Join Prof. Vivienne Lawack as she delves into the transformative world of fintech, dissecting its impact on the financial sector, and unravelling the enigmatic forces behind this digital revolution in finance.
Since the global financial crisis, the world of financial services and products has undergone a remarkable transformation. We now witness the widespread use of crypto assets, digital assets, automated financial advice (robo-advice), and peer-to-peer platforms that act as alternatives to banks for facilitating finance between lenders and borrowers.
Money itself has evolved beyond physical coins and physical currencies issued by central banks.
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All these developments fall under the umbrella of financial technology. Fintech broadly denotes the application of technology to finance. It has been hailed as the “hottest topic in finance today.”
Between 2010 and 2019, the global fintech sector witnessed a significant surge in investments, totalling over US$165.5 billion. According to a recent report by the Boston Consulting Group, annual fintech revenues are projected to reach $1.5 trillion by 2030.
Despite the immense potential of and growing interest in fintech, its precise meaning and scope remain grey areas, even for regulators. However, there are some essential points to consider for a better understanding of this phenomenon.
When defining fintech, it is first important to note that not all forms of application of technology in finance should be considered fintech in a strict sense. There has been a long history of the application of technology to finance, dating back over 150 years.
In the 19th century, telegraphic networks were used to conduct transactions, credit cards were developed in 1950, and ATMs were introduced in 1967. Additionally, as digital technologies became more prevalent, online and mobile banking emerged, making it easier for users to access financial services remotely.
However, the current era of technological innovation in the financial sector that exists under the umbrella of fintech is distinct from previous periods. The interest of policymakers and regulators lies not solely in the technology itself, but rather in the individuals or firms that are using technology and the potential implications, both positive and negative, that may arise from its application.
Fintech can generate two main implications. First, it can drive innovation by introducing new business models, financial products and services, market players, and even market infrastructures.
Second, these fintech innovations can disrupt or challenge every facet of the financial sector, including the regulatory landscape. In essence, an ideal definition or description of fintech, in whatever context – whether as a technology, an idea, a service, or even a company – should incorporate two key elements: innovation and disruption.
The Financial Stability Board’s definition of fintech as “technologically enabled financial innovation that could result in new business models, applications, processes, products, or services with an associated material effect on financial markets and institutions and the provision of financial services,” fairly accommodates these two elements.
The scope of fintech, on the other hand, can be understood by examining its environment, which consists of five main components. First, there are the fintech activities which encompass a range of unique financial products and services that fall under the umbrella of fintech. These include mobile money, digital banking, equity crowdfunding, peer-to-peer lending, and peer-to-peer invoice financing, to mention a few. Second, there are technologies that enable fintech. Technology serves as the backbone of fintech activities.
Some of the technologies that underpin fintech activities include blockchain, artificial intelligence, machine learning, application programming interfaces, internet of things, cloud computing, big data, cryptography, biometrics, mobile telephony, and internet technology.
Third, there are the fintech firms themselves. These can be divided into three groups: fintechs, technology financial companies (techfins), and incumbent financial institutions.
Fintechs are firms that identify gaps or inefficiencies in the services provided by incumbent financial institutions. They address these gaps or inefficiencies by developing solutions and offering them directly to customers and/or established financial institutions, or by positioning themselves for acquisition. Fintechs tend to be smaller in size, have a more focused scope, and are often nimbler in adapting to market trends and customer needs than traditional financial institutions.
Techfins, on the other hand, start with other business interests such as IT, telecommunications (Vodafone, Airtel, MTN), search engines (Google), e-commerce (Amazon, Alibaba), or social media services (Meta), and later leverage the data generated from those businesses to enter the financial services sector. They are also called big technology companies (bigtechs).
Incumbent financial institutions have, for their part, realized the need to digitally transform their services to consumers if they are to remain competitive in the new environment of digital financial services.
The fourth component of the fintech environment is the fintech business model. Fintech firms adopt various models to render their services. These models include the direct-to-customer model, where fintechs develop and offer services directly to financial consumers, and the marketplace or intermediary model, where fintechs create platforms that connect consumers with potential providers of financial services.
There is also the white-labeling model in which fintechs develop services, and traditional financial institutions rebrand and deliver them to consumers as their own. There is yet another model in which fintechs leverage the resources of traditional financial institutions, such as infrastructure or licenses, to offer services to their customers.
The final component of the fintech environment consists of the growth and development enablers of fintech. Some of the policy measures that facilitate fintech include regulatory sandboxes, open banking, innovation hubs, and innovation accelerators. In addition, fintech thrives in an environment of adequate financial and human capital and requires a sound legal and enforcement regime of data protection, cybersecurity, and measures against illicit financial flows.
It is important to note that the application of technology to finance extends beyond fintech. In addition to techFins/bigtechs, other key categories within the broader “technology in finance” paradigm include regulatory technology (regtech) and supervisory technology (suptech).
Regtech refers to the use of technology by regulated firms to manage regulatory requirements and ensure compliance, while suptech involves the use of technology by regulatory authorities to supervise regulated firms. Although both regtech and suptech have significant applications in the financial sector, they should not be considered sub-categories of fintech as they apply to other industries as well.
In conclusion, fintech has brought about remarkable changes in the financial landscape. While the definition of fintech may be challenging to pin down precisely, understanding its core elements (innovation and disruption) and the broader fintech environment can help shed light on this exciting and transformative phenomenon.
- Vivienne Lawack is the deputy vice chancellor: academic and professor in the mercantile and labour law department at the University of the Western Cape. Her research focuses on legal and regulatory frameworks in fintech, with a strong focus on payment systems, financial markets law, financial inclusion, and financial integrity.
