# Why change in banking is accelerating 
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2019-04-01
Category: BANKING
Category URL: https://financedigest.com/category/banking
Meta Title: The Evolution of Fintech: From Pantelegraphs to iPhones
Meta Description: Discover the fascinating history of fintech, from the pantelegraph to modern-day innovations. Explore the shift in consumer engagement and technology
URL: https://financedigest.com/why-change-in-banking-is-acceleratinghtml

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By **Renier Lemmens,** Visiting Professor of Fintech and Innovation and Senior Advisor on Digital Education at The London Institute of Banking & Finance

Fintech has been around for a long time. Few will remember the pantelegraph, invented in 1860. A precursor of the fax and used predominantly to verify signatures over telegraph cables, the pantelegraph took almost two minutes to transmit a sheet of 25 handwritten words. Or the early days of the Federal Reserve Wire Network, which relied on a variant of Morse code from 1918 until the late 1970s. (The Fedwire Funds Service is now the [Fed banks’](https://www.financedigest.com/swiss-national-bank-makes-another-large-draw-on-fed-swap-line.html "Swiss National Bank makes another large draw on Fed swap line") real-time gross settlement system.)

Closer to home, Barclays installed the first ATM at its Enfield branch in North London in 1967. Money was withdrawn with a specially produced cashiers’ check, later to be complemented with a four digit PIN-code – setting a trend for [decades to come](https://www.financedigest.com/global-hid-ballast-market-expected-to-decline-with-a-cagr-of-9-8-in-the-coming-decade.html "Global HID Ballast Market Expected to Decline with a CAGR of -9.8% in the Coming Decade"). Credit cards, debit cards, [online trading](https://www.financedigest.com/online-trading-and-stock-markets.html "Online Trading and Stock Markets"), online banking, PayPal – are all examples of fintech innovations that were launched long before the term ‘fintech’ was coined. In those days – like today – customers did not really care about the [technology that enabled the innovation](https://www.financedigest.com/u-s-lighting-products-market-recent-strategies-trends-technology-innovation-analysis-application-by-tmr.html "U.S. Lighting Products Market: Recent Strategies, Trends, Technology Innovation, Analysis Application by TMR"). IBM, Cobol, AS400, or AWS – they were just part of an alphabet soup. Incidentally, even today – more than 50 years after its first standard – an estimated $3tn worth of transactions is transacted ever day on systems that use the Cobol computer programming language.

Yet, despite the fact that most consumers (rightly) do not care how an ATM works, or what programming languages banks use, and despite the fact that financial [services is a huge and highly regulated sector](https://www.financedigest.com/protecting-the-uk-financial-services-sector-from-cyberattacks-now-and-in-2023.html "Protecting the UK financial services sector from cyberattacks now and in 2023") that is usually slow to change – something has shifted over the last five years or so. According to Statista, there were [around 12,000 fintech start-ups globally at the start of 2019, of which around 5,700 were in the US and around 3,500 were in Europe](https://www.financedigest.com/after-fleeing-war-ukrainians-struggle-to-settle-around-europe.html "After fleeing war, Ukrainians struggle to settle around Europe"). Deloitte estimates that [around US$26bn was invested](https://www.financedigest.com/ford-to-invest-around-300-million-to-build-electric-car-parts-at-uk-plant.html "Ford to invest around 0 million to build electric car parts at UK plant") in fintechs in 2017, up from US$0.3bn in 2012. More importantly, consumers are engaging with the new technology, which may explain why most of the funding goes to [payments and deposit and lending technologies](https://www.financedigest.com/why-anti-spoofing-fingerprint-technology-is-essential-for-the-continued-growth-of-digital-payments.html "Why anti-spoofing fingerprint technology is essential for the continued growth of digital payments"). What is it that has triggered the change?

**A rocket in your pocket**

[Apple’s iPhone](https://www.financedigest.com/apple-falls-on-fears-of-slowing-iphone-14-demand.html "Apple falls on fears of slowing iPhone 14 demand"), launched in 2007, was not the first smartphone. Nokia, for example, had already launched the Symbian. The iPhone was, however, a step-change in mobile computing. (Nasa points out that an iPhone 5 with 16 gigabytes of memory has about 240,000 times the memory of a Voyager spacecraft.) The iPhone revolutionised not only mobile processing power and the form factor, but also user interaction with handsets. It is, arguably, the reason why, in 2012, 39 per cent of UK adults had a smartphone and now 78 per cent do. It is probably also part of the reason why data access has become cheaper. Though the average mobile [data consumption in the UK has increased five-fold since](https://www.financedigest.com/average-annual-uk-grocery-bill-highest-since-at-least-2008-industry-data.html "Average annual UK grocery bill highest since at least 2008 -industry data") 2013 the weighted average cost has gone down by 11.5 per cent, according to Ofcom (2018 figures).

As that upsurge in use suggests, consumers are very engaged with their smartphones. The average Briton now checks a mobile phone every 12 minutes and is online for 24 hours a week, according to Ofcom. [\[1\]](#_ftn1) What is interesting in all of this for financial services companies is that the computing power, fast connectivity and ease of use of smartphones put a bank, an asset management company, an insurance company, or a lender all just a tap or a swipe away. Mobile bank logins in the UK are forecast to [top 2.8bn next year](https://www.financedigest.com/global-crypto-regulation-body-likely-in-next-year-top-official-says.html "Global crypto regulation body likely in next year, top official says"), compared to only 200 million branch visits. Branches still [play a useful role](https://www.financedigest.com/the-role-embedded-finance-systems-will-play-as-commerce-goes-increasingly-digital.html "The Role Embedded Finance Systems Will Play as Commerce Goes Increasingly Digital") for some segments, but the direction of travel is clear. People prefer the ease, immediacy and personalisation of using their phone for most financial services. Unsurprisingly, most retail fintechs have a mobile-only presence. In that way, they can avoid the cost of running branches but still target customers right across the country.

**Know your customer**

Using online data, of course, also allows fintechs to segment their [customer base in ways that old-style bank](https://www.financedigest.com/strong-customer-authentication-must-be-adopted-to-make-open-banking-a-success.html "Strong Customer Authentication must be adopted to make open banking a Success") branches never could. Large data [platforms like Google and Facebook have brought a seismic change to marketing](https://www.financedigest.com/cloud-communication-platform-market-2022-scope-of-current-and-future-industry-2030.html "Cloud Communication Platform Market 2022 | Scope of Current and Future Industry 2030"). It used to be said about traditional advertising that half of it was wasted – just that nobody knew which half. [Fintechs analysing mobile](https://www.financedigest.com/the-growth-of-mobile-fintech-and-the-impact-for-mobile-app-marketers.html "The growth of mobile fintech and the impact for mobile app marketers") data, in contrast, can pick off just about any segment they want – and leave the incumbents with the less profitable customers. That could have [major repercussions for incumbent banks](https://www.financedigest.com/banks-deploy-ai-3-major-technological-advances.html "Banks Deploy AI – 3 Major Technological Advances            ") that often rely on cross-subsidies – eg, overdraft charges paying for ‘free’ accounts.

**Hunt for yield**

The core of [retail banking](https://www.financedigest.com/the-power-of-digital-why-theres-still-life-in-the-traditional-retail-banks-yet.html "The power of digital: Why there’s still life in the traditional retail banks yet") is maturity transformation. Banks borrow short (deposits) and lend long (loans) and [manage the risk](https://www.financedigest.com/risk-management-redefined-navigating-post-covid-disruption.html "Risk Management redefined: navigating post-COVID disruption") that comes from the mis-match. The social utility of that is, of course, one of the reasons why large banks are rarely allowed to fail. Until the 1980s, banks also did very little else. Then, they started to build a suite of other financial products around being the place where people hold their [current account](https://www.financedigest.com/euro-zone-current-account-swings-back-to-a-surplus-in-june.html "Euro zone current account swings back to a surplus in June") – and to increasingly fund themselves in wholesale debt markets. By the end of 2006, according to the FCA, the ‘customer funding [gap’ in the UK that was filled](https://www.financedigest.com/analysis-energy-hungry-europe-cant-look-to-u-s-shale-to-fill-any-opec-gap.html "Analysis-Energy hungry Europe can’t look to U.S. shale to fill any OPEC gap") by short-term wholesale lending had reached £500bn.

When the wholesale debt markets froze, banks like RBS were, effectively, insolvent. Since the crisis, banks – and in particular systemically important banks – have been required to have much more [equity funding](https://www.financedigest.com/private-equity-funds-approach-italys-serie-a-to-explore-media-rights-deal-sources.html "Private equity funds approach Italy’s Serie A to explore media rights deal -sources"). That means their [costs higher](https://www.financedigest.com/uk-pub-operator-wetherspoons-loss-narrows-despite-higher-costs.html "UK pub operator Wetherspoon’s loss narrows despite higher costs") and, often, that they are lending less. However, the advent of ultra-low [interest rates](https://www.financedigest.com/london-stocks-slip-ahead-of-key-interest-rate-decisions.html "London stocks slip ahead of key interest rate decisions") and quantitative easing has led to an overall “hunt for yield” and made cheap capital for new ventures very widely available. (That was, in part, the aim of quantitative easing – that money should be driven out of ‘safe’ securities into riskier growth assets.) [Low interest rates](https://www.financedigest.com/russia-jobless-rate-stays-at-record-low-of-3-9-in-july.html "Russia jobless rate stays at record low of 3.9% in July") mean that a fintech with a good idea is very likely to be able to raise capital to build it out – and at scale.

**Time to market**

Gone are the [days that it took weeks](https://www.financedigest.com/transitioning-into-a-4-day-week.html "Transitioning into a 4 day week") or months to set up a company, order an expensive computer, organise accounting/HR/marketing systems, design a website etc. [Every support activity or system can now be insourced from the web in no time](https://www.financedigest.com/how-to-nail-your-banking-audition-every-time.html "How to nail your banking audition every time"). Any committed entrepreneur can have the rudiments of a [business set up in a matter of days, scaling with ease as cloud services – often open source and free – seemingly seamlessly keep pace with growing business needs](https://www.financedigest.com/pstn-isdn-switch-off-what-businesses-need-to-know.html "PSTN/ISDN switch-off: what businesses need to know "). And, of course, wide availability of these [cloud services](https://www.financedigest.com/tech-amigos-provides-unrivalled-aws-cloud-service-support-for-autorama-groups-leading-brand-vanarama-2.html "Tech Amigos provides unrivalled AWS cloud service support for Autorama Group’s leading brand, Vanarama") not only makes it much faster but also much cheaper to start a new company from scratch.

**Regulation – when ‘push’ creates shove**

While the burdens of regulation and compliance have become more onerous – especially for large institutions, we should not forget how much innovation has been enabled. Take e-money as a case in point. It has spawned hundreds of innovative offerings. Post-crisis, European regulators also seem very minded to encourage more competition.

The EU’s Revised Payment Services Directive (PSD2), and its UK equivalent [Open Banking](https://www.financedigest.com/why-open-banking-is-safe.html "WHY OPEN BANKING IS SAFE?"), for example, require banks to set up interfaces that enable customers to share their account data with other firms. PSD2 removes the monopoly banks once held over their [customers’ account](https://www.financedigest.com/covid-19-has-made-your-customer-accounts-more-valuable.html "Covid-19 has made your customer accounts more valuable") information. It means that third-party providers can start to use that data to offer new services that undermine existing market structures. For example, [consumers can now make ‘push’ payments direct from their account](https://www.financedigest.com/what-successful-accounting-looks-like-in-the-age-of-the-consumer.html "What successful accounting looks like in the age of the consumer") – goodbye debit and credit cards if consumers decide that ‘push’ is more convenient than the existing four-party model.

These [forces have come together to create](https://www.financedigest.com/european-privacy-watchdog-creates-chatgpt-task-force.html "European privacy watchdog creates ChatGPT task force") a wave of new banking start-ups. Currently, there are at least 100 [challenger banks](https://www.financedigest.com/the-rise-of-challenger-banks.html "challenger banks") active around the world. Not all of them are banks in the formal sense, in that they may not have banking licenses. But to their retail or business customer, that does not matter: they [provide the financial services](https://www.financedigest.com/unprecedented-constructive-disruption-to-drive-the-sleep-service-providers-market.html "Unprecedented, constructive disruption to drive the Sleep Service Providers Market") they need. The factors described above enable them to scale fast, without the encumbrance of legacy systems and other infrastructure. So fast, that many incumbent banks are now [opting](https://www.financedigest.com/central-banks-opt-for-shock-and-awe-to-tame-inflation.html "Central banks opt for shock and awe to tame inflation") to create their own ‘internal’ challenger banks from scratch.

[\[1\]](#_ftnref1) [https://www.theguardian.com/media/2018/aug/02/fifth-of-britons-feel-stressed-if-they-cant-access-internet-ofcom-report](https://www.theguardian.com/media/2018/aug/02/fifth-of-britons-feel-stressed-if-they-cant-access-internet-ofcom-report)


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