BUDAPESTI GAZDASÁGI EGYETEM

PÉNZÜGY ÉS SZÁMVITELI KAR

SZAKDOLGOZAT

Szabó István
Nappali tagozat
Pénzügy és Számvitel
Pénzügy

2019
 BUDAPESTI GAZDASÁGI EGYETEM

PÉNZÜGY ÉS SZÁMVITELI KAR

Fintech in financial services industry

How financial services industry evolves with Fintech

Belső konzulens: Dr. Sági Judit

Szabó István
Nappali tagozat
Külső konzulens: Novák Dávid Pénzügy és Számvitel
Pénzügy
 TABLE OF CONTENT

1. Introduction....................................................................................................................................................2

1.1. What is Fintech? ........................................................................................................................................3

2. Background of Fintech – Technology evolution ............................................................................................4

2.1. Development of computational power .......................................................................................................4

2.2. Development of data collection and storage ..............................................................................................6

2.3. Development of digital connectivity ..........................................................................................................7

2.4. Cloud computing........................................................................................................................................8

3. Reforming the financial industry ..................................................................................................................10

3.1. Reforming the payment industry................................................................................................................10

3.1.1. Multichannel digital wallets...................................................................................................................12

3.1.2. POS systems ..........................................................................................................................................13

3.1.3. Blockchain .............................................................................................................................................13

3.1.4. Cryptocurrencies ....................................................................................................................................15

3.2. Reforming the lending industry .................................................................................................................17

3.2.1. P2P lending ............................................................................................................................................17

3.2.2. Online lending........................................................................................................................................18

3.2.3. Payday lending.......................................................................................................................................20

3.2.4. Microfinance..........................................................................................................................................21

3.2.5. Crowdfunding ........................................................................................................................................22

3.3. Reforming the wealth management industry..............................................................................................24

3.3.1. Financial advice .....................................................................................................................................24

3.3.2. Robo-advising........................................................................................................................................26

3.3.3. Equity research ......................................................................................................................................28

3.4. Reforming the insurance industry ..............................................................................................................29

3.4.1. P2P Insurance ........................................................................................................................................30

3.4.2. On-demand insurance ............................................................................................................................32

4. Status of Fintech in Hungary .........................................................................................................................34

4.1. Status of payment sector ............................................................................................................................36

4.2. Status of insurance sector...........................................................................................................................37

4.3. Status of wealth management sector ..........................................................................................................38

5. Conclusion .....................................................................................................................................................39

References .........................................................................................................................................................42

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1. Introduction

The financial services industry has always been a pioneer in innovation. Conventional
banks have been playing the key roles of the financial world. However, the rapid
technological development has evolved the world economic to shift to digital channels.
Fintech, or Financial Technology is the mixture of technology development applied to
the financial services industry. With Fintech, the whole financial industry has started to
transform fundamentally. I am going to describe what Fintech covers in itself in the next
section.

With the advancement of technology, the financial services industry is being disrupted by
Fintech innovations. The financial world has started to adopt new ways of processes,
methods and mind-set. Fintechs are truly the next phase of evolution for both finance and
technology.

In this thesis I am going to describe the innovations and solutions Fintech has brought to
the financial services industry.
In the second chapter I am going to write about the technological evolution which is
considered as the background of Fintech. The chapter uncovers historical evolution of
computational power, data collection and data connectivity. The chapter will also
describe the combination of these three components, which is cloud computing.
The third chapter defines the financial sectors which are the most affected by Fintech
solutions. I will describe thoroughly the innovations and solutions Fintech has given to
each area.
The fourth chapter contains a deep analyses of the status of Fintech in Hungary.

I will draw a conclusion on how the Fintech innovations have transformed and reshaped
the entire financial world at the end of this thesis.

My assumptions are that Fintech is becoming widespread. It increases financial integrity

and simplifies processes which were hardly transparent before. It is both beneficial for
service providers and service users as well. On one hand, it causes significant cost
avoidance for suppliers. On the other hand, it brings people closer to the financial world.

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The research method used in this thesis utilized both the literature study and the
empirical research using credible data sources, such as the financial reports and
expert analysis. The primary purpose of the empirical study was to validate and verify
the literature reviews

1.1. What is Fintech?

“Fintech refers to the novel processes and products that become available for financial
services thanks to digital technological advancements. More precisely, the Financial
Stability Board defines Fintech as “technologically enabled financial innovation that
could result in new business models, applications, processes or products with an
associated material effect on financial markets and institutions and the provision of
financial services”(NAVARETTI, CALZOLARI, POZZOLO. 2017, p.12)

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2. Background of Fintech – Technology evolution

2.1. Development of computational power

Gordon E. Moore, co-founder of Intel, predicted in 1965 that the number of transistors in
an integrated circuit would double every two years. These circuits, consisting of network
of transistors and other elements, are the backbone for any computer to calculate and
deliver even the most complex tasks. The larger the number of transistors a computer has,
the greater its computational power. (ARSLANIAN, FISCHER, 2019)

As time passed Moore’s prediction turned out to be correct and became the basis of the
concept referred to Moore’s law (named after its co-founder). This growth in
computational power has been the key reason for the fast improvement in technology in
the last 50 years. (ARSLANIAN, FISCHER, 2019)
While computational power increased exponentially, concurrently its price fell
significantly over the years. Graph 1. perfectly reflects this trend. (ARSLANIAN, FISCHER,
2019)
Graph 1. One dollar’s worth computer power

Source:https://www.hamiltonproject.org/charts/one_dollars_worth_of_computer_power
_1980_2010 Accessed: 29. November 2019.

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In 2010, the number of transactions that can be purchased for one US dollar is ten million
times more than the number of transactions purchasable for the same amount in 1980.
Most electronic devices, that an average person owns nowadays, are more powerful, in
terms of computational power, than the computers which was used when NASA sent
humans to the Moon in the Apollo 11 mission. Wide range of products used in everyday
life have several microchips built in them, from coffee machines to toothbrushes.
(ARSLANIAN, FISCHER, 2019)

Recently, it is becoming more and more obvious that Moore’s law cannot last forever.
Technology began to reach physical limitation in the matter of size. The development of
microchips soon will get to the point where the body of microchip cannot be decreased
anymore. For instance, Intel developed a transistor called Skylake which is only 100
atoms long. Pushing the boundaries of the size limitation raises extra cost and complexity
of the development of new microchips. This challenge calls for new approaches to be able
to increase the computational power exponentially in the future as well. One possible
approach which could solve this problem is called quantum computing. Google, IBM,
Microsoft and other smaller professionals are seeking to develop a quantum computer in
major projects. The main focus of these projects is to deal with the upcoming challenges
of building a quantum computer. Solving these problems is the hot topic of the future.
(ARSLANIAN, FISCHER, 2019)

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2.2. Development of data collection and storage

Few decades ago when digital data began to appear, the storage of data was extremely
expensive and required a huge amount of space. One of the first disc unit storage, the
IBM 305 RAMAC, had the size of two refrigerators and was able to store five megabytes.
(ARSLANIAN, FISCHER, 2019)

Graph 2. Cost of storage of 1GB data

Source: (ADAPTED FROM ARSLANIAN, FISCHER, 2019, P. 7.)

To have a comparison how drastically the cost of data storage went down, it costed 10,000
USD to store one gigabyte for IBM 305 RAMAC while today it costs less than two cents
to store the same amount of data. (ARSLANIAN, FISCHER, 2019)

The extraordinarily low price of data storage has inspired people and businesses to
accumulate information nearly without any limit. The availability of data storage,

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combined with the presence of microchips, has generated various types of sensors. These
days almost every electronic device has built-in sensors that can send information for
analysing. Data is turning into the basis of business models for most enterprises around
the world. Large data provider companies like Bloomberg, Refinitiv and Dow Jones as
well as big technology companies such as Facebook or Google have built their business
models on generating and providing valuable client information for analysing and
advertising. (ARSLANIAN, FISCHER, 2019)

Huge quantity of information helps companies to refine their way of doing business. For
example, nowadays car producing companies build in several sensors to their car. This
sensors can provide useful information to car insurance companies. With access to that
information, insurance companies can personalize their services in a much more detailed
way comparing to the conventional way where they categorized people into different
groups such as sex, age, driving history. (ARSLANIAN, FISCHER, 2019)

This drastic increase in the amount and availability of information is changing the
priorities of firms as well as putting extreme pressure on governments and regulatory
regimes, whose task would be protecting these sensitive data.
(ARSLANIAN, FISCHER, 2019)

2.3. Development of Digital Connectivity

In the early stage of technology advancement, entities accumulated their data on one
computer, which could be accessed solely by one person at any time. As companies began
to use more than one computer, it was getting crucial to be able to bring the information
from one place to another in a very short time. A digital network was required to ensure
the quick exchange of data between two points. Two types of digital networks are LAN,
local area network, used when the two endpoints are particularly in the same place, and
WAN, wide area network, which provide connection when the endpoints are around the
globe. (ARSLANIAN, FISCHER, 2019)

Today, 640 terabytes of data is transferred every second. Over one million miles of fiber-
optic cables provide the backbone of the global connectivity network, which connects

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nearly half of the population. Basically, this network has supported a trend of
decentralized data, switching from storing the information on companies’ servers to
share, exchange and combine it with different data from other sources all over the world.
(ARSLANIAN, FISCHER, 2019)

2.4. Cloud computing

Three main elements of technological development were discussed in the previous

sections: the development of computational power, the drastic decrease in the size and
cost of storage and how the data exchange has accelerated. These progresses are radical
changes even in themselves. But cloud computing is where these three components meet.
(ARSLANIAN, FISCHER, 2019)

Cloud computing allows corporations to dynamically change their computational power,

data storage and bandwidth. To be able to do that, a given computational task is divided
into smaller processes using enormous shared pool of servers in a data centre. The cloud
provider operates the data centres, which represent inexhaustible resources. One of the
biggest cloud computing providers is Amazon Web Services, which has 28 data centres
with 80,000 servers in each data centre all over the world. (ARSLANIAN, FISCHER, 2019)

Initially, organizations were sceptical about the concept of providing their sensitive data
and IT operations to a third–party infrastructure. But the potential in cloud computing is
highly fascinating. (ARSLANIAN, FISCHER, 2019)

One of the reasons is that the required computational power and storage are often not
fixed within a normal organization. There can be huge fluctuations as the revenue earned
is not divided equally within a business year in some cases. For instance, around holiday
seasons an online vendor may sell more than any other time of the year. If the retailer had
its own IT infrastructure, it would need to expand its data centre during holiday season to
be able to meet the expectations. But the expansion would be left unused during other
time of the year. With cloud data centres, the retailer is able to change its usage
dynamically and pays only for what they need, giving the retailer potential cost avoidance.

8
In addition, it became much easier for newly established start-ups to enter the market of
digital world as they need less investment to start a business since the server infrastructure
does not need to be purchased. (ARSLANIAN, FISCHER, 2019)
The potential of cloud based computing is inarguable. Graph 3. shows the forecasted
investments in billion USD in cloud computing.

Graph 3. Investment amounts in cloud computing (in billion $)

Source: (ADAPTED FROM ARSLANIAN, FISCHER, 2019, P. 14.)

In 2019, the total investments forecasted got doubled comparing to 2015, it increased
from 67 billion US dollars to 138 billion US dollars. This continuous increase in total
investments marks the tendency that cloud computing is one of the key areas for market
expansion.

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3. Reforming the financial industry

3.1. Reforming the payment industry

The payment industry is one of the most complex industries in the financial world. Several
players are presented in the payment industry, who work together to make a payment
transaction successful. Initially, the payments were handled by banks in exchange of
check, draft or a withdrawal note if specified accordingly or the payment was transferred
to the account which was determined on the check. Due to this, large chunk of payments
were executed in cash until the introduction of the first credit card. Multiple credit cards
entered the market as banks tended to create their own credit card. The revolution what
credit cards brought is similar to how the Fintechs are reshaping the payment industry
with new customer experience. To understand the impact caused by Fintechs from
business and technology perspective it is fundamental to understand the entire payment
system and to know the players involved in payment transactions. (ARJUNWADKAR, 2018)

When an individual uses his/her credit card at a point of sale, or POS, the payment process
begins and the entities involved start cooperate with each other. In this environment, the
seller who receives the money is called the merchant and the customer who pays is
described as card holder. Both the merchant and the card holder has a bank account at
certain bank, this situation the merchant’s bank is the acquirer and the customer’s bank is
the issuer. The issuer bank issues cards linked with different card schemes like
Mastercard, Visa or Maestro. The card scheme plays an intermediary role. It is
responsible for connecting all the entities in the ecosystem. When the credit card is swiped
at the POS, the transaction process begin to work. The POS system sends an authorization
request to the merchant’s acquirer bank. After that, the acquirer bank forwards the request
to the card scheme. Then the card scheme starts to communicate with the issuer bank to
understand if the customer has adequate balance on his/her bank account to complete the
transaction. Lastly, the merchant provides a receipt to the customer and keeps a copy of
it to prove the existence of the transaction. (ARJUNWADKAR, 2018)

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Numerous transactions are implemented at a later time to close settlements when the
transaction is finished at the POS. The acquirer bank generates batches of settlements and
circulates them towards to the relevant card schemes. Then the card schemes proceeds to
create another batch of settlements to be sent to the respective issuing bank. When the
issuing bank receives the payment request, it settles the payment towards the card scheme
which pays the acquirer bank after that. (ARJUNWADKAR, 2018)

The above described event is a simplified version of what happens during a transaction
completion. Multiple banks, merchants and credit card issuers are involved in the
processing of payment transactions across the world. This complexity created the
opportunity for financial technologies to disrupt the financial industry by enabling
different methods in payments. (ARJUNWADKAR, 2018)

Among Fintech entities, the payment industry has seen the highest amount of investments
comparing to any other sectors. In fact, the payment industry in itself had more money
invested than the other sectors altogether. (ARJUNWADKAR, 2018)
Graph 4. Fintech Funding by sector

Source: https://gomedici.com/Fintech-companies-around-the-world-raised-7-billion-in-january-2016

11
Accessed: 29. November 2019.

In 2016, out of the 7 billion US dollar that the whole Fintech industry received, 51%
landed in the payment industry. This shows the true potential of payment Fintechs.

3.1.1. Multichannel digital wallets

The wallet revolution had already begun in the late 1990s with the introduction of wallet
companies like PayPal. Later, the technology advancement boosted the wallet industry,
enabling mobile technology and the availability of client-side scripting technology. When
the first smartphones entered the mobile phone market, they started to reshape the way
how business was done. Mobile phones became the prioritized platforms for e-commerce
transactions. Numerous wallet-related applications are launched for online shopping
using the mobile device directly. When a customer purchase something using such
application, the payment process begins. The customer is directed to a payment gateway
point where the credit card information has to be added, as well as personal, shipping and
invoicing information, making the user experience less enjoyable. The digital wallet
applications can diminish this bad experience. These applications are able to store
consumer data such as credit card details, identity details, shipping and invoicing
information and even loyalty-related information, making the user interface more
transparent and easy-going. Large number of start-ups as well as telecom companies and
phone manufacturers began to provide digital wallet solutions. Apple Pay and Google
Wallets are the most commonly known examples of digital wallet solutions.
(ARJUNWADKAR, 2018)

The popularity of digital wallets has risen with near-field communication, NFC, chips
installed in mobile devices and POS systems. NFC enables devices close to each other to
transfer payment information with a simple tap. This technological advancement
improves the payment experience. In addition, tokenization and security solutions are

12
getting standardized. Consequently, the number of frauds is decreasing in digital wallets,
adding one more reason to their popularity and adoption. (ARJUNWADKAR, 2018)

3.1.2. POS systems

Retailers nowadays use POS system that is typically near the store exit or at the end of a
specific store section, and these POS systems are either fixed or stationary. The new
concept that is gaining popularity is to have a POS solution on a tablet or phone and the
billing can be done right there. This allows consumers to have an idea of "paying
anywhere" when shopping. (ARJUNWADKAR, 2018)

Fintechs are focused more on making it possible for a costumer to have a seamless
payment when shopping. Fintechs' POS systems help companies recreate an online
shopping experience. Fintechs transformed the shopping experience with the use of an
iPad which also let the customer select from a wide range of choices. They have advanced
analytics engines as part of the POS reporting system. POS Fintechs also makes
acquisitions in multiple countries to grow their impact globally. (ARJUNWADKAR, 2018)

3.1.3. Blockchain

Blockchain is an online bookkeeping platform or ledger that is incorruptible, enforces

transparency and bypasses censorship. Blockchain technology has gained attention as the
basis of cryptocurrencies such as Bitcoin, but its capabilities extend well beyond that,
allowing existing technology applications to be greatly improved and new applications to
be launched. Blockchain, also known as distributed ledger technology, is predicted to
revolutionize business sector and drive economic change globally. It is transparent and
redefines trust, enabling secure, quick, reliable and transparent solutions that can be
public or private. Blockchain, such as the Internet, is an open, global infrastructure that
enables people and businesses to cut intermediaries, reduce transaction costs and reduce
the time delay of third parties to work. The technology is based on the distributed ledger

13
structure and consensus mechanism. The model allows to create and share digital ledgers
of transactions between distributed computers on the network. When a client adds a
transaction to the ledger, other computers on the network use cryptographic algorithms
to encrypt and validate the transaction data. If the majority of computers agree that the
transaction is valid, a new data block will be added to the chain and accessed by all on
the network. Transactions are secure, reliable, publicly available, and immutable. The
financial services sector, which needs to be innovate in order to reduce the costs of legacy
systems and manage increasing compliance, is leads the way to blockchain and taking
advantage of the safety, immutability, transparency and ability of the technology to
eliminate the intermediary. (UNDERWOOD, 2016)

R3 is a Fintech start-up, supported by more than 40 global banks. It is designing a

structured framework for private ledgers that could significantly reduce costs and time of
transaction settlement. Likewise, the Hyperledger project of the Linux Foundation is an
industry project which includes tech giant IBM, that is developing open source
technologies and creating the foundation of a structured digital ledger. Deloitte partners
with customers and entrepreneurs to develop solutions, including Smart Identity which
can help onboarding regulatory clients and Know Your Customer (KYC) procedures for
banks, while large financial firms, insurance companies, exchanges and technology
suppliers have also placed their resources behind blockchain. Many take advantage of the
ability of the technology to act as a huge stamp of time. NASDAQ uses its Linq
blockchain technology to complete and record private securities transactions, and
the Depository Trust & Clearing Corporation, working with market participant and
technology company Axoni, manages post-trade events for credit default swaps.
Regulatory authorities are also interested in the technology, as its transparency and
integrity make it possible to monitor market activities in real time. These early
technologies have a great potential, but data protection, the complexity and latency of
financial markets are troubling. The privacy issue is about how much information needs
to be revealed to validate a transaction. Scale and latency are also concerns the market
that manages huge data volumes. These issues are addressed by industry organisations
and individual firms, but robust solutions remain elusive. (UNDERWOOD, 2016)

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3.1.4. Cryptocurrencies

Blockchain is the background technology behind cryptocurrencies such as Bitcoin, the

first and most famous use of blockchain. Cryptocurrency is a virtual asset which is
accessible via the Internet. It can be bought, exchanged or shared between parties. This is
why it is used to store value just like conventional investing of cash, land and other forms
of assets. As with other investments the market determines how much people are willing
to pay for it. Cryptocurrency is a form of digital currency that can be used to buy products
and services and to make payments to others on the Internet. However it varies in many
aspects from the traditional currency. There are no physical coins or paper bills for
cryptocurrencies in contrast to US dollars or euros that can also be used digitally.
Additionally, cryptocurrencies are decentralized unlike traditional money.
When cryptocurrencies is transferred to someone or it is used to purchase something, it is
not needed to use an account, credit card or any other third-party intermediary to manage
the payment. The payment goes directly from one party to the other and comes securely
and almost immediately, all without any intermediary involved. (GRABOWSKI, 2019)

Transferring things directly from one individual to another online is nothing special.
Examples of peer-to-peer interaction include e-mail and instant messaging. People can
easily and instantly send files, photos and other types of information over the internet.
But when people want to send money over the Internet, they must apply to join a third
party's networks such as a bank, credit card or PayPal to make sure the transfer is carried
out. Money just cannot be attached to an email and cannot be sent over to another
individual. If it was possible, everybody would copy that money as they can copy
documents and pictures. It's worthless if digital money can be copied. Nothing would
prevent it from being multiplied many times and shared with multiple people. This
argument is known as the double spending problem and this is why banks and other

15
money transfer services are needed as intermediaries in online transactions.
(GRABOWSKI, 2019)

Cryptocurrency provides a solution to this problem by means of a special type of

transparent and decentralized ledger known as blockchain technology. Cryptocurrency is
encrypted in such a way that it cannot be copied. Each cryptocurrency transaction is
recorded in a publicly viewable database. A global network confirms the transfer of
cryptocurrency from one person to another. It verifies that a person owns the
cryptocurrency that he claims to have and that the person did not previously spend it in
another transaction. Instead of having a centralized database that verifies transactions as a
third-party like a bank, cryptocurrency uses blockchain technology to securely validate,
confirm and record every transaction. Since the data is stored in a totally decentralized
way over a global computer network instead of a centralized database, there is no single
failure point. This makes blockchain records safer than banks and less defenceless to
fraud, falsification or system-wide collapses. With a decentralized blockchain, no
intermediary is needed to arbitrate the transaction, make demands and take a large cut.
Cryptocurrency lets the user send and receive 24-7 unlimited amounts anywhere in the
world without any cost, in contrast with banks which normally operate between 9 and 5,
charge transaction fees, limit the money the customer can withdraw from ATM or pay to
someone, and sometimes take days to process deposits. (GRABOWSKI, 2019)

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3.2. Reforming the lending industry

Since the global financial crisis happened in 2008, it became complicated for customers
to apply for a loan. The compliance-related requirements have increased to approve loans
for conventional credit and lending institutions. This led to more complex and time-
consuming loan receiving processes. To ease the complexity, Fintechs have begun to
emerge in the lending sector. The following chapters will discuss the different types of
lending offered by Fintechs. The types of lending are as follows: P2P lending, online
lending, payday lending, microfinance and crowdfunding. (ARJUNWADKAR, 2018)

3.2.1. P2P lending

Peer to peer lending is a form of lending where the transaction is done between the lender
and the borrower directly. The amount and the terms of payment are mutually agree by
the individuals. This form of lending is more popular than any other forms of lending
because the profit that the lenders can earn is much higher than in the formal lending
system. (ARJUNWADKAR, 2018)

Several Fintech start-ups have introduced P2P lending platforms. These platforms mix
the flexibility of informal P2P lending with the transparency and trustworthiness of
formal lending. The variations of the platforms created by Fintechs is diverse.
(ARJUNWADKAR, 2018)

17
Most P2P lending Fintechs established an online marketplace wherein the borrowers and
lenders can be connected and they are able to post anticipated borrowing or lending
details. Borrowers applies for a loan at the beginning. Borrowers can apply for a loan if
they have certain credit score. After it, the loan gets listed on the platform. Then investors
can go through the list and select the borrowers. The verification is done by the platform.
Once the verification is successful, the borrower receives. These borrowed amounts are
usually paid back within a very short term. (ARJUNWADKAR, 2018)

There are some examples of P2P lending where all the funds are distributed in a first come
first serve basis. The investment is shared to multiple borrowers at a market rate.
Consequently, a single lender can give away money to several borrowers and the other
way around where a single borrower can get money from many lenders.
(ARJUNWADKAR, 2018)
Other platforms are specialized in personal loans and provide a financial advisory
platform along with managing loans. These platforms usually manage onsite inspection.
Borrowers need to be verified before entering the platform. (ARJUNWADKAR, 2018)
Some P2P platforms have reached an entirely new level of transparency. These platforms
keep the records of every loans issued via their platform. They maintain the database for
analysis purposes. The clients can request the required data from which they can plan
their financial moves. (ARJUNWADKAR, 2018)

3.2.2. Online lending

The online lending space have been revolutionized by digital channels. As discussed in
the previous chapter, most P2P lenders act purely as marketplace that manages lending
through their platforms, connecting lenders and borrowers directly. In contrast, online
lenders use their own funds to lend to either businesses or consumers. These online
lenders have their own banking or financing background. They use digital technology to
connect with customers, to process and approve loans. (ARJUNWADKAR, 2018)

A person with a low credit rating would have a greater chance that most of the established
banks would reject his / her loan application. This would mean refusing millions of
applications to credit for customers. This is where Fintech, despite low credit scores and

18
high interest rates, provides creditworthy borrowers an opportunity to borrow from them.
In a traditional set-up, the loan process could imply that customers go on multiple trips to
branches of a bank or finance firm. The whole process is time consuming and for the
customers could be quite stressful. In fact, it is not even a transparent process to confirm
an individual's qualification for credit and the interest rate charged. Unlike the traditional
banks and financing firms, Fintech’s innovative machine-learning algorithms and their
digital collaborations allow the majority of the processes to be done completely online
and in a transparent way. (ARJUNWADKAR, 2018)

Some of Fintech's other tools help customers to monitor their credit score and debt
repayment. The client can handle their interest rates feasible across Fintech services using
gamification and a rich user interface. Hence, it goes on to demonstrate that Fintech are
not only there to earn money, but instead to offer people with services and opportunities
and to help them achieve their goals as well as in some cases to become the advisor of
choice at reasonable price. (ARJUNWADKAR, 2018)
Some of the other digital lending companies are changing online lending spaces customer
behavior by rewarding people for good repayment performance. The reward is not in
financial form but rather elevates the customers to a privileged status. What this does is
whenever a customer applies for a loan under a certain category, and if the borrower
makes repayments on time, he will be upgraded to the next level, which means that the
client can borrow more at lower interest rates. By making prompt repayments, an
individual can lower the interest rates and simultaneously increase his/her eligibility for
a loan. This in fact leads to good behaviour by borrowers rendering the financial
sector trustworthy. (ARJUNWADKAR, 2018)

Fintech are also active in student loans. Such Fintech are transforming the potential
multibillion dollars student loan industry that is expected to continue to expand. Many
Fintech offer student loans on the basis of their potential return on investment (ROI).
Every loan is considered as an investment they build on an individual student. One of the
major issues with offering student loans is that repayment by the student is only possible
if his / her abilities are sufficiently compelling to secure a decent job. In order to ensure
that students are deployable to get jobs after graduating, these Fintech work with colleges
and universities that provide the right type of training at affordable costs in addition to
standard education. (ARJUNWADKAR, 2018)

19
Some of the Fintechs recognized the potential and began funding small business start-ups
and their requirements for working capital. This form of lending is also classified as B2B
and C2B loans in connection with digital loans. Fintechs provide loans from few thousand
dollars to a million dollars at a nominal interest rate with repayment terms ranging from
three to five years. The process of loan approval depends on the business or individual's
credit score. Since the loan is approved through automated loan process in some cases the
customer can get the loan as fast as in one day. It clearly indicates that these Fintechs are
now eliminating all the paperwork chaos involved in loan processing at big banks by a
fast processing algorithm. Consequently, these Fintechs are extremely popular and are
used by most small businesses for their working capital loans and short-term capital
requirements. (ARJUNWADKAR, 2018)

3.2.3. Payday lending

Payday lending is an unsecured loan of a small sum of money with a really short payback
period and payback is usually deducted from the individual's next salary. People would
take these loans primarily to fulfil financial obligations such as paying for car
insurance and so on. The person is optimistic that if he takes a loan to pay off the
immediate financial needs, he will be able to repay the same from his / her next paycheck.
Payday lenders normally check that the individual is employed and are expected to
receive the next paycheck. (ARJUNWADKAR, 2018)

Fintechs across the world are reshaping payday lending space through a number of
different initiatives. In addition, the entire scheme for payday lending has been made
simple and is more convenient for anyone to become a payday lender. The P2P lending
platforms, mentioned above, have also been actively used by payday borrowers and
lenders. Improved loan accessibility and low default rates have reduced overall operating
costs due to advanced AI-driven algorithm. It allows most of these lending institutions to
offer lower interest rates, making the whole concept more attractive to most of the
investors. A large number of payday lending Fintechs disrupts the entire lending industry
through some of the alternative business models. (ARJUNWADKAR, 2018)

20
The traditional credit scoring mechanisms to identify an individual's creditworthiness are
not very useful as payday lending involves lending to people who are unable to save
enough money to address financial contingencies until they receive their next paycheck.
Consequently, a large number of Fintech have built their own proprietary risk assessment
platforms to analyse the profiles of customers who have defaulted in the past and thus
indicate the applicant's likelihood of default. Customer profiles are also analysed by
enriching the same with inputs from both traditional credit scoring mechanisms and social
media. Such Fintech use the available data to predict the borrowers ' repayment capability.
Some of the Fintech were able to deliver 90% accuracy on their platforms and had the
highest repayment rates even at the peak of the banking crisis. As a result of low default
rates, these Fintech were able to manage profitably even with increased loan applications.
(ARJUNWADKAR, 2018)

Some of the other Fintech firms use machine-learning algorithms to help customers such
as millennials. Since millennials do not have good credit ratings, conventional
underwriting processes would not have qualified them for a loan. These platforms,
designed for creditworthy payday borrowers, have now adapted as one of the standards
for credit ratings. As a result, these Fintech have been quite successful in collaborating
with banks and financial institutions around the world to
provide credit scores for borrowers, especially for short-term borrowers with no credit
scores, but with better repayment capability. (ARJUNWADKAR, 2018)

3.2.4. Microfinance

Most emerging nations, such as China, India, Brazil and Bangladesh, have citizens who
have not been able to borrow through normal banking channels. Fintechs have arisen in
these countries over the past 10-15 years. They run their business as a profit / non-profit
organization with the purpose of alleviating poverty. Start-ups in microfinance are
getting the unbanked into financial systems, promoting financial inclusion. The poor
would usually take the loan from moneylenders before microfinance companies existed
and would be left to the moneylender's mercy for the interest rate and the frequency of

21
collection. What microfinance companies do differently is that they have a standard
lending process, and they prefer to lend only a certain amount, thus ensuring lower default
rates. Most of the microfinance firms are non-profit organisations in developed countries,
especially the United States and Canada, where they support the unbanked. Microcredits
are classified as microfinance or microcredit in the United States and are loans up to
$50K. (ARJUNWADKAR, 2018)

Microfinance institutions, particularly in developing countries, have specific challenges

to overcome. One of the most common challenges microfinance businesses face
worldwide is identifying a user and preventing fraud from creating a false identity. Some
microfinance organizations have created a team, culture and trust between their clients
and their workers to avoid such fraud. In addition some of the microfinance companies
used biometrics, typically fingerprints, to avoid fraud of false identity.
(ARJUNWADKAR, 2018)

A large number of these Fintech are non-profit organisations and some of them are
developing platforms that help minorities, low-income businesses and students
internationally as well as supporting individuals. In addition to providing technology
platforms, these Fintech also help connect people and facilitate loans to the poor, thereby
trying to alleviate property. There are also Fintech that are primarily a digital
platforms that use systems like PayPal or mobile payments to facilitate loans. It is a
platform that brings together both borrowers and creditors where creditors offer
extremely low interest rates or borrowers sometimes have no interest at all. The borrower
places his / her story or business case on these platforms and then the lenders, including
charitable institutions, help these individuals to get a loan at a very low or sometimes 0%
interest rate. (ARJUNWADKAR, 2018)

3.2.5. Crowdfunding

In crowdfunding, a number of investors or lenders contribute financially to the costs that

the project has incurred or is expected to incur. Also in crowdfunding, the amount of
contributions and the desired outcome vary across investor and lending communities.
Since the financial crisis of 2008, crowdfunding has seen a major uptick as faith in the

22
banking system has undermined and investors and borrowers have been looking for ways
to invest more as a partner and/or help the cause they always wanted to fulfil.
Crowdfunding is also closely connected to donations, but unlike a donation where the
only expected outcome is emotional satisfaction, the expectation is for material gains in
crowdfunding, in addition to the emotional satisfaction of achieving the goal. Most cases
crowdfunding is used for funding some of the causes like funding for equity, funding to
build an innovative product, funding for research project and funding for emotional
reasons. (ARJUNWADKAR, 2018)

Crowdfunding platforms charge their clients two ways, either they charge commission on
the overall collected fund or they charge service fees for enabling transactions of
investors. Since crowdfunding platforms impose very low transaction charges, it is very
helpful for investors. Money holders also supported by crowdfunding in finding the right
opportunities. Such platforms allow small amounts of money to be invested and are open
to a wider audience. Hence, it lets small investors participate in investments that would
normally only be accessible for large investors including venture capitalists and fund
houses. Besides managing the funding for fund seekers, crowdfunding platforms help
investors by providing feedback on their projects or products as well. In certain scenarios,
the owner of the product profits from inventing functionalities that could be key to the
user. (ARJUNWADKAR, 2018)

23
3.3. Reforming the wealth management industry

After the lending and payment sector, the wealth management business has been the third
industry, most affected by Fintechs. The disruption of Fintech in the wealth management
industry has been focused around the financial management and wealth advisory
functions usually done by investment banks. A large portion of Fintech's disruption is
focused on robo-advisors and financial planning. Financial advice, automated
investment, socially responsible investment and investment-related research are the
business functions that are affected by Fintechs. (ARJUNWADKAR, 2018)

3.3.1. Financial advice

Established investment banks would generally offer financial advice to high net worth
individuals only. Those individuals are in focus who are eligible for investment with a
certain basic minimum capital, normally thousands of dollars or more. The increasing
middle-class income globally and various outlets of financial education, including the
Internet, has led to a dramatic increase in the number new investors. Fintechs have
been able to gain advantage on this increase by using digital channels for financial advice
and planning instead of attracting investors through a face-to-face meeting that most
established investment banks do. One interesting thing about these tools is that they help
people manage their long-term finances. An employed individual would normally plan
from month to month or, in some cases, for the whole year as well. A tool is usually
required to have a long-term goal planning that spreads over several years including
pension. Generally, the tool would help a person to update their financial positions and
objectives as life goes on. In addition, Fintechs has been able to keep their operating costs
relatively low by using these digital platforms over the Internet and mobile phones.
(ARJUNWADKAR, 2018)

Some of the Fintechs use a combination of digital technologies and professional guidance
to support a client with financial planning. Such businesses also provide tailored financial
advice for people who are enrolled with them. Once a person has registered with them,
they can assess the individual's rating based on the user's financial information. The rating

24
determines the financial dependency and potential risks an individual faces while
reaching the goal. The platform also assists clients in defining the financial goal,
providing advice aimed to improve it and keeping track of actions taken to achieve it. All
of these platforms provide a dashboard where one can see how the scorecard is updated
by his/her financial actions and track his/her progress towards achieving the goals. A
standard advice from these online and personal financial experts allows an individual to
determine if he needs to continue or adjust the same collection of financial measures. As
part of their product portfolio, some of these firms have also developed gamification
components. With the tool of gamification these platforms are able to attract young
investors who via these channels can understand financial planning and become more
involved in the financial market. The Fintechs are therefore changing the way financial
advice and planning is carried out with the use of digital channels and gamification.
(ARJUNWADKAR, 2018)

Some of the other Fintechs are revolutionizing the entire digital financial advisory
environment by providing financial guidance on mortgage management. The idea of
helping others handle their mortgage is very revolutionary in itself. More than two-thirds
of the population are still in debt and would like an online solution to help them discover
how various mortgage loans can be managed properly. In addition, there are people with
disposable incomes who do not properly handle their debt. These Fintechs already have a
personal advisor algorithm that evaluates and allows a client to understand how their
mortgages can be managed. (ARJUNWADKAR, 2018)

Many Fintechs are transforming the way financial management is handled for the
ordinary person. Those kind of Fintechs have made their own mobile applications,
therefore allowing self-service financial planning. The most innovative thing about these
platforms is to connect all of an individual's financial accounts and track the same in real
time. Another interesting feature about some of these Fintechs is that they give free
consultation from a professional financial advisor either during the trial period or within
their application's free versions. (ARJUNWADKAR, 2018)

Some of the above-discussed platforms, with the knowledge and advice they offer, are
slowly becoming the new favourite financial advisors for most earning individuals, who
have small amount of money to invest. (ARJUNWADKAR, 2018)

25
3.3.2. Robo-advising

Robo-advising is performed using robo-advisor systems or fully automated investing

products that use algorithms to handle costumer's portfolios. There are multiple different
forms of robo-advisor systems based on the level of technology used to maintain the
investment of a person. Robo-advisor platforms are classified into four categories, which
are fully automated, guided, hybrid or minimalistic automation platforms. There are
several benefits that robo-advisors provide over traditional financial advisors. One of the
most significant perk is to reduce overall transaction costs for trading. The automation
of operational activities using computer algorithms significantly reduces expenses
of wealth management firms. Moreover, most of these companies ' user interface is really
user-friendly, which in turn fuels acceptance by young and tech-savvy stakeholders. In
most robo-advisor platforms, once the user has established his/her risk-taking capacity
and linked his/her expenses and financial planning, the algorithm proceeds to collect
stocks based on the profile given. The algorithm also re-balances as needed. A robo-
advisor service is the best choice for financially well-off people who are lack of time to
pick securities and control their portfolios. These are usually mid- to high-income salaried
people who are unable to have sufficient time for financial investment, even though they
know for sure they could still make more money by transacting on stock and equity
markets rather than on government securities at fixed interest rates. Eventually, market
research has shown that most high-net-worth investors are also more likely to have
significant parts of their investments managed by robo-advisors. All these aspects and the
growing presence of different kinds of investors increased the total assets for robo-
advisors. Over the past few years, the total value of robo-advisor investments has
increased significantly. (ARJUNWADKAR, 2018)

A large number of robo-advising systems optimize user spending by goal-based investing

strategies. Usually, they characterize an individual's target into different categories such
as pension, emergency, child education, and major expenses. Each of these objectives
would have a suggested minimum and maximum stock allocation, expected term and
certain cash-out expectations according to their recommendations. For each goal

26
category, an investor may adjust such allocations depending on his/her strategy which
can be aggressive or conservative. Once the client has set the strategy, he is pretty much
on "autopilot" until it gets interfered by the client. Additionally, the system tracks the
portfolio and occasionally re-balances it so that the individual's defined strategy is on
target and the risk taken is not very high. The interesting part of all this is, the entire
process is optimized to match a particular goal category. (ARJUNWADKAR, 2018)

One of the most common types of investment strategies used by these Fintechs is the use
of modern portfolio theory (MPT), which summarizes that an investor will gain more if
he diversifies funds across various risk-weighted categories instead of relying on a single
stock. (ARJUNWADKAR, 2018)

Graph 5. Compound annual growth rate in robo-advisory

Source: https://assets.kpmg/content/dam/kpmg/pdf/2016/07/Robo-Advising-Catching-
Up-And-Getting-Ahead.pdf Accessed: 29. November 2019.

27
Based on KPMG report, by 2020, $2.2 trillion will be managed by robo-advisory
platforms. The compound annual growth rate is 68% year-over-year.

3.3.3. Equity research

Equity research in the investing world is described as research on equity and related
products, such as mutual funds, to provide an investor a buy or sell recommendation.
Until the last century, most of the researches were being done by research agencies which
were employed by large corporations of investment banks. In most instances, the accuracy
of research reports was always questionable due to the influence of companies or
investment banks on published reports. (ARJUNWADKAR, 2018)

Over the past decade, a number of research-related websites have arisen specialized in
delivering analyst reports at small or free prices. Some of these platforms are connected
to independent analysts who offer customized advice for stock selection for nominal fees.
Over time, numerous such websites have appeared, leading to a huge amount of
information available for every investment topic. Processing this data and assessing
reliability and truthfulness of information became a problem to investors. Several start-
ups seized the opportunity and developed applications that only release reviews from
accredited experts affiliated with their platform. Such applications reshape how people
access and understand research reports on different kinds of financial instruments. They
have database of multi-year history of large number of companies and funds. These
channels provide updates and monitor stock and fund reports. A large proportion of these
sites supply data that is helpful for further research, but does not provide
recommendations to stakeholders directly. Therefore, these tools provide the data and
analytics and an analyst requires to provide recommendations. Therefore, apart from
being a useful tool for experts, these sites often transform beginners into stock trading
professionals through visual tools. (ARJUNWADKAR, 2018)

28
3.4. Reforming the insurance industry

In the insurance industry, start-ups and Fintech companies, collectively referred

as Insurtechs, have appeared. They are completely transparent, efficient, flexible, able to
have a stronger relation with clients and most significantly, cost-effective. Many new
business models have arisen that could benefit with the use of the latest technology. These
business models have been reshaping existing business processes to adapt to different
preferences of the new generations like the delivery of transparent and collaborative
insurance products, the provision of customized, on-demand insurance, smooth multi-
channel customer experience, low premiums and social change. To meet customer's
growing demands insurance start-ups have launched personalized asset and property
insurance. An individual can customize the coverage based on various items that he
wants to insure. As a result, individuals can insure specific valuable items while ignoring
others that they may be ready to lose in the event of an emergency. Another sector that
Fintechs disrupt is aggregating data linked to numerous insurance offerings and
associated coverage from various insurance companies in the industry. Therefore,
equipped with information available on the aggregator pages, it is much easier for clients
to look at the different deals available and then make a logical choice about the insurance
products they get to choose. Digital technology allows customers to simply apply for a
plan or cancel a policy on a website or mobile app. Some of the Fintechs cause disruption
in the health insurance industry by offering end-to-end services to directly connect a
patient to the hospitals during an emergency. (ARJUNWADKAR, 2018)

29
3.4.1 P2P insurance

FinTech companies are changing the insurance industry by eliminating the conflict of
interest between insurance firms and clients. The conflict of interest derives mainly from
the idea that if all the claims were paid out by insurance companies in a timely manner,
their earnings would be decreased and, thus, insurance companies could be likely to
postpone payments to maximize profits. (ARJUNWADKAR, 2018)

The insurance broker model is one of the most popular forms of a P2P insurance business
model. In this model, the policyholders form a small group among themselves and keep
a certain chunk of the premium paid by an individual member as part of the pool. The
remaining premium is used to purchase standard insurance typically from an existing
insurer. Money is taken out of the pool in the event of minor damages, claims for larger
damages are routed through regular insurance. At the year-end the remaining money from
the pool is refunded to the members or could be reinvested for the next year. If more
money is needed than available amount in the pool, then the claims could be directed to
regular insurance. This type of insurance helps the participant in getting a quick
settlement of claims as a group. The settlement usually takes place over a meeting of
authorized representatives with very limited paperwork. The representatives directly or
via a third-party can determine the losses and provide immediate help to the individual in
need. This is beneficial for the customers because he gets direct financial assistance rather
than experiencing a time-consuming insurance procedure within conventional insurance
providers. (ARJUNWADKAR, 2018)

One of the other models more frequently used is a version of insurance broker model. A
group of members join together in this system, as in the insurance broker model, to form
a group and then pool money that acts as an insurance. In certain situations, insurance
companies themselves form the peer group. In turn, these peer groups reinsure themselves
with a larger reinsurer in order to accommodate claims beyond what the group can handle.
Most of these companies are charging a fee for processing claims and customer service.
Then they really make no money from the collected premiums and make the whole P2P
insurance process non-conflicting. The costs and income of the insurance companies are
gained primarily by handling claims and servicing the client, thereby providing low

30
premiums to the client on a long-term basis. Fintechs encourage good social behaviour
while at the same time becoming financially beneficial by engaging a group of people to
have shared pool of insurance. As in any basic group insurance, they offer discounts to
all members of a group. They also give incentives for risk-free conduct to the group as a
whole. This encourages every person in the group to monitor and ensure good behaviour
for the others, thus maintaining the premiums low for all group members.
(ARJUNWADKAR, 2018)

There are FinTech companies that have truly established P2P insurance in reality.
Policyholders who have the same insurance form small groups and pay a small amount
of their premium to the pool. The pool is used to settle smaller claims that occur within
the group. If no claim is made by the group within the defined period, the amount
available in the pool will be allocated out to all its participants in a pre-defined ratio. The
cashback to members will be reduced by the proportionate amount if there are claims.
This arrangement offers the most if the members are in relation to each other, group of
friends or family members. The idea is that friends or family would not promote fraud
claims within themselves. The friends or family would enter the platform as a group or
locate each other on the insurance firm's application and then create the group. Most of
the premium money paid moves into the pool as mentioned previously, and the rest of the
money goes into paying the insurance companies' fee to cover large claims. If there is not
enough money in the pool to cover the anticipated claim then the insurance company, to
which the group paid the premium, will cover the claim. (ARJUNWADKAR, 2018)

Another P2P FinTech offers car insurance as well with a creative addition to the way how
car insurance works. Like other P2P insurance systems, it allows users to pool their capital
to reduce the total premium and refund insurers for the unclaimed volume from the fund.
There is an innovative feature that is the members of the group are able to invite friends
and family via social media to be part of the insurance pool. They motivate family and
friends to join together, which results in lower collective premium. Groups also have a
forum to debate their claims and consult on issues. If a person does not have a friend or
family that could be part of this group, then the insurance company recommends the most
appropriate pool for the individual based on the risk profile, location and several other
components. (ARJUNWADKAR, 2018)

31
3.4.2 On-demand insurance

On-demand insurance is changing the way the insurance business is carried out. One
would buy insurance for a specified time period for insurance, until recently. With new
age technologies, FinTechs had the advantage of innovating and quickly evolving against
their conventional peers. Hence they could deliver a digitally-only, multichannel user
experience for customers. Furthermore, their operations are built in a configurable way to
address the rapidly changing conditions, enabling them to quickly react to changing
market demands. Eventually, they use more automatization and artificial intelligence to
eliminate the need for human involvement. FinTechs are therefore more agile, creative
and adaptable in addressing the changing customer demand with on-demand insurance
coverage rather than fixed insurance coverage. The client does not take insurance
coverage for the whole year or for a full lifetime in a standard on-demand plan, but instead
only takes it for the period that he requires. In order to make this happen, what is needed
is a quick response system that generates offers as soon as the customer places the type
of policy that he needs and the duration for the same. Customers are expected to follow
this type of insurance service in the future more than any other type of insurance coverage.
An example could be when a driver of a car subscribes to insurance only when he really
uses the car to get from one point to another. It is quite possible that the driver would only
use the vehicle for 4 months a year and therefore ends up paying only for the 4 months in
which the owner drives the car. The driver would still end up paying premiums for the
whole year in a traditional insurance scheme and more or less the amount would be equal
to what would normally be charged by any other person who drives the car every day of
the year. This would mean overcharging the first customer through forcing him or her to
sign up for a fixed-term policy and subsidizing the second customer by compensating for
his or her real contribution to the pool through an excess first customer. In this way, on-
demand insurance enables to fix this anomaly by allowing customers to buy insurance
only when it is required and by using technology options such as mobile devices, the same
is made possible. A user would now be able to start and end a program anytime he
wants by using the mobile device. (ARJUNWADKAR, 2018)

32
Developing a customer interface for on-demand insurance is the easy part. The real
challenge is how flexible the backend operation can be to process these just-in-time
request with a very short response time. This is almost impossible to achieve in a
conventional insurance set-up, but since most FinTechs develop the system from scratch,
they have the advantage to build this configurability level using the current tools and
products. In addition to the technological challenges faced by conventional insurers, they
would also face a major challenge in underwriting the risks and then estimating the
premium as there is very little historical data available for on-demand insurance and the
premium figures may differ based on multiple factors such as claim timing and individual
behaviour. They find it difficult to fix a premium amount for an exact risk during the
specified period. FinTechs have been truly innovative in fixing this issue by using
information collected from social behaviour and device sensors to collect data points.
They have been using technologies such as artificial intelligence and machine learning to
evaluate the data points collected from social media and devices. Hence, when these
innovations are used on the collected data, they can draw several hypotheses regarding
drivers of behaviour, time of claiming an insurance and social habits of clients. FinTechs
have been able to change the insurance processes in order to meet the requirements of the
customer. (ARJUNWADKAR, 2018)

33
4. Status of Fintech in Hungary

Despite the fact that there are several successful Fintech companies in Hungary, the
Fintech sector is still in an early stage of growth. Hungarian Fintech solutions, which are
already on the market or under testing, are connected mainly to financial services
industry. The most widespread examples are mobile payment and money transferring
solutions. According to Hungarian National Bank’s estimate, there are approximately one
hundred active Fintech firms on the market with their products or services. Numerous
start-ups provide financial innovations and are getting popular regionally among
customers and investors. Feedbacks of the market show that Fintech start-ups would have
a lot of pioneer innovations for the financial services industry, although the Fintech sector
is still in developing stage due to the structure of domestic market and the lack of
flexibility in regulation. These components restrain Fintech start-ups to enter the market
independently. These features of the market encourage new entrants to cooperate with
established financial institutions. (mnb.hu)

Graph 6. Market entry strategy of Hungarian Fintech companies

Market entry strategy of Hungarian Fintech companies

18%

50%
14%

18%

Cooperate with conventional bank system Provides services to specified group of people
Provides services to general clients Takes over the role of banks

Own elaboration source: mnb.hu

34
The continuously developing ecosystem can help the spreading of Fintech solutions. In
Hungary the traditional financial service providers have been starting to realise the
opportunity in Fintechs and they are open to co-operate with them. Workshops, created
by conventional financial institutions, provide infrastructure, professional and sometimes
monetary support for newly established Fintech firms which create a tighter cooperation
between traditional and innovative corporations. Besides that, the Hungarian National
Bank launched initiatives which also help the cooperation and ease the market entry.
Between 2008 and 2018 the total investment amount in Fintech solutions was below the
regional average, but as investors are more and more open to invest in Fintechs, it is
expected to grow potentially. (mnb.hu)

There is a potential expand as well on the demand side for Fintech innovations. Quick
and simple administration is becoming the top priority for domestic consumers. Because
of that, digital innovations are likely to have significant role in the improvement of
financial processes. There is a huge demand for simplification of processes such as
applying for a credit or opening a new bank account. Besides, large number of users can
be found already in every generation for applications whose main portfolio is either cost
tracking, saving, or insurance product utilization. Comparing to other nations in the
region, the Hungarian consumers are the most open-minded for Fintech innovations.
(mnb.hu)

Despite the favourable factors in supply and demand side, the level of digitalization
among traditional financial services providers is considered very low. Adapting Fintech
innovations, digitalization and automatization would be the right path for development.
Some players on the market have already understood that and have started developing
their own strategy for digitalization or they have strengthened the digitalization in their
business models. Although, by and large the digital transformation is happening quite
slowly as the domestic market environment does not demand higher degree of
digitalization. The institutions are willing to partner with new, innovative players on the
market, but still a low number of contracted cooperation can be seen on the market.
However, it is worth highlighting that the adoption of lean and agile mind-set, which is
the basis of innovative and efficient client service centre, is common. This can catalyse
the spreading of Fintech solutions and can ensure to catch up to the digital bank system
of the EU. (mnb.hu)

35
Graph 7. Fintech strategy development

Fintech strategy development

13%

20% 40%

27%

Develops own strategy in the future Has its own strategy

Adapts the strategy of parent company Parent company develops strategy in future

Own elaboration source: mnb.hu

4.1. Status of the payment sector

More and more Fintech innovation is available in the payment sector in Hungary. Among
domestic and international financial services companies, the primary focus of
development is on the online payment. The impact of wallets and innovative money
transferring solutions shows a continuous increase. The number of users for start-up
companies, who provide such services, is increasing as well. 80% of banks have
introduced or are planning to introduce their own mobile payment solutions. Banks
provide their services to clients on digital platforms on a much greater extent. Nowadays
it is getting common that clients are able to apply for a loan or open a new bank account
via online platforms. User verification and online signing is a simple routine too.
(mnb.hu)

The digitalization of internal operations is not on a favourable level for banks in Hungary.
This might be a biggest barrier of having an up-to-date bank system. Comparing with
international bank systems, the domestic bank systems work with a very low cost
efficiency. Core system of banks are outdated. The replacement of these core systems

36
would increase the cost efficiency and would enable banks to get on the same level as the
EU average. (mnb.hu)

4.2 Status of insurance sector

Although there is a small number of Insurtech innovations available in Hungary, those

firms which adopts business models based on online and digital services are getting more
and more successful. Mainly the daughter companies of international corporations
represent these business models. (mnb.hu)

Due to the size of the Hungarian market the spreading of Insurtech companies is not
intensive, thus the number of companies, which have the primarily focus on providing
insurance services innovatively, is relatively low. (mnb.hu)

In international comparison, the Hungarian insurers are in an early stage of digitalization.

The main focus of digitalization for insurers is to establish paperless processes, also they
aim attention at digitalization of processes such as product selling, contacting and keeping
in touch with clients and insurance claiming. Similarly to banks, insurance companies
primarily want to enhance customer satisfaction on a short-term. (mnb.hu)

The automatization and digitalization of the internal operations is expected to be done on

a longer-term. Although the testing of these systems has already begun, but none of the
companies reached the anticipated results. The main challenge is to consolidate and
harmonize the different types of systems. Several insurance companies have established
common platforms which enable the free flow of information between clients and partner
companies. (mnb.hu)

37
4.4 Status of wealth management sector

Several development is going on in wealth management sector but typically they are in
an early phase and the impact of them is considered quite small. The uncertainty around
the introduction of innovations to the market is huge in Hungary, as well as in the EU
generally. Due to the regulatory mainframe, the implementation of Fintech solutions is
cumbersome. Although in some areas, for example robo-advisory, minimal progress can
be seen but the real disruption of the market is expected on a longer run. (mnb.hu)

38
5. Conclusion

Over recent decades, the emergence of digital technology has changed the world
dramatically. Every day, more and more digital services are being developed, gradually
transforming customer behaviour and replacing traditional business models. The
movement introduced to various industries, particularly the financial sector. Since the
introduction of Fintech, it has also moved to digital services. With the use advance
technology, Fintech has enabled various financial services with better user experience
and lower costs.

In this thesis I have described the innovations Fintech has brought to the financial services
industry. I addressed the technology evolution which took place in the last five decades.
I also listed all the main solutions in the four most affected sectors which are payment,
lending, wealth management and insurance sector. Finally, I presented the current status
of Fintechs in the Hungarian financial market.

The technology evolution made it possible to disrupt the financial services market as
nothing before. More computational task can be done at a time, more information can be
stored and the more data can be transferred at a time. Simultaneously, the cost of these
components has decreased significantly. With the evolution of these features, cloud based
computing has emerged. Before cloud computing, firms used their own resources to
complete computational tasks or store data. Cloud based computing changed this and
enabled companied to do the same at a much lower cost. Cloud computing has a bright
future as the amount of investments are increasing year-by-year.

The payment industry is the most disrupted sector. Here the impact of Fintech is the
largest by far. Fintech innovations have fundamentally transformed the payment industry.
With the innovation of wallets, Fintechs are able to store customers’ information, giving
a very good user experience. With POS systems, the payment became seamless. The key
to their success is that these innovations were able to replace the traditional payment
process with a more comfortable way of paying. In traditional setup, a transaction
verification would always involve a third-party who confirms back the success of a
transaction. The blockchain technology disrupts the process as it enables anybody to

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become a third-party verifier. Blockchain became the basis of cryptocurrencies.
Transaction of money with cryptocurrencies is almost limitless. Blockchain and
cryptocurrencies have brought a level of transparency which was never experienced
before in the financial services market.

Fintechs revolutionized the lending industry as well. P2P lending simplifies the process
of applying a loan. With the use of algorithms and machine learning, the lenders can
profile their clients, maximizing the chance of return. The AI is able collect huge amount
of data, which would be very costly without it. Crowdfunding and microfinance increase
the financial integrity. They expand the range of users, as borrowers can borrow money
from a very small amount and lenders can lend small amounts as well. They also let start-
up companies to enter the market easier than before.

Fintechs also in wealth management have the feature of increased financial integrity.
Wealth management before was available only for those ones who had relatively high
income. Fintech solutions brought ordinary people closer to the world of wealth
management. What is really innovative is that Fintech platforms do not just manage the
wealth of people, but they also help clients how to manage their money on their own.
Robo-advisory has a focus on supporting people who are novice in the wealth
management industry.

The insurance industry became much more flexible than before with Fintechs. They
became user friendly as well since the clients can flexibly set the parameters of their
insurance. Fintech innovations also simplified the processes of an insurance claim. In
addition, they were able to cut-off the insurers with the help of money pools.

In summary, what is common in all Fintech innovations, independently from the area of
industry, is that they could enhance user experience in those financial services which
would be unavailable for most of them without Fintechs. They simplify processes, cut-
off the middlemen where they can, as well as save a lot of money for the firms.

But the success of Fintech innovations depends on several components, as in Hungary,

due to the market conditions and regulatory framework the introduction of Fintech
solutions is in early phase and still under development and testing.

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This paper did not consider the problems of Fintech innovations. As this Fintech
phenomenon is relatively new, it is hard to make a conclusion on a longer-term. Fintechs
are successful in bull market, but they haven’t proven themselves in recession times.
Future papers might focus on this aspect.

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References

Henri Arslanian, Fabrice Fischer. 2019. The Future of Fintech – The impact of Fintech,
AI, and Crypto on Financial Services

Parag Y. Arjunwadkar. 2018. Fintech – The Technology Driving Disruption in the

Financial Services Industry

Sarah Underwood. 2016. Blockchain Beyond Bitcoin

Available: https://www.cs.helsinki.fi/u/jilu/paper/blockchain03.pdf. Accessed: 24 November
2019

Mark Grabowski. 2019 Cryptocurrencies – A Primer on Digital Money. Routledge

Giorgio Barba Navaretti, Giacomo Calzolari, Alberto Franco Pozzolo. 2017.

Fintech and Banking. Friends of Foes?
Available: http://european-economy.eu/wp-content/uploads/2018/01/EE_2.2017-2.pdf.
Accessed: 15 November 2019

Magyar Nemzeti Bank. 2019. Fintech Stratégia.

Available: https://www.mnb.hu/letoltes/mnb-fintech-strategia-final.pdf. Accessed: 25
November 2019

Magyar Nemzeti Bank. 2017. Innovácios és Stabilitás, Fintech Körkép Magyarországon.

Available: https://www.mnb.hu/letoltes/konzultacios-dokumentum.pdf. Accessed: 25
November 2019

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