WHEN Marco Polo finally set foot in 1275 in the summer palace of Kublai Khan in China, he had travelled along a global trading system made possible by the invention of a little appreciated financial technology (fintech) — the cheque. This innovation had been developed by Muslim traders during the Abbasid Caliphate (9th century) and was called saqq in Arabic or chak in Persian. As a syariah-based contract the new system allowed traders to transport paper saqq rather than risk transporting monies. These saqq could be issued in the bank of one country and exchanged for money in the bank of a different country. Its impact was revolutionary as it enabled financial transactions with distant markets that fuelled the growth of the Silk Road and Indian Ocean trading system — linking the Mediterranean, South and Central Asia, Africa and the Malay world to the great emporium of China.
Subsequent fintech innovations have created the modern financial system that we know of today. This was from the laying of deep ocean telegraph cables in the 19th century that enabled bank transfers and wire services to electronic systems that supported the development of automated teller machines, credit cards and interbank payment systems. From the 1980s greater computing power allowed banks to utilise customer data and record-keeping in more sophisticated ways, opening the way for electronic trading for individual investors and online banking.
At the heart of these innovations that catalysed the growth of the finance industry are the twin principles of trust and convenience. Engineering systems created to improve the convenience of financial transactions cannot work without complimentary trust mechanisms built into the system. When you wire a sum of money across the street or Pacific Ocean, you expect the exchange to take place and that the recipient is legitimate and receives the accurate sum. Such a system works because the trust mechanism is embedded within the right institutional environment.
With the rise of new Internet and communication technologies utilising wireless connectivity, handheld mobile devices and high encryption capabilities, we are now poised to embrace a new era of financial transactions. This is one where the exchange of money between business and consumer and between consumer and consumer can be conducted instantaneously using a smartphone. The speed and sharing of information across platforms has enabled consumers to become producers with potentially disruptive and destructive consequences to traditional banking.
How fast and transformative this innovation becomes, and which countries will be winners and losers, will be determined by the institutional environment that will co-develop with fintech.
As new payment mechanisms and robo-advisory services come into play with increasing sophistication utilising blockchain technology, artificial intelligence and machine learning, regulators will need to employ new tools to support the industry.
A new terminology has now emerged in tandem with fintech called regtech — regulatory technology. Covering topics such as monitoring and radar tools, compliance, fraud detection, risk simulation, anti-money laundering and know-your-client protocols, a host of new technologies are currently being developed, tested and subsequently applied in the financial landscape.
Of critical importance is the pace with which fintech and regtech co-evolve and get deployed in the marketplace. Like all innovation, fintech requires lots of rain, love and sunshine to sprout and grow. With the right support, fintech will grow fast and sturdy. Too much shade and the budding tree will wither and die. It is exciting times ahead as we watch the dance of the Yin and Yang of finance.
Dr Shahridan Faiez is a venture capitalist in sustainable development and green economy space. He is interested in the intersection of finance and sustainable development and has investments in fintech, sustainable food technologies, and smart cities sectors. Dr Shah (as he is usually called) is an ex-World Bank official and has a PhD from the University of Cambridge.