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 and convenience
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.
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 ia 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 the11
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
Sectors - Top 100 Fintech Companies
(2018)
• 34 Payments and transactions companies
• 21 Lending companies
• 14 Wealth companies
• 12 Insurance companies
• 10 Neo-banks
• 4 “multi” companies (who play across sectors
with multiple offerings)
• 5 “other” companies (regtech, data analytics etc.)
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 in 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 fintechs 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.
2018 Fintech Trends Report
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 startups. Their technical
capability, cost structure, legacy systems, lack of visionary
strategic thinking may act as detterent.
• Alternatively, financial institutions can use collaborative
investments with fintech startups 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 startup.
• 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 startups face
regulatory challenges in capital requirements, anti-money
laundering, and privacy and security.
• Traditional financial institutions and fintech startups 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 startup 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 oftentimes get 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 startups, 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 startup 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
