Financial technology

Financial technology, also known as ‘FinTech’, denotes the use of computer programs or other technology to assist the financial industry. The term was used for the first time at the beginning of the 1990s and what started as a word related solely to the financial industry, it soon expanded into other very diverse sectors. Since early 2014, the sector has started attracting the attention of regulators, industry members, customers, and academics. Blockchain in FinTech appeared for the first time as the distributed ledgers of Bitcoin, but has recently attracted consideration from practitioners and researchers. Today, financial institutions and other market participants, mainly due to the development of the blockchain technology, are approving the nature of FinTech and the necessity for research in the academic world given the implications of this technology. Financial innovation is not something new, as it has an extensive history. The development of FinTech throughout history can be divided into three main eras.

1. Fintech 1.0 (1866–1967): In this early stage, finance started developing in agricultural states. The use of money, with its main advantage being the transfer of its value, started facilitating financial transactions. Developments in the 19th century of railroads and the invention of the telegraph facilitated connections across borders. After the Great War, technology started quickly developing, laying the foundations of the next FinTech era.
2. Fintech 2.0 (1967−2008): This era is characterized by the rapid expansion of electronic payment systems. In 1968, the Inter-Bank Computer Bureau was founded in the United Kingdom, cementing what today is known as the Bankers’ Automated Clearing Services. Regulations in the FinTech world started taking place, mainly due to the collapse in 1974 of Herstatt Bank. The effects of the collapse of the stock market in 1987 (also known as Black Monday), confirmed the suspicion that global markets were technologically linked. Throughout the 1990s, technological advances were made in risk management systems and the development of online consumer banking. The creation of digital banking (back then banks were the sole authorized monetary institutions) attracted more attention by regulators as it created new risks.
3. Fintech 3.0 (2008–present): The beginning of this era was characterized by the financial turmoil of the years 2007–2008. Trust in the banking system started to be lost, and technological firms started to operate through peer-to-peer networks outside the regulatory framework (in China alone over 2000 platforms were developed). Today, these technological firms and many start-ups are displacing banks at a pace never seen before. Flexible regulations that stimulate entrepreneurship are beginning to be adopted by some countries.

Smart Contracts

The introduction of smart contracts has been key in the development of FinTech. During the last decade, blockchain technology has been constantly evolving. Some of the most relevant products of this evolution are smart contracts. These are not something new, as Nick Szabo introduced the concept in 1994. Smart contracts can be defined as a computerized transaction procedure that performs the terms of a contract. This means that all the contractual clauses are embedded in the computer of the individuals performing the transactions. As these contracts are automatically executed when certain conditions are met (the codes in the algorithm that conform the smart contracts specify these conditions), there is no need for a central authority or third-party support these transactions. 

There are many different languages in which smart contracts can be coded, Ethereum being one of the most relevant to date. Ethereum has been proven to be extremely reliable when preventing the double spending problem, although, in order to attain this, a high level of difficulty is added. Currently, the platforms that support blockchain’s smart contract are Ethereum and Hyperledger.

Ethereum uses its own language, just as any other computer program. It has a consensus procedure that details the way in which the nodes forming the network extend the blockchain. A particularity of Ethereum is that blocks are added based on the strength of the nodes that form the network, through what is called a lottery. This means that nodes with a higher degree of computational strength have more chances of winning this lottery than the ones with less computational strength. Malicious nodes, which could access to win this lottery and add improper contract executions, are automatically removed from the blockchain.