When financial giant Lehman Brothers abruptly filed for bankruptcy on 15th September 2008, the financial world was shaken. What happened next would completely change the face of the banking industry, ultimately leading to the creation of a new breed of financial institutions - fintechs.
At the time, many couldn’t foresee how the demise of firms like Lehman would lead to the beginning of one of the toughest financial crises the world had ever seen. Soon after that dreadful Monday, 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 the people who would sign off our mortgage agreements and trust in a system that was fundamentally broken.
This general mistrust of banking was, in our view, the turning point that led to the creation of Fintech. But that’s just the tip of the iceberg…
Interesting, but 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.
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.
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 the 15th of September 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, more competitive services. Over the course of a few years, an archaic industry started to slowly change.
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 three years, and Revolut is Europe's fastest growing fintech unicorn, opening 7,000 new accounts each day with over 2.5 million customers across Europe.’
A Focus on Technology
Another factor that helped promote the emergence of fintechs was the banks’ inability to focus on developing better technologies. Instead, they shifted their attention towards reviewing their financial models and banking operations to prevent future meltdowns from happening - the natural reaction to an ongoing global crisis.
Fintechs, on the other hand, 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.
Seeing the potential for the industry to morph into something that would ultimately serve the consumer instead of some form of corporate greed, venture capital funds started pouring more and more money into these new type of businesses. To put things in perspective, the total value of investment offered to fintech companies increased exponentially from just under $1b in 2008, to an estimated $35b in 2018, according to one study.
Armed with funding, new technology and a mission to reimagine our relationship with money, fintechs were set to take centre stage in a post-crisis world - one that was already starting to look very different from what it used to be a few years ago.
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. A few short years after the start of the global financial crisis, we have seen the introduction of Electronic Money Regulation which governs many fintechs including Revolut.
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 are playing a key role in the development of fintech.
What does the future hold for fintech?
Ten years after the financial crisis, we find ourselves living in a world where fintechs are becoming mainstream and many of them are taking on the big banking players of the pre-crisis era.
Recent scandals linked to traditional institutions remind us all of the tragic days when the banking system as we knew it was on the brink of collapse. More and more people are choosing to trust fintechs 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.
‘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 mobile banking services continue to create new products or utilise new technology, we'll be able to offer a more competitive marketplace and provide better customer experiences for mobile banking users. We also believe that competition in the mobile banking space prevents complacency. If companies are constantly trying to create better financial products for their customers, we'll improve the financial services industry as a whole.’
Nik Storonsky, Revolut CEO
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