This story begins on the 1st of July 1944, the world was at war with Hitler, nations were tumbling & running dry on power, literally & figuratively. The world economy was in disarray, each country depleted its funds building an arsenal to protect itself against invasion over the preceding 5 years. The world’s financial system was in complete shambles. The allies, comprising of 44 nations decided they needed to come up with a plan, a different financial system from what existed. At the time the USA was relatively unscathed from the war except for the Pearl Harbour attack 3 years prior. The USA, at the time, had two-thirds of the world’s gold reserves & were already a global economic force. Each nation sent their most trusted economic lieutenant to the Bretton Woods Conference. The Australians sent Sir Leslie Melville, the dutch sent Johan Beyen, one of the founding fathers of the European Union but the most important delegates at the conference were the famous 20th-century economist & the founding father of modern macroeconomics, John Maynard Keynes & an unlikely figure in the senior official of the US Treasury, Harry Dexter White.
Each gentleman had his idea of how the financial system of the future should look like. John Maynard Keynes wanted an International Clearing Union (ICU) that would regulate the currency exchange & play an active role in managing trade between countries. He wanted each country to be a member of the ICU & proposed the ICU create a new supranational currency called Bancor which would be used as a medium of exchange for international trade. On the other side, Harry Dexter White had other ulterior motives, the world ran on the gold standard at the time & the USA already had two-thirds of the world’s gold. He wanted the dollar to be pegged against the gold & become the world’s currency of reserve. John Maynard Keynes categorically rejected the idea.
One of the days during the conference John Maynard Keynes was preoccupied with a council meeting deliberating on what would become the World Bank, a meeting that Harry Dexter White put him in & White was in another meeting with one of John Maynard Keynes underlings, Lionel Robbins on what will become the IMF. In that meeting, Harry Dexter White changed every world that had ‘unit of account’ to ‘the US dollar’ & that gave rise to the US dollar being pegged against the gold. This became the Bretton Woods System, up until 1971 when Nixon killed it. By that time, the majority of the world was holding dollars instead of gold thus the US dollar became the world’s de facto currency of reserve.
With the US dollar as the world’s global currency, the US banking system thrived. In 1958 Bank of America created the BankAmericard Program. The BankAmericard card system would grow to 15 countries by 1972 & in 1974 IBANCO was created to manage the BankAmericard Program. In 1976 IBANCO united numerous international networks to create a single global network which would be called VISA.
During the same period in 1966, a group of small California banks formed the Interbank Card Association (ICA). The ICA created ‘Master Charge: The Interbank Card’. Those small California banks would go on to be swallowed by bigger banks, increasing the distribution of ‘Master Charge: The Interbank Card’ & in 1979 it was renamed Mastercard.
The significance of this is that the US controls 4 of the biggest card networks in the world, which 2 account for 90% of all western credit & debit transactions. 90% of all western credit & debit transactions flow through either Visa or Mastercard’s payment rails. One of the main reasons for globalization is the interconnectedness of the world’s financial system, due —in part— to Harry Dexter White & the Bretton Woods Conference.
FinTech 1.0: 2005-2008 (Peer to Peer Lending)
Fintech has had 3 revolutions over the last 15 years. The word ‘FinTech’ has only been around for about 5 years, it’s a new term. Prior to that financial technology was just software licensed to banks. Fintech 1.0 began around 2005, Mark Zuckerberg just moved to Palo Alto after Shaun Parker & Travis Kalanick convinced him to — (If you have watched The Social Network you will be aware of the scene where Justin Timberlake tells Jesse Eisenberg to change ‘The Facebook’ to just ‘Facebook’, that was Shaun & Travis, whose role was played by Brenda Song) — I digress. Shaun & Travis before him founded peer-to-peer file-sharing companies that blew up in flames. Travis, before Uber was even a thought, founded Scour, a peer-to-peer file-sharing platform for sharing videos which was sued to oblivion for $250 billion. Shaun, a year later founded Napster, the famous peer-to-peer sharing platform for music which didn’t even last a year.
Peer-to-peer sharing platforms was the right idea, but the wrong application. When LendingClub was launched in 2006, it was launched on Facebook. LendingClub is a peer-to-peer lending company where consumers can get unsecured loans from a pool of investors on the platform. This was successful for some time with new startups such as OnDeck Capital & Cabbage entering the fold. Ultimately peer-to-peer lending has become stifled by regulation across the world, but still a popular sector of FinTech in emerging markets.
FinTech 2.0: 2009-2014 (Unbundling the bank)
Fintech 2.0 was the beginning of the unbundling years. Around 2009 2 young genius Irish brothers were living in San Francisco, thinking about their next thing. The older one had moved to the USA a couple of years earlier to attend MIT. The younger one followed & went to Harvard. Both dropped out of school in 2007 to start a company. Then moved to San Francisco to partake in the now world-acclaimed start-up accelerator Y-Combinator. That company merged with another one founded by 2 British fellows to form Auctomatic, a management system for marketplace & auctions. Auctomatic was then acquired by a Canadian media company.
Thinking about their next thing the brothers, Patrick & John Collison remembered through the Auctomatic journey it was difficult for internet businesses to accept online payments. They didn’t believe Paypal was adequately built to for this & banks had no clue that such a problem existed. But the question was still, who were they solving this problem for? Patrick’s answer; “our customers don’t exist yet”. Today, Stripe is valued at $36 billion.
At the time of Stipe’s founding, Jack Dorsey had been ousted as CEO of Twitter & was home for the holidays. His close friend & former boss Jim Mckelvey called him, Jim had lost out on a $2000 sale for one of his glass sculptures. Jim was frustrated & asked Jack why people had supercomputers at the palm of their hands but couldn’t accept payments? what can be done to solve this problem, not only for him but for other small businesses? They found out that getting a merchant account with a bank was tedious, admin-intensive & an onerous process to integrate those clunky card machines. Jim then designed what would spark a revolution; the little square card reader. The rest is history.
By 2013 Square would process $20 billion a year with a valuation of $5 billion. During the same time, in New York 2 young Stanford grads were working on Wall Street, building high-frequency trading systems for hedge funds & other financial institutions. They saw that large financial institutions could execute trades for a fraction of the amount they charge their customers & still required them to have trade minimums. One of the founders, Vladimir Tenev took heed of this & enlisted his friend & co-founder Baiju Bhatt to help him build a platform that will provide everyone access to the financial system. In its beta year, Robinhood had 1 million people on its waitlist. As of 2020 Robinhood has 13 million users with a valuation of $8.3 billion, majority of those users being millennials.
FinTech 3.0: 2015-2020 (The rise of the challenger banks)
By 2015 the US was the epicentre of all thing FinTech. In 2011 three young British gentlemen (man, this industry needs more women) were accepted into Y-combinator. Hiroki Takeuchi, Matt Robinson & Tom Blomfield founded a startup called Go-cardless, a direct deposit start-up that leverages the ACH network to allow merchants to collect recurring payments from their customers but knowing what Go-cardless does isn’t important for this story, Tom Blomfield is. Tom Blomfield would leave Go-cardless after a couple of years & join a new bank founded by a former banking executive by the name of Anne Boden (finally). This bank would be the first licensed bank mobile bank in the United Kingdom. Tom wouldn’t stay long at Anne Boden’s Starling Bank, young Tom had his plans for a bank & in 2015 started a bank called Mondo.
Mondo would be changed to Monzo due to copyright issues. Monzo also obtained a full banking license in the UK & since its founding, Monzo has grown to 3.5 million customers with a valuation of 2.4 billion. Tom Blomfield changed the future of British banking.
While this was happening in the UK, two Russian immigrants launched a multi-currency travel card, Revolut. Nikolay Storonsky the Co-founder & CEO was tired of paying foreign exchange fees so he thought he should solve this problem for himself. Revolut obtained a European Banking license from Lithuania & became an everything bank, from travel card to crypto trading to teen banking. Out of all the European challenger banks, Revolut has the most customers at 10 million & valued at $5.5 billion.
Starling, Monzo or Revolut don’t have the first movers advantage. The German challenger bank N26 (Number 26) was founded in 2013 by 2 Austrians, Valentin Stalf & Maximilian Tayenthal. N26 is the first-born who went to university but graduated after the middle child. Full of grit & tenacity N26 has persevered & got its banking license in 2017, since then the startup bank has regained its exponential growth amassing 5 million customers globally. The title of King of Fintech 3.0 belongs to Brazilian challenger Nubank. Nubank was founded in 2013 by David Vélez & Cristina Junqueira. As of 2020 NuBank has 20 million customers in brazil. N26 & Nubank fall into this category due to the nature of their business models even though they were founded outside the window.
Without a doubt, challenger banks have taken market share from incumbents in some capacity, but they have not shown the ability to gain deposits & convert a majority of their customers to use their banks as their primary account. This has become evident during the global pandemic with the likes of Monzo having a difficult time. The question now is, can the challenger banks keep on growing their respective books to pose a significant threat to incumbent banks.
FinTech 4.0 2021-
I am not qualified to predict what the future of FinTech looks like but I will anyway. What is happening in China & South East Asia is interesting. The idea where banking is not institutionalized, it’s not a place, it’s a thing you do. China’s WeChat & Alipay might be utopian for the western world but the Grabs & Gojeks are building what seems to be the agreeable medium. FinTech 4.0 might be the rise of the platform bank. The bank which brings the ecosystem of all the things you want onto one platform. Who knows your next bank might Facebook or Google or maybe Uber & Airbnb. If I had the money I would bet on Apple or that Bezos fellow. I did not touch on bitcoin & the rest of crypto, maybe a tokenized world is what we will get. But for now, I will settle on the idea that everything is FinTech & what is not will be.