This document entails all lectures and guest lectures of the course Introduction to FinTech. It contains info from the slides and extra information that is said during the lectures. Formulas, examples, graphs, and important pictures are included as well and explained comprehesively.
Introduction to FinTech Lectures
Learning Objectives:
- Understand and identify stakeholders in the FinTech landscape.
- Understand the impact of new technologies on society.
- Understand and connect existing (behavioral) economic theories to FinTech products.
- In depth analysis of one FinTech product plus development of new ideas and solutions in
student groups.
- Get insights from experts in the industry/field.
Examination: 75% exam, 25% group term paper and presentation.
- Paper: max 4000 words and presentation max. 15 min.
* due October 11th
- Exam: duration 60-120 minutes. Open questions (essay and math) and multiple choice.
* including info from guest lectures, group project, group presentations from others, Q+A
and discussion sessions
,Week 1: Introduction
Lecture 1 & 2, Introduction
What’s FinTech?
- Academic definition (one of many): “Fintech is a new financial industry that applies
technology to improve financial activities.”
- Business definition (one of many): “FinTech companies are businesses that leverage new
technology to create new and better financial services for both consumers and businesses. It
includes companies of all kinds that may operate in personal financial management,
insurance, payment, asset management, etc.”
FinTech is a BuzzWord that fits almost all new developments in finance (and related
areas).
Long term technological trends
Financial innovation started all a very long time ago:
- Keeping track of records, bookkeeping (around 30.000 years ago).
- Livestock as money to replace barter (9000-6000 B.C.).
- Invention of printing press allowed for establishing bank notes in Europe (17th century).
- Introduction of stock companies where people could by shares and become owner of that
company (already 618-907 in China).
- Communication devices: Telegrams (around 1840).
- Digitalization 60ies-70ies.
What happened between 1961 and today: computers get smaller and smaller… trend goes
to miniaturization.
follows Moore‘ s Law
Moore’s Law: first long-term trend
Moore’s Law: every two years, the number of transistors on computer chips doubles/ The
number of IC transistors doubles every 18 months.
There is a free “miniaturization” dividend for each round of miniaturization.
- Which means that for every computation on a computer chip, the distance between the
units that do the computation, is shorter.
- That allows faster computation.
- And more transistors to put in a machine, which allows to build more complex chips.
* that allows to have lower cost of memory and stationary storage
* which means you can do faster and more efficient processing of data
Internet adoption: second long-term trend
From the 1990’s the percent of people having access to the internet sharply increases.
What does that mean:
- Exponential decline in computing and storage cost and growing network capacity.
* enabled mass adoption of the internet
- Exponential data growth.
- Mobile use highest share.
- Information transmission increased. More cheaply and faster.
,Disruption of existing industries: first wave
The vast improvements in technology and the rapid adoption of the internet made a number
of businesses obsolete/out of date (to the majority of the population).
Key advancement of ongoing digitalization: information transmission.
- Business models at risk were those that:
* deliver information on physical media
* forward information
- But many industries did not even think they were in the information business.
Disruption of:
a. Music industry.
- Records industry thought they were selling music… when in fact they were selling
information on physical media.
b. Publishing industry.
- Publishers were thinking that they were selling quality journalism… when in fact they were
broadcasting information.
* can be done much faster and cheaper over the internet
- In addition: new social media emerged…
* e.g., Facebook could forecast better than anyone else what or whom people really liked
- Moreover: in 2007, the smartphone was “born”…
* it reduces the burden involved in launching webpages, you can just launch and app
* interact with people from everywhere
* amplifies internet use even further (easy for firms also to send push notifications and use
persuasion to keep people “hooked”)
Disruption of existing industries: second wave
- Growing internet use allowed for more scope and economies of scale.
- Growing information advantage of tech firms over other actors in the economy.
- Growing willingness of users to lend their trust to internet technology (instead of classical
physical firms).
Consequence: risk for business models that:
* rely on customer trust or are based on knowing customer characteristics (i.e.,
intermediaries)
* provide services which can be substituted by an (informed) digital agent
Disruption of:
a. Travel Agencies.
- Information-centric intermediary.
* match individual preferences with touristic services that are on the market
- Now: better information and increasing returns to scale on online platforms.
b. Hotel business.
- Now you don’t have to go to the hotel, but just to a site.
- Informed digital intermediary that brings two parties together and enables mutual trust.
c. Cab drivers.
,- Cab callcentres were information intermediaries.
* cab drivers had to pass heavy tests and were screened to ensure that passengers could
trust the driver
- Now: Uber or Lyft.
* created an easy to use digital intermediary that perform the service more efficient
So: business models currently at risk of disruption are information-centric or trust-based
models of intermediation.
Disruption of banks as informed intermediaries
Banks are informed intermediaries and bridge information asymmetries between agents.
- E.g., banks have information about riskiness of borrowers and lend money that other
people deposit in their bank account. The bank receives interest on the loan, account
holders receive interest on savings.
* bank has info, you don’t have
- Now: this information advantage may not be there anymore. Facebook, Amazon, Google
have a lot of information about people, too.
But the question is: when it comes to FinTech why did banks (or other financial
institutions) not simply innovate themselves? Why are they behind on FinTech compared to
start-ups?
- After all: banks and existing financial institutions were pretty good at innovation.
* internet banking, introduction of ATM‘s, checks, credit cards, etc.
One reason why banks did not be at the forefront of FinTech innovation may also be because
of the 2008 Financial Crisis.
a. Economic downturn caused unemployment.
- Many (young and) creative people from the financial sector had to find new jobs (or create
them themselves).
* these people used to come up with new ideas how to make the financial sector better
b. In the aftermath of the financial crisis, banks had to deal with much stricter regulation,
cost of capital increased and high fines were introduced.
- Therefore lack of resources (financial and manpower) to foster innovation.
- One way to do so now is by technology.
* new trend: RegTech, reducing cost of regulation
* especially interesting for cross border operations, automatic compliance with multiple
regulatory regimes
- Increase of fines because of new regulation and non-compliance.
c. Distrust in banks.
Startups
After the Financial Crisis new Startups emerged that challenged existing players in the
financial sector.
“A startup is a young company founded by one or more entrepreneurs to develop a unique
product or service and bring it to market. By its nature, the typical startup tends to be a
shoestring operation, with initial funding from the founders or their friends and families.”
,- Startups are usually online oriented.
- Startups are temporary in nature and the intention is to scale up rapidly.
What are the main FinTech areas?
a. Finance and investment.
* like robo advisors, wealth management
b. Risk management and operations.
* Regtech
c. Payments and Infrastructure.
* Alipay, paypal
d. Data Security.
e. Customer Interface.
Disruption also bears risks
- Idea of a startup and FinTech is that it scales up very rapidly. And that bears risks.
* Bitcoin grew into a bubble rapidly (and much faster than any other market/commodity)
* startups grow rapidly from too small to care to too big to fail
- A normal company has a linear growth and at some point, when you reach the threshold
point, you may become interesting for regulators and they might check you as a company on
certain requirements, restrictions and guidelines, aiming to maintain the stability and
integrity of the financial system.
- Checking is still totally up to regulators.
- But when a FinTech startup suddenly has grew immensely overnight and is now ‘too big to
fail’ and it has never been checked by a regulator, nobody knows how they treat their
costumers and how risky that is.
Challenging for regulators.
Week 2: Banking and crowdlending
Banks
, Lecture 3, Banks response to FinTech
Before: we learned that banks have been disrupted by financial technology that replaced
some services banks were offering.
Classical bank lending
Informed lending:
Key business of banks: acquire information.
- BEFORE a borrower receives a loan, the bank wants to know more about their
creditworthiness (ex-ante information acquisition).
* can the borrower repay?
- AFTER a borrower received a loan, the bank checks if the loan money is used for proper
purposes (ex-post monitoring).
Bank lending – Relationship lending
Banks acquire information (through monitoring and screening) about lenders. This has
several advantages for the relationship between lenders (banks) and borrowers:
- For example, in case of exogenous liquidity shocks to the borrower, the bank can react
more flexible.
* because the bank has information about the borrower, it knows this is just temporarily and
can judge the situation a bit better
- This relationship may beneficial for the borrower in particular because it may benefit from
lower interest rate over time because of the good relationship.
- For the lender it’s beneficial because more security about the repayment ability of the
borrower.
- However, this may also create a hold up situation in which banks may charge higher
interest rates.
* if the borrower stays a long time with one bank, they have a lot of info about the borrower
* if the borrower wants to change banks, they don’t have that information and there’s a
chance they won’t give a loan
Geographic proximity:
- Most banks have a close relationship to their borrowers. Not only on a business transaction
level but also geographically.
- Information about borrowers decreases with increasing distance (Granja et al. 2018).
Back to FinTech…
- Personal relationships do not play such a big role if technology is involved.
* there is communication but not so personal
- This loss in relationship (see before) might play not such a big role because now, what is
primary key, is data.
- So with new technology arising and new information available because of our digital
footprints, new (Tech)firms that venture into financial markets, have a lot of information
that banks do not have.
- These digital footprints might be more precise predictors about creditworthiness as credit
scores from credit bureaus.
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