New technologies are disrupting the financial services industry, like they have in many other markets, whether Wall Street is ready for them or not. From peer-to-peer lending and robo-advisors to bitcoin and crowdfunding, financial technology or fintech is smashing old business models on its way to crowning new rulers in the world of money. And there is no turning back.
“Fintech is not only the future, but it is here,” said Amy Gutmann, president of the University of Pennsylvania at the April 3 launch of the Stevens Center for Innovation in Finance at Wharton. The business school is planting an official stake in the ground by establishing a center dedicated solely to fintech. “We have an incredible history and heritage in finance, but I think the best way for us to honor the history of the school is to leverage it for the future,” added Wharton Dean Geoffrey Garrett, at the event. (Garrett also wrote a LinkedIn post about the event.)
It’s helpful to think about fintech companies as fitting into any of three main business verticals — lending, asset and wealth management, and payments, according to David Klein, CEO and co-founder of CommonBond, which he said allows his firm to provide lower cost student loans. Layer on top three technology horizontals — front-end, middle ware and back-end — and pretty much any fintech company will fall into this grid, he said during a panel discussion among fintech disruptors and regulators at the launch event.
CommonBond fits into the lending space. Klein’s own experience with hefty student loans led him to found a company that he said offers lower interest rates and improved customer service. The firm, he added, can offer a better deal by underwriting the loan risk, which the federal government does not do. It also has lower operating costs by not having any physical stores, unlike banks. “We don’t have bricks-and-mortar locations and we underwrite so that has allowed us to lower the rate of interest for students going to school or refinancing,” he said.
Like Klein’s company, Square Capital is focused on meeting the unfilled needs of the end user. There are 30 million small businesses in America and 24 million of them are sole proprietorships — think of the food truck, shoe repair shop, nail salon or beauty parlor — according to Jackie Reses, head of Square Capital. If they want to expand, many of these small businesses face big hurdles in getting loans from a major bank, which typically ask for volumes of paperwork and guarantees. “It has become a total crimp in U.S. economic growth,” she said.
Access to financing is the lifeblood of any business, which uses funds for things such as working capital, inventory purchases and emergencies. If a flood closes down a shop for a few days, the impact could be severe. “Most businesses have only 17 days of working capital in their bank accounts,” Reses said. “Any unusual occurrence that happens could really put an end to a business.” At Square, 70% of its sellers can’t get capital anywhere else.
“Most businesses have only 17 days of working capital in their bank accounts. Any unusual occurrence that happens could really put an end to a business.”–Jackie Reses
“The mission of Square and Square Capital is to bring small businesses into the financial ecosystem,” Reses continued. Since the introduction of its first product, the Square Reader, a white dongle that plugs into a smartphone to let anyone accept credit cards, Square has expanded into a broad suite of products. “Our whole ecosystem is built around the idea of listening to the pain points and issues that we hear … and building tools that help small businesses,” she said. As such, “we really changed the risk paradigm of who is allowed into the financial system.”
The small entrepreneurs’ needs guide the strategies of Square Capital. “We start with the framework of what job we’re doing and what’s the help wanted,” Reses said. “I don’t sell loans. I help small businesses solve their cash-flow problems.” If Square just focused on matching what competitors were doing, it would end up offering a ‘me too’ product. Such a way of doing business is “very backwards-looking, not forward-looking,” she added.
Two Phases of Cryptocurrencies
There’s another thing that seems backward to the folks at Square: the idea of a currency issued by a country. Founder Jack Dorsey thinks such a system feels “antiquated,” Reses said. “In a multi-country world that we live in, there’s no reason why a nation-state should actually control the movement of that capital going forward.” One way to wrest control of money from a central authority like a government is to switch from using fiat, or hard, currency to cryptocurrencies. Square’s Cash app already makes it easy for users to buy cryptocurrencies — with a simple swipe.
Cryptocurrencies have the power to change the lives of people in countries with substandard, inadequate or corrupt financial systems. “What we’ve seen in the last 10 years is the birth and growth of an open source monetary system that allows those people to opt out for the first time,” said Robby Gutmann, CEO of New York Digital Investment Group, a digital asset management firm. For example, cryptos could preserve the income of a taxi driver in Venezuela who has seen the bolivar sharply devalued.
Robby Gutmann said the crypto world falls into two buckets. The first pertains to the use of cryptos, which he said is expanding albeit slowly. The second relates to investments in cryptos. Over time, he believes, the two will converge. He also identified two phases for the cryptocurrency. It is currently in phase one where it functions as a “bridge asset,” he added. Cryptos can’t be used directly to buy most goods and services; they still need to be converted into hard currency and vice versa. Phase two comes when local currencies are replaced by cryptos, he said.
Gutmann said it is hard for him to imagine the developed world mass-adopting cryptocurrencies. The existing financial systems work well for most people and so there’s less motivation to change. Any change also needs the participation of banks and institutional investors. But for developing nations, cryptos could solve some tough problems and thus be more quickly adopted.
“What we’ve seen in the last 10 years is the birth and growth of an open source monetary system that allows those people to opt out for the first time.”–Robby Gutmann
Regulators Are Moving
Regulators are taking notice. The Securities and Exchange Commission, for one, is becoming more proactive instead of reactive, said Elad Roisman, a newly appointed commissioner. The SEC sees lots of interest in cryptos. “We have this burgeoning asset class, incredible interest by a whole new generation of investors, [which is something] I’ve never seen before,” he said. “Our job is to help facilitate [growth], but at the same time ensure that investors have enough information to make informed decisions and if there are bad actors, we’re finding them.”
Instead of waiting for new laws to be minted that apply to these new technologies, the SEC gets guidance from history. “We have found a way to find decades-old laws and Supreme Court cases and apply them to new technologies and new assets,” Roisman said. For example, to determine whether a crypto is a token or a security, it looked at the Supreme Court case SEC v. Howey in the 1940s. The ruling in the case defined a security: It is an investment of money in a common enterprise with a reasonable expectation of profits based on the efforts of others.
Roisman said the SEC has also offered guidance through periodic reports. For example, he pointed to a 2017 report that classified tokens offered by “The DAO” as securities and thus must comply with federal securities laws. The SEC also set up groups like FinHub where regulators, innovators, developers and entrepreneurs congregate to learn from each other. “We have continually brought in people with … financial and technology backgrounds to inform our policy-making decisions.”
But Klein said there’s still a big regulatory gap that makes it hard for startups to scale like the incumbents. For example, CommonBond can’t compete with big banks when it comes to access to capital. Banks have a source of cheap capital in the form of customer deposits — it pays very little interest to the bank customer and turns around and lends the money out at a higher interest rate. Companies like CommonBond cannot get capital this cheap to lend out. It has to offer higher rates to savers to lure them away from banks, which enjoy their trust because they’ve passed stringent government requirements.
“We have this burgeoning asset class, incredible interest by a whole new generation of investors, [which is something] I’ve never seen before.”–Elad Roisman
“In our space, if you’re a very big bank — who has what I believe to be a pseudo-government sponsored monopoly on capital — then you get access to big capital at a low cost consistently over time in a way that nobody else does,” Klein said. “So when innovative players who are smaller and truly thinking about the customer first, what’s their access to capital? What’s the cost of capital and how sustainable is that over time?”
Klein said this dilemma leads to a bigger question: “Are we going to have an intermediary regulatory frame that allows smaller innovators to make the jump, or bridge, to true long-term scale?” Right now, on one side are smaller players operating in a “hodge-podge of state-based regulatory noodle soup” and the other side are banks that meet a “very high bar” of capital and liquidity ratios and other compliance measures, he said. There’s nothing in between. “I would propose having an intermediary solution that allows innovators to bridge to scale.”
But until the regulatory framework gets there, the best scenario is for startups and incumbents to work together since they each want what the other has. “Unless and until we get to that point, I believe there is an opportunity for incumbents to take the best of both worlds, partner in some capacity [with disruptors], and make finance better for the end consumer,” Klein said.
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Anumakonda Jagadeesh
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Financial technology, often shortened to fintech, is the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. It is an emerging industry that uses technology to improve activities in finance. The use of smartphones for mobile banking, investing services and cryptocurrency are examples of technologies aiming to make financial services more accessible to the general public. Financial technology companies consist of both startups and established financial institutions and technology companies trying to replace or enhance the usage of financial services provided by existing financial companies.
After reviewing more than 200 scientific papers citing the term “fintech,” a study on the definition of fintech concluded that “fintech is a new financial industry that applies technology to improve financial activities.” Fintech is the new applications, processes, products, or business models in the financial services industry, composed of one or more complementary financial services and provided as an end-to-end process via the Internet.[3] Fintech can also be considered as “any innovative ideas that improve financial service processes by proposing technology solutions according to different business situations, while the ideas could also lead to new business models or even new businesses.”
Financial technology has been used to automate insurance, trading, banking services, and risk management.
The services may originate from various independent service providers including at least one licensed bank or insurer. The interconnection is enabled through open APIs and open banking and supported by regulations such as the European Payment Services Directive.
In trading on capital markets, innovative electronic trading platforms facilitate trades online and in real time. Social trading networks allows investors to observe the trading behavior of their peers and expert traders and to follow their investment strategies on currency exchange and capital markets. The platforms require little or no knowledge about financial markets, and have been described as disruptors which provide “a low-cost, sophisticated alternative to traditional wealth managers” by the World Economic Forum.[7]
Robo-advisers are a class of automated financial adviser that provide financial advice or investment management online with moderate to minimal human intervention.[8] They provide digital financial advice based on mathematical rules or algorithms, and thus can provide a low-cost alternative to a human advisers.
Global investment in financial technology increased more than 2,200% from $930 million in 2008 to more than $22 billion in 2015.[9] The nascent financial technology industry in London has seen rapid growth over the last few years, according to the office of the Mayor of London. Forty percent of the City of London’s workforce is employed in financial and technology services.
In Europe, $1.5 billion was invested in financial technology companies in 2014, with London-based companies receiving $539 million, Amsterdam-based companies $306 million, and Stockholm-based companies receiving $266 million in investment. After London, Stockholm is the second highest funded city in Europe in the past 10 years. Europe’s fintech deals reached a five-quarter high, rising from 37 in Q4 2015 to 47 in Q1 2016. Lithuania is starting to become a northern European hub for financial technology companies since the exit of Britain from the European Union. Lithuania has issued 51 fintech licenses since 2016, 32 of those in 2017.
Fintech companies in the United States raised $12.4 billion in 2018, a 43% increase over 2017 figures.
In the Asia Pacific region, the growth will see a new financial technology hub to be opened in Sydney, in April 2015. According to KPMG, Sydney’s financial services sector in 2017 creates 9 per cent of national GDP and is bigger than the financial services sector in either Hong Kong or Singapore. A financial technology innovation lab was launched in Hong Kong in 2015.[17] In 2015, the Monetary Authority of Singapore launched an initiative named Fintech and Information Group to draw in start-ups from around the world. It pledged to spend $225 million in the fintech sector over the next five years.
Financial magazine Forbes created a list of the leading disrupters in financial technology for its Forbes 2019 global Fintech 50. In Europe there is a list called the FinTech 50, which aims to recognise the most innovative companies in fintech.
A report published in February 2016 by EY commissioned by the UK Treasury compared seven leading fintech hubs: the United Kingdom, California, New York City, Singapore, Germany, Australia and Hong Kong. It ranked California first for ‘talent’ and ‘capital’, the United Kingdom first for ‘government policy’ and New York City first for ‘demand’.
Finance is seen as one of the industries most vulnerable to disruption by software because financial services, much like publishing, are made of information rather than concrete goods. In particular blockchains have the potential to reduce the cost of transacting in a financial system. While finance has been shielded by regulation until now, and weathered the dot-com boom without major upheaval, a new wave of startups is increasingly “disaggregating” global banks. However, aggressive enforcement of the Bank Secrecy Act and money transmission regulations represents an ongoing threat to fintech companies. In response, the International Monetary Fund (IMF) and the World Bank jointly presented Bali Fintech Agenda on October 11, 2018[26] which consists of 12 policy elements acting as a guidelines for various governments and central banking institutions to adopt and deploy “rapid advances in financial technology”.
The New York Venture Capital Association (NYVCA) hosts annual summits to educate those interested in learning more about fintech[28]. In 2018 alone, fintech was responsible for over 1,700 deals worth over 40 billion dollars.
In addition to established competitors, fintech companies often face doubts from financial regulators like issuing banks and the Federal Government.
Data security is another issue regulators are concerned about because of the threat of hacking as well as the need to protect sensitive consumer and corporate financial data. Leading global fintech companies are proactively turning to cloud technology to meet increasingly stringent compliance regulations.
The Federal Trade Commission provides free resources for corporations of all sizes to meet their legal obligations of protecting sensitive data. Several private initiatives suggest that multiple layers of defense can help isolate and secure financial data.
Any data breach, no matter how small, can result in direct liability to a company (see the Gramm–Leach–Bliley Act) and ruin a fintech company’s reputation.
The online financial sector is also an increasing target of distributed denial of service extortion attacks. This security challenge is also faced by historical bank companies since they do offer Internet-connected customer services.
Social media has affected the financial services sector by allowing for a global reach, improving customer service, advancing marketing strategies, and even creating new products and services offered to customers. Financial companies are able to overcome geographical obstacles and reach customers across the globe by connecting with their customers on a more personal level by using social media as a real-time platform of communication. Being an integral part of everyday life, social media and technology have also led to the development of a new industry, financial technology (fintech).
Social media has become a core marketing channel for some companies, especially online peer-to-peer lending (P2P lending) companies as well as small business lenders. Large traditional firms are also embracing social media as a way to market their products and services. Although these larger firms fear that they may be “too boring” for these innovative platforms due to their more traditional business models with compliance restrictions and FINRA regulations, companies like Chase, Charles Schwab, and American Express have shown great success in leveraging social media to their advantage.[1]
Especially after the financial crisis of 2008, financial companies utilize social media to try to gain back the trust of their customers. However, social media can present risks to a financial firm. Aside from FINRA regulations, companies also have to worry about oversharing, viral negative comments, and the risk of becoming a dumb pipe.
Social media has created entirely new products for the financial services sector, revolutionizing products and developing new industries such as fintech through the merging of social technology and financial services. Fintech is a way to streamline financial services and make them easier to use and access. Since this industry is more novel than the established financial services sector, fintech companies are generally startups. Although these companies are popping up all over the world, fintech companies are the most prominent in China, where digital banking, investing, and lending have become mainstream. According to consulting firm Accenture, 390 million people in China have registered to use mobile banking. This figure is more than the population of the United States.[7] Albeit not as popular in the U.S., the most prominent American fintech company, Venmo, blends technology and financial services together on a social platform.
Other financial technology companies:
• Lending Club
• Bitcoin
• OnDeck
• Funding Circle
• TransferWise
• Kabbage
• Avant
• Prosper
• Zopa
FinTech or financial technology has emerged as a relatively new industry in India. FinTech is an industry comprising companies that use technology to offer financial services. These companies operate in insurance, asset management and payment, and numerous other industries.
The Nasscom (NASSCOM)-KPMG (KPMG) report estimates that the total fintech software and services market in India was around $8 billion in 2016 and likely to grow 1.7 times by 2020. The report adds that the transaction value for the Indian fintech sector was approximately $33 billion in 2016 and slated to reach $73 billion in 2020 growing at a five-year compound annual growth rate (CAGR) of 22%(Wikipedia).
The Indian FinTech landscape is segmented as follows: 34% in payment processing, followed by 32% in banking and 12% in the trading, public and private markets.[4]Accelerators and incubators tapping the startup ecosystem include PayPal’s Star Tank, Yes Bank’s collaboration with T-Hub, among others. Visakhapatnam (Vizag) is being developed as FinTech valley and the local government of Andhra Pradesh opened Fintech Valley to promote the investments in this area.
Dr.A.Jagadeesh Nellore(AP),India