The Five Stages of Fintech and Their Impact on Financial Services

The global fintech space is the very embodiment of a growth market, with forecasts suggesting that it will achieve a total value of $556.58 billion by the year 2030.

To provide further context, this sector was worth around $133.84 billion at the end of 2022, with the market forecast to grow at a CAGR of 19.50% over the course of the next seven years.

This accelerated growth has much to do with the evolution of fintech and that stage that it has been able to reach, with the next decade likely to see the widespread integration of financial technology and APIs and the fusion between traditional and digital banking.

Appraising the Five Stages of Fintech

Let’s start by considering the five described stages of fintech, the fourth of which arguably began in earnest in 2022. Here’s a brief breakdown of how financial technology has evolved.

• Stage #1 – Disruption: While fintech gathered genuine momentum with the advent of peer-to-peer lending platforms in the wake of the great recession, some argue that the evolution actually started with the birth of PayPal in 1999. Regardless, early fintech innovations were highly disruptive, as they began to drive financial inclusion while also leveraging open finance through dedicated apps, APIs and advanced analytics. As usual, there was considerable skepticism and resistance to fintech during the technology’s first stage, at least until the financial crash in 2008 began to change attitudes among customers and institutions alike.

• Stage #2 – Discussion and Experimentation: It was around 2014 that the second stage of fintech commenced, as financial institutions began to engage with disruptors and learn more about financial technology. Around this time, banks also began to experiment themselves with innovation theatre and hackathons, with many preferring to invest in their own builds and innovation rather than acquire fintech startups or enter into collaborative mergers.

• Stage #3 – Partnership and Collaboration: Between 2017 and 2022, the notion of collaboration between banks and fintech startups became far less fanciful, as the latter stopped disrupting the financial services market and instead began to collaborate with banks and lenders. This was the result of extended ideation that ultimately led to a number of lucrative partnerships, including HSBC’s collaboration with Tradeshift and the union between Mastercard and Finicity.

• Stage #4 – Further Integration: As I’ve touched on, we’re now in the fourth stage of fintech evolution, which will continue to see the type of partnerships highlighted above evolve into fully integrated ventures that will revolutionise banking and financial market trading in the future. More specifically, Open Banking and Open APIs will become more commonplace in the next five years or so, especially as the the third Payment Services Directive (PSD3) is rolled out among EU member states and banks are enticed into becoming fully open and democratised.

• Stage #5 – Renewal and Full Financial Revolution: Before 2030, fintech is also likely to enter its fifth stage, which will see truly open and decentralised platforms dominate sectors such as banking and the financial services sector as a whole. This will manifest itself in part as an open marketplace of APIs, apps and analytics, as integrated banking becomes commonplace across the developed world. At this stage, terms like fintech will largely become obsolete, as the underlying technology will have been integrated and absorbed into the wider banking system.

How Will Fintech Continue to Change Financial Market Trading?

Outside of banking, fintech is definitely having a huge impact on financial market trading, and this trend will continue to take shape over the course of the next decade and as the technology evolves.

It’s already changing the portfolios of investors by creating newly prosperous markets, for example, with individuals rushing to back blockchain technology and increase their cryptocurrency holdings. 

In the next 10 years, blockchain has the potential to boost the global economy by as much as $1.76 billion, so it’s a natural target for stock traders and individuals who prefer to engage in buy-and-hold investment strategies.

Fintech will also continue to change how investors access their chosen markets, especially when dealing in assets such as stocks and currency. The impact of fintech varies according to the vagaries of investing vs trading, of course, but broadly speaking, it continues to leverage artificial intelligence and key subsets such as machine learning to underpin intuitive automated trading programs that are built on huge quantities of data.

This allows traders to execute a high volume of orders without compromising on accuracy or insights, empowering everyone from scalpers and day traders to investors with a much longer-term outlook and higher levels of risk aversion.

Fintech platforms also leverage such technology to help traders collate and analyse data from unstructured data sources like social media. This unlocks new opportunities and insights, while it will potentially elevate social trading onto an entirely new level in the years to come.

The fintech market is a cutting-edge and high growth entity, and one that has already had a dramatic impact on how we bank and the investment strategies leveraged by traders.

Financial technology is also in its fourth stage of evolution, as fintech startups and innovators continue to be integrated into the banking system to create a more open, accessible and increasingly transparent marketplace.

This trend will only gather momentum in the years ahead, while fintech adoption could even be accelerated given the current economic crisis and the widespread impact of rampant inflation and rising interest rates.