Session 2
Fintech: Ecosystem, Business Models, Investment Decisions, and Challenges – Lee, I., & Shin,
Y.J. (2018).
Fintech: An Introduction
Financial technology (fintech) is recognised as one of the most important innovations in the financial
industry and is evolving at a rapid speed, driven in part by the sharing economy, favourable
regulation, and information technology. Fintech promises to reshape the financial industry by cutting
costs, improving the quality of financial services, and creating a more diverse and stable financial
landscape.
Emergence of Fintech
E-finance refers to all forms of financial services such as banking, insurance, and stock trading
performed through electronic means, including the internet and World Wide Web. E-finance allows
individuals or businesses to access accounts, transact business, and obtain information on financial
products and services without being in physical contact with financial firms. Many e-finance business
models emerged in the 1990s. as with e-commerce, many of these changes have led to the downsizing
and reduction of number in physical locations for banks. The impact of internet technology has been
especially obvious in the banking industry. Information-intensive and time-sensitive in nature,
virtually every component of the banking business’ value chain benefitted from an innovative
utilisation of web technologies.
With the advances in e-finance and mobile technologies for financial firms, fintech innovation
emerged after the worldwide financial crisis in 2008 by combining the e-finance, internet
technologies, social networking services, social media, AI, and big data analytics. Fintech start-ups
differentiated themselves from traditional financial firms with personalised niche services, data-driven
solutions, an innovative culture and a nimble organisation.
Fintech Ecosystem
Five elements have been identified regarding the fintech ecosystem:
- Fintech start-ups (e.g., payment, wealth management, lending, crowdfunding, capital market,
and insurance fintech companies).
- Technology developers (e.g., big data analytics, cloud computing, cryptocurrency, and social
media developers).
- Government (e.g., financial regulators and legislature).
- Financial customers (e.g., individuals and organisations).
- Traditional financial institutions (e.g., traditional banks, insurance companies, stock
brokerage firms, and venture capitalists).
At the centre of the ecosystem are fintech start-ups. They are driving the phenomenon of unbundling
financial services, which has been highly disruptive for banks. The ability to unbundle services is one
of the major drivers of growth in the fintech sector, as traditional financial institutions are
disadvantaged in this situation. Consumers, rather than relying on a single financial institution for
their needs, are beginning to pick and choose services they would like from a variety of fintech
companies.
,Financial customers are the source of revenue generation for fintech companies. The predominant
revenue source for fintech companies are individual customers and small and medium-sized
enterprises (SMEs).
Traditional financial institutions are also a major driving force in the fintech ecosystem. After
realising the disruptive power of fintech and dwindling window of opportunities to blunt fintech’s
impact on the market, traditional financial institutions have been re-evaluating their existing business
models and developing strategies to embrace fintech innovation.
Fintech Business Models
Payment Business Model. The two markets of payment fintechs are consumer and retail payment
and wholesale and corporate payment. Mobile services that can be conveniently and securely used on
mobile devise are a popular business model.
Wealth Management Business Model. This business model benefits from changing demographics
and consumer behaviour that favour automated and passive investment strategies, a simple and
transparent fee structure, and attractive unit economics that allow low or no investment minimums.
Crowdfunding Business Model. Crowdfunding fintechs empower networks of people to control the
creation of new products, media, and ideas and are raising funds for charity or venture capital. It
involves three parties:
- The project initiator or entrepreneur who needs funding.
- The contributors who may be interested in supporting the cause or project.
- The moderating organisation 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.
Lending Business Model. 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.
Capital Market Business Model. Users are able to see live pricing and send/receive funds in various
currencies securely in real time, all via their mobile device. Fintechs offering this service are able to
do so at a much lower cost, via payment methods that are much more familiar to individual clients or
businesses.
Insurance Services Business Model. 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
A Real Options Approach
While NPV without real options thinking has been widely used, it ignores flexibility in investment
such as deferment and expansion in the investment horizon. Therefore, NPV tends to undervalue a
project’s worth with a higher discount rate, and is not suitable for highly uncertain, risky technology
,projects. Since many fintech projects are experimental and being developed in highly fluid economic
and regulatory environments, real options may be an appropriate evaluation method.
Similar to financial options, real options are the right, but not the obligation, to take an action such as
‘wait,’ ‘expand,’ and ‘abandon’ during a period of time or by an expiration date. There are
characteristics that make real options an appropriate application for fintech projects. Fintech projects
inherently carry technical as well as economic and regulatory uncertainties. Real options applicable to
fintech projects include:
- Option to defer, which gives management the option to wait/learn more to see if a project will
be profitable.
- Option to expand, which gives management the option to invest more in a project that is
profitable.
- Option to abandon, which gives management the option to abandon a project that is operating
at a loss and sell or redeploy the assets.
- Option to contract, which gives management the option to scale.
Values of real options for projects can be calculated using the Black-Scholes model and the binomial
option pricing model if the estimates of the underlying asset’s value and variance are obtained.
However, the use of these financial option pricing models is usually not possible for fintech projects
due to the lack of reliable market data and possibly one-of-a-kind project nature that is not traded.
Challenges Facing the Fintech Sector
Blockchain technology is revolutionising many traditional banking services with better transaction
security and faster exchanges of money at lower costs domestically and globally.
Fintech Investment Management Challenge. The ability to assess the value of projects accurately
will be critical in an increasingly competitive business environment. Without a proper portfolio
management of fintech projects, financial firms can get easily swamped in the plethora of fintech
technologies.
Customer Management Challenge. 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.
Regulation Challenge. Both traditional financial institutions and fintech start-ups face regulatory
challenges in capital requirements, anti-money laundering, and privacy and security. For traditional
financial institutions, the cost to meet regulatory requirements and compete against fintech start-ups
can be significant. Traditional financial institutions and fintech start-ups face different regulatory
requirements based on the type of financial services they provide.
Technology Integration Challenge. Many fintechs are based on new technologies, and it is
challenging to integrate the fintech applications with existing legacy systems.
Security and Privacy Challenge. For fintech applications, critical information may be stored on
mobile devices that oftentimes get lost or stolen.
, Session 4
Reinventing Your Business Model – Johnson, M.W., Christensen, C.M., & Kagermann, H. (2008).
Apple’s true innovation was to make downloading digital music easy and convenient. To do that, the
company built a groundbreaking business model that combined hardware, software, and service.
Very little formal study has been done into the dynamics and processes of business model
development. Second, few companies understand their existing business model well enough. So they
don’t know when they can leverage their core business and when success requires a new business
model.
Road map:
- To realize that success starts by not thinking about business models at all. It starts with
thinking about the opportunity to satisfy a real customer who needs a job done.
- To construct a blueprint laying out how your company will fulfill that need at a profit.
- To compare that model to your existing model to see how much you’d have to change it to
capture the opportunity.
Business Model: A Definition
A business model consists of four elements that, taken together, create value:
- Customer value proposition (CVP). Opportunities for creating a CVP are at their most potent
when alternative products and services have not been designed with the real job in mind and
you can design an offering that gets that job done perfectly.
- Profit formula. This blueprint defines how the company creates value for itself while
providing value to the customer. It consists of:
o Revenue model (price * volume).
o Cost structure (driven predominantly by the cost of the key resources required by the
business model).
o Margin model (the contribution needed from each transaction to achieve desired
profits).
o Resource velocity (how fast we need to turn over inventory, fixed assets and other
assets).
- Key resources. The key elements that create value for the customer and the company, and the
way those elements interact.
- Key processes. Operational and managerial processes that allow companies to deliver value in
a way they can successfully repeat and increase in scale.
The power of this framework lies in the complex interdependencies of its parts.
How Great Models are Built
Creating a customer value proposition often starts as a quite simple realization. The most important
attribute of a CVP is its precision; how perfectly it nails the customer job to be done. Companies
trying to create the new often neglect the focus on one job. In doing lots of things, they do nothing
really well. One way to generate a precise CVP is to think about the four most common barriers
(insufficient wealth, access, skill or time) keeping people from getting particular jobs done.
In designing a profit formula, fundamental shifts can be made in all components of the formula
(revenue stream, cost structure and the supporting margins and transaction velocity).
