It is interesting how the FinTech world has developed over the past decade. My first memory of any company that would fit the FinTech world stems way back to March 30, 2005. On that memorable evening, one of the funders of a technology start-up talked about a vision where platforms could connect people who have money with people who need money and have the risk managed by software. It would be like an eBay for money, he said, and the people would trust each other knowing that the system polices the activities. That person was Richard Duval, co-founder of Zopa. Zopa has now grown into a megabrand in Britain, enabling 1000s to save and borrow through a peer-to-peer money network. Incredible.
Back in 2005, no one understood what the hell Richard was talking about however. Things like cloud computing were just being discussed, and rejected by most financial institutions as too risky. After all, if third parties look after core systems and data, it would bring down the financial system. Mind you, they didn’t need third parties to do that. They did it themselves. Another key date: September 14, 2008. It was a Sunday, and I was flying into Vienna, Austria with 1000s of other people, for the biggest banking tradeshow SIBOS, run by SWIFT. 1000s flew out the next day when they heard the news of Lehman Brothers collapse; the crisis in Washington Mutual and Royal Bank of Scotland, amongst others; and the downfall of the financial system as we knew it.
In retrospect, we all know that the crash was caused by calculated risks being taken by investment markets using instruments that had no connection to reality. Collateralised Debt Obligations and Mortgage-Backed Securities were derivatives that seemed to wrap up buckets of debt nicely; unfortunately, it then dumped them into other buckets of debt, and caused a global debt crisis.
However, out of the ashes of the financial system came a new drive and vision from young millennials who could code. They hated the big banks, and wanted to redefine finance through software and servers. Just as Zopa had the idea of connecting savers and borrowers through code peer-to-peer, 1000s of other bright young things had the same ideas.
This led to the first wave of FinTech and the explosion of peer-to-peer everything from peer-to-peer money (bitcoin) to peer-to-peer payments (Venmo) to peer-to-peer insurance (Freindsurance) to peer-to-peer investing (eToro). From the combination of open sourced structures allowing start-ups to bootstrap on cloud computers and release APIs into the wild, a whole new world of finance and technology emerged, FinTech for short.
Initially, in the first wave of FinTech, much of the development was directed at disrupting the banking system through these peer-to-peer models. Then some moved into new areas from financial inclusion through mobile wallets in African nations to crowdfunding projects and ideas across the developed world. All of these proved to be radical and new. For example, from the seeds of M-PESA in Kenya in 2007 sprang mobile wallets that allow anyone in almost any country of Africa to send and receive money instantaneously electronically. Kickstarter and Indiegogo created models of allowing start-ups to get funded by their customers, so they no longer need to get a bank to have a loan to find their markets; their markets find them. And other new ideas were emerging, especially in China where Alibaba, Tencent and Baidu have all been developing radical new ideas with technology. More on that later.
Meantime, back to the first FinTech wave. In my own mind, the first major wave of FinTech started around 2010 and lasted until 2015. During the first five years of this decade, we saw huge investment in start-ups that could attack the financial structures with code, and specially leveraging apps, APIs and analytics. Big Data, Cloud Computing, mobile networks and social media all conspired to create new structures, and the banks were subsumed by these developments. Many banks got the idea of mobile banking apps, but they hadn’t understood the gamut of technologies affecting their business structures which left a soft underbelly for kids with code to attack.
And attack they did. Unicorns emerged with many removing friction from the financial networks: Stripe, Square, Klarna, Adyen and more, were all making successful bids for the FinTech crowns, and many struggled to keep up.
Then the bank decided that much of what these guys were doing was actually helping rather than disrupting their business. Removing friction from financial processes with code is a good thing. So, banks started to collaborate, co-create, invest and partner in many of these start-ups, triggering FinTech 2.0.
FinTech started to rock and roll around 2015, and some of the big banks moved from innovation theatre to collaborating with FinTech. I saw it as moving from the great unbundling of banks (FinTech 1.0) to the great rebundling of FinTech (FinTech 2.0) by the banks. In this process however, something started to happen that moved us from a big bucket of FinTech to a much more granular strata of different markets for different things: RegTech, WealthTech, InsurTech, Blockchain and Distributed Ledger Technology, Artificial Intelligence and Machine Learning and more came into play; and it was no longer integrating finance and technology, but merging them into something completely new.
During this period however, the quiet developments emerging from the Chinese internet giants blossomed and bloomed into the financial stratospheres. Ant Financial, Alibaba’s payments subsidiary, suddenly emerged as the 10th largest financial firm in the world by market capitalisation, and everyone seemed to start talking about Alipay and WeChat Pay.
A completely different FinTech world had also emerged out of Asia, and many suddenly woke up to the fact that they hadn’t even been looking. By way of example, in 2018, Alipay and WeChat Pay EACH processed more dollars in a month through their apps than PayPal processes in a year. China has seen an explosion of online mobile payments, rising from $5 trillion in 2016 to $15.5 trillion in 2017 and predicted to boom to $45 trillion in 2020. Compare this to the USA and you see a quiet revolution, and it is not just about Alibaba and Tencent, but the whole FinTech scene emerging from Asia, Africa and South America. This FinTech scene began without the blinkers of big bank thinking, and has created wholly integrated internet finance on mobile apps, or superapps, seamlessly.
Think of Amazon acquiring PayPal and Facebook, and you get the idea. An internet scene spawning giants like Alibaba and Tencent, but also Baidu, JD.com and Ping An. This is why I rarely refer to GAFA – Google, Amazon, Facebook and Apple – but prefer the acronym FATBAG – Facebook, Amazon, Tencent, Baidu, Alibaba and Google. FATBAGs, companies born on the internet, will change the world of everything including banking, payments, finance and FinTech.
This is why I see FinTech 3.0 as being a hybrid model that brings together many players across ecosystems and marketplaces on the FATBAG platforms. I see FinTech unicorns collaborating to offer full services on those platforms. Already we see the Revolut’s working with Xero, Sage, Freshbooks and Quaderno; Monzo partnering with TransferWise; Metro Bank working with Zopa; Wirecard working with Alipay, Ingenico and many others; whilst Starling Bank is working with PensionBee, Wealthsimple, Habito and Kasko. These are the foundations of FinTech 3.0: collaborative marketplaces of apps, APIs and analytics led by one, partnering with many on platforms.
Banks should feel duly threatened by FinTech 3.0 because they are control freaks by nature, who partner with no one unless they have to. For a big bank to about face and start to become an open market collaborator is a huge cultural change and, in the meantime, the challenger banks are actively building their ecosystems. FinTech 3.0, which starts around now and will play through 2025, will be the most interesting of these three phases as yes, it truly does disrupt banking.
As goes the classic line from Star Trek: It’s banking Jim, but not as we know it.
This article first appeared as the opening to this year's FinTech50 list.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...