The purpose of this paper is to examine the nature of the new financial technology (FinTech) phenomena that has had such a significant impact on financial markets in recent years. A wide range of new competitive digital products and services launched through new online platforms have emerged challenging income incumbent institutions and traditional market sectors. This has led to a degree of immediate disruption to legacy systems and business models with even further disruption threatened. This promises to bring substantial benefit and advantage although a number of significant areas of concern arise. This paper attempts to balance the promise and threat and draw some provisional conclusions with regard to the possible growth and direction of this exciting new marketplace. This is nevertheless a new and fast changing area of development with this only being an opening preparatory and exploratory study at this stage.

 

Banking and financial markets have been subject to significant change in recent decades. Markets have benefited from substantial advances in all forms of technological operation including computer hardware and software capability, massive downsizing in circuitry and processors, telecommunications speed and efficiency, mobile access, in particular, through mobile telephony, tablets and other hand-held devices and wearables, and substantial reductions in manufacturing and service costs.

 

All of this has been accompanied by parallel deregulatory processes in many market sectors including banking, securities and insurance as well as telecommunications and media services. Deregulation has substantially increased capital and investment flows in banking and financial markets which has, in turn, increased liquidity and reduced borrowing and funding costs significantly.

 

International financial markets are nevertheless also still dealing with the significant costs and impacts of the global financial crisis beginning in 2007-2008. Substantial recent advances in financial technology and FinTech service and product models have then created important possible opportunities for growth with increased efficiency and earnings in the aftermath of the crisis although this has also created significant new threats especially in terms of market and counterparty fragmentation and consequent regulatory and supervisory dislocation, disconnection, division, depletion and distraction as well as a resource demand and potential skills deficit.

 

FinTech has emerged as a powerful new market force as a result of the coming together of a number of disconnected trends. Significant advances have occurred in the areas of computer and digital technology, the Internet and mobile telecommunications as well as economics and finance which have transformed traditional areas of study and created important potential new business structures and operations. The Internet, or world wide web (www),[1] specifically has emerged from two earlier phases of the static Net 1 to the interactive Net 2 with the current phase constituting the beginning of Net 3, or the Value Net or Value Web, and the full realisation of the potential to digitalise and monetise all online banking and financial and other products and services.[2] This is expected to be followed by Net 4, with the semantic or machine Net,[3] and then the immersive or sensory Net 5.[4] All of this can be considered to be associated with the emergence of the digitalisation, mobilisation, disintermediation, personalisation and democratisation of financial services activities and functions. All industries will have to become aware of the possibilities of disruptive technology replacing existing industrial business structures, products and services.[5] Law and regulation have been sensitive to these changes although slow to respond to date with no meaningful coherent programme constructed to date.

 

The purpose of this paper is to examine the meaning and nature of FinTech and other associated terms including regulatory technology (‘RegTech’), incubators, accelerators and catapults, law technology (‘LawTech’), electronic banking and finance, digital currencies and the digital economy. Market size and location studies are referred to. The FinTech market is explained in terms of its various sub-sectors and components. The specific technology underlying distributed ledgers and some of the most recent developments in digital currencies are also considered. Relative advantages and disadvantages of this new exciting market area are noted with a provisional set of comments and conclusions drawn on its current and potential future value and direction. It has to be stressed that these can only be considered to be pre-emptive and exploratory observations at this stage in light of the new and fast changing nature of the subject matters covered.

 

[1] The Internet forms the underlying network infrastructure that connects computers with the world wide web constituting a specific language based on http (hypertext transfer) protocol that allows the sharing of information in a common format. See, for example, Tim Berners-Lee, Weaving the Web: The Original Design and Ultimate Destiny of the World Wide Web by its inventor (Harper New York 1999).

[2] Skinner describes the Value Net in terms of financial markets having moved from paper-based localised systems to online digital models that allow the transfer of value in real time at almost zero cost. See, for example, Chris Skinner, ValueWeb: How fintech firms are using mobile and blockchain technologies to create the Internet of Value (2016).

[3] This is also referred to as the Internet of Things (IoT) or internet of objects (IoO). The term was first referred to by Kevin Ashton to refer to inter-connected devices in 1999. Alex Wood, ‘The internet of things is revolutionising our lives, but standards are a must’ The Guardian (31 March 2015). Berners-Lee has referred to Web 3.0 as the semantic web, or Linked Data, which involves the development of common data formats and exchange protocols to allow data transfer between computers and systems. This is included with Net 4.0 and the machine net for the purposes of this paper. Tim Berners-Lee, James Hendler and Ora Lassila, ‘The Semantic Web’ Scientific American Magazine [17 May 2001].

[4] This refers to a further highly personalised stage were people effectively live inside the Internet. Skinner refers to this as with 4.0 and predicts that it will arrive around 2015. Skinner (n 2).

[5] ‘Media groups face up to how tech groups now call the shots’ Financial Times (14 April 2016).