technology.
2010: Contactless cards were introduced for quicker and easier payments.
2011: Google develops Google Wallet.
2014: Apple launched Apple Pay.
2015: The cryptocurrency Ethereum was introduced, featuring Smart Contracts.
2015: Yu’E Bao, a Money Market Fund, was launched by the Chinese company Alibaba. Within 9 months it became the world’s fourth-largest MMF (after Vanguard, Fidelity, and Schwab).
2018: Data flow has increased dramatically. From 2013-2018, as much undersea cable was laid as in the previous 150 years.
2018: Global FinTech investment rose to a record $111.8 Billion.
In 1994, Bill Gates famously stated, “Banking is necessary, banks are not.” At the time the moguls of the financial world didn’t heed his warning. Now, traditional financial institutions are nervous.
In 2014, J.P. Morgan CEO, Jamie Dimon, was aware of the imminent change. “Silicon Valley is coming,” he said. “When I go to Silicon Valley… They all want to eat our lunch. Every single one of them is going to try.”
By 2019 we know it’s not just Silicon Valley who’s coming after the ‘lunch’ of traditional financial institutions. Nobody knows that better than the founder of Alibaba, Jack Ma. He started his technology company Alibaba, and as we saw above, they created Yu’E Bao which became the world's largest Money Market Fund.
Jack Ma coined the term ‘TechFin’. While modern FinTech saw startups competing with traditional financial institutions, TechFin will see companies like Google, Amazon, Apple, and Alibaba competing with banks.
We knew that FinTech would improve the technology of the financial system. But TechFin will rebuild the entire system with new technology. Citigroup put the new fear succinctly in their 2018 report The Bank Of The Future, “When bankers worry about the future, the fear is BigTech, not FinTech.”
Bankers may be worried about BigTech, but the founder and executive chairman of the World Economic Forum, Klaus Schwab, is predicting something that could have far more impact: a 4th industrial revolution powered by artificial intelligence and hyper-scalability.
What will that revolution look like? Former Ceo of Deutsche Bank, John Cryan, predicted, “In our bank we have people doing work like robots. Tomorrow we will have robots behaving like people.” However, we aren’t as good at predicting the impact of innovations as we often believe. As Amara’s law states: We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.
In 1867 when the transatlantic cable was built, nobody could have predicted that it would lead to credit cards, mobile money, and Bitcoin. Whatever the future of FinTech or TechFin brings, it’s sure to rise beyond even the most creative imaginations. And civilisation is going to ascend with it.