S 1 - Overview of the Fintech

industry

B B Chakrabarti
Professor of Finance
 Technological Disruption in Banking
• Fact:
• Major retail banks still dominate the financial services
landscape providing deposit, payment and credit
facilities.
• Reality:
• Traditional banks are not the only players in banking.
• A shopper may pay with a bank debit card but can also
choose Paytm or Paypal.
• A customer can borrow on peer-to-peer (P2P) platforms.
• The key to the disruption is – access, convenience and
lower cost facilitated by technology.

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 What is FinTech?
• FinTech (a contraction of “finance” and “technology”),
is defined as the use of technology and innovative
business models in financial services.
• FinTech is an organization that combines innovative
business models and technology to enable, enhance
and disrupt financial services – EY 2019.
• Today, fintech companies directly compete with banks
in many areas of the financial sector to sell financial
services and solutions to customers. Mostly due to
regulatory reasons and their internal structures, banks
still struggle to keep up with Fintech startups in terms
of innovation speed.
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 What is FinTech?
• Fintechs have realized early that financial services of
all kinds – including money transfer, lending, investing,
payments – need to seamlessly integrate in the lives of
the tech-savvy customers of today to stay relevant in a
world where business and private life become
increasingly digitalized.
• Especially millennials (people born between approx.
the early 80s and late 90s) and the following
generations prefer quick and easy banking services
over walking to a branch, appointments with bank
consultants and lengthy processes for setting up
accounts or other banking services.
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 Fintech or Techfin
• Fintech is where the original financial system is
improved upon by the use of technology. A very
common & simple example of this is the online
banking services that most of the traditional banks
offer through this platform. 
• TechFin on the other hand — coined by Chinese
Tech giant Alibaba’s founder Jack Ma in 2016 — is
where Tech companies provide financial services
with a more customer & technology centric
approach. Examples of techfin companies include
Google, Amazon, Facebook, Apple and Alibaba.
Consumer Fintech Adoption Index – EY 2019
 Wealth Management – Disruption by Fintech
• Information need for existing and new clients - Fintech can provide
real-time data, news and analytics, market intelligence, product and
service development, client communications and performance
monitoring.
• Client onboarding - Currently tedious and frustrating experience for
clients due to risk-related questions and repeated conversations for
setting up an account. Fintech can solve these issues by using
customer and behavioral data and gamification techniques to
automatically identify risk profile, loss acceptance levels etc.
• Investment advice and distribution - Smart algorithms can be used to
support life-stage planning, automated transaction advice, investment
strategies, tax planning, estate planning etc.
• Investment management – Fintech can speed up decision-making,
rebalancing and monitoring processes, asset selection, settlement etc.
• Account administration – Fintech can automate account maintenance,
self service, 24/7 support and multi-channel interactions.
 Evolution – E-Finance to Fintech
• Internet revolution in the early 1990s lowered financial
transaction costs.
• This led to the development of e-finance, which includes online
banking, online brokerage services, mobile payments, mobile
banking etc.
• Banking being information intensive and time-sensitive in nature,
benefitted with lower transaction costs, shorter turnaround time,
real time managerial information and smoother intra-bank
communication.
• The growth of Smartphone user base in mid-2000s facilitated
growth of mobile finance – mobile payments and mobile banking.
• Fintech innovation emerged after 2008 financial crisis by
combining e-finance, internet technology, social networking
services, social media, artificial intelligence and big data analytics.
Evolution of Fintech (Fintech Report 2021)
 FinTech – Major Impact Factors

1. Artificial Intelligence, Machine Learning and Automation

• In finance, AI is helping detect and fight fraud before it can be
detected by humans. Stacks of new compliance regulations
are being fed into AI systems like IBM Watson to help
businesses stay on top of the ever-changing rules. 
• Chatbots built with AI are able to help agents satisfy customer
questions with accuracy and speed, or even satisfy customers
with no human manpower at all.
• In wealth management, AI is helping with stress testing a
market scenario and removing biases from investment
decisions.
• Automation and AI are emerging in a way that machines will
do up to 10 to 25 percent of bank work.

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 FinTech – Major Impact Factors

2. APIs
• The benefits of creating applications using APIs as building
blocks are being recognized as the best way to meet the
business and economic challenges facing the financial
industry.
• FinTech startups have dominated the landscape by creating
mobile apps that have challenged, and in some cases,
surpassed the established banking industry.
• By using APIs, these small but dynamic businesses are able to
innovate with agility and speed that larger established banks
and FIs are unable to duplicate.
• To keep pace, banks are now investing heavily to improve
their ability to create innovative mobile apps.

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 FinTech – Major Impact Factors

3. Fintech Revolution Leader: Blockchain

• Blockchains or distributed ledger technology, is promising to
bring trust and transparency to a world filled with uncertainty
and the threat of fraud. Large financial players are
collaborating in consortiums to rebuild infrastructure based
on this new technology to replace legacy and incompatible
systems.
• From trade finance platforms, to cross border payments and
digital identification, eliminating inefficiencies created by lack
of trust and transparency is a major selling point of
implementing blockchain technology.
4. Data, Data, Data
• Everyone knows that big data is big news throughout all
industries. However, major changes are happening with the
financial industry when it bbc@iimcal.ac.in
comes to data collection. One of the12
biggest changes is the evolution of lending data.
 FinTech – Major Impact Factors
5. Human Digital Interfaces
• Mobile technology becoming more integrated into our daily lives. We’re
already using our voice to make commands rather than touching our screen
or typing. Passwords are being replaced by biometric finger, retinal, or face
scans as security checks.
• Technology is gauging our emotional state based on our interactions with
our devices. Gestures can be used to trigger an action.
6. Increased Fintech Regulation
• Finance is one of the heaviest regulated industries and as financial
institutions begin to use new technology, data is gathered in droves and
self-service becomes the norm, it is only natural for regulations to increase.
Regulations are required to keep money and vital personal data safe.
• Regulations are not a negative thing. A stronger and secure finance industry
only builds confidence between the consumer and the institution. And if we
want the FinTech revolution to continue we need trust between consumers
and institutions to continue to grow.

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Fintech Ecosystem
 Top 10 Fintech Companies (2021)
• The list is based on product quality, customer adoption,
management team caliber, organizational effectiveness, company
growth etc. (Financial Technology Report)
Name Sector Founded in
Square Merchant payments 2009
Stripe Merchant payments 2010
Finastra Banking technology 2017
Figure Technologies Consumer lending 2018
Personal Capital Wealth management 2009
Transfer Wise Money Transfer 2011
AvidExchange Business payables 2000
Bright Health Care Healthcare payments 2015
Grab Consumer payments 2012
Marqeta Card issuer process platform 2010
Fintech Startup Activity Index (FT Report)
 Fintech Business Models
• Payment business model
• Payments are relatively simple compared to other financial products and
services. Payments are one of the most used retail financial services on a
day-to-day basis, as well as one of the least regulated financial services.
• Consumer and retail payment Fintechs include mobile wallets, peer-to-
peer (P2P) mobile payments, foreign exchange and remittances, real-
time payments, and digital currency solutions. These services improve
the experience for customers who look for a streamlined payment
experience in terms of speed, convenience, and multi-channel
accessibility.
• Fintech companies focusing on payments are able to acquire customers
rapidly at lower costs, and are one of the fastest moving in terms of
innovation and adoption of new payment capabilities.
• Examples: Google Wallet, Apple Pay, Samsung Pay, PayPal, Venmo, Paytm
etc.
 Fintech Business Models
• Wealth management business model
• One of the more popular wealth management Fintech
business models is automated wealth managers (robo-
advisors) that provide financial advice for a fraction of the
price of a real-life adviser. These robo-advisors use algorithms
to suggest a mix of assets to invest based on a customer’s
investment preferences and characteristics.
• This business model benefits from changing demographics
and consumer behavior that favor automated and passive
investment strategies, a simple and transparent fee structure,
and attractive unit economics that allow low or no investment
minimums.
• Examples: Betterment, Wealthfront, Motif, Folio.
 Fintech Business Models
• Lending business model
• P2P consumer and business lending is another big trend in Fintech.
P2P lending Fntechs allow individuals and businesses to lend and
borrow between each other. With their efficient structure, P2P
lending Fintechs are able to offer low interest rates and an
improved lending process for lenders and borrowers.
• A subtle but significant distinction from a bank is that these
Fintechs are technically not involved in the lending themselves, as
they are simply matching lenders with borrowers, and collecting
fees from users.
• The Fintech innovation in lending manifests itself in the use of
alternative credit models, online data sources, data analytics to
price risks, rapid lending processes, and lower operating costs.
• Examples: Lending Club, CreditEase, Prosper, SoFi, Zopa, RateSetter.
 Fintech Business Models
• Crowdfunding business model
• Crowdfunding involves three parties: the project initiator or
entrepreneur who needs funding, the contributors who may be
interested in supporting the cause or project, and the
moderating organization that facilitates the engagement
between the contributors and the initiator.
• Rewards-based crowdfunding, donation-based crowdfunding,
and equity-based crowdfunding are the most popular
crowdfunding business models.
• Rewards-based crowdfunding has been an attractive fundraising
option for thousands of small businesses and creative projects.
In return for a fund from supporters of a project, the business
typically gives some type of rewards / interest.
 Fintech Business Models
• Donation-based crowdfunding is a way to source money for a
charity project by asking donators to contribute money to it.
• Equity-based crowdfunding is an appealing option for small and
medium-sized companies (SMEs). Equity-based crowdfunding
allows entrepreneurs to reach investors interested in acquiring
equity in their start-up or other privately held small business.
• Examples:
a) Reward-based crowdfunding - Kickstarter, Indiegogo,
CrowdFunder, RocketHu etc.,
b) Donation-based crowdfunding - GoFundMe, GiveForward,
FirstGiving etc.,
c) Equity-based crowdfunding - AngelList, Early Shares,
Crowdcube etc.
 Fintech Business Models
• Capital market business model
• New Fintech business models take hold across a full spectrum of
capital market areas such as investment, foreign exchange,
trading, risk management and research.
• Trading Fintechs allow investors and traders to connect with each
other to discuss and share knowledge, place orders to buy and sell
commodities and stocks, and monitor risks in real time.
• Foreign currency transactions have been a service dominated by
financial institutions. Fintechs lower barriers and costs for
individuals and SMEs engaging in foreign currency transactions all
around the world. Users are able to see live pricing and
send/receive funds in various currencies securely in real time, all
via their mobile device.
• Examples: Robinhood, eToro, Magna, Estimize, Xoom etc.
 Fintech Business Models
• Insurance services business model
• In insurance Fintech business models, Fintechs work to enable a
more direct relationship between the insurer and the customer.
They use data analytics to calculate and match risk, and as the
pool of potential customers broadens, customers are offered
products to meet their needs (e.g., car, life, healthcare, or
casuality insurance). They also streamline healthcare billing
processes.
• The insurance Fintech business model seems to be the most
well-embraced by traditional insurance providers. The
technology allows insurers to expand their data collection to
non-traditional sources to supplement their traditional models,
improving their risk analysis.
• Examples: Censio, CoverFox, The Zebra, Sureify Labs, Ladder.
 Challenges for Fintech Sector
1) Fintech investment management
• Should financial institutions develop Fintech initiatives on
their own or collaborate with Fintech start-ups?
• Financial institutions may choose to invest in internal Fintech
projects in competition with Fintech start-ups. Their technical
capability, cost structure, legacy systems, lack of visionary
strategic thinking may act as deterrent.
• Alternatively, financial institutions can use collaborative
investments with Fintech start-ups as a means of remaining
on the cutting edge of the technology without requiring
internal innovation.
• The ability to assess the value of projects will be critical in an
increasingly competitive business environment.
 Challenges for Fintech Sector
2) Customer management
• As competition is high for customer acquisition and retention,
customer management is crucial. Many customers use multiple
services from different Fintech firms for different needs. For
example, customers may use PayPal for paying businesses
online, while using Venmo for paying friends.
• High responsiveness and care to customer concerns is
paramount, as word-of-mouth recommendations can be crucial
for the success of a fintech start-up.
• Robo-advisors are designed to provide more personalized 24/7
service to a greater number of people with low fees.
• As the clients from Generations X and Y are more tech-savvy,
Fintechs need to better address customer needs by offering
enhanced accessibility, convenience, and tailored products.
 Challenges for Fintech Sector
3) Regulation
• Both traditional financial institutions and Fintech start-ups
face regulatory challenges in capital requirements, anti-
money laundering, and privacy and security.
• Traditional financial institutions and Fintech start-ups face
different regulatory requirements based on the type of
financial services they provide.
• For example, most banks operate on some form of fractional-
reserve banking system. There are strict and complex
guidelines for what kind of lending can be done based on the
capital held by a traditional financial institution that may not
apply to a lending Fintech start-up that does not technically
lend (e.g., a P2P lending firm).
 Challenges for Fintech Sector
4) Technology integration
• Technology integration is essential in providing seamless
customers service. Many Fintechs are based on new
technologies, and it is challenging to integrate the fintech
applications with existing legacy systems.
5) Security and privacy
• For Fintech applications, critical information may be stored
on mobile devices that often gets lost or stolen.
• As consumers can easily file complaints related to data
security and privacy breaches to regulatory agencies, Fintech
companies need to develop appropriate measures to protect
sensitive consumer data from unauthorized access.
 Challenges for Fintech Sector
6) Risk management
• There are many risks for Fintech start-ups, including financial
risk as well as regulatory risk.
• The financial risk can vary based on what exactly the Fintech
specializes in. For example, a Fintech offering financial services
for student loans or mortgages may face counterparty risk that
can be absorbed by a financial institution with large amounts of
capital that a smaller start-up would not be able to cover.
• Deploying robo-advisors for the wealth management of bonds,
treasury bills, and stocks may expose customers to financial risk
and the Fintechs may have to take potentially serious
responsibilities for any loss due to the algorithmic failure of the
robo-advisors.
Global Investment in Fintech (2010-H12021)
- Statista.com