ASSIGNMENT

INFOMAX COLLEGE OF IT AND MANAGEMENT

(AQO35-3-M)

(MANAGERIAL FINANCE)
HAND OUT DATE: (04/11/2019)

HAND IN DATE: (15/11/2019)

WEIGHTAGE: (50) %

INSTRUCTIONS TO CANDIDATES:
1. Submit your assignment at the administrative counter.
2. Students are advised to underpin their answers with the use of references (cited using the
Harvard Name System of Referencing)
3. Late submissions will be awarded zero (0) unless Extenuating Circumstances are upheld.
4. Cases of plagiarism will be penalized.
5. The assignment should be bound in appropriate style (comb bound or stapled)
6. Where the assignment should be submitted in hardcopy and softcopy, the softcopy of the written
assignment and source code (where appropriate) should be on a CD in an envelope / CD cover
and attached to the hard copy.
7. You must obtain 50% overall to pass this module.

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 INTRODUCTION

There is no denying how important the finance sector is for the society and daily lives
of people all around the world. While this industry has encountered significant shifts
over the centuries as to political, geographical systems and regulatory amendments,
many scholars [ CITATION All03 \l 1033 ][ CITATION Mar16 \l 1033 ][ CITATION
Yon16 \l 1033 ] claim that the rise of FinTech has generated a new age for banks.

"FinTech", a contraction of financial technology, relates to tech-enabled financial

applications. It includes non-regulated or fully regulated companies whose aim is to
create a value-added, modern, technology-friendly financial service to enhance
existing financial operations. They help enhance existing financial services that
conventional financial organizations are offering. FinTech companies with an
approximate 12,000 companies around the world have grown rapidly over the last few
years [ CITATION Dru16 \l 1033 ].

The inter-connection of finance and technology has a long record. A new era

of FinTech has flourished since the Global Financial Crisis (GFC), 2008. This
generation does not focus on financial products or services delivered, but on who
provides them and the implementation of retail and wholesale increasingly evolving
technologies. The recent developments in FinTech driven by start-ups provide both
regulators and market participants with pressures to sustain the prospective
opportunities of innovation with the potential threats of emerging strategies.

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 LITERATURE REVIEW

As discussed above, it is relatively straightforward and apparent that the term

“FinTech” is a fusion of application area “finance” with “technology”. [CITATION
Alt16 \p 9 \l 1033 ]

Over the past centuries, the financial industry has been growing, as the first bank was
founded in 1472, accompanied by a vast number of other companies (e.g. brokerage
firms, insurance companies, property agents). Financial firms are sometimes pointed
to as service companies because they assist businesses in the prime market and have
over time formed a secondary market in which financial service firms engage among
themselves. This led in a vast network of associations, more sophisticated, relational,
and less linear than conventional manufacturing and retail industries [CITATION
KEV04 \l 1033 ].

Technology, the other part of FinTech has become a significant factor in handling
financing in today’s digitalized world. According to [ CITATION Har05 \l 1033 ], a
technology is a more convenient approach to organizing, managing activities and
conducting tasks. This particular concept considers both analogue and digital
technology, which dispersed throughout the financial industry. Earlier analysis on
FinTech's evolution by scholars like [ CITATION Lee18 \l 1033 ] also clearly shows
that financial technology has a longer history than FinTech itself. Since the 1990s,
[ CITATION Lee18 \l 1033 ]have associated FinTech's origins with dissemination of
the Internet.[ CITATION Dou16 \l 1033 ] portrayed a wider vision and already
understood the mid 90th century financial developments.

Evolution of FinTech
[ CITATION Dou16 \l 1033 ]’s analysis splits FinTech's evolution into three
divergent periods.

 FinTech 1.0 (1866 – 1987): From analogue to digital

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 The fundamental pillars of modern telecommunications technology were
developed worldwide over this phase comprising major accomplishments such
as;[CITATION Mar \l 1033 ] introduction of credit cards, telegraph later replaced
by telex network and the establishment of NASDAQ (National Association of
Securities Dealers Automated Quotations).This phase was vital in developing
suitable banks and rising worldwide accessibility of financial institutions. Even
today, banks conduct this system to offer their consumers with trusted services.
The favourable ground for the present phase of innovation would not exist
without this contribution in technology.

 FinTech 2.0 (1987 – 2008): Development of Traditional Digital Financial

Services
The conventional financial industry was established during this period. Banking
became progressively digitalized, use of Internet became widespread, prominent
IT technologies were established to sustain its activities, while ATMs and other
creative financial products and services were developed. Central clearing firms,
stock exchanges and foreign correspondent banking became broadly dispersed
and regulatory requirements were established. This phase was the emergence of
modern banking, with its branch oriented business structures, which many banks
are still implementing. During this period, a huge range of innovation took place,
which was deemed disruptive then. Conversely, banks depended too heavily on
their past achievements and previously sufficient programs become out-dated.

 FinTech 3.0 (2008 – present): Democratizing Digital Financial Services

The present phase, FinTech 3.0 is underway and includes both modern tech-
enabled financial companies and conventional banking companies as well. The
Global Financial Crisis began in the US sub-prime markets and dispersed
exponentially around the globe. Massive job losses due to the crisis led highly
qualified but unemployed people to drive a new age of FinTech start-ups.
The major catalyst for FinTech development has been a new wave of FinTech
start-ups [ CITATION Zet17 \l 1033 ]. Major developments in this era include
the introduction of Bitcoin v0.1 in 2009, which quickly contributed to the
explosion in numerous crypto currencies (preceded by the massive crypto crash
of 2018) and mainstream market penetration of smart phones that took FinTech to
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 a new turn. Establishment of Google Wallet by Google with ‘tap payments” in
2011, followed by Apple’s Apple Pay in 2014 and “Smile to Pay” services by
Alibaba were other major turns in FinTech 3.0.
DISCUSSION

FinTech’s Global Regulatory environment

Regulatory and technological improvements are transforming the structure of
financial markets, services and companies in fully unpredicted manner prior to the
2008 Global Financial Crisis (GFC)[CITATION Arn16 \l 1033 ]. This has rendered
the financial regulators across the globe challenging to recognize these emerging
innovations and how they into the current regulatory system. Regulators understand
the necessity for innovation, and are seeking to encourage and endorse FinTech
activities by means of initiatives.

 Asset and Wealth Management

FinTech has made significant progress in the area of Asset management. This
involves investment advisory services to affluent or high net worth clients and
management of those investments. In rivalry to the traditional asset managers, new
start-up FinTech companies have introduced automated digital advisory services
known as Robo-advice. These robo-advisor firms offer a collection of exclusively
online wealth management services, based primarily on data-driven, algorithm-based
methods tools for investment. Typically, they offer well developed, fully optimized
smartphone applications to provide their advisory services and connect with their
clients through mails and blogs. They constitute lower costs in the industry than the
traditional ones and therefore are cheaper for clients.
Robo-advisors are required to be certified by the securities regulator as traditional
advisors regardless of the advisory service being delivered online or face-to-face or
both. They go through the same licensing procedure and are liable to same regulatory
criteria. These are based on a number of factors as; type of advice, advisor, customer,
investment purpose, product and activities performed.
[ CITATION Joh20 \l 1033 ]Other regulations exclusive to robo-advisors involve:

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  Licensing requirements: an example can be, robo-advisors in Singapore are
required to hold Capital Market Services (CMS) licence to deal in capital
market products.
 Before endorsing any investment product, robo-advisors are required to
acquire appropriate and accurate information. Information can only be
accurate if the method used to retrieve client information is transparent and
self-explanatory, provides a framework for addressing conflicting client
responses, and includes a process for recognizing clients for whom robo-
advisory is not appropriate.
 Ensure efficient use of algorithms. An algorithm bug or bias will damage
many consumers as it may lead in systemic mis-selling of financial goods and
inadvertent losses. To address these risks, some regulators mandate robo-
advisors to enforce algorithm governance and monitoring arrangements.
 Robo-advising is limited in nature, as it does not take account of customers’
economic position. In such, robo-advisors are expected to clarify the situation
and its consequences.
 To help clients to make rational decisions, robo-advisors are required to
provide clear, non-deceptive, and adequate information.

 Crowdfunding
FinTech has also brought dramatic improvements towards other important financial
roles as, raising capital. The main role of financial sector has always been to
determine which firms and individuals to receive credit and investments
to support them expand and flourish. The key breakthrough designed by FinTech in
raising capital is the innovation of crowdfunding.
Crowdfunding typically refers to the practice of early-stage companies gathering
capital via the internet from large communities of individuals, often supported by
social media and promotions. It helps in connecting individuals who are willing to
lend or invest directly with those who require financing for a particular project. Both
debt and equity crowdfunding platforms are brokering financial services, whose
financial returns rely on their expected cash flows. Both approach the mass crowd or
public over the internet to pair investors and financier like a stock exchange in a way
similar to a marketplace.

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One of the important crowdfunding methods that is flourishing in the debt financing
sector is the peer-to-peer lending (P2P lending) or crowdlending. This involves
connecting borrowers and lenders directly through the internet. While crowdfunding
is usually engaged towards long-term investment in a single project, P2P system
collects investors’ capital into a common fund, and then creates multiple loans for
different borrowers.

Crowdfunding involves high risk in investment and lending than traditional

investment and loan system as platforms can malfunction abruptly, engage in
fraudulent behaviour or cause fraud to be committed by parties raising funds. They
have to depend on the platform for necessary details and reliability of creditors or
investment ventures. Both lenders and borrowers are prone to operational risks and
security breaches.

Hence, crowdfunding platforms often require certification or authorization and

comply with regulations. [ CITATION Joh20 \l 1033 ]Most regulators aim not only to
increase investor security but also to extend the direct financing channels for SMEs.
Regulatory standards in most developed countries emphasize on the security of
customers and investors, anti-money laundering (AML) and combating the financing
of terrorism (CFT) and organizational flexibility. Only few countries have a strict
permit system solely for loan crowdfunding. For example; loan crowdfunding in
China is governed by internet financing regulatory system. In Chinese law,
crowdfunding sites for loans are regarded as mediators of information that serve as
dealers between lenders and borrowers. Similarly, P2P lending companies in Brazil
are regarded as a different form of financial firm and hence, require license by the
Central Bank of Brazil to operate.

 Digital Payment services

Digital Payment services involve payment through digital modes. Both the payer and
the receiver make use of online digital modes for transaction. These services are
provided by banking and non-banking firms in accordance of various transaction
accounts. Although the payment market has traditionally been monopolised by banks,

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non-banking FinTech companies engagement has boosted significantly in the recent
years.

Users are offered multiple alternatives for digital payments. For money transfer, users
may use conventional banking services or prefunded e-money or payment services
run by non-banking payment service provider (PSP). Non-banking firms use
technologies to enable payment transactions by digitally transferring funds, clearing
or settling accounts, without physical money being used. PayPal and Alipay are some
examples of non-banking PSPs.

Many countries analysed by [ CITATION Joh20 \l 1033 ] have FinTech-precise

digital payment services regulations. Organizations with operations requiring funds
from clients are governed separately than those who do not. Some seek to promote
entry to the payment sector for non-banks. For example; Non-banks in South Africa
are generally expected to collaborate with a bank to provide payment services.
Granting non-banks the ability to clear and settle such transactions is presently
undergoing discussion in attempt to ease this limitation and expand the market to
wider competition.

Similarly, some countries have adopted regulatory reforms to enhance non-bank

specifications. For an example; a new system incorporating regulatory standards for
non-bank payments was introduced in Turkey in 2013.

 E-money
While e-money accounts are equivalent to bank accounts and enable money to be held
unlimitedly, payment accounts are more linked to the pass through accounts for future
payment transactions. It is a digital store of monetary worth on a technological device.
The buying potential lies in a personal physical tool or professional systems, such as
e-wallets, based on the kind of e-money.

[ CITATION Joh20 \l 1033 ]’s survey describes the following e-money regulations:

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  E-money is usually governed differently from other payment systems due to
the risks associated. E-money companies are bound to more strict and extra
standards than those that offer payment services only. There are two wide
categories of systems for e-money licensing.

 E-money system is be deemed a banking operation in the first one and are
exposed to bank-like fiduciary supervision. In countries like South Africa, a
banking certificate is necessary, whereas in other countries like Colombia, e-
money providers constitute a special category of bank that is permitted of
offering confined variety of banking operations.

 Usually, non-bank e-money companies are prohibited from participating in

financial intercession or other banking operations like making loans of the
capital obtained in return and interest earning.

 Many countries demand that the funds kept by customers at least contribute to
the unpaid e-money. It is intended to ensure that all refund demands can be
fulfilled at all periods and that adequate funds are required to meet the
allegations of e-money owners in the case of e-money bankruptcy or e-money
service provider.

 Customers are at risk in case of insolvency of service provider or other party

involved. For this, regulatory mechanisms also demand that clients’ funds be
separated and enclosed from the assets of the issuer to assure that lenders other
than e-money owners do not access e-money funds.

 Blockchain
Besides asset management and crowdfunding, FinTech has pioneered in a far more
profound aspect of finance, which is the currency system itself. Virtual currency
refers to an unregulated digital currency system that is generated and held
electronically.[ CITATION Lor14 \l 1033 ]Virtual currency is founded upon the
concept of trading value without an organization's permission.

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In recent years, FinTech has removed those government-authorized traditional
currencies from the course by the use of Blockchain. Blockchain is a protocol that
stores information in a manner that makes it complex or impossible to alter, hack or
cheat the system. It is a form of DLT (Distributed Ledger system), which secures data
at various locations via a distributed ledger, that is, a replicated virtual copy of data.

[ CITATION Joh20 \l 1033 ] discussed that among various countries they analysed,
only few have specific DLT regulations and only Switzerland form their survey had
issued a DLT regulation framework. While some countries like France has
incorporated certain DLT frameworks. The purpose of the draft issued by the Swiss
Federal Council is to further strengthen the regulatory environment for DLT in
Switzerland by expanding legal clarity, minimizing obstacles to DLT-based
technologies and reducing the likelihood of misuse. Internationally, DLT is used to
finance private transactions of shares, interbank settlements and netting systems for
repo and foreign currency markets.

Managing the underlying risks of FinTech

In order to manage the underlying risks of FinTech, the following FinTech tools can
be implemented to enhance the accessibility of public and private digital resources in
their nations, in order to take economic and social benefits that a digital economy is
offering.

 Deploying Regulatory Sandboxes

A regulatory sandbox is a standardized and regulated setting in which legislation can
be established efficiently enough, while offering businesses with some breathing
space for new technologies to emerge. The key purpose of regulatory sandboxes is to
balance governance and regulation with aggressive advancement of FinTech
companies, without flooding them in regulations, yet taking consumer protection in
account.

 Setting up a productive infrastructure of regulatory technologies by better use of

big data and AI

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As the economy proceeds to grow and cross-border financial practices expand to
develop, Big data, AI and other related innovations have become valuable instruments
to create successful smart regulatory technology (RegTech) frameworks.

RegTech relates to practical approaches, which standardize regulatory systems and

enhance them with the use of information technology. Like FinTech, RegTech is a
contraction of regulation and technology, relates to tech-enabled regulatory
applications for FinTech.

An example of RegTech is the KYC (Know Your Customer) system, which facilitates
banks to check the customers’ identities when opening an account. The use of AI in
KYC frameworks can improve fraud prevention, and strengthened cyber threat
security of customer data, evolving the KYC approach towards KYD (Know Your
Data) framework.

 FinTech development of the Twenty-First Century

This involves the latest benefits of technologies like blockchain also in clearing and
settlements if securities trade in exchange-traded and related environments. Moreover,
with the introduction of blockchain-based networks for the clearing and settlement of
foreign exchange transactions, financial firms are evolving, possibly at the next phase
of growth in the long history of regulatory and business initiatives to facilitate the
productivity and regulation of these largest and most competitive markets. Blockchain
can also help initiatives to restructure SWIFT and related schemes.

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 CONCLUSION

This paper has demonstrated FinTech's evolution across three key eras, resulting in
current FinTech 3.0, marked by rising globalization, with close overview on
FinTech’s global regulatory environment and management of FinTech’s underlying
risks. This transition to FinTech 3.0 arose from the 2008 GFC in emerging economies
and was guided by investor aspirations and pressures, the migration of digital firms to
the financial sector, and political needs for a more diversified banking environment.

With FinTech's advancement, regulators do not want to surge prevailing risks, notably
cyber security and fraud. Modern payment mechanisms and instruments may bargain
the veracity of the market and eventually the monetary policy; new items could be
offered inappropriately to customers who do not recognize or cannot afford to cover
their costs. FinTech includes the complexities of incorporating these technologies into
traditional business systems and the threats associated. Henceforth, the financial
sector is one of the globe’s most extremely regulated areas.

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