The Fintech Revolution
The relationship between technology and financial companies is changing at a rapid pace.
Finance companies have always used technology in their businesses. But now the evolutions made possible by the internet and fintech – or financial technology – are changing the way people interact with money in their daily lives. It affects how they buy products, pay bills, send money, and invest. New and innovative start-ups offer services that used to be done by banks, insurance companies, and financial management groups.
1.1 What is Fintech?
In its broadest sense, the definition of FinTech (financial technology) is the use of technology as it applies to the financial sector. This includes areas such as payments, insurance, investment management, deposits and lending, capital raising, and market provisioning. 1 Finance companies have always used technology to make their businesses faster, safer, more productive, and more global. But now they are disrupting the entire nature of finance.
What is a Fintech Company? The rise of new and cutting-edge technology allowed small start-up companies to offer financial services outside of traditional banking. For the first time, consumers can bypass the bankers, brokers, and middlemen. Now, people can deal directly with businesses or other consumers.
For example, companies like PayPal send payments directly to merchants or between people. And peer-to-peer lending companies like Upstart brings borrowers and lenders together. Bitcoin and other cryptocurrencies store money digitally, simplifying international payments and bypassing governments as well as financial institutions. These are just a few examples how fintech leaves banks out of the equation.
Recently, the term fintech has expanded beyond financing, or areas like peer-to-peer lending, and now covers any service or product the financial sector once did. 2
1.2 Fintech History
Traditionally, banks, insurance firms, and trading companies have been among the leaders in using advanced technology. Breakthroughs started with the telegraph in 1838 and the transatlantic cable in 1866. These inventions vastly increased the speed of communication and allowed for the globalization of finance to begin.
Up until the 1950s transactions were done by phone, mail, or in person. Stocks were kept as a certificate on paper by a broker or by the client themself and could be mailed in to redeem the value of the share. In banking, a loan officer would usually judge a client’s credit risk based on how well he knew them as a person.
The 1950s brought IBM and computing. Diner’s Club and American Express introduced the first credit cards. The fax machine came out in 1964 letting people send documents in seconds instead of days or weeks.
Barclays Bank put out the first ATM in 1967 and revolutionised banking. Now people could get money from their account without speaking to a teller or even entering the bank. Suddenly, banking became 24/7. Some consider this the beginning of the second stage of the fintech revolution.3
Then finance companies began computerizing their systems. They moved from paper to digital. Payments no longer needed to be sent by cheque or bank draft. They could be electronically transferred through the Bankers Automated Clearing Services (BACS). International payments went through the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
In 1971 NASDAQ completely changed trading by introducing electronic trading. For the first time,computers handled the price feeds instead of live traders on the floor of the exchange. This significantly cut the cost and the time it took to fill an order.
Fintech advancements didn’t come problem-free. The crash of 1987 was probably caused by computerised trading systems. Investment firms set up programmes to automatically buy and sell at pre-set prices. The crash brought this weakness to light, so regulations and technology stepped in to correct it.
Starting in the mid 1990s, financial services topped all other industries in technical equipment buying. It continues to be the largest purchaser of fintech.4 It uses technology to reduce risk and comply with regulations, to streamline operations and of course, reduce costs and increase profits.
Banks were some of the first companies to offer their services online. Wells Fargo let customers check their accounts online starting in 1995. And 2005 saw the rise of banks that transacted business only online.
The most significant shift in the world of fintech was born from the wake of the 2008 crash. At that time, credit tightened. Many financial professionals lost their jobs and people started to distrust banks and financial institutions. It was the perfect storm for the revolution to begin.5
Tech savvy financial experts looked for ways to solve customer problems in a novel way. They found direct solutions that eliminated traditional financial service providers. For the first time, technology was used to displace banks and the fintech of today emerged.
Factors that contributed to the financial revolution include:
- Digitally skilled population
- Fast-growing international middle class
- Inefficient financial and capital markets
- Shortage of physical banking infrastructure, especially in third world countries
- People’s changing preferences and expectations
- Failing trust of established financial services
- New market opportunities
- Highly skilled, innovative engineering and technology graduates6
1866 transatlantic cable
1950 Diner’s Club Card
1951 Ferranti Mark 1 – first commercial computer
1958 American Express Card
1964 Fax machine
1966 Interbank Card (now MasterCard)
1966 Global Telex
1967 First handheld calculator
1967 Barclay’s ATM machine
1968 UK Banker’s Automated Clearing Services (BACS)
1970 US Clearing House Interbank Payments System (CHIPS)
1973 Society of Worldwide Interbank Financial Telecommunications (SWIFT)
1983 Online Banking Nottingham Building Society (NBS)
1980s Banks go from paper to computer
1987 Stock market crash, new regulations
1992 European Union
1995 Wells Fargo Bank Internet customer online account checking
2005 Online only banking
2008 Market crash, increased regulations
2010 eToro Social Trading Platform with Copy-Trading features
2012 JOBS Act in USA promotes alternative funding for start-ups
2014 Apple Pay
2015 Square IPO
2016 Uber uses self-driving cars in San Francisco
2017 Ongoing new fintech apps and programs…
Today fintech stands to disrupt traditional financial services by being direct, nimble, accessible, and customer oriented. For many users, the experience with fintech is easier and more fun. They feel more in control of their finances.
1.3 How does Fintech Work?
Fintech generally slips into places where traditional financial services are failing, or where customers are having a difficult time accessing services. Anywhere that tech companies can fix those issues and keep an adequate profit margin, they will.
The World Economic Forum says fintech is taking over traditional services in these areas:
- Deposits and Lending
- Investment Management
- Capital Raising
- Market Provisioning7
Payments: The internet and new technology make payments simple, fast and secure. Some companies have one click check-outs. It’s now possible to eliminate credit cards with direct bank payments to merchants. Or pay with your phone and avoid cash or credit cards altogether.
Customers can set up automatic bill payments. They now deposit cheques with a snap of a picture on their phone. You can use your phone to collect payments. Voice, face, or fingerprint recognition and geo-location ensure security.
Players in the field include:
- Mobile payments: ApplePay, PayPal, Square, Level Up, m-Pesa
- Integrated billing: Uber, Order Ahead, iBeacon
- Streamlined payments: MagicBand, bPay, Shipwallet
- Next-generation security: Nuance, biyo, XYverify8
Deposits and Lending: With fintech, you no longer need to keep money in a bank. You don’t have to borrow from a financial institution. Angel investing and peer-to-peer lending cut out the banks. They use computerised processes to assess creditworthiness. You can borrow money for personal or business needs from private lenders.
Finally, you can now store your funds in alternative locations from cryptocurrencies to trading platforms.
Players in the field include:
- Peer-to-peer lending: Funding Circle, Lending Club, CreditEase
- Credit assessment: Lenddo, Kabbage, eCredable
- Automated processing: OnDeck, Prosper, Zopa9
Investment Management: Fintech gives ordinary investors more control over their money. New trading platforms offer small traders investment choices formerly available only to high-networth investors. You’ll find reduced fees, easier access, and customer education. You have the freedom to manage your money without a broker and choose every investment.
Now you can invest with small amounts of money. You can choose computer assisted trading or social trading. This way you build on the expertise of others. With some platforms, you may move beyond stocks, bonds, mutual funds, and Exchange Traded Funds (ETFs). You are free to trade bitcoin, currencies, and other commodities.
Players in the field include:
- Automated management & advice: FutureAdvisor, Wealthfront, Motif Investing
- Social trading: eToro, Covestor, StockTwits
- Algorithmic trading: CoolTrade, Quantopian, QuantConnect10
Insurance: Big data now lets insurers set rates based on your actions, your credit score, perhaps even your social media profile. Wearable technology measures our health and fitness. The Internet of Things (IoT) brings smarter cheaper devices. And self-driving cars are set to disrupt the insurance industry.
These all impact your life and the cost you may pay for insurance. But fintech also levels the field. You can go online to compare rates and insurers as well as check reviews. You can shop like never before.
Players in the field include:
- Comparative shopping sites: BeatThatQuote, Money Supermarket, BizInsure
- Shared economy: Airbnb, Getaround, Uber
- Hedge funds and insurance-linked securities: Leadenhall Capital Partners, Triplepoint Capital11
Capital Raising: Fintech opened the world of business financing. Now start-ups and mid-sized companies can find capital outside banks, hedge funds, or affluent investors. And ordinary investors can pool funds with others to gain a share of the company. The best news? You don’t need lots of money to invest, so you can spread your money across several businesses.
Now you can invest in companies before they go public. Or you may donate to charitable ventures that may not bring a return.
Players in the field include:
- Crowd approved funding: Seedrs, Spacehive, iAngels, Kickstarter, Kiva
- Follow the expert: AngelList, SeedInvest
- Custom business funding: Abundance Investment, Crowdcube12
Market Provisioning: This fintech area uses smarter and faster machines for machine based trading. It’s the next step past algorithmic high speed trading. The machines respond to real-life events. Powerful computers analyzes huge chunks of information to suggest trades and trends. They read the news and social media to predict price changes and potentially gain a trading advantage. AI and machine learning run predictive modeling and are self-correcting. This can improve the accuracy, consistency, and speed of trading.
Players in the field include:
- Machine accessible data: Thomas Reuters, SemLab, SNTMNT
- Big data: SAS, Palantir, Hadoop
- Artificial intelligence & machine learning: Sentient Technologies, Rebellion Research, Ayasdi13
1.4 Why Fintech?
Fintech opens a wide range of financial opportunities for you. Here are 10 ways fintech can make your life better.
- Need a loan? Go to crowdfunding and present your case.
- Want a place with better returns than the bank? Loan your money to an individual or business in peer-to-peer lending.
- Need auto or life insurance? Check the aggregate sites to compare companies and policies.
- Want a different place to keep your money? Buy cryptocurrency or hold it in a trading platform.
- Want to invest, but need some help? Use social trading to give you choices and confidence.
- Want to invest in start-up businesses pre-IPO (Initial Public Offering)? Choose your company from a capital raising site.
- Want to invest in currency trading? Find a fintech trading platform that offers Contract for Difference (CFD) trading so you can buy fractions of lots.
- Want to know market trends? Check out big data driven algorithms to see what AI and machine learning suggests.
- Want a place to stay or to take a quick trip? Use Uber or Airbnb to bypass the large industries. Find something much nicer for less money.
- Need to send money to a friend or pay a bill? Skip the bank or cheque and use mobile payments.
Fintech is all around you. You probably use it every day to make your life easier and your tasks go faster. You may feel more comfortable and trust fintech more than you do traditional banking. It’s never been easier to control your money and manage your wealth than in the fintech revolution.
Investments and money management carry risks, even in fintech startups or large companies. Investing on trading platforms or in peer-to-peer lending means you can make or lose money. Cryptocurrencies and investments fluctuate and can be volatile. Please research and exercise care before you invest.
1.5 Why is Fintech Important?
One of the most exciting innovations in fintech is the marriage of trading and the social revolution. First, it’s fun to trade with a group of friends and enjoy the social experience. Second, new investors benefit from the wisdom of experienced traders. And finally, the transparency of seeing exactly how the trades play out lets you trade with confidence and trust.
The best platforms help you asses the risks of the trades. That way, you can match your risk tolerance with that of other traders. They also help you lock in profits or minimise losses with built in stop loss or profit taking points that you set based on your trading plan.
Small investors are welcome. At eToro you can start with just a few hundred dollars and build from there. This new technology lets you practice trading with a ‘virtual’ account. This gives you time to gain confidence as you practice trading the markets and discover different traders you might like to copy, all without risking real money.
With social trading you can check out the performance and history of other successful traders. Learn their investment style. Then you can allocate a portion of your funds to a variety of traders, copying their trades, exactly as they make them. Importantly, you are free to move your money at any time. You are never locked in.
Social trading takes advantage of the newest in fintech innovation. Now you can trade and build your wealth with the same freedom and tools as the ultra-wealthy. Fintech democratises trading. It levels the playing field. Check out eToro for the best in social trading.
Of course, all trading involves risk. Only risk capital you’re prepared to lose. Past performance does not guarantee future results.
1.6 The Fintech-CFD Connection
Fintech opened a new playing field for non-institutional investors. It has taken contracts previously only available to high net investors and created a system for the average investor to trade a broad range of securities. These high net investors had access to markets around the world so they could diversify their portfolios to reduce risk and seek better returns. Thus they had an advantage over lower net worth investors.
The instrument they used was based on futures contracts. It was the promise to buy a commodity or investment in the future at a price that was fixed today. Currently 92% of the world’s 500 largest corporations use this tool to manage their risks.
The instrument is called a Contract for Difference (CFD). This derivative acts very similar to a futures contract. It allows two parties to agree on a price for a certain stock or commodity at the opening of the contract. The actual settlement takes place sometime in the future. You can take a position that lets you to profit as the asset falls. A different position allows you profit from a rise. Let’s look at an example so you can see it how it works with prices either rising or falling.
Say Tony buys a CFD for ABC company at a price of £100. At some point in the future, ABC goes to £110. Tony cashes in his agreement and gains £10 per unit. Or Tony may sell an ABC contract for £100 expecting the price to fall. In the future, if the price falls to £90, Tony buys back the contract and pockets £10 on the drop.
CFDs are different than other instruments because they trade based on an underlying asset’s price, without actually owning the asset. With no leverage, a CFD holds no more market risk than buying stock in the company. Used this way, it looks and feels almost exactly like equity ownership. If the equity pays dividends, you’ll receive them as well. But there are some impressive advantages to using CFDs.
Higher Leverage: CFDs are often bought and sold on margin. You may be able to trade with a margin as low as 2%. That means your £2 can control £100 of equity. While this can be a good opportunity to make substantially more money than the actual capital you have invested, it also carries much higher risk, since losses are also leveraged.
eToro supports a ‘responsible trading’ policy. To help traders manage risk, they limit leverage for certain clients and equip them with many risk management tools. In addition, eToro does not allow high risk traders to be copied, thus maintaining an extra layer of protection for the social investors.
Smaller Lots: Since there’s no actual ownership of the asset by the trader, the asset may be traded in fractions, rather than purchasing the entire share or futures contract. Traditional hedge funds trade in 100,000 lots in currency which is probably more than the average investor could afford. But with CFDs, investor can trade in small fractions of a lot. So they need less money to enter trades. Because they can buy CFDs in fractions, traders have money left to more easily diversify across more assets.
Global Market Access from One Platform: Fintech brings multiple markets into one convenient place, including stocks, commodities, currencies, and more. You can trade stocks from other countries that typically could only be found on their own country’s exchange. Because you are only purchasing a contract based on the asset’s price, you have much more freedom to trade. It opens up trading in Bitcoin and other cryptocurrencies.
Finding all of these assets on one platform bypasses the hardships of dealing with securities laws of foreign countries, and legal statements in other languages. The instantaneous nature of transactions made on platforms such as eToro, gives its users the added benefit of high liquidity. They can easily and instantly buy or sell any CFD so they can quickly adjust to changes in the market.
No Day Trading Limits: Certain markets require minimum amounts of capital to day trade. When you are actually buying, selling, or writing options on assets, your broker may limit the number of daily trades within an account. The CFD market does not have these restrictions so traders can move their investments as frequently as they wish.
Avoid Shorting or Borrowing Rules: Certain markets prohibit shorting. That is, you contract to sell a security you don’t own. You do this because you think the asset will drop in price. Then you can buy it for less, fulfill your contract, and pocket the difference. Of course if the market goes up, you still must buy the asset to fulfill your contract. In that case, you lose money.
Several market crashes have been blamed on this practice, so now, many exchanges require traders to own the instrument before shorting or have a reserve margin to cover the risk. Both of these practices help reduce the risk of short trading. However, the CFD market uses a different instrument to trade. Since ownership of the underlying asset is not possible with CFDs, it avoids the short selling rule.
Low Fee Trading: CFD trading platforms are finding wide appeal with newer and younger investors because it can be traded around the world. The increase in CFD users and the nature of the instrument means that the cost of trades can be significantly lower than that of traditional brokerage firms. Instead of high commissions per executed trade, CFDs are nearly cost free.
The platform makes a profit from the spread. Buyers must open the trade at the ask price and sell at the bid price. The spread is the difference between the two prices. Leveraged trades may incur an overnight fee for trades held past the closing bell. The size of the overnight fee depends on the amount of leverage you choose to use.
Because the contract is between the user and the company running the platform, contracts can be sold instantly, at any time, even when opening a short position. This privilege is sometimes not available to traditional traders due to costs.
Recently, the Financial Instruments Directive (MiFID) extended regulation of the European financial services to CFDs for the first time. The increased oversight of these platforms gives their clients extra confidence when trading. eToro, for example, holds both a European MiFID license (CySEC), and a British FCA license, therefore certifying they have the highest levels of compliance and risk management.
This is a marketing communication and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without having regard to any particular investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared utilizing publicly-available information.
eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
1‘The Future of Financial Services. How disruptive innovations are reshaping the way financial
services are structured, provisioned and consumed’, An Industry Project of the Financial Services Community Prepared in collaboration with Deloitte, June 2015, pg.12 http://www3.weforum.org/docs/WEF_The_future__of_financial_services.pdf
2 Arner, Douglas W.; Barberis, Janos Nathan; Buckley, Ross P. ‘The Evolution of Fintech: A New Post-Crisis Paradigm?’, UK report published Oct 1, 2016, pg.6 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2676553
3 Arner, ‘Evolution’, pg. 10
4 Arner, ‘Evolution’, pg. 6
5 ibid, pg. 17
6 ibid, pg. 23
7 See Note 1.
8‘Future’, pg. 30
9‘Future’, pg. 87
10 ibid, pg. 127
11‘Future’, pg. 60
12 ibid, pg. 113
13 ibid, pg. 154