The fintech relationship enters its fifth epoch

Financial services are synonymous with technology, to the point where FinTech is a widely accepted truncation in many discussions. The nature of FinTech has evolved over the last forty years, and is now moving into its fifth distinct phase. It’s worth looking at where we’ve been and talking about how it informs where we are going.

The relationship between financial services and the technology sector is exceptionally close. It could be argued that much of the success of technology over the last twenty years is down to the support and resources that financial services offered from the mid-1980s onwards. It is certainly difficult to argue with the benefits that the financial services have enjoyed as a result of its close relationship with technology.

As we move into the next phase of development, it’s possible to see five distinct phases in the relationship.

Phase one: academic in a suit and tie

Personal computers began to make their presence felt in the mid-eighties, and the banking industry was quicker than most to spot their potential. Traders embraced rudimentary spreadsheet systems to help them understand and start to anticipate market moves. As individuals invested in Macintosh IIs, Sinclair XLs and Nimbus PC-186s, they began to get a sense of what was possible, creating a well of knowledge that the technology industry has drawn from ever since.

Meanwhile, financial institutions invested heavily in high-end mainframe computers to manage activities, using their resources to counter the threat of what the competition was doing down the road. This was the catalyst for the technological arms race that has moved the financial services forward ever since.

The simultaneously individual and institutional approach has framed the development of FinTech ever since.

Phase two: In-house development

What followed was a period of in-team and in-house development, and businesses across the financial services strove to gain competitive advantage by developing platforms that helped them eliminate repetitive tasks and operate efficiently.

Often these platforms were developed for specific teams and activities and didn’t have the flexibility to be adopted by colleagues in other departments, let alone on different floors or in entirely different offices. They were also rarely designed to support reporting across a business let alone for scrutiny from external regulators.

But the financial services were still leading the way in technology adoption and a generation of tech-savvy senior leaders began to emerge that understood what should be possible.

Phase three: Silos

The challenge was that working on an individual department level reinforced the silos within a business, reducing cross-selling opportunities and making accurate reporting notoriously difficult. By the late nineties, the financial services were proclaiming that straight-through processing (STP) was a goal to focus on, rather than something that happened automatically.

STP was the concept that information on an overall client and an individual trade could be input onto a system once and would then be able to make its way seamlessly through all the hoops that a trade had to pass through without having to be rekeyed or any other form of manual intervention. Today it sounds like common sense, but twenty years ago there were conferences and detailed white-papers devoted to discussing whether STP was possible or even desirable.

One of the reasons STP was so elusive was that in many cases all of the different departments, offices and businesses had developed systems independently on a variety of in-house platforms using data from a myriad of spreadsheets and a mish-mash of plug-ins. Finding ways to ensure that apples were compared to apples and pears to pears meant that credible reporting on business performance at any level of detail was incredibly difficult.

Problems also developed when businesses devoted significant amounts of time, expertise and resources to deliver systems that were not fit for purpose or were already superseded by what a competitor had achieved. Accompanying this was the risk that the people that knew how a system worked would move on from the business.

Thankfully competitive pressure kept moving development forward.

Phase four: Outsourcing and APIs

So, what we have had over the last few years in the financial services sector is financial institutions no longer employing vast internal IT departments. The efficiency of outsourcing has been recognised, and outsourced FinTech companies have got better at understanding the difference between what a client says they need and what they actually need which has reduced the risk of clients getting stuck with inflexible platforms that don’t respond to fast changing economic environments. This has enabled the financial services to focus on the core business of providing financial services.

As a result, the last decade has seen technology move increasing out of the institutions. It has become far more adaptable and able to help the financial services respond to opportunities as they arise. Modular platforms have enabled institutions to buy-in what they need, when they need it, without every platform having to be rebuilt from the ground up every time someone has a good idea.

With numbers and data more likely to be coming from a single version of the truth, reporting has also become more adaptive, helping investors enhance their decision making and regulators protect investors.

Phase five: Widening the net

This creates an opportunity for the tech companies that have been focused on supporting wholesale and retail financial institutions to turn their attentions to other parts of the financial services. Over the next few years related sectors that were not as quick to embrace technology, such as insurance and reinsurance, will start to benefit from the enhancements.

Meanwhile, the firm relationships between the financial services and technology sector will continue to yield results. FinTech is already offering responses to new technologies such as blockchain, using them to enhance efficiency, increase transparency and reduce the time between a trade being placed and processed. Swift, which has been providing secure financial messaging services globally for around half a century, recently updated its messaging standards to reduce settlement times and enhance transparency for correspondent banks.

They will also be a need to come up with a more consistent response to cryptocurrencies, which have the potential to create a significant change in the way that the financial services operate and the way that people interact with financial institutions generally. This will of course be dependent on governments and regulators finding a way to accommodate the crypto sector and the crypto sector accepting the need for some form of regulation that doesn’t stymie its flexibility, creativity and ability to support the under-banked.

Ultimately, the relationship between the financial services and technology is likely to continue to be close, because there is never an end point where every challenge is overcome and every innovation solved. There will always be a new opportunity and FinTech will continue to thrive.

About Marco Quacken

Marco has a passion for business development that helps projects succeed and businesses flourish. With a global network of contacts, he brings teams together, matching expertise to requirements and implementing strategies that help good ideas grow into sustainable businesses. He has experience across a range of sectors including finance, real estate, technology, advertisement, automotive, consumer goods, energy, retail, sports and telecommunications.