FinTech, short for “Financial Technology”, is an innovative development in the financial services industry [1; 2]. Firms in the financial services industry are facing dramatic changes due to technological innovations, such as Personal Capital. FinTech is used as a new approach to innovate in the financial services industry. Usually FinTech is developed by start-ups because they are more flexible than large established institutions like banks. However, these large firms are gaining more interest in FinTech, not only as an approach to innovate, but also to increase their market share. [3] This leads to the question: ‘What impact can FinTech create?’.

FinTech innovation

FinTech is “incremental or disruptive innovations in or in the context of the financial services industry induced by IT developments resulting in new intra- or inter-organizational business models, products and services, organizations, processes and systems”. [2] Examples of FinTech companies are Stripe, Adyen, Ant Financial and SoFi [10; 11].

FinTech has three categories of innovation: (1) innovation object, (2) innovation degree and (3) innovation scope. Firstly, innovation object is a new or innovative product, for example crowd-lending platform or Lending Club. Secondly, innovation degree is the impact of the technology: incremental or disruptive effect. Thirdly, the innovation scope of FinTech differs from innovation. Organisations focus on internal and micro-level innovation. Whereas FinTech focusses on a macro-economic structures with changes in the value chain and thereby creating new innovations. [2] An example of a disruptive, macro-economic structured FinTech innovation are Blockchain technologies.

More than a hype

FinTech used to be considered a hype, but it is more than a hype. Before FinTech, the concept of innovation was connected to development. Since 2010 innovation became more important in the financial services started to become a known concept in 2012. As a result, a large increase of articles were published about FinTech since 2013. Due to the rise of FinTech, strategies changed from: ‘being innovative’ to: ‘using innovation to disrupt the financial market’. [1] The global adoption of FinTech also increased over the years. The average global adoption is 33%, see Figure 1. [4] Fintech firms excel at using their tech-literate, but financially underserved population, of which are high ratio’s in emerging countries. China has the largest adoption rate of 69%, for multiple reasons:

  • In China are open regulations which allow both FinTech and non-financial services firms to innovate financial services products;
  • Open API’s enable Chinese technology platforms;
  • FinTech is supported by large fund-raisers;
  • In addition, 58% of Chinese customers have used savings and investment services.[4]

fintech

Figure 1 FinTech adoption rate (EY, 2017, p. 8)

Using FinTech to impact the financial services market

The ability of FinTech to be a disruptive innovation is proven by innovations such as Blockchain and Bitcoin. Therefore, FinTech was considered a threat for many established organisations. A shift has been started. The established institutions are investing in FinTech themselves or buying start-up companies that have innovation(s) with potential. Their approach towards FinTech changed from a defensive to an offensive strategy [5].

As of the late fourth quarter 2017, VentureScanner listed on the order of 1,537 companies in 64 different countries having received US$80.4 billion in venture capital funding for their fintech innovation start-up activities. In addition, it reports that 291 other companies in 74 countries have raised US$4.5 billion for Bitcoin related initiatives. Another related fintech start-up category is insurance technology, with 61 countries and 449 companies involved, and US$19.5 billion in capital raised.”[3]

FinTech Landscape

The FinTech landscape within the financial services industry is mapped in Figure 2.

FinTech Innovation Landschape

Figure 2  Fintech Innovation Landscape: The Market-Competition-Customer Experience View (Gomber et. al., 2018, p. 7)

FinTech has created a lot of new innovations, both disruptive and incremental. Examples are shown in Figure 2. Within the Information Management field, Bockchain-based markets are known as a cryptocurrency. [6] Furthermore, an example of faster payment settlement is the popular Tikkie. [7] An example of robo-advisory services is BMO SmartFolio by Canada’s Bank of Montreal. This is an online investment management application that manages the customer’s investment portfolio through algorithms but still has human involvement. [8] Another expression in Figure 2 which needs explaining is RegTech solutions. RegTech originated from FinTech and collaborates with financial institutions and regulatory bodies. RegTech facilitates regulatory requirements more effectively and efficiently (by information sharing), for example through cloud computing. However, RegTech is arguably becoming more than a subset of FinTech, namely the next step in financial services regulation. [9]

Changing the operations of financial services

FinTech is changing the operations in financial services industry in multiple ways. An example is that investments across business partners and competitors are harmonized through new services and products. Furthermore, niche products are created through open source software, for example Google Cloud. In addition, the transactional process is transformed: transactions are supported by machine intelligence and added value human involvement. FinTech forced financial services firms to be more customer focused.

Significant improvements are made in four core aspects of financial services:

  1. transitioning to branchless banking,
  2. real-time transaction and credit monitoring,
  3. credit scoring and approval,
  4. and transformations in customer acquisition and retention.

Transitioning to branchless banking is the transition from in-person to digital transactions: physical bank evolves into a digital banking service. Mobile banking as an alternative service channel is also a result of this transition. The transitioning to digital banking services led to the opportunity for non-financial firms to offer financial services. [3]

Historically, monitoring transactions has been stressful and subject of significant time delays for customers. The ability of new FinTech products and services can meet this need more appropriate than traditional financial services. For example, FinTech improved the detection of fraudulent transactions. It used to have time delays, but the real time location data improved the detection of fraudulent transactions. [3]

Credit scoring is the process a company uses to decide whether to grant or deny credit to a potential borrower” [3] Financial technology can provide alternative services for credit scoring and approval, e.g. Lenddo in Singapore. [3]

Organisations such as CreditKarma and Mint have used FinTech as an advantage to reliably reduce customer acquisition costs. Platforms are created where these companies collaborate with credit card companies and banks. In doing so, they improve their costumer intimacy, which has led to a reduction in costs when customers are switching to a competitor. [3]

Concluding

FinTech is a highly relevant topic in the Information Management and financial services field. . FinTech can be seen as the umbrella concept approach for disruptive and incremental innovations in the financial services industry. It changes the core of the financial service industry using technical developments. To conclude, FinTech creates a large impact on the financial services industry, both in the present and future.

References

[1] Zavolokina, L., Dolata, M., & Schwabe, G. (2016). FinTech–What’s in a Name?.

[2] Puschmann, T. (2017). Fintech. Business & Information Systems Engineering, 59(1), 69-76. Retrieved from https://link.springer.com/article/10.1007/s12599-017-0464-6

[3] Gomber, P., Kauffman, R. J., Parker, C., & Weber, B. W. (2018). On the fintech revolution: interpreting the forces of innovation, disruption, and transformation in financial services. Journal of Management Information Systems, 35(1), 220-265.

[4] EY. (2017). EY FinTech Adoption Index 2017. Retrieved at March 4 2019, from https://www.ey.com/Publication/vwLUAssets/ey-fintech-adoption-index-2017/$FILE/ey-fintech-adoption-index-2017.pdf

[5] Deloitte. (n.d.). Fintech by the numbers Incumbents, startups, investors adapt to maturing ecosystem. Retrieved at March 6, 2019, from https://www2.deloitte.com/tr/en/pages/financial-services/articles/fintech-by-the-numbers.html

[6] Hayes, A. S. (2017). Cryptocurrency value formation: An empirical study leading to a cost of production model for valuing bitcoin. Telematics and Informatics, 34(7), 1308-1321.

[7] Majekodunmi, D. (2017, July). Social Media Banking: What do we know?. In ECSM 2017 4th European Conference on Social Media (p. 373). Academic Conferences and publishing limited.

[8] BMO SmartFolio (n.d.) What our Portfolio Experts do. Retrieved at March 6, 2019 from https://www.bmo.com/smartfolio/what-we-do/

[9] Arner, D. W., Barberis, J., & Buckey, R. P. (2016). FinTech, RegTech, and the reconceptualization of financial regulation. Nw. J. Int’l L. & Bus., 37, 371.

[10] Yapstone (February 28, 2019). 12 Top Fintech Companies to Watch. Retrieved at March 7, 2019, from https://www.yapstone.com/press/12-top-fintech-companies-to-watch/

[11] Bajpai, P. (June 5, 2017). The World’s Top 10 FinTech Companies (BABA). Retrieved at March 7, 2019, from https://www.investopedia.com/tech/worlds-top-10-fintech-companies-baba/

Artikel door Maud Bakker