EconomyAre we in the third wave of fintech?

Are we in the third wave of fintech?

(Expansion) – The combination of technology and finance is often thought of as something entirely new; however, the history of the financial industry is one that goes hand in hand with technology. Since the mid-nineteenth century the world began to witness the scope of this pair.

Fintechs are currently perhaps the main emblem of technology and finance. It is not for less. Although they are commonly associated as innovators for using technology in the financial industry, the truth is that they are innovators not because of the use of technology per se, but because this allowed them to financially include populations that have been excluded by traditional banking.

As strange as it may seem, the history of the technology and finance duo dates back to 1858, when the first transatlantic telegraph cable began to operate, connecting two continents in near real time for the first time and offering investors and entrepreneurs from Europe and the United States the possibility to manage their financial assets from different latitudes. This has led academics, such as Dr. Douglas Arner of the University of Hong Kong, to speak of this period as the first era of financial globalization and even one of ‘proto fintech’, that is, before fintech.

Advances in those times were slow and undemocratic. And perhaps that is why what we see today in the financial sector is so surprising, because the processes of technological development and integration are advancing by leaps and bounds. In the current fintech tidal wave, in fact, there is talk that we are on the eve of a third wave that will completely change the way the financial industry works globally.

How did we get to this point?

What we understand today as fintech is specifically the close relationship between the financial sector and information technology. The first wave refers to a moment of disruption in the industry. A point at which small companies began to design innovative products and services, embedded in digital processes, which opened up the range of possibilities for users who had historically been left out of the banked population. Very specifically, after the banking collapse of 2008 and a lack of confidence in traditional institutions.

The second wave of fintech had to do with the reaction of traditional banks to the emergence of young companies that wanted to break with everything established. At that time -which is technically where we still find ourselves-, the consolidated financial institutions have adopted state-of-the-art technological models and have modified their processes and products to compete with the fintech offer.

What would a third fintech wave look like?

According to Jeff Gido, Global Director of the Financial Technology Sector at Goldman Sachs, fintech companies are about to enter a third wave. In it, there will supposedly be a collaboration between companies in the industry. In other words, there will be a joint understanding of fintech and traditional banking to create more and better products taking advantage of what both sides of the coin can offer: on the one hand, creativity, technology and novelty; on the other, institutional solidity and massive reach of users and clients.

How plausible is this? Although it is true that there is increasing collaboration within the aggregate sector -for example, models such as Open Banking that advocate a transparent flow of information between financial institutions, regardless of whether they are traditional or fintech-, they are few. the cases in which expansive alliances are created to imagine that this third wave will be a reality in the short term, particularly in countries like Mexico and those of Latin America.

What is missing to consolidate it?

To a large extent, a third fintech wave, such as the one proposed by Gido, is far from the industry because regulation is still a challenge for the sector; again, specifically in Mexico and Latam. The Open Banking secondary rules package has not finished consolidating; For this reason, the infrastructure and legislation conditions do not yet exist for the application programming interfaces of all financial institutions to operate as a whole and adequately handle transactional and aggregated data.

In Mexico, the authorization of fintech operations has been given slowly and, therefore, the sector cannot have accelerated growth or reach its maximum potential. Both are necessary conditions for there to be a collaboration between fintech and banking for mutual benefit in the long term.

Progress has been considerable, but there are still pending challenges that must be addressed before starting to think about a third fintech wave, which will not only catapult the financial industry, but will also greatly benefit end users.

Editor’s Note: Nick Grassi is Co-CEO of Finerio Connect. Follow him on . The opinions published in this column belong exclusively to the author.

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