FINTECHS AND THE NEW WAVE OF FINANCIAL INTERMEDIARIES

The financial services industry is undergoing a massive transformation similar to what was observed when other industries underwent digitization. The FinTech revolution has given rise to a vast number of technology-oriented market entrants who challenge many parts of the financial services industry. This research seeks to provide a better understanding of how FinTechs across various business functions fundamentally impact the value chain in this industry. To this end, we built on top of financial intermediation theory, and developed a taxonomy of FinTechs’ intermediating functions. The following hierarchical clustering analysis identified six archetypes of FinTech intermediaries as observed in the real world, i.e. the different ways in which FinTechs across business functions act as financial intermediaries by transforming assets, reducing transaction cost, and alleviating information asymmetries. Finally, we discuss how FinTechs impact financial intermediation in itself, and to what extent the notion of FinTechs disintermediating the financial value chain is accurate

Digitalisation and banking: new risks and three scenarios for the European banking system of the future

En este artículo se analiza el impacto de la digitalización en la estructura del sistema bancario europeo. La reciente ola de innovación financiera, basada en las oportunidades generadas por la digitalización en términos de nuevos productos y servicios, se ha originado principalmente fuera del sistema bancario tradicional. La forma que tengan los nuevos proveedores de servicios financieros (fintech y bigtech) de competir o colaborar con la banca tradicional podría afectar sustancialmente a la intermediación financiera. Como consecuencia, los riesgos financieros podrían desplazarse parcialmente del sector bancario, al tiempo que aumentaría la relevancia de los riesgos no financieros. Para poder definir mejor una estrategia de respuesta por parte de las autoridades, hemos considerado tres escenarios para el futuro sistema bancario europeo: i) la banca tradicional mantiene su dominio; ii) la banca tradicional reduce su presencia, y iii) se introducen las monedas digitales de bancos centrales en los pagos minoristas conforme a determinadas especificaciones

Digitalisation and banking: new risks and three scenarios for the European banking system of the future

This article discusses the impact of digitalisation on the structure of the European banking system. The recent wave of financial innovation, based on the opportunities created by digitalisation in terms of new products or new services, has come mostly from outside the incumbent banking system. How new financial service providers (fintechs and big techs) compete or cooperate with incumbent banks has the potential for substantial disruption in the provision of financial intermediation. As a result, financial risks may be partially shifted away from the banking sector, while non-financial risks increase their relevance. In order to better frame a policy response, we consider three scenarios for the future European banking system: (i) incumbent banks continue their dominance; (ii) incumbent banks retrench; and (iii) retail central bank digital currencies are introduced under certain specifications

From FinTech to TechFin: The Regulatory Challenges of Data-Driven Finance

Financial technology (‘FinTech’) is transforming finance and challenging its regulation at an unprecedented rate. Two major trends stand out in the current period of FinTech development. The first is the speed of change driven by the commoditization of technology, Big Data analytics, machine learning and artificial intelligence. The second is the increasing number and variety of new entrants into the financial sector, including pre-existing technology and e-commerce companies. This paper considers the impact of these new entrants with their typically large pre-existing non-financial services customer bases. These firms (loosely termed ‘TechFins’) may be characterised by their capacity to leverage the data gathered in their primary business into financial services. In other words, TechFins represent an Uber moment in finance. This shift from financial intermediary (FinTech) to data intermediary (TechFin) raises implications for incumbent financial services firms, FinTech startups and regulators. This seachange calls for analysis to underpin regulatory approaches with a view to balancing the competing interests of innovation, development, financial stability and consumer protection.postprin

FinTech: a new hedge for a financial re-intermediation. Strategy and risk perspectives

The emergence of new technologies and players, along with a favorable regulatory framework (PSD2 Directive), is changing the banking industry. FinTechs and TechFins have allowed the introduction of new services and changed the way customers interact to satisfy their financial needs. The FinTech landscape is constantly evolving in the market. Different business value propositions are entering the financial services industry, moving from increasing the user’s experience to developing a time to market framework for banks to innovate products, processes, and channels, increasing the cost efficiency and looking for a “partnering on order” to lighten the regulatory burdens for banks. The many businesses of banks are changing their value chains, and banks’ business models should do the same accordingly. Strategists could no longer take their value chains as a given; choices have to be made on what needs to be protected and maintained, what abandoned and the new on coming to make banks evolve and become more resilient in doing their job. Banking is shifting significantly from a pipeline, vertical paradigm, to open banking business models where open innovation, modularity, and ecosystem-based bank’s business model may become the ongoing mainstream and paradigm to follow and develop. Opportunities and threats for banks are many and new ones to re-gaining their role in the market throughout a re-intermediation proces

Sustainability in FinTechs: An Explanation through Business Model Scalability and Market Valuation

Framework: Financial Technology (FinTech) is an industry composed of diversified firms that combine financial services with innovative technologies. The research question and main goal are attempting to answer whether they are more similar to traditional banks or trendy technological firms deploying their innovativeness to favor financial inclusion and sustainability. Justification: Evaluators may wonder if FinTechs follow the typical evaluation patterns of bank/financial intermediaries or those of technological firms. Preliminary empirical evidence shows that the latter interpretation is the one consistent with the stock-market mood. Objective: This study goes beyond the extant literature, analyzing the differences between FinTechs and traditional banks in market valuation, and showing the potential for digital interaction and cross-pollination of complementary business models. Methodology: The differences will be empirically analyzed with the stock market valuation and the multipliers associated with these firms. Results: The main contribution of this paper is that the appraisal approaches of FinTechs follow those of technological startups, having a revenue model much more scalable than that of a typical bank. FinTechs may so provide a solution for sustainable finance with microfinance and crowdfunding among others. FinTechs and traditional banks may eventually converge towards a common market exploiting co-opetition strategies

Making Innovation More Competitive: The Case of Fintech

Finance startups are offering automated advice, touchless payments, and other products that could bring great societal benefits, including lower prices and expanded access to credit. Yet unlike in other digital arenas in which American companies were global leaders, such as search engines and ride hailing, the U.S. has lagged in consumer finance. This Article posits that the current competition framework is holding back consumer financial innovation. It then identifies a contributor that has yet to be articulated: the organizational design of administrative agencies. Competition authority—including antitrust and the extension of business licenses—is spread across at least five regulators. Each is focused on other missions or industries. The Federal Reserve and other prudential regulators prioritize financial stability, which conflicts with their competition mandate. The Department of Justice (DOJ), hindered by statutes and knowledge gaps, devotes significantly fewer resources to banking than to other industries in merger review. No regulator has the right authority, motivation, and expertise to promote competition in consumer finance. Innovation has raised the stakes for fixing this structural flaw. If allowed to compete fully, financial technology challengers (“fintechs”) could bring large consumer welfare advances and reduce the size of “Too Big To Fail” banks, thereby lessening the chances of a financial crisis. If allowed to grow unchecked, either fintech startups or the big banks acquiring them may reach the size of technology giants, thereby increasing systemic risk. Whether the goal is to benefit consumers, strengthen markets, or prevent crises, a reallocation of competition authority would better position regulators to navigate the future of innovation

Cyber finance challenges demand a unified response. CEPS Policy Insights No 2018/12, October 2018

The biggest opportunities and threats in finance these days come from the cyber-sphere. Fintech firms (fintechs) have made big inroads in financial intermediation, and some new companies are valued more than large banks. Blockchain and robo-advice are expected to revolutionise the ways banks interact with their clients and structure operations internally. The use of cryptocurrency has created a big controversy in central banking circles about the creation of a new form of money outside the classic institutions. But more cyber could also create more threats for operational failures of systems, or huge thefts of data. Fintech is depriving banks of important sources of revenue and raising questions about the adequacy and sustainability of bank business models and their legacy systems. Blockchains may in theory be very secure, but the technology is still immature and they are very energy intensive. Cryptocurrencies facilitate money laundering and reduce financial inclusion, or may be simply Ponzi schemes. Robots store large amounts of private information, but how the data are used and the reasons why certain products are recommended to clients may be very opaque. In this Policy Insight, CEPS CEO Karel Lannoo assesses the impact of innovation in the cyber-sphere on finance and addresses the central question of whether the policy response, either at the global or European levels, is adequate