Evolution of the Financial Services Industry

Evolution of the Financial Services Industry

In earlier times, the barter system was a fairly common mode of transaction that various civilisations followed. It involved exchange of goods and services as part of early economic exchanges.37 This is evidenced in civilisations such as Mesopotamia, ancient Rome, Greece, China, pre-colonial Sub-Saharan Africa and pre-Columbian nations. In India, too, cowrie shells, grain, cattle and salt were used as part of the barter system during the Indus Valley civilisation (3300–1300 bce). Ancient Indian traders and merchants conducted money-lending and goldsmith businesses.38 Although public banking was invented in the 12th century by Venetian merchants, it was during the Renaissance period that the initial formats of the banks in the form of loans and deposits started to get formalised.39 Around 1500, the Americas, Africa and Asia were colonised, and global trade increased substantially. This necessitated the creation of formal financial intermediaries with money lending becoming a common practice. Hawala methods, originating in South Asia, started to become popular.40 Industrialisation in Europe led to the setting up of large factories and production facilities to export goods across the globe. This resulted in the setting up of central banks and companies offering life insurance and property insurance to manage risks.

The New York Stock Exchange was founded in 1792,41 which, in turn, nurtured the development of securities trading, and investment banking as a specialised offering started taking root. The United States of America and Europe witnessed rapid industrialisation with private and national banking systems gaining momentum after the 1900s and during the Second World War. This period also witnessed the Great Depression, which led to the stock market crash and several measures to streamline financial operations in various countries. In the United States, the Securities and Exchange Commission was created in 1934 to safeguard the interests of investors and regulate the stock market.42

In India, while money-lending practices continued, the British set up the banking system in Calcutta, Madras and Bombay to primarily support trade and raise investment for national projects like the railways. These banks were eventually merged into the Imperial Bank of India, which later became the State Bank of India.43 The post–Second World War phase provided opportunities for nations to rebuild and grow rapidly. Several erstwhile colonies like India and Indonesia became independent, and this also created avenues through their growth and impetus for the financial services industry to expand. Global financial institutions such as the International Monetary Fund and the World Bank were set up, and they could play a significant role in the development of countries and, specifically, in the financial sector. Credit cards were introduced, which changed the manner in which consumers started to spend. Mutual funds were introduced, allowing diversification of portfolios for investors.

As the number of transactions of financial services institutions grew, computers were introduced to process data and reports. With the advent of microprocessors and desktop computing in the 1980s, technology started to play a key role in the transformation of businesses. Online banking was introduced in the 1990s, which would eventually act as a game changer for the financial services industry and its customers.44 Along with this, deregulation efforts, particularly in the United States, helped businesses to introduce several innovative financial products in the market. The financial crisis of 2008 led to regulatory changes and more stringent risk management practices.

With digital technology and telecommunications leapfrogging, enabling the industry and customers to have dramatically different experiences, the financial services industry has been at the forefront for adopting mobile technology, blockchain, cryptocurrencies, cloud computing, AI and much more. As a result, the industry has been witnessing breakthrough innovations in the offerings, not just in the United States but around the world as well, based on the local needs through an integrated service line—fintech. Several path-breaking propositions have emerged through fintech start-ups across the world, disrupting the existing processes and established players in the market. The slow response or lack of adequate investment in digital efforts has negatively impacted the financial services business. The rate of change and the dynamics of change are stupendous in this sector, and only nimble-footed and technology-savvy entities can survive and succeed. A digital-first strategy is being implemented by several companies now. There is a need for constant review of the digital approach, regulatory changes and compliance requirements on the basis of new tools and technologies available.

Wirecard was an upcoming European fintech company that had attracted large investments. Despite its lead with the digital payment solutions, its missteps in reporting and accounting scandals led to the downfall of the business, which ultimately resulted in bankruptcy.45 Paytm is another example from the Indian fintech business. It was a darling of the Indian financial services market and had attracted investments from Alibaba and Softbank. However, its inability to comply with regulatory requirements and financial lapses led to sharp drops in its market value, and after regaining the confidence of the regulatory bodies, investors and customers, it is only in August 2025 that the payment aggregator licence has been approved.46 In the meantime, Softbank, which had invested around US$1.5billioninOne97Communications,theownerofPaytm,exitedatalossofaroundUS$150 million in 2024.47