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THE BEGINNING OF A NEW ERA: FINANCIAL TECHNOLOGY IN EUROPE

THE BEGINNING OF A NEW ERA: FINANCIAL TECHNOLOGY IN EUROPE

Traditional Finance

Finance can be defined as “the process of raising funds or capital for any kind of expenditure” according to Encyclopedia Britannica, however, it is also essential to emphasize how the modern understanding of finance emerged to be able to comprehend the dynamics of the new rapidly growing sector across the globe, namely Financial Technology.

Even though the very first financial institutions can be traced back to the foundation of Medici Bank in Italy at the end of the 14th century, the major break between commercial and financial systems occurred with the organization of the Amsterdam Stock Exchange in 1608. Back then, the only financial product was the shares of the Dutch East India Company. However, it did not remain the last one.

With the dawn of merchant capitalism at the very beginning of the 17th century, a large amount of capital was needed for the expeditions that were sent by the English East India Company to the East Indies. Financing voyages separately with traditional merchant practices, however, was quite risky since the ships were being sent to very remote locations for long-distance trade. Hence, the company changed its method of finance to be able to spread the risks that the expeditions had and became a joint-stock company. In the year 1688, it was possible to trade in the English East India Company’s stocks on the London Exchange Market, which was also one of the most prominent features of new financial institutions of the modern era.

Meanwhile, the deposition and replacement of the rulers of England, Scotland, and Ireland, known as the Glorious Revolution, took place between November 1688 and May 1689, which led to establishing a new regime. Revolution in public finance came with the new English Government created by the Glorious Revolution, and the Bank of England was founded for the financial needs of the government during the war with France. To some scholars, the creation of the Bank of England in 1694 gave rise to the financial revolution, which led to the development of financial markets and banking. On the other hand, it should also be noted, finance without banks could lead, arguably, to stagnation in the long term and prevent the birth of capitalism and certain financial instruments. It can also be stated that a developed banking system is strictly required under financial capitalism. Having said that the finance is a way broader term than banking, given the fact that it involves numerous instruments.

In this regard, over centuries the state's urgent need for borrowings was supplied by financial institutions however, such institutions lacked the appropriate regulations to ensure sustainable growth because governments certainly overlooked the importance of such institutions for the economy. It is certain that; the Great Depression, which revealed financial fragility in the worst possible way from 1929 to 1939, led the countries to take precautionary bank regulation measures. 

With the experiences of the Great Depression in 1929 and the Great Recession in 2007, governments have realized that the finance sector was “too big to fail” and has vital consequences for the whole economy. Moreover, the Great Depression dramatically changed the financial history as states enhanced more watchful attitudes on financial institutions and the Financial Technology boom was one of the consequences of the digitalizing world, especially after the crisis between 2007-2009.

New Face of Finance: Financial Technology

As technology developed over the last two centuries more than anyone has ever expected, it had incredible impacts on almost every facet of our lives. It was also impossible for the finance sector to remain untouched by technology, which started with the electric telegraph system demonstrated by Samuel Morse in 1838. The first transatlantic cable providing infrastructure for financial globalization in 1866; the book named ‘The Economic Consequences of Power’ regarding the connections between technology and finance published by Keynes in 1920; Telex networks in the United States, Canada, Great Britain, Germany, and France, especially after the Second World War; the first auto teller machine (ATM) in 1967 or the foundation of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in 1973 were each extremely significant steps for the development of Financial Technology. 

Nevertheless, one cannot stress enough how important the effect of the financial crisis between 2007-2009 was, which can be seen as the turning point for Financial Technology since financial institutions across the world faced huge losses and the danger of systemic collapse. On the other hand, some have argued that it was a required revolution for the evolution of Financial Technology. 

After the crisis, people working in the banking sector started to seek opportunities in which they could use their abilities and educational background since they have lost their job at incumbent financial institutions. One of the main motivations that people have had in their initiatives such as starting businesses or start-ups was also unprecedented developments in information and communication technology as well as sudden unemployment that they have faced. Therefore, it is fair to state that Financial Technology, which challenges the traditional financial system and gives people a chance to work independently in the sector, was a great path to take for people who were high-skilled and unemployed. 

Financial Technology, abbreviated fintech or FinTech, was used to refer to the Financial Services Technology Consortium in the '90s, an initiative by Citicorp. FinTech can be used differently depending on the context, however, many people commonly think that FinTech is a unique integration of financial services and information technology. Financial technology can be defined in the simplest way as using technology and innovation in the delivery of financial services. Likewise, the European Parliament indicates that Financial Technology refers to firms that use technology and innovation to provide financial services more efficiently. 

The use of smartphones for mobile banking, investing services or blockchain, crowdfunding, P2P lending, Robo-advice, virtual currencies are the best examples of technologies aiming to make financial services more accessible to the general public. The said the brand-new and buzzing area is also in line with the concept of Financial Inclusion set out by the United Nations, which aims to provide equal access to financial services for everyone around the globe.

According to statistics released by Statista in January 2020, 59% population of the world have access to the internet, along with the impressive rates of Northern Europe, Western Europe, and Northern America, respectively 95%, 92%, and 88%. Even though the numbers are not good enough to have financial integration and financial inclusion for everyone around the globe, the rate of increase is undoubtedly promising.

FinTech Ecosystem in the European Union

With its developed infrastructure, the European Union is one of the largest and fastest-growing FinTech markets around the globe, together with the United States, India, and the People's Republic of China. Recent research showed that %51 of European adults used internet banking in 2018, this figure grew by more than two times since 2007. Another striking number is that European online alternative finance market volumes in 2013-2016 (including the UK) reached over 7.6 billion euros. 

Apart from the United Kingdom, Germany, France, the Netherlands, and Spain are the most remarkable countries in the Union in terms of attracted investments and active companies. For instance, as of 2020, more than 800 Financial Technology and Insurance Technology companies are active in Germany alone. 

According to the 2019 FinTech Investment Landscape Report of Innovative Finance, the globally top 10 countries in FinTech investments are the United States, the United Kingdom, India, China, Germany, Brazil, Sweden, Canada, Singapore, and France more than two thousand deals in one year. Even though total global FinTech investment decreased compared to the amount in 2018, investment in the FinTech sector in these ten countries exceeded $32 billion in 2019. 

In the meantime, FinTech investments in Europe continue to accelerate, exceeding $8.5 billion. Such major FinTech ecosystems in Europe as the UK, Germany, France, and Sweden all hit the record in terms of attracted investments in 2019 even though the total number of deals decreased 15%.

To understand the potential of the market, it is useful to point out that, Sweden with its small number of deals of 37, took place in the top ten countries in the world and ranked third in Europe by fundraises at not many firms or businesses but two, Karma and Tink. Since it depends only on innovative ideas and market needs, big deals of Financial Technology (exceeding $100 million) could be in any country across the globe no matter how developed the FinTech ecosystem in the country is or whether the country is a major player in information and communication technologies.

With their very nature of being innovative, there is no doubt that start-ups will keep being the main dynamics of the sector. As mentioned above, start-ups with innovative financial ideas are deeply challenging traditional financial institutions by providing faster and low-cost services. However, it has been observed that the new kind of businesses with innovative ideas are accepted as means of collaboration rather than competition. Incumbent and traditional financial institutions tend to acquire new emerging small businesses instead of competing with them to serve their customers in a better way or develop and adapt their businesses.

It should also be stated that the FinTech companies still operate in a regulatory gray zone without being subject to the same licensing and regulatory regimes as other BigTech companies or incumbent institutions such as banks. Financial technology and its impacts on the financial sector should be regulated carefully by lawmakers. It brings many challenges regarding some significant issues such as data protection, fair competition, or consumer protection. Since there is no single piece of legislation covering all aspects of Fintech in the European Union, Fintech companies have to abide by the same rules as any other company providing the same service. Thus, regulators face a balancing act - encouraging disruptive innovation without allowing risks of unfair competition in the market.

On the other hand, it would also be argued that creating strict regulations might incentivize companies to settle in countries requiring fewer obligations and red tape or slow down the innovation in the sector. Once and for all, lawmakers are going to need innovative regulations to resolve the problems regarding innovative ideas.

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