Fintech Overview - Session3

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A Global Fintech Overview
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What Is Fintech?
Fintech is the use of technology to solve financial services problems. It can be understood as traditional
financial services segmentation and the technologies influencing these segments.1
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Part A: Financial services segmentation
 Lending
 Payments
 Wealth/investment management
 Insurance technology (insurtech)
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 Regulatory technology (regtech)
Part B: Influential technologies

 Application program interface (API)

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Artificial intelligence (AI) and machine learning

 Blockchain and distributed ledger technologies (DLT)
 Cloud computing (cloud)
 Edge computing (edge)
 Quantum computing (quantum)
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1 A number of formal definitions for fintech exist: “products and companies that employ newly developed digital and online technologies in the
banking and financial services industries,” Merriam Webster, https://www.merriam-webster.com/dictionary/fintech (accessed Dec. 17, 2018); “A
portmanteau of finance and technology…[referring] to businesses [that] are using technology to operate outside of traditional financial services business
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models to change how financial services are offered. Fintech also includes firms that use technology to improve the competitive advantage of traditional
financial services firms and the financial functions and behaviors of consumers and enterprises alike,” KPMG, The Pulse of Fintech 2018: Biannual Global
Analysis of Investment in Fintech (July 31, 2018), 57.
This technical note was prepared by Joseph M. Becker (MBA ’19) and George (Yiorgos) Allayannis, Paul Tudor Jones II Professor of Business
Administration. Copyright  2019 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send
an email to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any
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This document is authorized for educator review use only by Hashim Ali, Lahore University of Management Sciences until Sep 2020. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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Part A: Financial Services Segmentation
Lending
Lending is at the core of banking and is a massive market uniquely positioned for technological
improvements. While recognizing the importance of technology in lending, one may be tempted to conclude
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that fintech lenders have the ultimate edge.2 However, a thorough analysis reveals that relative strengths exist
between banks and fintech lenders, and collaboration between these entities may enable both sides to capture
value in a growing sector.
 The fintech lending market is large. Market analysts have identified a $1 trillion addressable market for online
marketplace lenders, excluding mortgages, and have estimated that loan origination volumes will reach
$90 billion by 2020.3 Potential reasons for the emergence and growth of fintech lending include the
following.
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o Technology rapidly developed and was broadly adopted by consumers and economies. Increasing consumer
comfort with and use of technology, such as the iPhone (which debuted in January 2007),
contributed to the emergence and growth of fintech lending. Between 2006 and 2016, the number
of US and Chinese internet users grew at a compound annual growth rate (CAGR) of 3.4% and
18.2%, respectively. By 2016, US and Chinese internet users totaled over one billion.4
o A reduction in available credit from traditional sources followed the global financial crisis (GFC). Many believe
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small businesses struggled to obtain credit as standards tightened during and following the GFC.5
Additionally, many banks retreated from personal loans after the GFC as they experienced a
significant increase in losses. Lending volumes decreased, which arguably created an opportunity
for fintech companies.6
o Investors sought yield in the post-GFC interest-rate environment. Short-term interest rates hovered around
zero following the GFC.7 Fintech lending provided a new investment category to retail and
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institutional investors seeking a way to earn a yield in this low-rate environment.8

o Fintech lenders faced less-stringent regulation. It is commonly believed that fintech lenders were subjected
to more lenient regulation. Fintech lenders were not chartered, deposit-taking banks, and as a
result, they avoided certain regulation based on their business models.9 More lenient regulation, in
turn, likely provided a competitive edge that supported growth.
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2 Fintech lending initially emerged as peer-to-peer (P2P) marketplaces that provided individual investors with the ability to extend financing to
individual borrowers; however, the investor base and business models have since evolved. The investor base for fintech lending has expanded from
individuals to institutional investors, hedge funds, and financial institutions. Two primary business models emerged: direct lenders that originate loans
to hold in their own portfolios (i.e., balance sheet lenders), and indirect lenders that partner with an issuing depository institution to originate loans and
then purchase the loans for sale to investors as whole loans or by issuing securities such as member-dependent notes (i.e., platform lending) (Exhibit 4).
OnDeck Capital, Inc. (OnDeck) and LendingClub Corporation are prominent examples of direct and indirect lenders, respectively. US Department of
the Treasury, Opportunities and Challenges in Online Marketplace Lending, May 10, 2016, 5–8; UBS, On Deck Capital Inc initiating coverage, March 27, 2018.
3 US Department of the Treasury, 9.
4 Statista, Internet Usage in the United States, 2018; Statista, Internet Usage in China, July 2016.
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5 Julapa Jagtiani and Catharine Lemieux, “Small Business Lending after the Financial Crisis: A New Competitive Landscape for Community Banks,”
Economic Perspectives 40, no. 3 (Federal Reserve Bank of Chicago, November 2016): 2.
6 AnnaMaria Andriotis and Peter Rudegeair, “Lenders Shunned Risky Personal Loans. Now They’re Competing for Them,” Wall Street Journal, August
24, 2018.
7 US Department of the Treasury, “Daily Treasury Yield Curve Rates (2009),” https://www.treasury.gov/resource-center/data-chart-center/interest-
rates/Pages/TextView.aspx?data=yieldYear&year=2009 (accessed Dec. 17, 2018).

8 Bank for International Settlements (BIS), “International Banking and Financial Market Developments,” BIS Quarterly Review (September 2018): 30–
36; David W. Perkins, “Marketplace Lending: Fintech in Consumer and Small-Business Lending,” Congressional Research Service (September 4, 2018): 6–7.
9 Perkins, 2, 16–17, 20.
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Growth in fintech lending is expected to persist as financial sectors develop in emerging markets, and as
technology enables improvements in loan accessibility and convenience in developed markets.10 Lending
growth is expected to be particularly strong in China, which had more than 85% of global alternative lending
transaction values as of 2017.11 (“Alternative Lending” and additional terms are explained in Exhibit 1. For an
overview of fintech lending in China, see Exhibit 2.)
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 Technology is uniquely positioned to solve lending problems. Technology helps solve two major problems facing
lending: access and convenience.
o Access. Technology reduces the need for costly bank infrastructure and enables digital application
processes and automated underwriting. Technology may provide fintech lenders with operating-
cost advantages.12 Lower fixed and operational costs may permit fintech lenders to offer smaller-
value loans more economically, thereby increasing small business and consumer credit access.13
Additionally, technology may enable access for individuals and businesses excluded under
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traditional credit methodology (e.g., FICO). Numerous fintech lenders use alternative data sources,
big data, and machine-learning technology for credit decisions and monitoring.14 Many banks
partner with fintech lenders to access these technologies and the customers they serve.15
o Convenience. Speed and ease are valued by credit applicants.16 Lenders leverage technology to
provide quick and automated credit decisions and monitoring. For example, Kabbage, Inc., an
Atlanta-based small business fintech lender valued at over $1.1 billion, claims it can assess a loan
application in minutes.17 Additionally, technology enables seamless, consumer-focused
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experiences. In the United Kingdom, companies such as WDFC UK Limited (i.e., Wonga), a
payday loan provider, facilitate a fully digital customer journey, and companies such as Zopa
Financial Services Limited provide an integrated digital platform for other offerings (e.g.,
investing).18 In the United States, fintech payment providers that are also involved in lending, such
as PayPal, Inc. (PayPal), and Square, Inc. (Square), are repaid automatically by the companies to
which they lend through deductions from the companies’ sales.19
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Although technology solves major problems facing lending, and as a result, could bolster fintech lenders,
gaining an edge in lending requires more. Table 1 provides additional details on the advantages and
10 Fintech credit will be impacted by factors affecting all forms of credit (e.g., economic growth, financial development, and quality of institutions).
Fintech lending varies greatly across economies. Differences reflect economic development and financial market structure: fintech lending is greater in
countries with high incomes, less competitive banking systems, and less stringent banking regulations. BIS, 29, 36, 44–45; Statista, “FinTech Report
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2018: Alternative Lending,” Statista Digital Market Outlook: Segment Report (September 2018).
11 Statista, “FinTech Report 2018.”
12 One analysis estimated that loan processing and servicing costs for marketplace lenders as a percentage of loan amounts were 61% lower than those
for traditional banks. Perkins, 7.

13 Katie Darden, Tom Mason, and Eric Turner, “2017 US Fintech Landscape,” S&P Global Market Intelligence (2017): 5.
14 Julapa Jagtiani and Catharine Lemieux, “Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information” (working paper, Research
Department, Federal Reserve Bank of Philadelphia, June 16, 2017): 3, 8.

15 Small business lending historically has had high search, transaction, and underwriting costs for depository institutions relative to earnings potential.
Extending business loans entailed significant fixed costs associated with underwriting, servicing, and collection, which made smaller loans particularly
challenging. In fact, it is estimated that only half of small firms receive the full amount of financing requested. Given the market dynamics, banks are
increasingly partnering with fintechs; for example, Fifth Third Bancorp invested in ApplePie Capital, Inc., an online lender specializing in franchise loans;
and JPMorgan Chase & Co. licensed technology from OnDeck to offer Chase customers small business loans in an entirely digital process. US
Department of the Treasury, 13; Jagtiani and Lemieux, “Fintech Lending,” 35.
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16 One-third of small firms that applied with large banks indicated that they were most dissatisfied by credit decision wait times, and 28% were most
dissatisfied by a difficult application process. Also, 70% of small firms that applied with online lenders noted speed as an influencing factor, compared
with just 28% and 34% of small firms applying with small and large banks, respectively. Federal Reserve, Small Business Credit Survey Report on Employer
Firms (2017): 11.
17 Pitchbook, Kabbage Company Profile; Jagtiani and Lemieux, “Small Business Lending,” 13, 23.
18 Elena Mazzotti and Francesca Caminiti, “Where Fintech Lending Will Land and What It Means for Banks: The Time Is Right for Strategic
Collaboration. Focus on Europe,” Accenture (2017): 9.

19 PayPal and others have used small business lending to grow payment transaction volumes as opposed to focusing on lending as a standalone
business. Jagtiani and Lemieux, “Small Business Lending,” 13–14.
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disadvantages held by US banks and fintech lenders, and Exhibit 3, Case Study No. 1, provides information
on a prominent investment bank’s foray into consumer lending.
Table 1. Who has the lending edge? Banks versus fintech in the United States.
Criterion Potential Why?
Advantage
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 Banks are funded through deposits, which are lower cost/more stable than capital
Funding Banks market funding/securitization used by fintech lenders.
Source  Whole loan purchases and equity investments by hedge funds and private investment
firms are increasingly important to fintech lenders.20
 Banks may benefit from existing relationships across many business lines.
Customer Banks  Fintech lenders spend heavily on customer acquisition.21
Acquisition  Potential customers may perceive security risks for new platforms.22
 Banks have been tested in a range of economic-/interest-rate environments.
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 Many fintech lenders do not hold loans on balance sheet, and therefore earn much of
their revenue through origination/servicing fees; this could incentivize weaker
Underwriting Unclear/TBD23 underwriting standards.24
 Fintech lenders could have an edge through tailored models and the use of alternative
data sources, big data, and machine-learning technology.
 Stringent banking regulation deters fintech lending activity; fintech may be advantaged
versus depository institutions subject to the US Federal Deposit Insurance Corporation
(FDIC), US Office of the Comptroller of the Currency (OCC), US Federal Reserve
Regulation Unclear/TBD (Fed), and other forms of regulatory oversight.25
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 Banks are able to pursue national or state charters under dual banking; fintech lenders
are presented with reduced flexibility and face added complexity via state-by-state
nonbank lending license and other requirements.26
 On July 31, 2018, the OCC announced that it would begin accepting national bank
charter applications from fintech lenders.27
Data source: Created by author from sources cited.
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Payments
The global payments sector is massive and well positioned to benefit from improvements in speed,
convenience, and cost brought by technology. Payments can effectively enable entry into other areas of financial
services, such as lending, resulting in even larger and more diverse commercial opportunities.28 Unsurprisingly,
fintech companies and incumbent financial services firms have a keen interest in payments, and opportunities
in payments have inspired both competition and collaboration among these companies and firms.
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 The payments sector is sizable and growing. The total addressable market in payments may be as large as
$110 trillion, and global payments revenue is expected to rise from $1.2 trillion to more than
20 Perkins, 1, 3, 5–6.
21 40% to 50% of fintech lenders report negative EBIT. Mazzotti and Caminiti, 3.
22 Darden et al., 6.
23 Major fintech lenders are tightening underwriting standards following a wave of defaults. Many US fintech lenders have incurred high default rates
and have increased write-offs, even as US economic conditions remain strong and unemployment levels fall to multidecade lows. In response, major
fintech lenders are tightening underwriting standards and shifting toward shorter-term loans. Shelly Hagan and Adam Tempkin, “Online Lenders Tighten
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Rules after a Wave of Defaults,” Bloomberg, May 30, 2018. Additionally, conditions are troubling within the massive Chinese fintech lending market.
Hundreds of platforms have failed. In fact, more than 400 Chinese fintech lenders collapsed between June and August of 2018, including PPMiao;
PPMiao’s collapse resulted in the loss of as much as $117 million for as many as 4,000 people. “How China’s Peer-to-Peer Lending Crash Is Destroying
Lives,” Bloomberg, October 2, 2018.
24 Perkins, 0, 23.
25 BIS, 29–30, 36, 38.
26 Jagtiani and Lemieux, “Small Business Lending,” 15.
27 “OCC Begins Accepting National Bank Charter Applications from Financial Technology Companies,” OCC press release, July 31, 2018.
28 Examples include Square and PayPal, as discussed in Part A of this note.
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$2.1 trillion in 2026.29 Strong growth will likely persist as check and cash usage decrease, and as digital
commerce and mobile device usage advance.30 Growth will be pronounced in emerging markets, which
are projected to constitute 60% of total payments revenue by 2026.31
 Technology is well positioned to solve problems in payments. The underlying problems in payments are speed,
convenience, and expense. There exists a growing gap between current payments capabilities and those
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needed and expected in the digital economy—fast, convenient, and accessible to all.32 The Fed has
looked to technology to facilitate transformational change, and noted that technology providers may
be able to develop new services or enhance existing services that could ultimately benefit all consumers
by lowering costs.33 For example, current cross-border payment infrastructure lacks standardization
and automation in inter- and intrabank networks, often resulting in manual intervention to collect and
repair data, the inefficiencies of which in turn raise costs throughout the ecosystem.34
 Payments serve as a gateway to other financial services offerings. One major fintech trend is the “unbundling”
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and “rebundling” of financial services.35 Payments is no exception to this trend. Payments companies
are well positioned to progress into other areas of financial services, using payments and the data
generated thereby as a gateway to financial services scale.36 This trend is particularly important to
incumbents given that payments “represent the beachhead for the entire banking relationship…and
that a strong payments plan [needs to be offered] as part of a comprehensive strategy for digital
banking.”37
Fintech and legacy incumbents both offer value propositions in payments. Fintech companies,
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unencumbered by existing technology infrastructure and slow-to-change culture, are positioned to propose
agile, innovative, and consumer-centric solutions, while incumbents are positioned to benefit from trust and
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29 PayPal Investor Day Presentation, 2018; Mohammed Badi, Stefan Dab, Pierre Paoli, Maarten Peeters, Prateek Roongta, Olivier Sampieri, and Yann
Sénant, “Global Payments 2017: Deepening the Customer Relationship,” BCG, October 16, 2017.
30 Boston Consulting Group (BCG) estimated that 20% of all transactions will be digital by 2020. According to Visa, Inc. (Visa), retail mobile
commerce sales are expected to grow between 26% and 35% between 2016 and 2020, reaching a 2020 total of $335.8 billion. Badi et al., 11; Visa, “The
Importance of a Digital Payments Strategy,” https://usa.visa.com/partner-with-us/visa-performance-solutions/importance-of-a-digital-payments-
strategy.html (accessed Dec. 18, 2018).
31 Noncash growth has occurred at the expense of checks, with credit and debit card usage increasing and cash usage for low-value transactions
remaining prevalent. In China and emerging markets, adoption of mobile payments and wallets have driven growth. Going forward, noncash growth in
emerging markets will be driven by three factors: promotion of cashless societies, technological innovations, and financial inclusion efforts; growth in
mature economies will be driven by a combination of mobile payments and contactless technology/near-field communications. It is estimated that
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emerging markets will experience noncash transaction growth of 21.6% (CAGR) between 2016 and 2021. Capgemini and BNP Paribas, World Payments
Report 2017 (2017): 5–7, 9–12, 16; Capgemini and BNP Paribas, World Payments Report 2018 (October 2018): 5, 9, 11.
32 Lael Brainard, “Supporting Fast Payments for All,” (speech, Fed Payments Improvement Community Forum, Chicago, Illinois, October 3, 2018).
33 A 2016 US Consumer Payment Study determined consumers are focused on ease, regardless of payment method used, and mobile and digital
payments may provide the solution. According to Visa, convenience was the main reason (64%) why mobile payments users chose related solutions.
Brainard; “2016 U.S. Consumer Payment Study,” TSYS (2016): 26, 32–33; Visa, “What Does the Mobile Payments User in Europe Look Like?,”
https://www.visaeurope.com/media/images/v2%20visa%20digital%20payments%20european%20fact%20sheet%2010.10.16-73-40177.pdf (accessed
Dec. 18, 2018).
34 Yoon S. Park, “The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future,” Visa, November 2006, 5, 8–10, 14.
35 Many fintech companies were founded to fill and/or improve upon a specific offering within the larger financial services landscape (i.e.,
“unbundling”). Following successful execution within such an offering, many fintech companies then expand into other areas of financial services (i.e.,
“rebundling”). For example, Ant Financial established Alipay as a designated online payment service for Alibaba Group Holding Limited’s (Alibaba’s)
Taobao marketplace; in other words, Ant Financial unbundled the myriad of financial services offerings to fill a specific need of online payments on
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Taobao. In 2013, Ant Financial expanded into wealth management, and as of 2019, it provides payments, wealth management, insurance, credit score,
and consumer lending services (i.e., “rebundling” financial services offerings). Matthew Wong, “Ant Financial: Unpacking the $150B Fintech Giant,”
CBInsights.
36 For example, cross-border transactions generate substantially higher margins than domestic, and they serve as a foundation for a broader array of
client services. Sukriti Bansal, Philip Bruno, Olivier Denecker, Madhav Goparaju, and Marc Niederkorn, “Global Payments 2018: A Dynamic Industry
Continues to Break New Ground,” McKinsey, October 2018, 4.
37 The average customer interacts with her bank at least twice a day for payments-related matters, and these interactions represent more than 80% of
customer interactions with banks, making payments an ideal platform for cross-selling other financial services. Olivier Denecker, Sameer Gulati, and
Mark Niederkorn, “The Digital Battle that Banks Must Win,” McKinsey, August 2014.
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reputation, as well as from scale and regulatory competencies.38 Given the importance of payments and varied
value propositions, both competition and collaboration exist between fintech and incumbents:
 Competition.39 Early Warning Services, LLC, a decades-old consumer reporting agency owned by major
financial institutions such as Bank of America Corporation (BofA) and Wells Fargo & Company (Wells
Fargo), debuted Zelle in 2017.40 Zelle enables money to be sent by mobile directly between almost any
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US bank account, typically within minutes.41 In its first year, Zelle processed more than 320 million
transactions valued at $94 billion.42
 Collaboration. In July 2017, PayPal announced a partnership with JPMorgan Chase & Co. (JPMorgan)
through which JPMorgan customers would be able to link their credit cards to PayPal and pay with
Chase Ultimate Rewards points wherever PayPal is accepted.43 In the following month, PayPal
announced a partnership with Synchrony Financial to launch the Mastercard-branded PayPal Cashback
credit card.44
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Fintech and bank collaboration will likely make the payments landscape unrecognizable in a decade.45 While
the future is uncertain, ongoing trends in India may foreshadow the development of payments (Exhibit 3, Case
Study No. 2).
Wealth/investment management
Following the emergence of online or “discount” brokerages, trade execution was largely commoditized,
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with brokerage firms reducing per-trade charges and introducing new pricing models.46 It is argued that the
wealth management industry is now experiencing its own “discount” moment, with algorithms driving the
commoditization of portfolio creation and with competitive industry dynamics compressing margins.47 To
succeed in this environment, incumbents and digital wealth managers (DWMs or robos) alike are leveraging
fintech.48
 Portfolio creation is becoming increasingly commoditized. Robos introduced algorithms and digital platforms
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that have enabled low-cost portfolio construction, rebalancing, and monitoring based on objectives,
risk tolerance, and other criteria.49 Many large incumbents have responded with their own offerings.50
While DWM and incumbent robo offerings surpassed $200 billion in aggregate assets under
management (AUM) in 2017, robo offerings hold a small amount of overall AUM; in North America,
38 Capgemini and BNP Parabas, World Payments Report 2018, 13, 31, 33.
39 According to McKinsey & Company (McKinsey), banks’ customer relationships, structural security, multichannel capabilities, and stability should
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ultimately combine to win payments, which is the gateway into overall financial relationships; however, banks will succeed only if they can match the
solutions, operational efficiency, and client-service skills of attackers. Denecker et al.
40 Julia Glum, “Should You Use Venmo, Zelle or Cash App? Everything You Need to Know about the Hottest Mobile Payment Apps,” Money,
September 4, 2018, http://money.com/money/5376350/venmo-cash-app-zelle-better/ (accessed Dec. 6, 2018).

41 “Frequently Asked Questions,” Zelle company website, https://www.zellepay.com/support/what-is-zelle (accessed Dec. 6, 2018).
42 “Zelle Moves 100 Million Transactions Totaling $28 Billion in Second Quarter 2018,” Zelle press release, July 26, 2018.
43 “JPMorgan Chase and PayPal Strike Payments Partnership to Enhance Payments Online, in App and in Store,” JPMorgan Chase press release, July
20, 2017.
44 GlobalData, Alternative Payment Solution: PayPal, March 2018, 14, 17.
45 Accenture, Driving the Future of Payments: 10 Mega Trends, 2017, 9.
46 These new models split advice from transactions: full-service brokers began charging on an asset-under-management basis versus fees per trade.
PwC, Asset & Wealth Management Insights: Exploring the Impact of FinTech, January 2017, 6.
47 Joe Ngai, Jill Zucker, Patrick Kennedy, and Simon London, “Wealth Management in an Era of Robots, Regulation, and New Money,” McKinsey,
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March 2018.
48 PwC, Digital Wealth Management: Driving Engagement through Data-Driven Insights, January 2018.
49 Ngai et al.; PwC, Asset & Wealth Management Insights, 10.
50 The Charles Schwab Corporation (Charles Schwab) launched Schwab Intelligent Portfolios; Vanguard Group, Inc. (Vanguard), launched Vanguard
Personal Advisor Services; and Morgan Stanley launched Access Investing. Additionally, T. Rowe Price Group, Inc., JPMorgan, and Wells Fargo have
launched or are planning to launch robos. “As Robo-Advisors Cross $200 Billion in Assets, Schwab Leads in Performance,” Barron’s, February 3, 2018,
https://www.barrons.com/articles/as-robo-advisors-cross-200-billion-in-assets-schwab-leads-in-performance-1517509393; Theresa W. Carey,
“Morgan Stanley Launches Robo-Advisory,” Barron’s, December 9, 2017, https://www.barrons.com/articles/morgan-stanley-launches-robo-advisory-
1512791864; Vanguard company website, https://investor.vanguard.com/advice/personal-advisor (all accessed Dec. 27, 2018).
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the value of AUM amounted to $37.4 trillion in 2017.51 While currently a fraction of total assets, robo
is expected to continue growing, likely due to incumbents (Exhibit 5).52
 Competitive industry dynamics are compressing margins. An increase in low-cost robo offerings will only
continue the trend of fee compression. A shift from actively managed funds to low-cost passive funds
has persisted for years, and zero-cost exchange-traded funds (ETFs) and no-fee index funds may
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further accelerate this trend.53 At the same time, expenses continue to rise, including those associated
with regulation, such as the Markets in Financial Instruments Directive in Europe (MiFID II);
increasing fee compression and expenses have squeezed profit margins.54
 Data analytics and technology prove vital. In addition to leveraging data and technology to provide robo
offerings, DWMs and incumbents (collectively known as managers) are utilizing data analytics and
technology to grow AUM and profit margins.
AUM growth. Managers are beginning to leverage big data, AI, and machine learning to more
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effectively analyze investment opportunities, optimize portfolios, mitigate risks, and provide
enhanced real-time insights to clients, all of which may enable stronger performance and may
attract and retain clients.55 To attract and retain clients, mobile and omnichannel capabilities are
also necessary. “The mobile channel now accounts for [nearly 35%] of client interactions…and is
the fastest-growing channel across financial services,” and clients increasingly prefer omnichannel
solutions, presenting opportunities for managers that effectively couple digital and mobile
capabilities with data-driven personal communication.56 Personalized communication is vital, and
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51 Outside North America, countries such as China have exhibited strong AUM growth. AUM in China grew from approximately $1.27 billion in
1998 to $2 trillion in 2018, and it is estimated to reach $5.6 trillion by 2025. Such growth has occurred via fintech; for example, Alibaba’s money-market
fund, Yu’e Bao, is now the world’s largest money-market fund (370 million account holders and over $210 billion in assets), and is twice the size of its
closest competitor, JPMorgan. Yu’e Bao was originally established to permit Alipay users to park idle cash sitting in mobile wallets. Additionally, Chinese
fintech lenders such as Yirendai and Lufax offer wealth-management products in addition to loans. https://www.barrons.com/articles/as-robo-advisors-
cross-200-billion-in-assets-schwab-leads-in-performance-1517509393; Renaud Fages, “Global Asset Management 2018: The Digital Metamorphosis,”
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July 19, 2018; “Meet the Earth’s Largest Money-Market Fund,” Wall Street Journal, September 13, 2017, https://www.wsj.com/articles/how-an-alibaba-
spinoff-created-the-worlds-largest-money-market-fund-1505295000; Sara Hsu, “China’s Fintech Giants Have the Money and Means to Dominate
Despite the Wider Slowdown,” Forbes, August 31, 2018, https://www.forbes.com/sites/sarahsu/2018/08/31/chinas-fintech-giants-have-the-money-
and-means-to-dominate-despite-the-wider-slowdown/#4a6f7cde465f (all accessed Dec. 31, 2018).
52 The number of individuals using robo advice in the United States is expected to grow from 2 million to 17 million by 2021, and by 2025, 57% and
58% of Americans expect to use some form of robo advisors or robotics, respectively. While over 80% of current US robo advice users are millennials
(60%) or Gen X (23%), baby boomers, who represent over 50% of households in North America and stand to be the generation with the most wealth
in the coming decade, are increasingly comfortable with robo offerings; 45% of boomers expect to use a robo by 2025. It is argued that growth will come
from incumbents, which have thus far outperformed DWMs in accumulating AUM; for example, as of February 2018, Betterment LLC (Betterment)
and Wealthfront Advisers LLC (Wealthfront) had $11.9 billion and $10 billion in AUM, respectively, while Vanguard Personal Advisor Services and
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Schwab Intelligent Portfolio had $101 billion and $27 billion in AUM, respectively. It has been estimated that Betterment and Wealthfront need as much
as $40 billion in AUM each to generate revenue in excess of operating and advertising expenses. Charles Schwab, “The Rise of Robo: Americans’
Perspectives and Predictions on the Use of Digital Advice,” November 2018, 2–4, 8; Ngai et al., 3–4; “Small Robo-Advisors Battle Vanguard, Charles
Schwab,” Barron’s, December 4, 2018, https://www.barrons.com/articles/small-robo-advisors-battle-vanguard-charles-schwab-1543949504 (accessed
Dec. 27, 2018).
53 In August 2018, Fidelity Investments became the first company to offer no-fee index funds, and in the first month, attracted nearly $1 billion in
assets. Investor preference for low-cost funds and rising cost pressures have led several distributors to drop funds from their platforms; five of the top
eight mutual fund distributors have cut funds offered by an average of 28%. Eric Rosenbaum, “Fidelity’s New No-Fee Index Funds Bring in $1 billion
in First Month,” CNBC, September 4, 2018, https://www.cnbc.com/2018/09/04/fidelity-offers-first-ever-free-index-funds-and-1-billion-follows.html
(accessed Dec. 27, 2018); Deloitte Center for Financial Services, 2019 Investment Management Outlook: A Mix of Opportunity and Challenge, 2018, 1, 5.
54 Bain & Co. estimated that profits per AUM have decreased by 2% CAGR since 2012, and will decrease by 7% through 2022, leaving profit margins
at just 8.3 basis points, an amount below that experienced during the GFC. Matthias Memminger, Mike Kuehnel, and Cyrosch Kalateh, “Asset Managers
Can No Longer Ride an Easy-Money Boom,” Forbes, August 7, 2018, https://www.forbes.com/sites/baininsights/2018/08/07/asset-managers-can-no-
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longer-ride-an-easy-money-boom/#35614e2c3ac1 (accessed Dec. 27, 2018).

55 “Fintech in Investment Management,” CFA Institute, https://www.cfainstitute.org/en/membership/professional-development/refresher-
readings/2019/fintech-investment-management (accessed Dec. 27, 2018).

56 Without digital enablement, advisers cannot scale to serve a larger customer base, as there are only so many hours in a day and only so many calls
that people can make; technology can enable a more efficient adviser team. Additionally, DWM clients reported satisfaction levels 5 to 10 times higher
than incumbents’ clients, suggesting that streamlined digital and mobile capabilities could provide improved experiences. David Schiff and Adele Taylor,
“Key Trends in Digital Wealth Management—and What to Do about Them,” McKinsey, October 2016; PwC, Beyond Automated Advice: How FinTech Is
Shaping Asset & Wealth Management, 2016; PwC, Digital Wealth Management; Pooneh Baghai, Brant Carson, and Vik Sohoni, “How Wealth Managers Can
Transform for the Digital Age,” McKinsey, August 2016.
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managers such as Morgan Stanley are combining machine-learning algorithms with analytics to
assist financial advisers in generating customized advice for clients.57
o Margin growth. Additionally, data analytics and technology present managers with the ability to
streamline operations and reduce expenses. For example, managers such as T. Rowe Price Group,
Inc., have migrated to the cloud to “achieve operational scalability and lower fixed costs.”58 Mobile
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and digital adoption can allow managers to decrease reliance on multipart, paper-centric account
opening and maintenance, which could reduce manual costs and costly errors.59 Further, it is
argued that automated customer analysis can lower the costs of customer onboarding, conversion,
and funding.60 Finally, emerging technologies such as blockchain could reduce costs associated
with databases and could enable smart contracts that impact the wealth management value chain
by augmenting or streamlining processes.61
Insurtech
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Just as insurance is a subset of financial services, insurtech is a subset of fintech. Insurtech is the use of
technology to solve insurance-related problems. Insurtech utilizes technology to enter new insurance markets
and to “squeeze out savings and efficiency from the current insurance industry model.”62 Because insurtech
enables industry growth and improvement, it is generating significant interest. In fact, between 1998 and June
2018, insurtech investment totaled $12.52 billion, reaching an inflection point in 2013. While investment totaled
$296 million in 2011, it reached $1.59 billion in 2013, $2.95 billion in 2015, and over $4 billion in 2018.63
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 Insurtech enables insurance industry growth. The insurance industry is massive, with global premiums of
nearly $5 trillion.64 Despite the insurance industry’s size, many products, services, and segments are
unserved or underserved. Insurtech can fill the void: 40% of insurtech companies have a primary value
proposition of increasing growth by introducing new products or services or by entering new
segments.65 Examples of insurtech-enabled growth are noted in Table 2.
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57 Deloitte, 2019 Investment Management Outlook, 6.

58 Cloud adoption may also help managers meet MiFID requirements of recording client communications and storing them for at least five years.
Deloitte, 2019 Investment Management Outlook, 8–10.
60 PwC, Beyond Automated Advice.
61 PwC, Asset & Wealth Management Insights, 7.
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62 “Insurtech,” Investopedia, https://www.investopedia.com/terms/i/insurtech.asp (accessed Dec. 19, 2018).

63 CBInsights, Quarterly InsurTech Briefing Q4 2018, February 2019, 34, 36; Deloitte Center for Financial Services, InsurTech Entering Its Second Wave, 2018,
1–4.
64 “Global Insurance Premiums Continued to Rise in 2017 with Emerging Markets Leading the Way, Latest Swiss Re Institute Sigma Study Says,”
Swiss Re news release, July 5, 2018.

65 Of insurtech companies, 22% have a value proposition built around lowering acquisition costs, typically by providing customers with a digital
interface using a direct distribution model. The remaining insurtechs have focused on lowering costs for claims management, policy administration, and
other tasks through digital and streamlined processes. Tanguy Catlin, Johannes-Tobias Lorenz, Björn Münstermann, Peter Braad Olesen, and Valentino
Ricciardi, “Insurtech—The Threat That Inspires,” McKinsey, March 2017.
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Table 2. Data capabilities and digital and mobile insurtech offerings drive growth.
Company Product/Offering
Homies, an alarm and security platform that seeks to lower the number of
Achmea Insurance, Netherlands burglaries and fire fatalities in undeserved community housing projects, uses
intelligent and connected burglary sensors and interacts with enrollees
through messaging apps such as WhatsApp and Facebook Messenger.66
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Amazon Protect (in the United Kingdom) offers protection against accidental
Amazon.com, Inc. (Amazon) damage, breakdown, and theft of Amazon purchases ranging from washing
machines to tablets.67
BIMA, Sweden Mobile microinsurer that provides insurance in emerging markets, in which
mobile penetration is high and coverage very low.68
Root Insurance Company, United States Online auto insurer that allows applicants to test-drive performance utilizing
telematics-based technology.69
Slice Insurance Technologies, Inc., United States Coverage for homeshare (e.g., Airbnb) and rideshare (e.g., Uber).70
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China’s first online-only insurance company, cofounded by Alibaba’s Jack Ma
ZhongAn Online Property & Casualty and Tencent’s Pony Ma, was the largest fintech IPO to list in Hong Kong.
Insurance, China The company utilizes big data and analytics to better determine product price
and control risk.71
Data source: Created by author from sources cited.
 Insurtech can improve existing business models.72 Fundamentally, insurance companies pool risk from an
individual customer and transfer that risk across a larger group. Insurtech enables insurers to focus on
the individual customer while improving overall risk management. Additionally, insurtech can help
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solve operational problems and reduce operational expenses.
o Customer-centricity. Financial services customers reported significantly fewer positive experiences
and lower satisfaction levels with insurance firms compared to those with banks, likely because
fewer customer touchpoints exist in insurance.73 Insurtech can improve the quantity and quality
of consumer interactions. Emerging technologies such as connected devices and advanced
analytics make it possible to connect with customers and to derive better insights on individuals.74
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Better insights may support personalized products and may result in a shift from a reactive business
model to a more sophisticated preventative model (i.e., a holistic model that seeks to prevent claims
and increase customer well-being versus simply underwriting policies and reacting to claims).75 AI
and machine learning may increase the quality of customer interactions through convenient and
expedited decision-making (e.g., automating underwriting, auto-adjudicating claims, and
automating financial advice).76
o Risk management. The insurance business relies on understanding risk. Insurtech leverages new
No
sources of data to facilitate more effective underwriting; health data, transaction data, and activity
data may be used to score risk at a granular level while underwriting without the need of physical
66 Capgemini, World Insurance Report, 2018, 29.

67 Debuted in 2016. For additional information on Amazon in financial services, see Exhibit 6. Capgemini, World Insurance Report, 20.
68 BIMA company website, http://www.bimamobile.com/ (accessed Dec. 6, 2018).
69 Deloitte, InsurTech Entering Its Second Wave, 11.
70 Slice company website, https://slice.is/ (accessed Dec. 19, 2018).
71 Ryan Browne, “10 of the Most Innovative Fintech Firms Right Now, According to Research,” CNBC, November 20, 2017,
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https://www.cnbc.com/2017/11/20/10-of-the-most-innovative-fintech-firms-right-now-kpmg-h2-ventures.html (accessed Dec. 31, 2018).

72 According to Deloitte, the majority of insurtechs are not seeking to compete with, let alone displace, incumbents. Instead, most are being launched
to help solve existing problems related to the customer, operational expenses, and risk. Deloitte, InsurTech Entering Its Second Wave, 11–12.
73 Capgemini, World Insurance Report, 6, 12, 17.
74 Capgemini, World Insurance Report, 17, 54, 56.
75 PwC, Opportunities Await: How InsurTech Is Reshaping Insurance, June 2016.
76 Chinese insurer Ping An utilizes AI for authentication and claims settlements. AI provides the ability to reduce claims settlement times from three
days to 30 minutes, and UK-based Cytora has developed an AI-based risk engine that enables commercial insurers to target, select, and price risk.
Capgemini, World Insurance Report 2018, 41; “Opportunities Await.”
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testing.77 Integrated internet-of-things (IoT) platform solutions may prove to be an efficient means
of generating risk insight. For example, Apple Inc. (Apple) is collaborating with Aetna Inc. to
provide customers with Apple watches, which in turn may not only improve risk assessment but
also reduce claims paid and improve customer engagement.78
o Operational efficiency. Insurtech is well positioned to improve operations and reduce expenses. AI is
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already improving efficiencies in customer interaction and conversion ratios. For example,
Prudential Financial, Inc., utilized natural language processing to create a chatbot that understands
nonscripted questions, clarifies the requester’s intentions, and delivers responses in a human-like
conversation.79 As AI capabilities continue to advance, AI will likely become more effective than
humans and may reduce expenses and inefficiencies related to call center representatives,
underwriters, and claims adjusters.80 Additionally, the cloud enables insurers to improve agility,
scalability, and cost efficiency within digital operating models, and drones have been deployed to
efficiently assess claims through unstructured data analysis (e.g., analysis of aerial images).81 (See
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Exhibit 3, Case Study No. 4, to learn about how Lemonade Insurance Company [Lemonade] is
utilizing AI.)
Regtech
The cost and complexity of regulation and compliance continues to rise (Figure 1). Regulators and
regulated entities have looked to technology to help address cost and complexity, given that several technologies
can help solve problems and overcome challenges in the highly regulated financial services industry. Regtech is
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strategically important for financial services stakeholders, as evidenced by recent investment: between 2013 and
2017, investment in regtech totaled $4.96 billion across 585 deals, and it continues to grow.82 In fact, first-half
2018 regtech investment exceeded total 2017 regtech investment.83
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77 French multinational insurance firm AXA leveraged machine learning to build a proof of concept that can predict “large-loss” traffic accidents with
78% accuracy, which will enable AXA to improve pricing accuracy. Capgemini, World Insurance Report, 41; “Opportunities Await.”
78 Capgemini, World Insurance Report, 20.
79 Capgemini, World Insurance Report, 41.
80 “Opportunities Await.”
81 “Opportunities Await.”
82 Lindsay Davis, “The State of Regtech,” CBInsights, September 20, 2017.
83 KPMG, The Pulse of Fintech 2018, 2.
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Figure 1. Regulatory cost and complexity by the numbers.
$321Bn $100Bn $1.65Bn
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2017 compliance spend
global financial penalties by financial services
between GFC and 2016 2017 SEC actual spend
firms
26,399
number of pages in Dodd
36Bn
daily market events
4,600
full-time equivalents
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Frank Act processed by FINRA employed at the SEC
Note: Bn = billion; SEC = US Securities and Exchange Commission; FINRA = Financial Industry Regulatory Authority.
Data source: Created by author from Gerold Grasshoff et al., “Global Risk 2017: Staying the Course in Banking,” BCG, March 2, 2017;
Lindsay Davis, “The State of Regtech,” CBInsights, September 20, 2017; US Securities and Exchange Commission, Fiscal Year 2019:
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Congressional Budget Justification Annual Performance Plan, 11, 95; American Bankers Association, Understanding Regtech, June 2015, 1;
“Statistics,” FINRA company newsroom, https://www.finra.org/newsroom/statistics (accessed Dec. 19, 2018).
 Regtech may address the increasing cost of financial regulation. The costs of regulatory violations and the costs
to protect against infractions are colossal.84 As a result, the financial industry’s compliance spend is
massive.85 Technology could have the power to streamline compliance functions and thereby improve
efficiencies and reduce costs. Technologies, such as robotics process automation (RPA), biometric
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authentication systems (BAS), big data and advanced analytics, the cloud, and APIs, offer tremendous
opportunities to enhance existing compliance at reduced costs.86
o RPA. RPA may be leveraged to reduce manual reporting burdens facing financial services
companies. For example, a regtech software solution could tie into a bank’s back end and
prepopulate reporting fields.87
o BAS. BAS could reduce fraud, drive down cost, and positively impact net income in the banking
No
industry by $700 million by 2020.88

o Big data and advanced analytics. Some regtech offerings provide customer identification, anti–money
laundering compliance, and real-time transaction monitoring through the use of data analytics on
information obtained from customers and external sources.89
84 In 2017, the SEC brought 754 enforcement actions and obtained judgments and orders totaling more than $3.7 billion in disgorgement and penalties.
The SEC suspended more than 625 individuals and suspended trading in the securities of 309 companies. Additionally, the SEC created a new Cyber
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Unit specifically to address cyber, dark web, and DLT. SEC Division of Enforcement annual report, 2017, 2–3; SEC annual performance report, FY2017;
Davis.
85 Compliance costs are arguably most impactful for community and small-to-medium-sized banks; compliance costs for community banks are
estimated to have increased to $5.4 billion in 2016, and the median-sized bank in the United States is estimated to have only 44 employees. American
Bankers Association, Understanding Regtech, June 2015, 1; Davis.
86 FINRA, Technology Based Innovations for Regulatory Compliance (“RegTech”) in the Securities Industry, September 2018, 3-4.
87 American Bankers Association, 2.
89 FINRA, 4.
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o Cloud. The US Financial Industry Regulatory Authority (FINRA) and the SEC have been moving
to cloud computing. FINRA deployed cloud storage and computing, and the SEC’s Office of
Information Technology is migrating applications and workloads to secure cloud environments.90
o APIs. APIs may enable regulators to obtain data that enable an understanding of the bank and its
activities, and this could reduce the frequency of onsite exams, which would reduce costs for
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regulators and banks alike.91
 Regtech addresses the increasing complexity of financial regulation. US financial regulation and the fragmented,
multiagency US regulatory structure are complex.92 Post-GFC legislation in the United States, such as
the Dodd-Frank Act, coupled with new and complex global rules and regulations, such as MiFID II,
Payment Services Directive (PSD2), and the General Data Protection Regulation (GDPR), have
contributed to an increasingly complex regulatory landscape.
Through technology, including natural language processing, data analytics, machine learning, and AI,
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regtech offers solutions to regulatory complexity.
o Banks can leverage natural language processing to determine which new regulatory requirements
apply to their products and services, thereby facilitating the identification of compliance gaps.93
o Data analytics and machine learning are impactful technologies for the Dodd-Frank Act Stress
Test (DFAST) and Comprehensive Capital Analysis and Review (CCAR), tests designed to
evaluate capital under adverse stress environments; such technologies enable the use of larger and
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unstructured data sets in identifying risks and developing credit models and forecasts.94
o AI-based regtech equips regulators and regulated entities with the ability to conduct pattern
recognition, process natural language, and deploy predictive analytics; these capabilities enable
regulators to better monitor markets and enable regulated entities to better monitor employees.95
Market participants indicated that regtech offerings could facilitate a move from the standard
review of words or phrases toward anomaly analyses of multiple languages, slang, tone, and coded
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vernacular.96
Miscellaneous
Other prominent areas of fintech include the following:

 Digital/neobanks/challenger banks. Banks of various sizes, including Citigroup Inc. and Wells Fargo, are
developing digital-only offerings, given the success experienced by digital-only banks in Europe.97 It is
No
argued that digital-only offerings enable banks to appeal to digital-first consumers, while serving them
at lower rates given the lack of overhead and other costs (e.g., branch maintenance costs).98 In Europe,
digital-only bank offerings, referred to as “neobanks” or “challenger banks,” have attracted millions of
90 FINRA, 2; US Securities and Exchange Commission, Congressional Budget Justification Annual Performance Plan, 2019, 67.
92 US Government Accountability Office, Report to Congressional Requesters: Financial Regulation—Complex and Fragmented Structure Could Be Streamlined to
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Improve Effectiveness, February 2016.

93 The United Kingdom’s Financial Conduct Authority and the Bank of England launched machine-readable rulebooks, which may lead to
incorporation within companies’ regulatory systems. FINRA, 5; American Bankers Association, 2.

94 Capgemini, U.S. Stress Testing Regulations: A Comparative Overview, 2015; American Bankers Association, 2–4.
95 American Bankers Association, 4; Davis; FINRA.
96 FINRA, 4; Davis.
97 Paul Schaus, “The Right Approach to Digital-Only Banks,” American Banker, November 26, 2018, https://www.americanbanker.com/opinion/the-
right-approach-to-digital-only-banks (accessed Dec. 30, 2018).

98 https://www.americanbanker.com/opinion/the-right-approach-to-digital-only-banks.
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millennials.99 Prominent examples of challenger banks include Monzo Bank Limited (Monzo) and
Revolut Limited (Revolut).100
o Monzo. With over 900,000 clients, roughly 75% of whom are under the age of 40, Monzo is a
prominent UK challenger bank.101 Monzo became one of the first challenger banks to receive a
license permitting it to hold deposits, and it offers checking accounts and ATM cards.102 Monzo
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also features a spending breakdown designed to help users control expenditures.103 Monzo’s move
to hold deposits is similar to Klarna Bank AB’s (Klarna’s) move to obtain a full banking license
from Finansinspektionen, the Swedish Financial Supervisory Authority; the license granted Klarna
the ability to offer a new range of banking products and services across Europe, apart from the
core payments services that enabled it to receive a valuation of over $2.5 billion and to serve over
60 million customers and 70,000 merchants.104
o Revolut. With over 2.75 million customers across Europe, daily customer growth of over 7,000, and
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an estimated valuation of $1.7 billion, Revolut is another prominent UK challenger bank that offers
services ranging from disposable cards to cryptocurrency exchange.105 Revolut offers a user-
friendly app and user control over an account and cards,106 and reportedly is interested in offering
services in the United States.107
 Brokerage, trading, and exchanges. The internet enabled the emergence of online or “discount” brokers
that have since reduced per-trade charges; taking fee reduction to its ultimate end is Robinhood
Markets, Inc. (Robinhood), a mobile app that does not charge commissions on stock purchases or
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sales.108 Robinhood has experienced rapid growth, adding cryptocurrency trading, doubling the number
99 Growth has been particularly strong in the United Kingdom, potentially because “officials have been concerned about the power of large banks in
the wake of the [GFC], and they see the start-ups as weakening the hold of traditional lenders. [Additionally, the] authorities have adopted policies such
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as a ‘regulatory sandbox,’ allowing…challenger banks to test new financial products and get feedback from regulators before proposing them to
customers.” While “challenger banks” and “neobanks” are terms that are used broadly and synonymously, the former can include established firms
seeking to compete with larger institutions, while the latter tends to refer to new digital mobile companies. Adam Satariano, “App-Only Banks Rise in
Europe and Aim at Traditional Lenders,” New York Times, September 23, 2018, https://www.nytimes.com/2018/09/23/technology/online-banking-
monzo.html; “The Rise of Challenger Banks,” KPMG, https://home.kpmg.com/xx/en/home/insights/2018/02/rise-of-challenger-banks-fs.html
(both accessed Dec. 30, 2018).
100 Other examples include Banco Original and Nubank in Brazil; SolarisBank and N26 in Germany; MyBank (Alibaba-backed) and WeBank (launched
by Tencent Holdings) in China; Jibun Bank in Japan; K Bank and Kakao Bank in South Korea; and Digibank in India. In France, nearly 6.5% of French
people are clients of digital-only banks, which capture about one-third of new account openings; the majority of online banks, including Orange Bank,
were taken over by traditional lenders. https://home.kpmg.com/xx/en/home/insights/2018/02/rise-of-challenger-banks-fs.html; “Digital-Only Banks
No
Take Sizable Share in France but Lose Money: Regulator,” Reuters, October 10, 2018, https://www.reuters.com/article/us-france-banks/digital-only-
banks-take-sizeable-share-in-france-but-lose-money-regulator-idUSKCN1MK2CO (accessed Dec. 30, 2018).
101 Monzo is adding over 2,000 new customers each day. https://www.nytimes.com/2018/09/23/technology/online-banking-monzo.html.
102 “Most challenger banks have focused on niche products rather than the entire retail banking value chain” (e.g., offering a high rate of return on
checking, but not offering credit cards). That said, the majority have banking licenses, even if challenger banks utilize a variety of business models; for
example, Monzo is developing a marketplace in which customers can shop for financial services offered by partner institutions, which pay Monzo a fee.
Sean Wise, “New App-Only Banks Are Here. Here’s How to Know If They’re a Good Fit for Your Small Business,” Inc., September 28, 2018,
https://www.inc.com/sean-wise/new-app-only-banks-are-here-heres-how-to-know-if-theyre-a-good-fit-for-your-small-business.html (accessed Dec.
30, 2018); https://www.nytimes.com/2018/09/23/technology/online-banking-monzo.html.
103 JPMorgan is testing a mobile-focused banking service called Finn with similar savings/budgeting tools.
https://www.nytimes.com/2018/09/23/technology/online-banking-monzo.html.
104 Ingrid Lunden, “Klarna Gets a Full Banking License, Gears Up to Go beyond Financing Payments,” TechCrunch, June 19, 2017,
https://techcrunch.com/2017/06/19/klarna-gets-a-full-banking-license-gears-up-to-go-beyond-financing-payments/; Ingrid Lunden, “Klarna Raises

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$20M from H&M, Will Build Financing and Payment Services for the Fashion Retailer,” TechCrunch, October 8, 2018,
https://techcrunch.com/2018/10/08/payments-startup-klarna-raises-20m-from-hm-its-second-backer-from-the-fashion-world/ (both accessed Dec.
31, 2018).
105 https://www.inc.com/sean-wise/new-app-only-banks-are-here-heres-how-to-know-if-theyre-a-good-fit-for-your-small-business.html;
https://www.nytimes.com/2018/09/23/technology/online-banking-monzo.html.
106 https://www.inc.com/sean-wise/new-app-only-banks-are-here-heres-how-to-know-if-theyre-a-good-fit-for-your-small-business.html.
107 https://www.nytimes.com/2018/09/23/technology/online-banking-monzo.html.
108 Ryan Derousseau, “This Free Investing App Has Attracted 5 Million Users. Here’s Why You Should Stay Away,” Money, August 15, 2018,
http://time.com/money/5366603/robinhood-investing-app-review-stocks-safe/ (accessed Dec. 30, 2018).
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of user accounts in 2017, and now claiming more users than E*Trade Financial (i.e., five million users
as of August 2018).109
In addition to enabling cheaper trading, fintech has enabled faster trading. High-frequency traders
(HFTs) utilize powerful computers and complex algorithms to “analyze multiple markets and execute
orders based on market conditions,” transacting in a large number of orders at fractions of a second.110
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Proponents of HFTs state that HFTs have improved liquidity and tightened bid-ask spreads, while
opponents criticize HFTs for contributing to flash crashes and profiting at the expense of institutional
and retail investors.111 One such critic, Brad Katsuyama, developed a new exchange to combat potential
issues with HFTs: IEX Group, Inc.’s, Investors Exchange (IEX).112
Notwithstanding IEX, exchanges charge for data on quotes, bid-ask spreads, and other information,
and charge for proximity to computers (i.e., “colocation”), a critical piece in accessing market data as
fast as possible and thereby critical for HFTs.113 Likewise, exchanges are invested heavily in underlying
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technology to ensure reliable and efficient market structure.114 In addition to traditional exchanges,
exchanges have developed for cryptocurrencies (e.g., Coinbase, Inc., which has more than 20 million
users).115
 Financial data solutions. The importance of data is not limited to data gleaned from exchanges. Financial
data providers are a vital component of the fintech landscape. Companies include CB Information
Services, Inc. (CBInsights), Bloomberg L.P., and S&P Global Inc. (S&P Global). For example, S&P
Global provides ratings information, credit analytics, news and insights, and a market intelligence
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platform, all of which enable financial services professionals, government and regulatory agencies, and
other stakeholders to “make decisions with conviction.”116
Part B: Influential Technologies
API
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 What is it? An API can be open or proprietary, and can be understood as “a documented set of
connecting points that allow an application to interact with another system.”117
 Why is it relevant? APIs enable the sharing of bank data between two or more unaffiliated parties to
deliver enhanced capabilities to the marketplace (i.e., “open banking”).118 Given data importance and
regulation (e.g., PSD2), APIs have the potential to enable new business models and products, which
No
109 Kate Rooney, “Trading App Robinhood Surpasses E-Trade in User Numbers,” CNBC, June 18, 2018;
http://time.com/money/5366603/robinhood-investing-app-review-stocks-safe/.
110 “High-Frequency Trading—HFT Definition,” Investopedia, https://www.investopedia.com/terms/h/high-frequency-trading.asp (accessed Dec. 30,
2018).
111 https://www.investopedia.com/terms/h/high-frequency-trading.asp.
112 IEX is a stock exchange for US equities “built for investors and companies.” IEX’s mission is to “build fairer markets, whether that is through
developing innovative technology designed to protect investors on IEX or identifying new areas where [IEX’s] technology and philosophy can contribute
to a fairer marketplace.” One such means promulgated by IEX is IEX’s “speed bump,” a brief delay in orders designed to stop HFTs from buying and
selling shares ahead of other market participants. IEX has since expanded its business to include stock listings, and it listed its first company, Interactive
Brokers, on October 5, 2018. IEX company website, https://iextrading.com/about/; Liz Moyer, “Speed Bump Exchange Gets Its First Stock Listing,
as Interactive Brokers Jumps from Nasdaq,” CNBC, September 12, 2018, https://www.cnbc.com/2018/09/12/speed-bump-exchange-to-list-
interactive-brokers-in-jump-from-nasdaq.html (both accessed Dec. 30, 2018).
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113 Such exchanges include Intercontinental Exchange, Nasdaq, and CBOE Global Markets. Daren Fonda, “Sparks Fly at SEC Roundtable on Market
Data Fees,” Barron’s, October 25, 2018, https://www.barrons.com/articles/sec-roundtable-on-market-data-fees-gets-heated-1540499420 (accessed Dec.

30, 2018).
114 https://www.barrons.com/articles/sec-roundtable-on-market-data-fees-gets-heated-1540499420.
115 Bitcoin futures are also now live at the CME Group. Coinbase company website, https://www.coinbase.com/about?locale=en-US; CME Group
company website, https://www.cmegroup.com/trading/bitcoin-futures.html (both accessed Dec. 30, 2018).

116 S&P Global company website, https://www.spglobal.com/marketintelligence/en/ (accessed Dec. 30, 2018).
117 Laura Brodsky and Liz Oakes, “Data Sharing and Open Banking,” McKinsey, September 2017.
118 Brodsky and Oakes.
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present opportunities and risks to incumbents and fintech companies alike. (See Exhibit 3, Case Study
No. 5, to learn about Stripe, Inc. [Stripe], an API-based payments company.)
AI and machine learning

 What is it? AI is the use of a machine to perform cognitive functions typically associated with human
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minds, such as learning, reasoning, and problem solving, among others. AI developments have been
enabled by machine learning; machine-learning algorithms are able to detect trends based on large data
sets and to make predictions and recommendations based on data and experiences, as opposed to
making forecasts based on explicit programming instructions.119 AI relies on three types of analytics
(in order of increasing complexity): descriptive (i.e., describe what happened), predictive (i.e., anticipate what
will happen), and prescriptive (i.e., recommend next steps).120
 Why is it relevant? AI has the “potential to improve forecasting and sourcing, optimize and automate
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operations, develop targeted marketing and pricing, and enhance the user experience,” and because of
these benefits, early evidence suggests that AI is delivering “real value to serious adopters and can be
a powerful force for disruption.”121 (See Exhibit 3, Case Study No. 6 to learn about how CircleUp
Network, Inc. [CircleUp], is leveraging machine learning to help investors, lenders, and entrepreneurs.)
Blockchain and DLT

 What is it? Blockchain is a type of DLT; DLT uses independent computers (nodes) to record, share,
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and synchronize transactions in their respective electronic ledgers.122 Blockchain organizes data or
transaction information into “blocks,” which are then “chained” together.123 For a more complete
discussion of blockchain, see “An Introduction to Blockchain” (UVA-F-1810).124
 Why is it relevant? Blockchain and other DLT provide an improved ability to verify and record the
exchange of value among an interconnected set of users; they are secure and transparent ways to track
asset ownership before, during, and after a transaction.125 Blockchain and other DLT establish trust
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without a trusted intermediary, and are forecasted to be the building block of the “internet of value.”126
(See Exhibit 3, Case Study No. 7, for information on Ripple Labs, Inc. [Ripple].)
Cloud
 What is it? Cloud computing is the delivery of on-demand computing resources over the internet on a
pay-for-use basis.127
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 Why is it relevant? The cloud provides an opportunity to lower fixed costs and increase flexibility in the
face of fluctuating business needs, and presents an opportunity to deliver technology products and
119 There are three major types of machine learning: supervised learning (i.e., algorithm uses training data and human feedback to determine
input/output relationships); unsupervised learning (i.e., algorithm explores input data without a previously indicated output variable); and reinforcement
learning (i.e., algorithms take an action to maximize a reward, such as increasing returns for an investment portfolio). “An Executive’s Guide to AI,”
McKinsey Analytics, https://www.mckinsey.com/business-functions/mckinsey-analytics/our-insights/an-executives-guide-to-ai (accessed Dec. 20, 2018).
120 Predictive and prescriptive analytics are the focus of machine learning. https://www.mckinsey.com/business-functions/mckinsey-analytics/our-
insights/an-executives-guide-to-ai.
121 McKinsey Global Institute, Artificial Intelligence: The Next Digital Frontier?, June 2017, 4.
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122 “Blockchain & Distributed Ledger Technology (DLT),” World Bank, April 12, 2018.
123 “Blockchain & Distributed Ledger Technology (DLT).”
124 George (Yiorgos) Allayannis and Aaron Fernstrom, “An Introduction to Blockchain,” UVA-F-1810 (Charlottesville, VA: Darden Business
Publishing, 2017).
125 Allayannis and Fernstrom.
126 “Blockchain & Distributed Ledger Technology.”
127 Cloud offerings can be divided into three categories: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service
(SAAS). Andrew McAfee, “What Every CEO Needs to Know about the Cloud,” Harvard Business Review, November 2011; “What Is Cloud Computing?,”
IBM, https://www.ibm.com/cloud/learn/what-is-cloud-computing (accessed Dec 20, 2018).
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services via new channels, to redesign operating models, and to work in more agile ways.128 Exhibit 3,
Case Study No. 8, provides an example of a financial services firm, Capital One Financial Corporation
(Capital One), deploying cloud computing.
Edge

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What is it? Edge is information technology architecture in which data are processed closer to their
source (i.e., near the “edge” of a network), as opposed to being sent over the internet to a centralized
data center for processing.129
 Why is it relevant? While in its infancy, edge could one day serve as an alternative to a centralized cloud
or data center.130 As more devices connect to the internet and generate data, cloud computing may not
be able to process data at speeds required in certain use cases (e.g., an autonomous vehicle cannot
afford a lag in processing). In the future, edge could enable faster data processing and application
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efficiency, and could even reduce costs.131 (See Exhibit 3, Case Study No. 9, for more information on
investment in edge.)
Quantum
 What is it? Quantum utilizes the quantum mechanics properties of superposition and entanglement.132
 Why is it relevant? While years from actualization, quantum could become vital to the financial services
industry.133 Quantum is well positioned to solve calculations and problems that do not necessarily
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proceed through a logical sequence of steps. Quantum is therefore both a threat to and replacement
opportunity for the modern encryption technology that underpins modern data security and emerging
technologies (e.g., blockchain).134 Additionally, quantum could solve complex optimization problems,
and thereby enable more effective risk management, derivative pricing, and portfolio optimization.135
That said, quantum faces tremendous challenges and is not without faults.136 (See Exhibit 3, Case
Study No. 9, for more information on investment in quantum.)
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No
128 Ranjit Bawa, “Cloud Adoption in Financial Services,” Deloitte, September 12, 2017, https://deloitte.wsj.com/cio/2017/09/12/cloud-
applications-in-financial-services (accessed Dec. 20, 2018).

129 “What Is Edge Computing?,” CBInsights, August 18, 2018; “Essential Guide: Emerging Data Center Workloads Drive New Infrastructure
Demands,” TechTarget, August 2017, https://searchdatacenter.techtarget.com/guide/Emerging-data-center-workloads-drive-new-infrastructure-

demands (accessed Dec. 6, 2018).
130 “What Is Edge Computing?”
131 Data management solutions for local devices may cost firms less than expenditures for cloud and data center networks. “What Is Edge Computing?”
132 Quantum utilizes quantum mechanics, which is a branch of physics that deals with the behavior of subatomic particles. Two properties of quantum
mechanics relevant to this potential form of computing power are superposition and entanglement. Superposition involves a particle being in multiple
states at the same time, and entanglement is a situation in which two quantum bits can influence each other even if they are not physically connected.
Richard Waters and John Thornhill, “Quantum Computing: The Power to Think Outside the Box,” Financial Times, September 3, 2018,
Do
https://www.ft.com/content/154a1cf4-ad07-11e8-94bd-cba20d67390c; Jonathan Margolis, “Fun Facts about Quantum Computing,” Financial Times,
October 17, 2018, https://www.ft.com/content/24bf2c72-d08b-11e8-9a3c-5d5eac8f1ab4 (both accessed Dec. 6, 2018).
133 Benefits may not be realized for 5 to 10 years. https://www.ft.com/content/154a1cf4-ad07-11e8-94bd-cba20d67390c.
134 https://www.ft.com/content/154a1cf4-ad07-11e8-94bd-cba20d67390c.
135 https://www.ft.com/content/154a1cf4-ad07-11e8-94bd-cba20d67390c.
136 Quantum can be imprecise and may not be an ideal means to analyze big data as we currently produce it. Additionally, quantum chips are
temperature sensitive, working only at temperatures typically 100th of a degree above absolute zero; this requires expensive equipment to even begin
building a quantum computer (e.g., dilution refrigerators sold for between 200,000 euros and 500,000 euros by BlueFors).
https://www.ft.com/content/24bf2c72-d08b-11e8-9a3c-5d5eac8f1ab4.
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Exhibit 1
Glossary of Terms
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Algorithm: A “set of instructions for solving a problem or accomplishing a task.” Computers utilize algorithms
to perform functions. A common financial services example is algorithmic trading, which is the use of a
computer to trade in securities at a speed and processing power not possible for humans.1
Alternative lending: A “broad term used to describe the wide range of loan options available to consumers and
business owners outside of a traditional bank loan.”2
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Bid-ask spread: The difference between the “highest price that a buyer is willing to pay for an asset and the lowest
price that a seller is willing to accept.”3
Big data: The use of data to glean intelligence and convey that into action. Differs from traditional data analytics
on the basis of volume, velocity, and variety. More data cross the internet each second than were stored in the
entire internet 20 years ago (volume); big data facilitates rapid analysis and insights (velocity); and big data
ranges in nature from messages and images on social media to GPS signals from cell phones (variety).4
op
Biometric authentication system (BAS): A security process relying on unique biological characteristics of an individual
as a means to verify identity. BAS “compare[s] a biometric data capture to stored, confirmed authentic data.”5
Challenger banks: Banks seeking to compete with larger institutions, many of which are digital-only and do not
carry the weight of legacy technology; many challenger banks are based in the United Kingdom because it is
not “saturated with big banks and their branches…creating an opportunity for non-traditional financial
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institutions,” and because “the UK was an early adopter of digital banking.” United Kingdom examples include
Monzo, Atom Bank, and Starling Bank.6 (See also: “Neobank.”)
Claims adjudication: The “determination of the insurer’s payment or financial responsibility after the member’s
insurance benefits are applied to a…claim.”7
Colocation: The practice of allowing trading firms to place trading computers in or near the same data center(s)
that houses an exchange’s server(s). Trading firms, ranging from major Wall Street banks to HFTs, “spend
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millions each year to place their trading models right on exchange servers. [They are] a big revenue generator
for both traders and the exchanges.”8 (See also pages 13–14 for more information on HFTs.)
1 “Algorithm,” Investopedia, https://www.investopedia.com/terms/a/algorithm.asp (accessed Dec. 21, 2018).

2 La Mancha Sims, “What Is Alternative Lending?,” Yahoo!, https://smallbusiness.yahoo.com/advisor/alternative-lending-040517627.html (accessed
Dec. 30, 2018).
3 “Bid-Ask Spread,” Investopedia, https://www.investopedia.com/terms/b/bid-askspread.asp (accessed Dec. 30, 2018).
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4 Andrew McAfee and Erik Brynjolfsson, “Big Data: The Management Revolution,” Harvard Business Review, October 2012,
https://hbr.org/2012/10/big-data-the-management-revolution (accessed Mar. 14, 2019).

5 Margaret Rouse, “Biometric Authentication,” https://searchsecurity.techtarget.com/definition/biometric-authentication (accessed Dec. 21, 2018).
6 “The Rise of Challenger Banks,” KPMG, https://home.kpmg.com/xx/en/home/insights/2018/02/rise-of-challenger-banks-fs.html (accessed
Dec. 21, 2018).

7 Joy Hicks, “Understanding Claims Adjudication,” Very Well Health, November 27, 2018, https://www.verywellhealth.com/understanding-claims-
adjudication-2317058 (accessed Dec. 21, 2018).

8 Geoffrey Rogow, “Colocation: The Root of All High-Frequency Trading Evil?,” Wall Street Journal, September 20, 2012,
https://blogs.wsj.com/marketbeat/2012/09/20/collocation-the-root-of-all-high-frequency-trading-evil/ (accessed Dec. 30, 2018).
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Exhibit 1 (continued)
Glossary of Terms
Comprehensive capital analysis and review (CCAR): A stress test component of the Dodd-Frank Act. CCAR assesses
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whether the largest bank holding companies in the United States “have sufficient capital to continue operations
throughout times of economic and financial stress and that they have robust, forward-looking capital-planning
processes that account for their unique risks.”9
Crowdfunding: The “use of small amounts of capital from a large number of individuals to finance a new business
venture.”10 In the United States, a company issuing securities in reliance on Regulation Crowdfunding (Reg CF)
is permitted to raise up to $1.07 million in a 12-month period, with other limitations (e.g., individual investor
limitations based on income and net worth). The SEC adopted Reg CF to implement the requirements of Title
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III of the Jumpstart Our Business Startups (JOBS) Act of 2012; Reg CF is an exemption from registration
under the Securities Act of 1933 (Section 4(a)(6) of the Act).11
Cryptocurrency: “any form of currency that only exists digitally, that usually has no central issuing or regulating
authority but instead uses a decentralized system to record transactions and manage the issuance of new units,
and that relies on cryptography to prevent counterfeiting and fraudulent transactions” (e.g., Bitcoin and
Ether).12
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Cryptography: The “secure information and communication techniques derived from mathematical concepts and
a set of rule-based calculations called algorithms to transform messages in ways that are hard to decipher. These
deterministic algorithms are used for cryptographic key generation and digital signing and verification to protect
data privacy, web browsing on the internet, and confidential communications such as credit card
transactions.”13
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Deep learning: A “subset of machine learning [in which] artificial neural networks, [i.e., algorithms] inspired by
the human brain, learn from large amounts of data.” Deep-learning algorithms will repeatedly perform tasks,
each time learning and improving. “Deep learning allows machines to solve complex problems even when
using…data…that is very diverse, unstructured, and inter-connected.”14
Digital wallet: An electronic version of a physical wallet enabling payments, including contactless payments (i.e.,
holding a device over a payment reader and using near-field communication technology). Examples include
Apple Pay, Google Pay, and Samsung Pay.15
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9 “Stress Tests and Capital Planning,” Board of Governors of the Federal Reserve System, https://www.federalreserve.gov/supervisionreg/stress-
tests-capital-planning.htm (accessed Dec. 21, 2018).

10 “Crowdfunding,” Investopedia, https://www.investopedia.com/terms/c/crowdfunding.asp (accessed Dec. 23, 2018).
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11 “Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers,” US Securities and Exchange Commission,
https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm (accessed Dec. 23, 2018).
12 “Cryptocurrency,” Merriam-Webster, https://www.merriam-webster.com/dictionary/cryptocurrency (accessed Dec. 23, 2018).
13 Margaret Rouse, “Cryptography,” Tech Target, https://searchsecurity.techtarget.com/definition/cryptography (accessed Dec. 23, 2018).
14 Bernard Marr, “What Is Deep Learning AI? A Simple Guide with 8 Practical Examples,” Forbes, October 1, 2018,
https://www.forbes.com/sites/bernardmarr/2018/10/01/what-is-deep-learning-ai-a-simple-guide-with-8-practical-examples/#16a9f2a88d4b
(accessed Dec. 23, 2018).
15 “What to Know about Using a Digital Wallet,” Commerce Bank, July 18, 2018 https://www.commercebank.com/personal/ideas-and-
tips/2018/digital-wallet (accessed Dec. 23, 2018).
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Glossary of Terms
Discount brokerage: A business for buying and selling securities at a lower rate, typically due to the fact that it does
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not provide extensive advice, research, planning, or investment services. Many investors who have smaller
portfolios, trade frequently, and/or do not need advice find discount brokerages appealing.16
Dodd-Frank Act: Post-GFC legislation that officially was passed in July 2010. Dodd-Frank is complex and
comprehensive, restricting proprietary trading (i.e., Volcker Rule), and establishing the Consumer Financial
Protection Bureau (CFPB), Financial Stability Oversight Council (FSOC), and stress tests (e.g., DFAST), among
other things.17
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Dodd-Frank Act Stress Test (DFAST): A mandated test that extends beyond just bank holding companies to cover
baseline, adverse, and severely adverse stress-test environments. Legislation passed in 2018 removed mandated
annual DFASTs for banks with assets under $250 billion, although banks with assets between $100 billion and
$250 billion are still periodically tested.18
Dual banking: The ability for US banks to charter at the state or national level. More than 80% of the nation’s
roughly 5,000 banks are state chartered. Proponents of dual banking argue that regulators have an added
incentive to control costs, which could raise performance for not only regulated entities but also regulators.19
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Encryption: The process of utilizing an algorithm to transform information into an unreadable state for
unauthorized users. Authorized users are able to decrypt or read the unreadable information via a key (e.g.,
symmetric key).20
Entanglement: A property of quantum mechanics vital to quantum computing. A situation in which two quantum
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bits can influence each other even if not physically connected; this could enable the creation of new algorithms
that bypass traditional sequential logical processes.21
Ethereum: A decentralized platform on which distributed applications can be built and on which smart contracts
are enabled. These applications are run using the platform’s virtual currency, Ether.22
Federal Deposit Insurance Corporation (FDIC): An independent agency of the US government created in 1933 in
response to bank failures of the 1920s and early 1930s. The FDIC insures deposits in banks and thrift
No
institutions for at least $250,000, and in that capacity, identifies, monitors, and addresses the risks banks and
thrifts pose to deposit insurance funds.23
16 “What Is a Discount Brokerage?,” Bankrate, https://www.bankrate.com/glossary/d/discount-brokerage (accessed Dec. 26, 2018).

17 “Dodd-Frank Act,” History, August 21, 2018, https://www.history.com/topics/21st-century/dodd-frank-act (accessed Dec. 23, 2018).
18 Capgemini, U.S. Stress Testing Regulations: A Comparative Overview, 3, 5, 7, 2015; Ed Young, “With Easing of Stress Test, Bank Risk Teams Have to
Step Up,” American Banker, June 6, 2018, https://www.americanbanker.com/opinion/with-easing-of-stress-tests-bank-risk-teams-have-to-step-up

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19 Julie Stackhouse, “Why America’s Dual Banking System Matters,” Federal Reserve Bank of St. Louis, September 19, 2017,
https://www.stlouisfed.org/on-the-economy/2017/september/americas-dual-banking-system-matters (accessed Dec. 23, 2018).

20 “Encryption,” Techopedia, https://www.techopedia.com/definition/5507/encryption (accessed Dec. 23, 2018).
21 Richard Waters and John Thornhill, “Quantum Computing: The Power to Think Outside the Box,” Financial Times, September 3, 2018,
https://www.ft.com/content/154a1cf4-ad07-11e8-94bd-cba20d67390c; Jonathan Margolis, “Fun Facts about Quantum Computing,” Financial Times,
October 17, 2018, https://www.ft.com/content/24bf2c72-d08b-11e8-9a3c-5d5eac8f1ab4 (both accessed Dec. 6, 2018).
22 “Ethereum,” Investopedia, https://www.investopedia.com/terms/e/ethereum.asp (accessed Dec. 23, 2018).
23 “Who Is the FDIC?,” Federal Deposit Insurance Corporation, May 3, 2017, https://www.fdic.gov/about/learn/symbol/ (accessed Dec. 23, 2018).
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Glossary of Terms
FINRA: A “not-for-profit organization authorized by Congress to protect America’s investors by making sure
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the broker-dealer industry operates fairly and honestly.”24
Flash crash: When a market plummets within minutes and rebounds; the plummet can be exacerbated by
computer trading programs that recognize aberrations and react by selling holdings. Prominent examples
include the 2015 New York Stock Exchange Flash Crash, in which trading was stopped for over three hours
on July 8, 2015; and the 2014 Bond Flash Crash in which 10-year US Treasury notes dipped from 2.0% to
1.873% within minutes, then quickly rebounded, on October 15, 2014.25
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General Data Protection Regulation (GDPR): European Union (EU) legislation approved in April 2016. GDPR aims
to provide consumers with control of their personal data and impacts companies located in the EU or otherwise
providing goods or services to, or monitoring the behavior of, individuals in the EU. Consumers are able to
access data and find out how data is used; and they may ask for data to be transferred to a different service
provider or to be erased.26
Infrastructure as a service (IaaS): A server or storage capacity that customers use when they want to access
computing power but do not want to install or maintain it.27
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Internet of things (IoT): A term encompassing everything connected to the internet; however, frequently used to
refer to objects that interact or “talk” to each other.28
Internet-of-Value (IoV): A term that refers to enabling the exchange of any asset that is of value to an individual,
(e.g., stocks, frequent flyer points, and intellectual property); many believe blockchain will enable the IoV.29
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Markets in Financial Instruments Directive II (MiFID II): Far-reaching EU legislation that regulates firms that
provide services to clients linked to financial instruments and venues on which those instruments trade. High-
profile aspects of the legislation include requiring that fund managers budget separately for research and trading
costs, and pushing trading away from the phone and onto electronic venues that provide enhanced audit and
surveillance capabilities.30
Natural language processing (NLP): A branch of AI that assists computers in understanding, interpreting, and
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manipulating human language. NLP “makes it possible for computers to read text, hear speech, interpret it,
measure sentiment, and determine which parts are important.”31
24 “About FINRA,” FINRA, https://www.finra.org/about (accessed Dec. 23, 2018).

25 Kimberly Amadeo, “Flash Crash Explained with Examples,” The Balance, February 23, 2018, https://www.thebalance.com/what-is-a-flash-crash-
3306184 (accessed Dec. 30, 2018).
26 Arjun Kharpal, “Everything You Need to Know about a New EU Data Law That Could Shake Up Big US Tech,” CNBC, March 30, 2018,
https://www.cnbc.com/2018/03/30/gdpr-everything-you-need-to-know.html (accessed Dec. 27, 2018).

27 “What Is Cloud Computing?,” IBM, https://www.ibm.com/cloud/learn/what-is-cloud-computing (accessed Dec 20, 2018).
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28 Matt Burgess, “What Is the Internet of Things? WIRED Explains,” WIRED, February 16, 2018, https://www.wired.co.uk/article/internet-of-
things-what-is-explained-iot (accessed Dec. 23, 2018).

29 Shanna Leonard, “The Internet of Value: What It Means and How It Benefits Everyone,” Ripple, June 21, 2017, https://ripple.com/insights/the-
internet-of-value-what-it-means-and-how-it-benefits-everyone/ (accessed Dec. 23, 2018).

30 Philip Stafford, “What Is Mifid II and How Will It Affect EU’s Financial Industry?,” Financial Times, September 15, 2017,
https://www.ft.com/content/ae935520-96ff-11e7-b83c-9588e51488a0; “MiFID II,” Financial Conduct Authority, June 14, 2018,

https://www.fca.org.uk/markets/mifid-ii (both accessed Dec. 27, 2018).
31 “Natural Language Processing,” SAS, https://www.sas.com/en_us/insights/analytics/what-is-natural-language-processing-nlp.html (accessed
Dec. 23, 2018).
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Glossary of Terms
Neobank: Newer, digital-only mobile banks that are unburdened by legacy technology and other operational
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expenses (e.g., branch networks). These banks typically focus on niche products rather than the entire retail
bank value chain, and are prominent in the United Kingdom.32 (See also: “Challenger banks.”)
Office of the Comptroller of the Currency (OCC): An independent bureau of the US Treasury that charters, regulates,
and supervises all national banks and federal savings associations, as well as foreign banks’ federal branches and
agencies.33
OCC fintech charter: A charter announced on July 31, 2018, that provides nondepository fintech companies
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engaged in the business of banking the ability to apply and obtain a special purpose national bank charter. Such
fintechs would be supervised like similarly situated national banks (e.g., capital, liquidity, and financial inclusion
requirements); the charter does not permit deposits, so FDIC insurance is not required. Potential benefits
include the “ability to engage in numerous transactions without having to share profits with a bank partner,
preemption of state licensing and many other laws, and having fewer regulators to contend with on a daily
basis.”34
Open banking: A system under which consumers have the ability to access personal banking information and
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grant third parties access thereto. Open banking utilizes application programming interfaces (APIs) and is
meant to improve a customer’s banking experience by generating competition and transparency.35 (See also:
“PSD2.”)
Payment Services Directive (PSD2): EU legislation requiring banks to open up their IT infrastructure to Third Party
Providers (TPPs), providing payment services companies with the ability to compete with banks. Additional
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requirements center around transparency (e.g., informing consumers of their rights and of all charges and
exchange rates) and cybersecurity.36 (See also: “Open banking.”)
Peer-to-peer lending (P2P): A system of “borrowing from individuals without using a traditional bank or credit
union…P2P loans are loans that individuals and investors make—as opposed to loans that come from [a]
bank.”37
Platform as a service (PaaS): A cloud-computing model in which a third-party provider hosts hardware and
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software on its own infrastructure, thereby providing capabilities—typically those needed for application
development—to users without requiring them to install in-house hardware or software.38
32 “The Rise of Challenger Banks,” KPMG, https://home.kpmg.com/xx/en/home/insights/2018/02/rise-of-challenger-banks-fs.html (accessed
Dec. 30, 2018).

33 “About the OCC,” OCC, https://www.occ.treas.gov/about/what-we-do/mission/index-about.html (accessed Dec. 23, 2018).
34 The business of banking would require fintechs to engage in paying checks, lending money, or both, given that these are two of three core banking
functions necessary for a national bank charter. John ReVeal and Rebecca H. Laird, “The OCC’s New Fintech Bank Charter—What You Need to
Know,” K&L Gates, August 24, 2018, http://www.klgates.com/the-occs-new-fintech-bank-charter---what-you-need-to-know-08-24-2018 (accessed
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Dec. 27, 2018); https://www.occ.treas.gov/about/what-we-do/mission/index-about.html.

35 “Open Banking,” Investopedia, June 25, 2018, https://www.investopedia.com/terms/o/open-banking.asp; Steve Boms, “U.S. Way Behind the Curve
on Open Banking,” American Banker, September 21, 2018, https://www.americanbanker.com/opinion/us-way-behind-the-curve-on-open-banking (both

accessed Dec. 27, 2018).
36 EY, Payment Services Directive 2 for FinTech & Payment Services Providers: Accelerate Your Growth Journey, 2017, 2, 4.
37 Justin Pritchard, “Borrowing with Peer-to-Peer Loans: How It Works,” The Balance, September 29, 2018, https://www.thebalance.com/how-
peer-to-peer-loans-work-315730 (accessed Dec. 31, 2018).

38 Margaret Rouse, “Platform as a Service,” Tech Target, https://searchcloudcomputing.techtarget.com/definition/Platform-as-a-Service-PaaS
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Glossary of Terms
Regulatory sandbox: “testing grounds for new business models that are not protected by current regulation, or
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supervised by regulatory institutions…[Sandboxes are relevant in fintech because of] a growing need to develop
regulatory frameworks for emerging business models. The purpose of the sandbox is to adapt compliance with
strict financial regulations to the growth and pace of the most innovative companies, in a way that doesn’t
smother the fintech sector with rules, but also doesn’t diminish consumer protection.”39
Reinforcement learning: A form of machine learning that rewards or disincentivizes an action to produce an optimal
outcome.40
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Retail investor: An individual or nonprofessional who buys and sells securities, such as stocks, bonds, or other
investment vehicles such as ETFs and mutual funds.41
Robo-adviser: One of several “digital platforms that provide automated, algorithm-driven financial planning
services with little to no human supervision. A typical robo-adviser collects information from clients about their
financial situation and future goals through an online survey, and then uses the data to offer advice and/or
automatically invest client assets.”42
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Robotics process automation (RPA): An “application of technology, governed by business logic and structured
inputs, aimed at automating business processes. Using RPA tools, a company can configure software, or a
‘robot,’ to capture and interpret applications for processing a transaction, manipulating data, triggering
responses, and communicating with other digital systems.”43
US Securities and Exchanges Commission (SEC): A commission created by the Securities Exchange Act of 1934 to
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restore investor confidence in US capital markets; it oversees key participants in the securities world, including
exchanges, broker-dealers, and investment advisers. The SEC’s mission is to protect investors, maintain fair,
orderly, and efficient markets, and facilitate capital formation, and one means the SEC uses to fulfill its mission
is required public disclosure.44
Shadow banking: A “group of financial intermediaries facilitating the creation of credit across the global financial
system but whose members are not subject to [the] regulatory oversight” faced by traditional banks.45
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Smart contracts: “Self-executing contracts with the terms of the agreement between buyer and seller being directly
written into lines of code.” Smart contracts enable transactions and agreements to be carried out without a
centralized authority.46 (See also: “Ethereum.”)
39 “What Is a Regulatory Sandbox?,” BBVA, November 20, 2017, https://www.bbva.com/en/what-is-regulatory-sandbox/ (accessed Dec. 30, 2018).
40 “Artificial Intelligence: What Is Reinforcement Learning—A Simple Explanation & Practical Examples,” Forbes, September 28, 2018,
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https://www.forbes.com/sites/bernardmarr/2018/09/28/artificial-intelligence-what-is-reinforcement-learning-a-simple-explanation-practical-
examples/#6fd9dd03139c (accessed Dec. 23, 2018).
41 “Retail Investor,” Investopedia, https://www.investopedia.com/terms/r/retailinvestor.asp (accessed Dec. 30, 2018).
42 “What Is a Robo-Adviser,” Investopedia, https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp (accessed Dec. 26, 2018).
43 Clint Boulton, “What Is RPA? A Revolution in Business Process Automation,” CIO, September 3, 2018,
https://www.cio.com/article/3236451/business-process-management/what-is-rpa-robotic-process-automation-explained.html (accessed Dec. 6, 2018).
44 “What We Do,” US Securities and Exchange Commission, https://www.sec.gov/Article/whatwedo.html (accessed Dec. 23, 2018).
45 “Shadow Banking System,” Investopedia, https://www.investopedia.com/terms/s/shadow-banking-system.asp (accessed Dec. 31, 2018).
46 “Smart Contracts,” Investopedia, https://www.investopedia.com/terms/s/smart-contracts.asp (accessed Dec. 23, 2018).
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Glossary of Terms
Software as a service (SaaS): A “software distribution model in which a third-party provider hosts applications and
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makes them available to customers over the internet. SaaS is one of three main categories of cloud
computing.”47
Stablecoin: A cryptocurrency pegged to a reliable and low-volatility underlying asset, typically the US dollar. The
reduction in volatility allows for the ability to more effectively transact on a day-to-day basis.48
Superposition: A property of quantum mechanics relevant to quantum computing. Superposition involves a

particle being in multiple states at the same time. Unlike a classic bit, which represents either zero or one,
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quantum bits can be in a state of on, off, or in-between at the same time. With just 50 quantum bits, one may be
able to solve problems beyond the fastest supercomputers in existence today.49
Supervised learning: A “method used to enable machines to classify objects, problems, or situations based on
related data fed into the machines.” During supervised learning, a machine is provided training data, and is
increasingly able to perform accurate classifications post-iteration. (See also: “Training Data.”)50
Telematics: A “method of monitoring an asset [e.g., car or heavy equipment] by using GPS and onboard
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diagnostics to record movements on a computerized map…[The] vast amount of data…collected via [a]
telematics device and other connected hardware or sensors [e.g., position, speed, or battery voltage]…The
term…comes from a blend of telecommunication and informatics sciences.”51
Training data: An initial set of data used to help a program learn how to process information and produce desired
results; used in machine learning.52
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Unbundling/rebundling: The act of deconstructing financial services offerings into an individual offering (i.e.,
unbundling), and following that single offering, expanding into other areas of financial services (i.e.,
rebundling).53
Unified Payments Interface (UPI): A system used in India that “powers multiple bank accounts into a single mobile
application (of any participating bank), merging several banking features, seamless fund routing, [and] merchant
payments into [a single area].”54
No
47 Margaret Rouse, “Software as a Service (Saas),” https://searchcloudcomputing.techtarget.com/definition/Software-as-a-Service (accessed Dec. 27,
2018).
48 Sherman Lee, “Explaining Stable Coins, the Holy Grail of Cryptocurrency,” Forbes, March 12, 2018,
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https://www.forbes.com/sites/shermanlee/2018/03/12/explaining-stable-coins-the-holy-grail-of-crytpocurrency/ (accessed Dec. 26, 2018).

49 https://www.ft.com/content/154a1cf4-ad07-11e8-94bd-cba20d67390c; https://www.ft.com/content/24bf2c72-d08b-11e8-9a3c-5d5eac8f1ab4.
50 “Supervised Learning,” Techopedia, https://www.techopedia.com/definition/30389/supervised-learning (accessed Dec. 27, 2018).
51 Craig Michael, “What Is Telematics,” Geotab, January 8, 2018, https://www.geotab.com/blog/what-is-telematics/ (accessed Dec. 27, 2018).
52 “Training Data,” Techopedia, https://www.techopedia.com/definition/33181/training-data (accessed Dec. 27, 2018).
53 Tilman Ehbrbeck and Alex Lazarow, “Now That FinTech Has Unbundled Our Financial Lives, Can It Re-Bundle Them?,” Medium, June 29, 2017,
https://medium.com/positive-returns/now-that-fintech-has-unbundled-our-financial-lives-can-it-re-bundle-them-fd34a0946840 (accessed Dec. 27,

2018).
54 “Unified Payments Interface (UPI),” Cashless India, http://cashlessindia.gov.in/upi.html (accessed Dec. 27, 2018).
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Glossary of Terms
Unsupervised learning: A “type of machine learning algorithm used to draw inferences from datasets consisting of
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input data without labeled responses.”55
Whole loan: A “single loan that a lender has issued to a borrower.” Lenders frequently package and sell whole
loans in the secondary market to institutional or agency buyers (e.g., Fannie Mae) because the sale reduces
default risk and improves liquidity (i.e., securitization).56
Source: Created by author using sources as cited.
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op
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No
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55 “Unsupervised Learning,” MathWorks, https://www.mathworks.com/discovery/unsupervised-learning.html (accessed Dec. 27, 2018).

56 “What Is a Whole Loan,” Investopedia, https://www.investopedia.com/terms/w/wholeloan.asp (accessed Dec. 28, 2018).
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Exhibit 2
Fintech Lending in China
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China represents the single largest fintech credit market.1 In China, investors in fintech lending are mostly
individuals, and large technology firms (e.g, Alibaba, Tencent, Baidu, and JD.com) have developed into
important players in lending, with some e-commerce platforms now extending credit to merchants utilizing
their platform; for example, Ant Financial (Alibaba) has provided loans and short-term financing to small and
medium-sized enterprise (SME) vendors on Alibaba’s e-commerce platform since 2010.2 It is argued that
fintech lending is well suited for China because small firms and less affluent consumers have limited access to
traditional bank credit, and the number of such firms and consumers in China is large.3
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However, over recent years, China has experienced a sharp rise in problematic peer-to-peer (P2P) fintech
lenders, with many instances of fraud and failure.4 As a result, Chinese authorities have tightened their
regulatory grip, and it is reported that they are “planning to wind down small- and medium-sized P2P lending
platforms nationwide.”5 It is argued that there will be very few P2P fintech lenders remaining after the
crackdown, and Citigroup estimates that just 50 of the roughly 1,200 platforms will receive regulatory approval
for ongoing operations.6 One major P2P fintech lender in China is Lufax, which was established by Ping An
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Insurance Group and is estimated to hold over 22% market share in the P2P space.7
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No
1 The ratio of fintech lending to new bank loans rose to almost 40% in June 2016, but fell to under 10% as of June 2018. Bank for International
Settlements (BIS), “International Banking and Financial Market Developments,” BIS Quarterly Review (September 2018): 30, 41.
2 Tencent established Tencent Credit; Alibaba established Sesame Credit; and Baidu invested in, and JD Finance entered into a joint venture with,
ZestFinance, a United States–based provider of automated machine learning that claims to be the “only machine learning credit and risk modeling solution
with end-to-end explainability.” Zestfinance company website, https://www.zestfinance.com/zaml#overview (accessed Dec. 31, 2018); DBS Group
Research, China/Hong Kong Industry Focus: China Fintech Sector, January 22, 2018, 1, 9–10; BIS, 31, 35.
3 In 2014, only 9.6% of Chinese adults had access to credit from a financial institution, and it is estimated that SMEs received less than 25% of the
loans extended by Chinese banks in 2012, despite SMEs accounting for over 60% of GDP and 80% of urban employment. Evidence has suggested that
automated credit lines to firms trading on Alibaba have increased credit access for firms with low credit scores, and “in a survey of retail borrowers on
a large Chinese platform, more than half reported that they had no borrowing history from a financial institution.” Wei Wang and David Dollar, “What’s
Happening with China’s Fintech Industry?,” Brookings, February 8, 2018, https://www.brookings.edu/blog/order-from-chaos/2018/02/08/whats-
happening-with-chinas-fintech-industry/#cancel (accessed Dec. 31, 2018); BIS, 39–40.
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4 In recent years, the industry has consolidated significantly, in part due to problematic fintech lenders exiting the market. BIS, 41–42
5 China is seeking to crack down on shadow banking, which is estimated to be $9 trillion; many P2P platforms comprise “one of the riskiest and least
regulated slices of the shadow banking system.” In Hangzhou, for example, regulators required some platforms with under 100 million yuan of
outstanding loans to wind down and repay customers within a year. “China Planning Major Purge of $176 Billion Loan Market,” Bloomberg, November
29, 2018, https://www.bloomberg.com/news/articles/2018-11-29/china-is-said-to-plan-major-purge-of-176-billion-loan-market (accessed Dec. 31,
2018).
6 https://www.bloomberg.com/news/articles/2018-11-29/china-is-said-to-plan-major-purge-of-176-billion-loan-market.
7 “China’s Lufax Seeks $60 Billion Valuation with April Hong Kong IPO,” Reuters, January 15, 2018, https://www.reuters.com/article/us-lufax-ipo-
valuation/chinas-lufax-seeks-60-billion-valuation-with-april-hong-kong-ipo-scmp-idUSKBN1F40DN (accessed Dec. 31, 2018).
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Fintech Lending in China
China’s P2P Market Share by Loan Outstanding in 2017 (Top 5)
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Data source: DBS Group Research, China/Hong Kong Industry Focus: China Fintech Sector, January 22, 2018.
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Online Consumer Loan/P2P Platform Valuation (FY16)
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No
Note: $MM = millions of US dollars.

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Data source: DBS Group Research.
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Exhibit 3
Case Studies
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Case Study No. 1, Lending: Goldman Sachs, a Retail Bank?
In 2015, the Goldman Sachs Group, Inc. (Goldman), hired Harit Talwar from Discover Financial Services
to help build a digital consumer business. In 2016, Goldman launched its first digital banking service, Marcus.
In part due to market-beating interest rates, Marcus appears to have achieved early success:1
 Marcus successfully launched in the United Kingdom in September 2018, and acquired over 100,000
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UK customers in just 40 days.2
 Marcus held $3.96 billion in loans on its balance sheet as of September 2018.3
 Marcus has deposited a total of $26.73 billion as of September 2018.4
 Marcus is integrated with past Goldman purchases, which may drive Marcus customer acquisition and
may position Goldman to offer a suite of other services.5
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Case Study No. 2, Payments: The Battle for India.
India serves as a relevant study because it highlights the strong payments growth expected in emerging
markets due to cashless society promotion, and illuminates the strategic efforts undertaken by companies across
industries and geographies to capture a piece of the soon-to-be $1 trillion digital payments market.6
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No
1 As of January 2019, Marcus offers a 2.05% annual percentage yield (APY) compared with 2.00% offered by online banking competitor Ally Financial
Inc. and 0.04% offered by Chase and Citibank. Marcus company website, https://www.marcus.com/us/en/savings/high-yield-savings; “Bank,” Ally
company website, https://www.ally.com/bank/online-savings-account (both accessed Jan. 2, 2019).
2 “Marcus by Goldman Sachs Is Opening a New Account Every 35 Seconds,” Finextra, November 5, 2018,
https://www.finextra.com/newsarticle/32884/marcus-by-goldman-sachs-is-opening-a-new-account-every-35-seconds (accessed Dec. 20, 2018).
3 Goldman Sachs SEC Form 10-Q, September 30, 2018.
4 Goldman Sachs SEC Form 10-Q, September 30, 2018.
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5 In April 2018, Goldman acquired Clarity Money, a personal finance application that, among other things, connects with savings accounts. The
application now not only directs Clarity Money’s more than one million users to Marcus, but also permits Marcus account holders to link their account
into the Clarity Money application. Marcus was moved under Goldman’s investment management division in October 2018, and a digital wealth
management product is expected soon. Julia Horowitz, “Goldman Sachs Bought the App Clarity Money. Now It’s Putting It to Work,” CNN Business,
October 31, 2018, https://www.cnn.com/2018/10/31/business/goldman-sachs-marcus-savings-accounts/index.html (accessed Dec. 6, 2018).
6 Capgemini projected Emerging Asia to grow at a CAGR of 30.9% between 2015 and 2020. India stands to drive this growth, given the
demonetization efforts promoted by the Indian government since November 2016, including the Indian government’s Bharat Interface for Money
(BHIM), a payments-enabling mobile application. Capgemini and BNP Paribas, World Payments Report 2017, 9–11; “Digital Payments Set to Become a
Trillion-Dollar Market in Next Five Years: NITI Aayog,” Press Information Bureau (Government of India) press release, July 31, 2018.
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Case Studies
Payments: The Battle for India
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Company Initiative
In 2017, Ant (an Alibaba affiliate) purchased a 40% stake in Paytm, and in 2018 acquired an
Ant Financial (Ant)7 approximately 22% stake in Zomato, an Indian restaurant/food-delivery platform. These and five
other strategic investments are part of Ant’s goal of global expansion.8
In 2016, Amazon acquired Emvantage Payments and relaunched it as a digital wallet under Amazon
Pay. In January 2018, Amazon Pay rolled out a Doorstep feature (a cash pickup service allowing
customers to load money into their Amazon Pay digital wallets), and in May 2018, Amazon co-
Amazon9 invested with Mastercard in ToneTag ($8 million Series B), a contactless payments hardware and
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software provider that reaches over 50 million consumers and can be integrated at both the
merchant and customer level. Amazon Pay now has both digital and offline capabilities.
FB reached a deal with several Indian banks to launch WhatsApp payments services nationwide,
Facebook, Inc. (FB) and early beta testing was encouraging (nearly one million users). More recently, FB reportedly
developed a stablecoin cryptocurrency for money transfer via WhatsApp.10
Google launched Tez, an e-payment gateway that has accounted for the majority (52%) of UPI
Google (Alphabet Inc.) transactions in India since December 2017 and that has outperformed the government’s own
payments-enabling app (i.e., BHIM).11
Kenya’s M-Pesa, a payments and money transfer company originally launched by Vodafone’s
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Safaricom mobile operator to facilitate small payments between individuals via text messaging,
M-Pesa launched in India in 2013. M-Pesa has since expanded via M-Pesa Pay, a digital payment system
enabling merchants to receive cashless payments.12
In November 2017, PayPal launched operations in India, granting Indian consumers the ability to
PayPal, Inc. use PayPal for online shopping; merchants accepting PayPal are able to process local and global
payments, and thereby have access to PayPal’s more than 218 million worldwide customers.13
Source: Created by author from sources cited.
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7 Ant’s major competitor is Tencent, which owns the mobile messaging app WeChat (just under 900 million active users as of 2017). WeChat enables
payments via WeChat Pay, and in 2017, enabled the exchange of nearly 46 billion Chinese yuan via digital hongbao (red envelope—a reference to the
stationery commonly used for cash gifts during the Chinese New Year). Further, WeChat Pay is also now accepted as payment at prominent businesses,
such as at Chinese Starbucks locations. Wei Wang and David Dollar, “What’s Happening with China’s Fintech Industry?,” Brookings, February 8, 2018,
https://www.brookings.edu/blog/order-from-chaos/2018/02/08/whats-happening-with-chinas-fintech-industry/#cancel; Gabriel Wildau and Leslie
Hook, “China Mobile Payments Dwarf Those in US as Fintech Booms, Research Shows,” Financial Times, February 13, 2017,
https://www.ft.com/content/00585722-ef42-11e6-930f-061b01e23655 (both accessed Mar. 14, 2019).
No
8 Thomas Graziani, “How Alipay Is Betting on India’s Mobile Payments,” Walk the Chat, June 4, 2017, https://walkthechat.com/alipay-betting-
indias-mobile-payments/; “Alibaba, Ant Financial Pump $500 Million in Big Basket, Zomato,” Times of India, February 6, 2018,
https://timesofindia.indiatimes.com/deals/-ma/alibaba-ant-financial-pump-500-million-in-big-basket-zomato/articleshow/62745001.cms; Madhav
Chanchani and Supraja Srinivasan, “Ant Financial Gets Rights for Biggest Pie in Zomato,” ET Rise, September, 11, 2018,
https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/ant-financial-gets-rights-for-biggest-pie-in-zomato/articleshow/65762632.cms
(all accessed Dec. 23, 2018).
9 “Everything You Need to Know about What Amazon Is Doing in Financial Services,” CBInsights,
https://www.cbinsights.com/research/report/amazon-across-financial-services-fintech/ (accessed Mar. 14, 2019).
10 Banks included HDFC Bank, ICICI Bank, Axis Bank, and the State Bank of India. Recent expansion plans with these banks have been delayed
because of concerns including those related to user data. Rahul Satija and Anto Antony, “WhatsApp Hastens Payments Push for 200 Million Indians,”
Bloomberg, May 30, 2018, https://www.bloomberg.com/news/articles/2018-05-29/whatsapp-is-said-to-hasten-payments-push-for-200-million-indians;
Kate Rooney, “Facebook Will Reportedly Use Cryptocurrency for Transferring Money through WhatsApp,” CNBC, December 21, 2018,
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https://www.cnbc.com/2018/12/21/facebook-reportedly-working-on-a-cryptocurrency-for-transfering-money-through-whatsapp-.html (both
accessed Dec. 23, 2018).
11 Ananya Bhattacharya, “Google Is Beating the Indian Government at Its Own Game: UPI,” Quartz India, February 27, 2018,
https://qz.com/india/1216715/googles-tez-not-modis-bhim-is-winning-the-upi-payments-race/ (accessed Dec. 23, 2018).

12 Kieron Monks, “M-Pesa: Kenya’s Mobile Money Success Story Turns 10,” CNN, February 24, 2017,
https://www.cnn.com/2017/02/21/africa/mpesa-10th-anniversary/index.html (accessed Dec. 9, 2018); Suresh Sethi, “Vodafone India Launches M-
Pesa Pay for Merchants and Retailers,” Vodafone Group press release, January 5, 2017.
13 “PayPal Starts Payment Services in India,” Reuters, November 8, 2017, https://www.reuters.com/article/us-paypalholdingsinc-india/paypal-starts-
payment-services-in-india-idUSKBN1D82KM (accessed Dec. 31, 2018).
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Case Studies
Case Study No. 3, Investment/wealth management.
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State Street Corporation launched Verus, a mobile application that utilizes machine learning, natural
language processing, and human expertise to “analyze global news reports and then [allocate] a score based on
their potential impact on portfolio holdings…[Investment managers are] provided with a customized
[newsfeed] that is most relevant to [their] portfolios, helping the [managers] with investment decisions and
managing portfolio risk.”14 Approximately 150,000 business and finance articles are generated each week, and
Verus helps investment and risk professionals reliably filter noise and discover material information.15
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Case Study No. 4, Insurtech: Lemonade.
According to Deloitte and Capgemini, the majority of insurtech offerings complement traditional insurers,
and only a few compete head-on.16 Lemonade, a digital AI-based insurer for home, condo, and renters
insurance, is one of the few competitors.17 Launched in 2015, Lemonade is reportedly valued at over
$570 million.18 Lemonade has achieved success through technological prowess and customer centricity:
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 Technical prowess: Lemonade replaced brokers and paperwork with two AI-enabled chatbots (Maya and
Jim), which perform underwriting, claims processing, and other tasks online; this has resulted in an
improved customer experience. For example, Jim runs 18 antifraud algorithms on user-recorded
mobile video submissions to determine whether a claim can be settled instantly or requires human
verification; in the case of instant approval, Lemonade asks for an applicant’s bank account details and
then settles the claim in just three seconds.19
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 Customer centricity: Lemonade’s focus on the customer extends beyond the improved experience
provided by streamlined, AI-enabled interactions. Lemonade creates peer groups of like-minded
individuals with similar causes close to their hearts and pools their premiums; Lemonade receives a
transparent and low fixed fee from this pool each month and pays unclaimed premiums to customers’
chosen charities.20 Lemonade has developed an innovative social contract with its customers.
No
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15 “Announcing State Street VerusSM—A Mobile Solution to Help Investment Professionals Assess Their Portfolio Exposure to Breaking News,”
State Street press release, July 18, 2018.
16 Deloitte, InsurTech Entering Its Second Wave, 11–12; Capgemini, World Insurance Report, 48.
17 GlobalData, Fintech Profile: Lemonade.
18 Pitchbook, Lemonade Company Profile.
19 GlobalData, Lemonade.
20 Lemonade utilizes reinsurance to cover for cases in which the group’s claims exceed what remains in the pool. GlobalData, Lemonade.
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Case Studies
Case Study No. 5, API: Stripe.
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Stripe is a “provider of an online payment platform designed to integrate electronic payments and enable
secure transactions. [Stripe’s] platform offers [APIs] and streamlined coding that focuses on fraud prevention
and…[enables] internet businesses to accept payments from anyone and from anywhere.”21
Case Study No. 6, AI and machine learning.
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CircleUp is an investment platform that has enabled over 250 companies to raise over $390 million in
capital (equity and credit).22 In the beginning, CircleUp was primarily a private placement platform that enabled
capital raising and investing; the company has since developed its own $125 million growth fund to directly
invest in companies through a machine-learning technology, Helio, which has been described as a “Moneyball-
style set of algorithms that predicts the next breakout hit in consumer packaged goods.”23
Helio gathers hundreds of data sources that are segmented into public data, partnership data, and
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practitioner data (i.e., information gathered directly from entrepreneurs, which is training data for machine-
learning models). Helio has the ability to classify over 500,000 relevant companies with granularity (e.g.,
kombucha distinct from tea). Helio enables effective sourcing and diligence for investors, analytical and strategic
insights for entrepreneurs, and predictive insights for lenders.24
Case Study No. 7, Blockchain and DLT: Ripple.

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Ripple connects banks and payment providers to create a frictionless experience for sending and receiving
money globally.25 Ripple utilizes a decentralized cryptographic ledger to support XRP, Ripple’s digital asset
designed to bridge different currencies in use worldwide.26 XRP settles payments in four seconds and
consistently handles 1,500 transactions per second (24 × 7).27
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21 Pitchbook, Stripe Company Profile.

22 CircleUp company website, https://circleup.com/ (accessed Dec. 20, 2018).
23 Katie Roof, “CircleUp Announced $125 Million Venture Fund,” TechCrunch, October 31, 2017, https://techcrunch.com/2017/10/31/circleup-
announced-125-million-venture-fund/; Erin Griffith, “Investment Platform CircleUp Is Using a Moneyball-Style Algorithm to Identify the Next Hit
Consumer Brand,” Fortune, February 27, 2017, http://fortune.com/2017/02/27/circleup-moneyball/ (both accessed Dec. 20, 2018).
24 “Helio,” CircleUp company website, https://circleup.com/helio/ (accessed Dec. 20, 2018).
25 Ripple company website, https://ripple.com/ (accessed Dec. 6, 2018).
26 “XRP Ledger Overview,” Ripple, https://developers.ripple.com/xrp-ledger-overview.html (accessed Dec. 6, 2018).
27 “XRP,” Ripple, https://ripple.com/xrp/ (accessed Dec. 6, 2018).
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Case Studies
Case Study No. 8, Cloud: Capital One.
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Capital One reduced its data-center footprint from eight facilities in 2014 to three in 2018. Capital One’s
shift to cloud simplified its infrastructure, drove savings back into the business, and allowed its thousands of
engineers to focus on building machine-learning capabilities and digital banking services.28
Case Study No. 9, Edge and Quantum: Industry investment.
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Companies are exploring edge and quantum. Examples of companies investing in edge and quantum are
noted below.
Edge29 Quantum30
Amazon (AWS Greengrass) Alibaba
AT&T Inc. Barclays Bank PLC
Google (Edge TPU and Cloud IoT Edge) Google
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HP Inc. (Edgeline Converged Edge Systems) International Business Machines Corp. (IBM)
Microsoft Corporation (Azure IoT Edge) JPMorgan Chase & Co.
NVIDIA Corporation (AI-based, Jetson TX2) Microsoft Corporation
Source: Created by author from sources cited.
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No
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28 Stephen Orban, “Capital One’s Journey through the Stages of Adoption,” AWS Cloud Enterprise Strategy (blog), April 5, 2017,
https://aws.amazon.com/blogs/enterprise-strategy/capital-ones-cloud-journey-through-the-stages-of-adoption/; Clint Boulton, “Why AWS Is the

IBM for the Cloud Computing Age,” CIO, December 2, 2016, https://www.cio.com/article/3146059/cloud-computing/why-aws-is-the-ibm-for-the-
cloud-computing-age.html (both accessed Dec. 6, 2018).
29 “What Is Edge Computing?,” CBInsights, August 18, 2018.
30 Prableen Bajpai, “Quantum Computing: What It Is, and Who the Major Players Are,” Nasdaq, March 26, 2018,
https://www.nasdaq.com/article/quantum-computing-what-it-is-and-who-the-major-players-are-cm939998; Penny Crosman, “Why Banks Like
Barclays Are Testing Quantum Computing,” American Banker, July 16, 2018, https://www.americanbanker.com/news/why-banks-like-barclays-are-
testing-quantum-computing (both accessed Dec. 6, 2018).
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Exhibit 4
Fintech Lending Models
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While hybrid business models have since emerged, fintech lenders are primarily operating a business model
of direct lending or of indirect lending. Direct lenders originate loans to hold in their own portfolios (i.e.,
balance sheet lending), while indirect lenders partner with issuing depository institutions to originate loans and
then purchase the loans for sale to investors as whole loans or by issuing securities such as member-dependent
notes (i.e., platform lending).1 Illustrations of these models are shown below.
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Direct Lender (Balance Sheet Lending)
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Indirect Lender (Platform Lending)
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No
Source: Created by author from US Department of the Treasury, Opportunities and Challenges in Online Marketplace Lending, May 10, 2016, 6.
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1 US Department of the Treasury, Opportunities and Challenges in Online Marketplace Lending, May 10, 2016, 5–8.
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Exhibit 5
Wealth/Investment Management
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AUM at US Digital Investment Managers Targeting Retail Investors (in billions of US dollars)
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Source: Created by author from S&P Global Market Intelligence, 2017 US Fintech Landscape.
Human Advice in Robo and US Robo Users by Age

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No
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Source: Created by author from Charles Schwab, “The Rise of Robo: Americans’ Perspectives and Predictions on the Use of Digital Advice,”
November 2018.
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Exhibit 6
Amazon in Financial Services
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The retail giant is building and deploying financial services initiatives that positively impact its existing
ecosystem. Simultaneously, Amazon is making strategic fintech investments to help further its core strategic
goals.
Segment Offerings and Investments

 With reportedly 33 million customers across 170 countries in 2016, Amazon Pay has
evolved to include a digital wallet for customers and a payments network for merchants;
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Amazon incentivizes Amazon Pay adoption by passing to retailers the card savings that
Amazon receives from card networks (volume guarantees).
 Amazon is pursuing biometrics payments technology piloted within its Amazon Go
grocery store; it uses sensors, computer vision, and advanced machine learning to enable
Payments an individual to “grab and go.”
 Amazon Cash, launched in the United States and Mexico in 2017, allows customers to
deposit cash at no cost to a digital account via a barcode at Coinstar and partner brick-
and-mortar retailers; this may help Amazon acquire underbanked/unbanked populations
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in the United States, and eventually worldwide. With Amazon Cash, Amazon launched
an allowance program aimed at children, and has continued to focus on children by
investing in a Series A for Greenlight Financial, an alternative debit card issuer targeted
at young consumers.
 Amazon Lending initially launched in 2011 to facilitate small business sales; by June
2017, it had issued $3 billion across 20,000 businesses in the United States, Japan, and
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the United Kingdom. In 2018, it was reported that Amazon Lending partnered with
Bank of America to issue loans that could range between $1,000 and $750,000.
 Amazon offers consumer cards: (1) the Amazon Prime Store Card, which was launched
Lending in 2015 with Synchrony Bank and offers unlimited 5% cash back on Amazon purchases;
Amazon Reload, (2) a reloadable digital debit card available to Prime members that
offers 2% cash back on Amazon purchases and is linked directly to a user’s checking
account; (3) Amazon Prime Rewards Visa Signature Card, which was launched in 2017
with Visa and provides Prime members 5% cash back at Amazon and Whole Foods, and
No
between 1% and 2% elsewhere; and (4) Amazon Visa Credit Card, a partner card with
Visa for non-Prime customers that offers 3% cash back on Amazon purchases.
 In India, Amazon made an investment in Capital Float, a platform providing working
capital finance to small-to-medium enterprises (SMEs), and Amazon launched a new
marketplace for lenders and sellers to obtain competitive loans.
 Amazon Protect launched in the United Kingdom and provides accidental and theft
insurance on consumer goods; it has since expanded to other countries including Spain,
Insurance Italy, Germany, and France.
 In May 2018, Amazon led a $12 million investment in Acko, a traditional car and bike
Do
insurer in India that is increasingly focused on e-commerce, ride hailing, and other
internet economy deals.
Source: Created by author from “Everything You Need to Know about What Amazon Is Doing in Financial Services,” CBInsights,
https://www.cbinsights.com/research/report/amazon-across-financial-services-fintech/ (accessed Mar. 14, 2019).

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Part B: Influential technologies

Artificial intelligence (AI) and machine learning

institutional investors seeking a way to earn a yield in this low-rate environment.8

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$321Bn $100Bn $1.65Bn

industry by $700 million by 2020.88

Other prominent areas of fintech include the following:

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Part B: Influential Technologies

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China’s P2P Market Share by Loan Outstanding in 2017 (Top 5)

Note: $MM = millions of US dollars.