The shock to the global economy from COVID-19 brings me back to the 2008 global financial crisis.
Although the nature of current shock is noticeably different than 12 years ago, I want to shed some light and share a story about how the 2008 crisis gave birth to fintech innovation. Probably … another great innovation might be born after the COVID-19 crisis is over.
After the financial giant Lehman Brothers filed for bankruptcy in 2008, the face of the banking industry would completely change, ultimately leading to the creation of a new breed of financial institutions – fintech startups.
At the time, many couldn’t foresee how the demise of firms such as Lehman would lead to the beginning of one of the toughest financial crises the world had ever seen.
The consequences were slowly starting to emerge: people were losing their jobs, families were losing their homes, but most importantly to our story, everyone was losing trust in the institutions that were meant to offer us financial support. Trust in a system that was fundamentally broken.
This general mistrust of banking was just the tip of the iceberg.
What has changed?
The term fintech stands for financial technology; so in order for these companies to thrive, they needed to address two fundamental problems. Fintechs needed to reimagine traditional financial products and offer them by means of new and disruptive technologies.
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While the rapid evolution of technology reduced the barriers to entry for many aspiring companies in the fintech space (the first iPhone was launched a year before the beginning of the global financial crisis), something also needed to change in the financial industry.
Consumer behaviour
For decades banks had little to no competition, which gave them the power to monopolise financial services. This is the reason why the banks were able to charge abnormally high commissions, add in hidden fees directly to the rates they offered, inflate foreign exchange spreads and more.
Back then, if you needed money, you went to the banks. Consumers had little choice when it came to financial service providers and so they had to play by the banks’ rules, simply because there were no other viable options.
But the events that started on September 15, 2008, with the collapse of Lehman Brothers instilled a general sense of anger towards the financial system, as well as a lack of trust in the banking industry.
The shift in consumer mentality created a demand that offered new players an opportunity to join the market and offer better.
An opportunity to innovate
In the aftermath of the financial crisis, many highly skilled people working in the financial sector decided to part ways with traditional banking and take on an entrepreneurial route to reimagining and rebuilding the industry as a whole.
This gave rise to a slew of innovators who started building their own companies that would soon become big enough to take on the very institutions they had been brought up with – this was also the case of Revolut, as Nik, our CEO and former trader at Lehman at the time, explains:
“Many of Lehman Brothers’ top employees who left in the aftermath of its collapse decided to start their own businesses. A generation of entrepreneurs rose from the ashes, but many were disillusioned with the financial system. At the time, I was working as a derivatives trader at Lehman’s when Nomura bought our division, but I ended up taking an offer from Credit Suisse, where I eventually met Vlad Yatsenko, Revolut’s co-founder and CTO. We were both frustrated with the fees charged to send money abroad and launched Revolut in July 2015 as a way to rebuild the industry from the ground up using technology. Fast forward five years, and Revolut is the world’s fastest-growing fintech unicorn, opening 25,000 new accounts each day with over 10 million customers across the globe.”
Focus on technology
Fintechs came to market with a technology-first approach which meant that these companies were hard at work developing new ways of managing our money, in the years following the collapse of Lehman Brothers in 2008.
They started building financial services based on the evolution of technology and the internet, which allowed them to provide faster and more competitive services – disruption of the financial industry was well underway.
New regulations
It’s said that innovation precedes regulation and this was certainly the case with fintech. The crisis triggered a string of sweeping changes and regulations in the financial sector, aimed at preventing such catastrophic events from happening again.
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Since then, we have seen the introduction of e-money regulation and evolution of the Payment Services of Act. In Singapore, we have seen the transformation of the Monetary Authority of Singapore’s Payment Services of Act, which governs many fintech companies, including Revolut, and aims to create an innovative environment for fintech.
In the last ten years, we’ve also witnessed an overhaul of the payments sector with the introduction of the Payments and Services Directives, changes in investment products through the introduction of Markets in Financial Instruments Directives and more broadly, new ways of handling privacy and data protection matters via General Data Protection Regulation.
Altogether, the introduction of these new rules is playing a key role in the development of fintech.
What does the future hold for fintech?
Twelve years after the financial crisis, we find ourselves living in a world where fintech is becoming mainstream and many of them are taking on the big banking players of the pre-crisis era.
More and more people are choosing to trust fintech over their traditional counterparts these days, while competition over who can offer the fastest, most diverse and cost-effective range of financial services has never been more fierce – something that will only improve the state of the finance industry.
Nik Storonsky, Revolut CEO said: “We believe that increased competition should be treated as an opportunity. As long as there is innovation, there is room for more players in the space. If companies are constantly trying to create better financial products for their customers, we’ll improve the financial services industry as a whole.”
So, what innovation will the COVID-19 economy crisis give birth to this time?
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