The past, present, and future of technology in the financial sector

As digitalization has increased across many industries, it should be no surprise that finance has also gone digital. According to financial research company Gitnux, 75% of all global financial transactions are made digitally, with approximately 255 billion digital transactions registered in the US alone in 2019.

But exactly when finance went digital may come as a surprise — not to mention where it’s headed.

First, what is digital finance, exactly? How does it compare to traditional finance, and how will digitalization continue to impact the industry? Let’s examine how digital finance has evolved and where it will take us in the future.

For more information about all things digital banking, read our comprehensive guide, The Complete Guide to Digital Banking.

What is digital finance?

Digital finance refers to the collection of technologies and techniques for delivering traditional financial services using digital means. It encompasses electronic transfer methods, digital banking, and digitalization of the financial industry as a whole.

In a nutshell, digital finance utilizes technology (also known as FinTech) to address the three central tenets of finance:

• Serving the customers' needs.
• Providing a foundation of security.
• Fueling growth.

Chances are, you are already participating in the digital finance ecosystem. Examples include a mobile app or website to make bank transactions, making digital payments, or keeping money in a digital-only bank.

According to the Electronic Transactions Association (ETA), digital finance and FinTech address the needs of the underserved by creating new transaction types and providing access to low-cost financial tools to communities that may not have previously been able to use the traditional financial system.

Tools like online banking and mobile payments provide safe and convenient alternatives to cash and checks. Instruments like digital-only bank accounts can offer savings over traditional accounts. Simply put, digital finance offers more options for managing money to more people.

How did digital finance evolve?

Digital finance evolved as the financial industry as a whole began to move toward utilizing technology for its transactions. This started earlier than you might think.

In the late 19th Century, as horse-drawn carriages were giving way to the technological innovation of the automobile, telegraph machines and transatlantic cables allowed money to be “wired” from one place to another. The centralized funds transfer service known as “Fedwire” was established in 1918 to facilitate these transactions. This marked the beginning of the digitalization of the finance industry.

It was the advent of the internet, though, that led to rapid acceptance and use of digital finance technologies. As internet usage became commonplace, banks began to offer online services to consumers. This also led to the creation of the first digital-only banks. These offered consumers access to financial services wherever they lived without the need for a brick-and-mortar branch office nearby. Digital payment systems also came online, offering consumers a method to pay for increasingly common ecommerce transactions.

In the 2000s, digital payment systems exploded in popularity. Services like Square gave almost anyone the power to accept credit card transactions. In that same decade, following the “Great Recession” of 2008, cryptocurrencies and the blockchain began to take shape, offering bank-wary investors an alternative to traditional currencies.

That brings us to today. Back to the basics of finance, this has resulted in the following effects:

• Serving the customers' needs: Smartphones and Wi-Fi have given consumers more access than ever to digital banking services. 

• Providing a foundation of security: Security technology has advanced to provide a deep foundation of trust for non-traditional financial services.

• Fueling growth: The vast, interconnected system of internet computing has allowed digital finance solutions to thrive. This is helping businesses grow faster than was previously possible.

How will digital finance shape the future?

As technological innovations continue and accelerate, digital finance will keep pace. We are already seeing the early stages of new technologies that could shape the way we interact with financial institutions in the future.

Cloud computing

Cloud computing is the most mature new technology impacting the financial sector. As more institutions move from physical infrastructure to the cloud, operations that had previously required intensive focus and high headcounts can now be automated. Financial advisory firm Deloitte predicts institutions will soon be able to “drastically reduce the complexity and cost of technology, without sacrificing functionality.”

Blockchain

Digital blockchain services were initially introduced alongside cryptocurrencies. On their own, they provide numerous benefits to financial institutions and are already in use. Blockchains provide digital clearing and registering of transactions. They offer greater efficiency than legacy clearing systems.

Artificial Intelligence (AI)

Although one of the newest technologies currently shaping the future of digital finance, AI is one with a high degree of promise. It is especially impactful in the area of risk management. AI, as a technology, is able to digest and analyze large amounts of data much more quickly than humans. This allows users of the technology to identify anomalies in large data sets much more quickly than before, which can be especially useful in identifying trends.

The bottom line

Just as the telegraph did in the past, these new technologies will shape the future of digital finance. There are undoubtedly technologies we’ve yet to imagine on the way, but it will be the ones that serve customer needs, provide security, and help businesses grow that will deliver the greatest impact.

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