European Research Studies Journal
Volume XXIV, Issue 2B, 2021
pp. 600-627
Fintech: A Literature Review
Submitted 11/03/21, 1st revision 14/04/21, 2nd revision 17/05/21, accepted 15/06/21
Ferdinando Giglio1
Abstract:
Purpose: This article analyzes the Fintech evolution. After describing the process of this
phenomenon, some of the main definitions are provided both nationally and internationally.
Finally, six main models of Fintech are analyzed.
Design/Methodology/Approach: Through a systematic literature, 14 articles have been
selected that deal with the phenomenon of Fintech.
Findings: Six Fintech business models implemented by the ever growing number of Fintech
startups have been identified, payment, wealth management, crowdfunding, loan, capital
market and insurance services. Internationally, Fintech has already been defined by the
International Monetary Fund (IMF), the World Bank Group (WBG), the Financial Stability
Board (FSB), the Organization for Economic Cooperation and Development (OECD), the
International Organization of Securities Commissions (IOSCO), the Bank for International
Settlements (BIS). On a national level, on the other hand, Fintech has been analyzed by
various countries, USA, United Kingdom, Singapore, China, Switzerland, China, Australia
and the European Union.
Practical Implications: Fintech refers to a broad set of innovations - observable in the
financial field in a broad sense - which are made possible by the use of new technologies
both in the offer of services to end users and in the internal production processes of financial
operators as well as in the design of market enterprises, without thereby compromising new
possible configurations of intersectoral activities.
Originality/Value: Fintech appears to be representative of innovative methods - based on
technology - of carrying out activities directly or indirectly connected to financial services
rather than being a pre-defined industrial sector. Following the logic of the digital economy,
Fintech contributes to designing an open and continuous network of modular services for
businesses, individuals and banking, financial and insurance intermediaries, becoming a
powerful acceleration force for the integration policies of the financial services markets in
the EU.
Keywords: Fintech, finance, banking.
JEL: O31.
Paper type: Literature review.
Ph.D., Candidate at the University of Campania “Luigi Vanvitelli” Capua (CE),
e-mail: ferdinando.giglio@unicampania.it
1
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1. Introduction
With the advent of the world wide web, concepts such as e-government, egovernance, information systems and/or Web2.0/3.0 or e-Health were born
(Alshaikh, Razzaque, and Alalawi, 2017; Razzaque, Eldabi and Jalal - Karim, 2013;
Razzaque, Eldabi and Jalal-Karim, 2013; Razzaque and Karolak, 2010). In business
and management research, concepts such as knowledge management have received
broad consideration, supported by various social science theories such as social
capital theory (Razzaque and Hamdan, 2020; Razzaque and Hamdan, 2020;
Razzaque and Eldabi, 2018). It is therefore not surprising that even in the financial
sector it has contributed decisively, bringing it to the fore for its relevance in society,
as well as in the daily life of people, all over the world, even if this sector has
encountered transformations over the years due to changes in geographical regimes,
political changes and legalization.
Although the financial technology known as FinTech is not a new concept (Berger,
2003; Mareev, 2016; Shim and Shin, 2016; Razzaque and Hamdan, 2020) it is stated
that, due to the rise and latest evolution of FinTech, a new era is dawning; FinTech
is a link between the financial industry, information technology (IT), and innovation.
The term "Fin-Tech" derives from the union of the words finance and technology
and represents what the acronym actually means, includes the development of
technology and innovation to support banking and financial skills with the latest
technologies. Fin-Tech also describes the relationship between technologies such as
cloud computing and mobile internet, with financial services businesses such as
loans, payments, money transfer and other banking. Many scholars have investigated
the FinTech phenomenon and its history, evolution, and concepts, however most
researchers have focused on the FinTech revolution and its impact within the
banking sector.
The document is set up as follows: after having illustrated the evolution of Fintech,
some of the main definitions of this term are provided at a national and international
level and finally the main models of this phenomenon are examined.
2. Fintech 1.0 (1866-1967): From Analogue to Digital
From the earliest stages of development, finance and technology have been
interconnected and mutually reinforcing.
Finance arises in the state administrative systems that were necessary for the
transition from hunter-gatherer groups to stable agricultural states. For example, in
Mesopotamia, written records, the earliest form of information technology, helped
manage administrative and economic systems, including through financial
transactions (Rowlinson, 2010).
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Therefore, the development process of finance and written documentation reinforce
each other, as one of the earliest forms of information technology, highlights the link
between finance and technology. Similarly, the development of money itself initially
and finance are clearly intertwined. According to Mervyn King, former Governor of
the Bank of England (2003-2013): “The story of money is… the story of how we
evolved as social animals, trading with each other. It begins with the use of
commodities as money, grain and livestock in Egypt and Mesopotamia as early as
9000 BC. ... The cost and inconvenience of using such commodities led to the
emergence of precious metals as the dominant form of money. Metals were first used
in transactions in ancient Mesopotamia and Egypt, with metal coins originating in
China and the Middle East and were in use as late as the 4th century BC. The first
banknotes appeared in China in the 7th century AD " (King, 2016).
Money is a technology that denotes transferable values (McGroarty and Farai
Mutsaka, 2011) and is one of the typical characteristics of a modern economy.
Furthermore, the emergence of early computing technologies such as Abacus has
greatly facilitated financial transactions. This evolutionary development can also be
seen in the context of trade, with finance evolving from an early stage to both sustain
trade and sustain the production of commodities for that trade. Double-entry
bookkeeping (Spoke, 2015), another form of information technology important to a
modern economy, emerged from the intertwined evolution of finance and commerce
in the late Middle Ages and the Renaissance.
Many historians today approve the view that the financial revolution took place in
Europe in the late 1600s and involved joint-stock companies, insurance and banking,
all fundamentally based on double-entry bookkeeping (More, 2000). In this context,
finance and access to capital supported the development of technologies and,
therefore, industrial development. Therefore, the relationship between finance and
technology is long-standing, with a development trajectory that sets the stage for the
modern period. The increasing speed of development over the past hundred years or
so is surprising compared to previous periods. The following subsections now
proceed to briefly outline the developments in financial technology between the late
19th and 20th centuries, which paved the way for today's foundations of FinTech.
2.1 The First Age of Financial Globalization
At the end of the 19th century, finance and technology came together to usher in the
first period of financial globalization, which lasted until the beginning of the First
World War. During this period, technologies such as the telegraph, railways, canals
and steamships have supported financial interconnections across borders, enabling
rapid transmission of financial information, transactions and payments around the
world. At the same time, the financial sector has provided the necessary resources to
develop these technologies (Roth and Dinhobl, 2008), Keynes’s writing in 1920,
provided a clear picture of the interconnectedness of finance and technology in this
first era of financial globalization: “The Londoner could order by phone, sipping his
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morning tea in bed, have the various products of the whole earth in the quantity he
saw fit, and reasonably expect early delivery on his doorstep; he could at the same
time and with the same means venture into his wealth of natural resources and new
enterprises anywhere in the world, and share, without effort or even difficulty”
(Keynes, 1920).
From this description it is clear that today's globalization is not new. However, the
speed of technological development has changed.
2.2 The Early Post-War Period
During the post-World War I period, while financial globalization was limited for
several decades, technological developments, particularly in communications and
information technology used in warfare, proceeded rapidly. In the context of
information technology, companies such as International Business Machines (IBM)
transferred codebreaking tools to early computers and Texas Instruments first
produced the portable financial calculator in 1967 (Thibodeau, 2007). The 1950s
were also the time when credit cards were first introduced, Diners' Club in 1950,
Bank of America and American Express in 1958 (Markham, 2002). The
development of what would later become a global consumer payment revolution was
further supported by the creation of the Interbank Card Association (now
MasterCard) in the United States in 1966 (Ben Woolsey and Emily Starbuck Gerson,
2009). By 1966, a global telex network was in place, providing the fundamental
communication foundation upon which the next phase of FinTech could be
developed. Xerox Corporation introduced the first commercial version of the telex
successor, the fax, in 1964 under the name of Long Distance Xerography (LDX)
(Auth, 2016). As noted earlier, in 1967 in the UK, Barclays implemented the world's
first ATM. In our characterization, the combination of these developments marked
the beginning of the FinTech 2.0 era.
3. Fintech 2.0 (1967-2008): Development of Traditional Digital Financial
Services
The launch of the calculator and ATM in 1967 ushered in the modern era of FinTech
2.0. From 1967 to 1987, financial services moved from an analogue industry to a
digital industry. Key developments set the stage for the second period of financial
globalization, which was highlighted by the global reaction to the 1987 US stock
market crash.
3.1 The Modern Foundations: Digitalization and Globalization of Finance
In the late 1960s and 1970s, electronic payment systems, the basis of today's mobile
payment systems and the Internet, advanced rapidly, supporting both major domestic
and international payments and financial flows. The Inter-Computer Bureau was
established in the United Kingdom in 1968, forming the basis of today's Bankers'
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Automated Clearing Services (BACS), (Welch, 1999) and the United States Clearing
House Interbank Payments System (CHIPS) was established in 1970 (Federal
Reserve Bank of N.Y., 2002). Fedwire, originally founded in 1918, became an
electronic system in the early 1970s (Federal Reserve Bank of N.Y., 2015).
Reflecting the need to interconnect domestic payment systems across borders, the
Society of Worldwide Interbank Financial Telecommunications (SWIFT) was
established in 1973 (Society of Worldwide Interbank Financial Telecomm, 2016)
followed soon after by the collapse of Herstatt Bank in 1974 (The Economist, 2001)
which clearly highlighted the risks of an increase in interconnections, particularly
through the new payment system technology.
This crisis triggered the first major regulatory focus on FinTech matters, with the
establishment of the Bank for International Settlements (BIS) Basel Committee on
Banking Supervision in 1975. This established the regulatory basis (Bank for
International Settlements, 2015). The BIS Payments and Settlement Committee was
established in 1990, based on a previous group established in 1980 and renamed the
Payments and Market Infrastructure Committee in 2016. The combination of
finance, technology and adequate regulatory attention is the basis of the current $5.4
trillion a day Global Foreign Exchange Market, the largest, most globalized and
most digitized component of the global economy (Mortimer, 2013).
In the securities industry, the establishment of the NASDAQ (Acronym for National
Association of Securities Dealers Automated Quotations) in the United States in
1971, the end of fixed securities fees and the eventual development of the National
Market System marked the transition from physical trading of titles dating back to
the end of 1600 to today's one. In the consumer banking sector, online banking was
first introduced in the United States in 1980 and in the United Kingdom in 1983 by
the Nottingham Building Society (NBS) (Choron and Choron, 2011). Throughout
this period, financial institutions have increasingly used each new IT development in
their internal operations, gradually replacing most forms of paper-based mechanisms
by the 1980s, as computerization and risk management technology progressed
developed to manage internal risks.
One such FinTech innovation is very familiar to financial professionals today, the
Bloomberg terminals. Michael Bloomberg started Innovation Market Solutions
(IMS) in 1981 after leaving Solomon Brothers, where he had designed internal
computer systems (Bloomberg, 2014). In 1984, Bloomberg terminals were
increasingly used by financial institutions. Bloomberg is therefore one of the earliest
FinTech startups and the most successful to date. Traditional financial services firms
are therefore a central aspect of FinTech. As Yang Kaisheng, CEO of Industrial and
Commercial Bank of China (ICBC), the world's largest bank by asset size recently
noted: "There is a perception that when banks develop Internet technology, it is not
regarded as FinTech. People say this is a new idea, a new ideology that will
eliminate agents and intermediaries and that banks cannot adapt ” (DiBiasio, 2015).
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In 1987 a new period of regulatory attention began to the risks of cross-border
financial interconnections and their intersection with technology. That same year,
the stock market collapsed on "Black Monday". The effects of the 1987 crash on
markets around the world have been the clearest indicator since the crash of 1929
that global markets were interconnected through technology. Indeed, Hollywood's
vision of the financial services industry of this era in Oliver Stone's 1987 film “Wall
Street” has produced one of the most iconic and popular images of this period, an
investment banker wielding an early mobile phone, a IT innovation first introduced
in the United States in 1983. Although almost thirty years later there is still no clear
consensus on what caused the collapse, at that time a lot of attention was paid to its
use by institutions. Financial systems of computerized trading systems that bought
and sold automatically based on predetermined price levels (Bookstaber, 2007).
The reaction has led to the introduction by exchanges and regulators of a variety of
mechanisms, particularly in electronic markets, to control the speed of price changes
("circuit breakers") (Guzman, 2016). It has also led securities regulators around the
world to work on mechanisms to support cooperation on cross-border interconnected
securities markets, both from the perspective of volatility and market manipulation
(Steinberg, 1999) in the way where the 1974 Herstatt crisis and the developing
country debt crisis in 1982 triggered greater cooperation between banking regulators
(Norton, 1995). Furthermore, the Single European Act of 1986 established the
framework for what would become the single financial market in the European
Union. That law, in addition to the Big Bang financial liberalization process in the
UK in 1986, the Maastricht Treaty of 1992 and an ever-increasing number of
financial services directives and regulations since the late 1980s, established the
basis for the possible full interconnection. Certainly, by the late 1980s, financial
services had largely become a digital industry, based on electronic transactions
between financial institutions, financial market participants and clients around the
world. By 1998, this process had completed its course with financial services
becoming, for all practical purposes, a digital industry.
This period also showed the initial limitations and risks in complex computerized
risk management systems (e.g. Value at Risk (VaR)), with the collapse of Long-term
Capital Management (LTCM) in the wake of the Asian and Russian financial crisis
of the 1997- 1998 (Jorion, 2000).
Advances in the mid-1990s certainly propelled FinTech forward. However, the
emergence of the internet really set the stage for the next level of development,
starting in 1995, when Wells Fargo began using the World Wide Web (WWW) to
provide consumer online banking services (Riggs, 2015). In 2001, eight banks in the
United States had at least one million online customers, with other major
jurisdictions around the world rapidly developing similar systems and related
regulatory frameworks to address risk (Cronin et al., 2001). By 2005, the first direct
banks with no physical branches had emerged and had gained wider public
acceptance (ING Direct, HSBC Direct) in the UK. At the turn of the 21st century,
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606
banks' internal processes, interactions with outsiders, and an ever-increasing number
of their interactions with retail customers were completely digitized. And as
digitization has become ubiquitous, IT spending from the financial services industry
has increased accordingly. Furthermore, regulators began to use new technology,
particularly in the context of stock exchanges, and by the late 1990s, computerized
trading systems and records had become the most common source of information on
market manipulation.
3.2 Regulatory Approaches to Traditional DFS in Fintech 2.0
As technology has changed, the regulatory structure and strategies have also
changed. As noted above, the internationalization of finance since the late 1960s,
supported by new technologies such as electronic payment systems and stock
exchanges, has supported important developments in cross-border regulatory
cooperation, notably through the Basel Committee and IOSCO. In addition,
particularly in the United States and Europe, major efforts have focused on
regulating the new emerging risks in payment systems and electronic exchanges in
the 1980s and 1990s. As an example of the regulatory interest in FinTech
developments, David Carse, then Deputy Director General of the Hong Kong
Monetary Authority (HKMA), gave a keynote speech in 1999 in which he
considered the new regulatory framework needed for e-banking (Carse, 1999). It is
important to note that this speech was made in 1999, while e-banking has existed
since 1980. This time frame highlights the delay in the regulatory reaction to
technological changes. This delay is predictable and often welcomed, as it is
consistent with effective market regulation. Regulating all new innovations
applicable to the financial sector has a limited advantage (Chan, 2016). Preventive
regulation would not only increase the workload of regulatory agencies and would
tend to severely stifle innovation, but would also have limited benefits (Menon,
2016).
By providing direct and virtually unlimited access to their accounts, the technology
eliminated the need for depositors to be physically present in a branch to withdraw
funds. Indirectly, the development of e-banking could facilitate electronic bank runs,
as the lack of physical interaction eliminates the friction that comes with a
withdrawal. In turn, the instant ability to withdraw funds can increase the stress on a
financial institution that has liquidity problems during a banking crisis (Carse, 2016).
Regulators also found that online banking creates new credit risks. By removing the
physical link between the consumer and the bank, competition was expected to
increase. On a large scale, although initially positive for consumers, this competitive
pressure can be problematic for the financial stability of the system. The
deregulation of the US banking market in the 1980s provided an example of the
systemic risks that arise from deregulation (Barberis, 2012). Second, on a smaller
individual scale, the constraints of being personally known by a loan officer would
be lost as the loan establishment decision can be replaced by an automated system.
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The benefits of online banking have, to date, outweighed the risks. Better data
organization can lead to a better understanding of borrowers' true credit risk and thus
enable financial institutions to offer products that are better aligned with the
individual consumer's risk profile. This insight precedes the emergence of big data
analytics, which provides more granular insights into consumer profiles (Douglas
Arrier and Jarios Barberis, 2015). However, the comparison between the risk created
by online banks and FinTech startups stops there because Carse's speech (1987) was
built on the premise that these technological innovations would only be used by
authorized financial insights. This distinction is the key to understanding the tipping
point between FinTech 2.0 and FinTech 3.0.
4. Fintech 3.0 (2008-present): Democratizing Digital Financial Services?
There has been a shift in mindset from the retail client's point of view about who has
the resources and legitimacy to provide financial services. While it is difficult to
pinpoint how and where this trend began, the 2008 Global Financial Crisis (GFC)
could represent a turning point and may have catalyzed the growth of the FinTech
3.0 era. In parallel, the twenty-first century has so far been characterized by
technological development and change from any previous period, highlighting the
second characteristic of speed.
The remainder of this section will show that an alignment of market conditions after
2008 has supported the emergence of innovative market players and new
applications of new technology for the financial services industry. Among these
factors were, public perception, regulatory control, political demand, and economic
conditions. Each of these points will now be explored within a narrative that
illustrates how 2008 acted as a turning point and created a new group of actors
applying technology to financial services. Indeed, since 2008, banks' brand image
and perceived stability has been shaken to the core.
A 2015 survey reported that American levels of trust in tech companies managing
their finances are not only increasing, but outstripping their trust in banks. For
example, the level of trust Americans have in CitiBank is 37%, while the trust in
Amazon and Google is seventy-one percent and sixty-four percent, respectively. In
addition to established companies like Amazon and Google, there is a growing
number of unlisted companies and young start-ups that manage customer money and
financial data. China provides a clear example of this phenomenon (Weihuan Zhou,
Douglas W. Arner, and Ross P. Buckley, 2015) with over 2000 P2P lending
platforms operating outside a clear regulatory framework (Alois, 2015).
This does not discourage millions of lenders and borrowers, who are willing to place
or borrow billions on these platforms due to the lower cost, seemingly better
potential return and greater affordability. Likewise, the "reputation" factors that
mean that only banks can offer banking services are not relevant to a large
percentage of people in developing countries. For 2 billion bankless individuals, this
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factor is weak, because for them banking can be a commodity that can be supplied
by any institution, regulated or not (Ash Demirguc et al., 2015). In other words,
there may be a lack of "legacy behavior" in developing markets such that the public
does not expect only banks to provide financial services. As effectively described
more than two decades ago, "banking is necessary, the banks are not” (McLean,
1998).
4.1 Fintech and the Global Financial Crisis: Evolution or Revolution?
The financial crisis impacted the public perception of banks and the people who ran
the financial services industry. First, as its origins became more widely understood,
the public perception of banks deteriorated. For example, predatory lending methods
directed at civil rights-free communities have not only breached banks' consumer
protection obligations, but also damaged their position (Sumit Agarwal et al., 2014).
Second, two groups of individuals have been hit by the financial crisis. As the
financial crisis turned into an economic crisis, it is estimated that 8.7 million
American workers have lost their jobs (Kell, 2014). Combining the decline in
employment prospects with the public's growing distrust of the traditional banking
system, many financial professionals have found a new sector, FinTech 3.0, in which
to apply their skills (Mark Esposito and Terence Tse, 2014).
In addition to traditional financial professionals, a new generation of highly educated
recent graduates have faced entry into a difficult traditional job market (Fottrell,
2014). Their educational background has at times equipped them with the tools to
understand the financial markets and their skills have found a fruitful outlet in
FinTech 3.0. Post-financial crisis regulation has increased banks' compliance
obligations and changed their business incentives and business structures. In
particular, the universal banking model has been tested with separation obligations
and regulatory capital increases, modifying the incentive or ability of banks to grant
low-value loans (Ferrari, 2016). Furthermore, the not always appropriate use of
some financial innovations, such as debt bond guarantees (CDOs), was considered a
contribution to the crisis by separating the credit risk of the underlying loan from the
originator of the loan (Segoviano et al., 2013). Finally, the need to ensure the orderly
bankruptcy of banks drove the implementation of the resolution regimes of financial
institutions in all jurisdictions, which required banks to prepare recovery and
resolution plans (RRPs) and conduct stress tests to assess their feasibility (Barberis,
2012). Consequently, since 2008, the business models and structures of banks have
been reformulated.
4.2 From Post-Crisis Regulation to Fintech 3.0
These regulatory responses to the GFC (e.g., Dodd Frank Act, Basel III) were clearly
necessary in light of the social and economic impact of the financial crisis and could
make it less likely that the next financial crisis will be triggered by the same causes
(Buckley, 2015). However, these post-crisis reforms have had the unintended
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consequence of spurring the rise of new technology players and limiting banks'
ability to compete. For example, Basel III resulted in an upward revision of capital
adequacy requirements for banks (Release, 2013). While this has increased market
stability and risk-absorbing capacity, it has also diverted capital away from small
and medium-sized enterprises (SMEs) and individuals. Many individuals have
therefore turned to P2P lending platforms or other innovations to meet their credit
needs.
During the FinTech 2.0 period, the expectation was that e-banking solution providers
would be supervised financial institutions. Indeed, the use of the term "bank" in most
jurisdictions is limited to companies duly authorized or regulated as financial
institutions (UK Companies House, Companies Act, 2006). However, the FinTech
3.0 era has shown that the provision of financial services is no longer the sole
responsibility of regulated financial institutions. The provision of financial services
by non-banks can also mean that there are no effective national regulators to act on
the concerns of host regulators, and therefore whether the provider is regulated or
not can make little difference. This means that the last safeguard could come from
consumer education and a distrust of placing funds with an offshore non-bank.
Public demand for greater access to credit was met by the approval of the Jump Start
Our Business Startups (JOBS) Act in the United States in 2012. The JOBS Act
addresses these issues of unemployment and credit supply in two ways. Regarding
employment, the JOBS Act aims to promote the creation of start-ups by providing
alternative ways to finance their businesses. The preamble of the law states: "One
act: Increase American job creation and economic growth by improving access to
public capital markets for emerging growth companies" (Jump Start Our Business
Startups Act, 2012). From a political point of view, the promotion of
entrepreneurship has few disadvantages, as it has a direct impact on job creation.
On financing, the JOBS Act has helped start-ups bypass the credit crunch caused by
rising bank costs and limited lending capacity. The JOBS Act has allowed start-ups
to directly access the capital needed to support their business by raising funds to
replace equity on P2P platforms.
The JOBS Act was not specifically intended to support FinTech 3.0 because it
applied to start-ups in general. But it bolstered FinTech 3.0 as these alternative
funding sources became available at a time that coincided with increasing regulatory
pressures limiting banks' ability to innovate, a heightened public perception of
traditional banks, and the outflow of human talent. which provided the market and
knowledge needed for new FinTech start-ups to emerge.
In summary, the financial services industry has been hit by a "perfect storm" financial, political and public at its source - since 2008, enabling a new generation of
market participants to establish a new paradigm known today as FinTech.
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4.3 The Fintech Industry Today: A Topology
Based on this evolutionary analysis, it is possible to develop a complete topology of
the FinTech sector. FinTech today encompasses five main areas: (1) finance and
investments, (2) internal operations and risk management, (3) payments and
infrastructure, (4) data security and monetization, and (5) customer interface.
Finance and investment: Much of the attention of the public, investors and
regulations today is focused on alternative financing mechanisms, especially
crowdfunding and P2P lending. However, FinTech clearly extends beyond this
narrow scope to include the financing of the technology itself (e.g., through
crowdfunding, venture capital, private equity, private placements, public offerings,
quotes, etc.). From an evolutionary perspective, the tech bubble of the 1990s is a
clear example of the intersection of finance and technology, just as NASDAQ is the
dematerialization of the securities sector that followed in the following decades and
the advent of program trading, high frequency trading and dark pools. Looking
ahead, in addition to the continuous development of alternative financing
mechanisms, FinTech is increasingly involved in sectors such as robo advisory
services (Halder, 2015).
Internal financial operations and risk management: These have been a key driver of
financial institutions' IT spending, especially since 2008, as financial institutions
have sought to create better compliance systems to address the massive volume of
post-crisis regulatory changes. For example, about a third of Goldman Sachs' 33,000
employees are engineers, more than LinkedIn, Twitter or Facebook (Marino, 2015).
Paul Walker, Goldman Sachs global co-head of technology, said they "were
competing for talent with start-ups and tech companies." From an evolutionary
perspective, the development of financial theory and quantitative techniques of
finance and their translation into financial institution operations and risk
management was a key feature particularly in the 1990s and 2000s, as the financial
industry built VaR-based systems and other systems to manage risk and maximize
profits (Lowenstein, 2000).
Payments and infrastructure: Internet payments and mobile communications are a
central focus of FinTech and have been a driving force particularly in developing
countries. Payments have been an area of great regulatory attention since the 1970s,
resulting in the development of domestic and cross-border electronic payment
systems that now support $5.4 trillion a day in global currency markets. Similarly,
infrastructure for securities trading and settlement and OTC derivatives trading
continues to be an important aspect of the FinTech landscape and are areas where IT
and telecom companies seek opportunities to disintermediate traditional financial
institutions.
Data security and monetization: These are key themes in FinTech today, especially
as both FinTech 2.0 and FinTech 3.0 begin to leverage the monetary value of data.
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Following the GCF, it became clear that the stability of the financial system is a
matter of national security. The digitized nature of the financial sector means that it
is particularly vulnerable to cybercrime and espionage, both of which are
increasingly important in geopolitics. This digitization and consequent vulnerability
are the result of decades of development, highlighted in previous sections and, in the
future, will remain a major concern for governments, policy makers, regulators and
industry players, as well as customers (Moody, 2015). However, FinTech innovation
is clearly present in the uses to which "big data" can be applied to increase the
efficiency and availability of financial services.
Interface for consumers, especially online and mobile financial services - this will
continue to be a major focus of traditional financial services and non-traditional
FinTech developments. This is another area where established and new IT and
telecom companies are looking to compete directly with traditional financial services
firms. Interestingly, it may be in developing countries where factors increasingly
combine to support the next era of FinTech development. The consumer interface
offers the greatest opportunities for competition with the traditional financial sector,
as these technology companies can leverage their large existing customer bases to
launch new financial products and services (Osawa, 2015).
5. Definitions of FinTech
Fintech is a term that derives from the combination of the words finance and
technology and is defined as an interdisciplinary field that combines finance,
technology management and innovation, describes the connection of internet-related
technology with commercial service activities of the financial sector such as banking
transactions and money lending. Financial technology terminology emerged when
Citicorp launched a project called the Financial Services Technology Consortium
that facilitates technology collaboration in the financial services industry. It was only
in the year 2014 when the new Fintech attracted public attention and has since then
been used to describe the development of technology, ecosystems and platforms,
which allows and facilitates access to services and processes within of the financial
sector, making it more efficient and convenient for more people. Imran (2014)
revealed that throughout the history of the financial sector it has been the largest user
of technology in the service sector after the telecommunications industry. Fintech
offers a promising change to the banking and financial services industry by
significantly reducing costs, increasing diversified services and providing more
stable industrial and market scenarios (Iman, 2019).
There is a wide variety of definitions of the concept in academic practice and in
business journals. Meanwhile, while stakeholders agree on the core elements of the
term, its scope has not been clearly defined. Opinions vary that only new emerging
technology-based financial companies can be called fintech and even operators can
only be called fintech if they innovate a new technology-based product or service.
Table 1 shows some of the main definitions of the term Fintech.
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612
Table 1. Definitions of FinTech
Definitions
“Financial technology” or “FinTech” refers to
technology-enabled financial
solutions. The term FinTech is not confined to
specific sectors (e.g. financing) or business models
(e.g. peer-to-peer (P2P) lending), but instead covers
the entire scope of services and
products traditionally provided by the financial
services industry.
Financial innovation can be
defined as the act of creating and then popularizing
new financial instruments as well as new financial
technologies, institutions and markets.
It includes institutional, product and process
innovation.
An economic industry composed of companies that
use technology to make financial systems more
efficient.
Source
Arner, DW;
Barberis, JN;
Buckley, RP
Year
2015
Farha Hussain
2015
McAuley, D.
2015
Fintech is a service sector, which uses mobilecentered IT technology to enhance the efficiency of
the financial
system.
Fintech is a portmanteau of financial technology that
describes an emerging financial services sector in
the 21st century.
Kim, Y., Park, Y.
J., & Choi, J.
2016
Investopedia
2016
FinTech describes a business that aims at providing
financial services by making use of software and
modern technology.
Fintech weekly
2016
Organizations combining innovative business models
and technology to enable, enhance and disrupt
financial services
Ernst & Young
2016
6. The International Definitions of Fintech
There have been requests for more international cooperation on how to deal with the
fast growing FinTech market and several international financial organizations such
as IMF, WBG, FSB and others have taken an active part in preparing the political
agendas.
6.1 International Monetary Fund (IMF) and World Bank Group (WBG)
In 2018 IMF and WBG launched the Bali FinTech Agenda (BFA), with the
fundamental objective of considering how technological innovation is changing the
provision of financial services with consequences for efficiency and economic
growth, financial stability, inclusion and integrity. BFA describes FinTech as
"advances in technology that have the potential to transform the provision of
financial services by stimulating the development of new business models,
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applications, processes and products" (IMF, 2018). The BFA is a response to
requests from IMF and WBG members to expand international cooperation and
provide recommendations on creating a favorable global regulatory environment for
FinTech. The Agenda has an informative nature to support awareness, further
training and ongoing work. The main conclusion of the policy paper of the IMF and
the World Bank group "Fintech: the Experience so far" (IMF, 2019) is that,
although there are important regional and national differences, countries make
extensive use of FinTech capabilities to accelerate economic growth and integration.
6.2 Financial Stability Board (FSB)
The FSB was established in 2009 after the G20 meeting and has played a key role in
making it easier to reform international financial regulation and supervision. The
FSB defines FinTech as "the technology that has enabled innovation in financial
services and could lead to new business models, applications, processes or products
with a material effect associated with the provision of financial services" (Financial
Stability Board, 2019). In 2017, the FSB published "Financial Stability Implications
from FinTech", classifying FinTech activities focused on the services provided,
rather than the suppliers or technologies used as:
➢ payments, clearing and settlement;
➢ deposits, loans and capital raising;
➢ insurance;
➢ investment management;
➢ market support. (The Financial Stability Board, 2017)
This classification arises from the work of the FSB Financial Innovation Network
(FIN), is based on the classification of the World Economic Forum (2015). In 2015,
the World Economic Forum released "The Future of Financial Services" report
which explores the transformational potential of new entrants and innovations on
business models in financial services. This project offers answers to the question
"Which new innovations are most effective and relevant to the financial services
industry?" As a result, 11 key clusters of innovations were identified based on how
they impact core functions of financial services:
1) cashless world;
2) emerging payment rails;
3) insurance unbundling;
4) related insurance;
5) alternative loans;
6) shift of customer preferences;
7) crowdfunding;
8) authorized investors;
9) outsourcing of processes;
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614
10) smarter and faster machines;
11) new market platforms.
The WEF approach to defining FinTech is based on financial market functions that
meet customer needs. Solutions and technology tools are changing, while the needs
of major customers remain relatively unchanged.
6.3 The Organization for Economic Co-operation and Development (OECD)
Furthermore, the OECD has been actively involved in determining the nature of the
FinTech phenomenon. In the document "Financial Markets, Insurance and Private
Pensions: Digitization and Finance", the OECD attempts to overcome the
limitations in the definitions and categories developed so far. Defines FinTech as
"innovative applications of digital technology for financial services" (OECD, 2018).
Criticizing the definitions provided by the WEF, the US National Economic Council,
the FSB, the International Organization of Securities Commissions (IOSCO), the EU
and the Hong Kong Monetary Authority (HKMA), have stated that "fintech is not
only about the application of digital technologies to financial services but also the
development of business models and products based on these technologies and more
generally on digital platforms and processes" (OECD, 2018) ranks new technologies
and digital processing in financial services and major financial activities and
services:
1) distributed ledger technology;
2) big data;
3) the internet of things;
4) cloud computing;
5) artificial intelligence;
6) biometric technologies;
7) augmented / virtual reality.
6.4 The International Organization of Securities Commission (IOSCO)
In partnership with the G20 and the FSB, IOSCO develops, implements and supports
compliance with internationally recognized standards for securities regulation.
IOSCO defines FinTech as "a variety of innovative business models and emerging
technologies that have the potential to transform the financial services industry".
FinTech's innovative business models usually automatically offer one or more
specific financial products or services using the Internet. Emerging technologies
such as cognitive computing, machine learning, artificial intelligence and distributed
ledger technologies (DLT) can be used for both new and traditional members, they
can also significantly change the financial services industry (International
Organization of Securities Commissions, 2017).
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Eight categories of FinTech are described in the IOSCO Research Report on
Financial Technologies (FinTech):
➢ Payments;
➢ Insurance;
➢ Planning;
➢ Loan and crowdfunding;
➢ Blockchain;
➢ Trading and investments;
➢ Data and analysis;
➢ Security (International Organization of Securities Commissions, 2017).
These FinTech categories meet basic client demands and focus on the functions of
the financial markets.
6.5 The Bank for International Settlements (BIS)
The Basel Committee on Banking Supervision (BCBS) takes advantage of the
Financial Stability Board (FSB) FinTech definition (BIS, 2018). According to
BCBS, regulators in many countries have not officially defined FinTech, partly due
to definitions already available, for example, such as the FSB, or also because it is
too early to give a definition for a rapidly evolving phenomenon. Those who define
FinTech see them as a company that provides innovative services, a business model
or a start-up of new technologies in the financial sector. BCBS believes that
jurisdictions may need to identify specific products and services in order to establish
a well-defined approach for possible regulation.
7. The National Definitions of Fintech
7.1 National Economic Council, White House, USA
In the United States, there is no specific regulatory framework for FinTechs subject
to a single federal or state regulation. Depending on the FinTech assets provided, the
company may be subject to laws and regulations, both at the federal and state level.
Fintech will be regulated like any other company if it provides services that are
regulated activities, for example, state-level consumer lending, money transmission
and virtual currency licensing, at the federal level of consumer loan laws, and antidiscrimination laws.
The National Economic Council (NEC) defines FinTech as "innovations in financial
technology", but in general "a broad spectrum of technological innovations that
impact a wide range of financial assets, including payments, investment
management, raising capital, deposits, loans and insurance, regulatory compliance
and other activities in the financial services sector" (National Economic Council,
2017). The NEC advises its policy makers and regulators to study best practices
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616
abroad, although each practice is not suitable for each jurisdiction, exchanging ideas
and best practices can help to agree policies, regulations and promote innovation
around the world.
US regulation of financial markets is fragmented due to the different legal
frameworks at the federal and state levels, making it very difficult to create a unified
sandbox for the country. The first sandbox was established in Arizona in 2018,
allowing starups, entrepreneurs and established companies to test their innovative
financial products or services in a regulatory friendly environment in the state of
Arizona. An innovative financial product or service is a financial product or service
that includes an innovation (State of Arizona, 2018). The legal explanation for
innovation is "with respect to the provision of a financial product or service or a
substantial component of a financial product or service, the use or incorporation of
new or emerging technology; the reimagining of uses for existing technology to
address a problem, provide an advantage, or otherwise offer a product, service,
business model or delivery mechanism that is not known to the Attorney General to
have a comparable widespread offer in this state" (section ARS 41-5601, 2019).
According to the Arizona Revised Statutes (A.R.S.) "anyone can apply to join the
regulatory sandbox to test an innovation" (section A.R.S. 41-5603, 2019), including
existing Arizona licensees and unlicensed companies. Although the term FinTech is
used on the Arizona Attorney General's home page, in the context of the FinTech
sandbox, the term "FinTech" is not used in the A.R.S.
In July 2018, the United States Treasury released Executive Order 13772 on Core
Principles for Regulating the United States Financial System: “A Financial System
That Creates Economic Opportunity.” Although this report is aimed at FinTech and
emphasizes that services are significantly impacted by rapid technological advances,
rapid digitization of the economy and capital surplus to facilitate innovation, the
term FinTech is not defined. In this report FinTech is explained as "financial
technology" and FinTech companies as "technology-based" (United States
Department of the Treasury, 2018). The Office of the Comptroller of the Currency
(OCC) in its document "Considering Charter Applications From Financial
Technology Companies" defines FinTech companies as "companies offering
products and innovative technology-based services" and may be eligible for a Nazi
bank card onale (The Office of the Comptroller of the Currency, 2018). In late 2018,
following the UK's lead, the Consumer Financial Protection Bureau (CFPB)
launched a unified regulatory sandbox to drive FinTech development. The Bureau's
Office of Innovation has issued a "No Action" letter to Upstart Network, a consumer
lending platform that leverages artificial intelligence, machine learning and
alternative data sources to assess consumer credit and automate the loan. Two
sandboxes have been created, the Compliance Assistance Sandbox and the Trial
Disclosure Sandbox, however the official documents framing the activities of the
sandbox (CFPB, 2018a; 2018b) do not use the term "FinTech".
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7.2 The United Kingdom
In the UK, there is no specific regulatory framework for FinTech firms subject to
financial regulation. FinTech will be regulated like any other company if it provides
services that are regulated activities, such as "traditional" financial services, for
example, payments or loans, or "alternative" financial services such as
crowdfunding. The Financial Conduct Authority (FCA) does not define FinTech
other than "financial technology" but provides structures / guidelines by its nature.
First, FinTech must be innovative. The FCA says innovation should have "real
potential to improve the lives of consumers coming to market in all areas of
financial services" (Financial Conduct Authority, 2019). In 2019, the FCA defines
the following areas of financial service providers:
➢ Banks, construction companies and credit unions;
➢ Claims management company;
➢ Consumer credit company;
➢ Electronic money and payment institutions;
➢ Financial advisors;
➢ Fintech and innovative companies;
➢ Insurance and general protection;
➢ Investment managers;
➢ life insurers and social security institutions;
➢ Lenders and mortgage brokers;
➢ Mutual companies;
➢ Sole consultants;
➢ Wealth managers (FCA, 2019).
Improvement is seen through products that are better suited to customer needs, better
access or lower prices. Furthermore, FCA states that innovation must be offered by
different actors, both in terms of the type of company and the people behind the
development. In the report on "UK FinTech" Treasury of the UK in partnership with
E&Y defines FinTech "as high-growth organizations that combine innovative
business models and technology to enable, improve and discontinue financial
services" (Treasury of the United Kingdom and Ernst & Young, 2016). This report
also identifies the key characteristics and emerging areas of FinTech innovation.
In particular, the UK has developed an innovative policy strategy to improve the
country's competitiveness as a global destination for FinTech. In 2014, FCA
launched the “Project Innovate” with the aim of encouraging innovation in financial
services for consumers by supporting innovative companies through a range of
services. One of the activities is the regulatory sandbox that allows businesses to test
innovative offers on the market with real consumers. The sandbox is open to
licensed and unauthorized companies requesting membership and to technology
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companies seeking to provide innovation in the UK financial services market (FCA,
2019). According to the FCA, any company can be considered a FinTech if it is
interested in providing innovation on the condition that it is a regulated business or
that it supports regulated business in the UK financial services market.
In 2019, with the active support of FCA, the Global Financial Innovation Network
(GFIN) was launched, an international network of regulators working together to
share knowledge and create an environment in which companies can experiment
with cross-border solutions. Of the 12 founding members, GFIN has grown rapidly
to cover a network of 35 organizations.
7.3 Singapore
Singapore is the leading FinTech economy in the ASEAN region and is recognized
around the world as a good example of the balance between FinTech support and
restrictive rules. As in other countries, even in Singapore there is no detailed
regulatory framework for FinTech companies. FinTech companies need to acquire
the right licenses that match their business models, while some FinTech business
models may require multiple licenses based on the services they offer. FinTech
companies are primarily financial institutions, regulated by the Monetary Authority
of Singapore (MAS), but the latest trends include the rise of non-financial
technology players in the FinTech area. One of the tasks of the MAS is to promote
FinTech innovation and make Singapore an international hub for FinTech.
Singapore's ambition is to be a smart nation and the financial sector is seen as one of
its integral parts.
In 2016 MAS launched the FinTech regulatory sandbox. According to the
guidelines, the applicant can be a financial institution, a FinTech firm, a professional
services firm that collaborates or provides support to such activities or any interested
company that can experiment with innovative financial services in a production
environment, but at the interior of a clearly defined space and duration. The
emphasis is on the use of innovative technologies to provide financial services that
are regulated or may be regulated by MAS (MAS, 2016). Additionally, the express
sandbox was launched in 2019 to complement the current regulatory sandbox. The
sandbox express, in the first phase, covers the following activities regulated by the
MAS:
➢ carry out activities as an insurance intermediary;
➢ establishment or management of an organized market;
➢ remittance activities (MAS, 2019b).
Under the Proof of Concept (POC) scheme of MAS Financial Sector Technology
and Innovation (FSTI), which provides financial support for the experimentation,
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development and dissemination of nascent innovative technologies in the financial
services sector, two types of companies are eligible for the application:
➢ a financial institution with MAS license in banking, capital market, financial
advice, insurance and money exchange and remittances;
➢ a technology or solution provider (artificial intelligence, API, blockchain /
distributed ledger technology (DLT), cloud, cybersecurity, digital ID and e-KYC and
regtech) with at least one licensed financial institution as a partner (MAS, 2019a).
This program supports two activities:
➢ Projects aimed at giving life to a new concept to solve problems at the sector
level using technologies or business processes;
➢ Tests aimed at the final response to the regulatory uncertainty on the risks and
benefits of replacing obsolete processes with innovative ones.
The government of Singapore is actively cooperating internationally with the
authorities and regulatory bodies of other countries, both globally as a member of
GFIN, and regionally as a member of the ASEAN Financial Innovation Network
(AFIN).
7.4 China
There is no specific legislative framework for FinTech companies in China. In 2015,
China's central and industry regulators jointly published Guiding Opinions on
Promoting the Development of Internet Finance (Guiding Opinions). This is the first
global government regulation on internet finance in China. The concept of Internet
Finance was born thanks to China's interest in promoting the “Internet Plus”
strategy in all sectors and, therefore, has unique characteristics.
However, the concept of Internet Finance is the same as the concept of FinTech and
both can be used to describe new technologies in financial services. In accordance
with the guiding opinions, Internet finance consists of:
➢ payment via the Internet;
➢ Online loan;
➢ equity crowdfunding;
➢ sale of funds on the Internet;
➢ Online insurance services;
➢ Internet Consumer Finance (PBOC, 2015).
The Chinese government provides a supportive legislative framework for FinTech
firms, for example, by assisting financial institutions, internet firms and e-commerce
firms in building innovative internet platforms, selling financial products and
effectively expanding supply chain operations of e-commerce businesses for the
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above categories. In addition, China's policy includes preferential tax policies for
FinTech businesses, for example, the reduction of corporate income tax from 25% to
15% or even exemption from it and state subsidies. In general, China's legislative
environment has been quite flexible compared to other countries, but disruptions and
failure in the FinTech industry are leading the government to enforce stricter
requirements for regulating the industry.
New types of FinTech businesses have also sprung up in China, such as the
provision of risk management services driven by big data and artificial intelligence,
as well as blockchain technology and business services. FinTech business in China is
governed by various administrative measures and guidelines, with leading
supervisory authorities such as China Banking and Insurance Regulatory
Commission and People's Bank of China.
7.5 Australia
Furthermore, in Australia, there is no specific legislative framework for FinTech
companies. FinTech companies must acquire licenses that match their business
models. Generally, it includes financial services and consumer credit licensing,
registration and disclosure obligations, consumer law requirements, and
requirements for combating money laundering and terrorist financing. In general, a
company must obtain an Australian Financial Services License (AFS) or an
Australian Credit License (Credit License) from the Australian Securities and
Investments Commission (ASIC) before it can release a new financial product or
service or undertake a credit activity.
According to the Australian government, FinTtech is concerned with "stimulating
technological innovation so that markets and financial systems can become more
efficient and be more consumer-focused" (The Australian Government, 2016). The
government launched the National Agenda for Innovation and Science (NISA) in
2015 in order to provide the right policy parameters to improve the economic and
financial environment. Additionally, the Australian Securities and Investments
Commission (ASIC) Innovation Hub provides practical support to FinTech and
RegTech firms. According to the ASIC, FinTechs are new and innovative
companies.
For example, in the Australian regulatory sandbox, it is possible to test products and
services without owning a license, if the company can rely on the ASIC FinTech
license exemption, provided by the ASIC Corporations (Concept Validation
Licensing Exemption) 2016/1175 tool (ASIC, 2017) and ASIC Credit (Concept
Validation Licensing Exemption) Tool 2016/1176 (ASIC, 2016a). The FinTech
license exemption, which facilitates experimentation with new FinTech services to
provide advice and deal or distribute products, applies in relation to:
➢ listed or listed Australian securities;
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➢ bonds, shares or bonds issued or proposed to be issued by the Australian
government;
➢ simple managed investments;
➢ deposit products;
➢ some types of general insurance products;
➢ payment products issued by ADI (an authorized institution for the collection of
deposits, a company authorized under the Banking Act 1959, including, banks,
construction companies and credit unions (ASIC, 2016b).
Anyone has the right to seek exemption from a FinTech license to provide financial
services if they are not prohibited from providing financial services and are not
licensed for Australian Financial Services.
7.6 Switzerland
In Switzerland, the legal framework refers to FinTech according to the principle of
technological neutrality, applying the same legislation to companies that use
traditional or innovative technologies. FinTech can be regulated by the Swiss
Financial Market Supervisory Authority (FINMA) or by self-regulatory bodies,
depending on the business activity:
➢ the company that accepts public deposits will be governed by the banking law
(Die Bundesversammlung der Schweizerischen Eidgenossenschaft, 1934);
➢ financial intermediary, which involves payments, individual portfolio
management or lending activities under the Money Laundering Act (Federal
Assembly of the Swiss Confederation, 1997);
➢ management of investment funds by the law on collective investments (Federal
Assembly of the Swiss Confederation, 2006);
➢ securities from the stock exchange law (Die Bundesversammlung der
Schweizerischen Eidgenossenschaft, 1995);
➢ insurance under the Insurance Supervision Act (Die Bundesversammlung der
Schweizerischen Eidgenossenschaft, 2004);
➢ other acts may be applied such as consumer credit law or data protection law etc.
In July 2019, the Swiss parliament introduced a new category of licenses. FinTech
companies, which apply to all business models that accept public deposits up to CHF
100 million, without participating in any loan operation, i.e., without investing or
pay interest on deposits. Additional requirement is that an institution with a FinTech
license must be a joint stock company, a company with unlimited partners or limited
liability and, in addition, it must have its registered office and conduct its business
activities in Switzerland (FINMA, 2018). The purpose of the new license is to
incentivize innovative business models, so the licensing approach should not be
based on a specific type of static business model. FinTech companies, depending on
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the business model structure, can act as payment service providers or as
cryptocurrency custodians or as crowdlender etc.
In 2019, the Swiss government and parliament continue to work on the regulatory
sandbox, amending the provisions regarding the sandbox, allowing non-banks to
invest deposits received up to CHF 1 million in the sandbox. But operating in the socalled interest rate differential business is prohibited and remains a privilege of
banks (FINMA, 2019).
7.7 The European Union
Until now, the EU, apart from the UK, has lagged far behind major FinTech
economies such as the US, China, Singapore and Switzerland. Furthermore,
according to the hub ranking of the Institute for Financial Services Zug FinTech in
2018, only Amsterdam (5th place) and Stockholm (7th place) were present in the
global top 10 of FinTech hubs (IFZ, 2019). The European Parliament's FinTech
report reveals that more than half of the top 10 FinTech companies are located in the
US, China and Israel and that Europe needs rapid innovation to stay competitive
(European Parliament, 2017). This is one of the reasons why the EU is trying to be
proactive and the European Commission in 2018 adopted the FinTech Action Plan
for the development of a more competitive and innovative financial sector in Europe.
The main aim of the plan is to increase supervisory convergence towards
technological innovation and prepare the EU financial sector to benefit from new
technologies. The definition provided by the European Commission in the FinTech
action plan is the following: "FinTech - Technology-enabled innovation in financial
services" (European Commission, 2018). The EC uses the definition provided by the
international financial organization, the Financial Stability Board, to explain more
specifically what FinTech is, to paraphrase it slightly. "FinTech is a term used to
describe technology-enabled innovation in financial services that could lead to new
business models, applications, processes or products and that could have an
associated material effect on financial markets and institutions and how financial
services are provided" (European Commission, 2018).
According to the definition of the European Parliament, FinTech should be
understood "as financing enabled or provided through new technologies, covering
the whole range of financial services, products and infrastructures" (European
Parliament, 2017). It also includes InsurTech and RegTech. EU institutions are
working to create a more future-oriented and innovation-friendly regulatory
framework that covers digitization and creates an environment in which innovative
FinTech products and solutions can rapidly spread across the EU to benefit from the
huge European single market. The idea behind this is to reduce regulatory
requirements for the FinTech industry without compromising financial stability or
protecting consumers and investors. For example, the Payment Services Directive
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(PSD2), which entered into force in 2018, is a step forward in a more favorable legal
environment.
All new EU legislation should focus on the "innovation principle". The EP stresses
that, in order to prevent regulatory arbitrage in Member States and legal states,
legislation and supervision should be based on the following principles:
➢ Same services and same risks: the same rules should apply, regardless of the type
of legal entity concerned or its location in the Union;
➢ technological neutrality;
➢ A risk-based approach, which takes into account the proportionality of legislative
and supervisory actions to the risks and the significance of the risks (European
Parliament, 2017).
Positive results are already visible, according to the CBI Global FinTech report for
the second quarter of 2019, Europe surpasses Asia as the second market for FinTech
transactions and financing in the first half of 2019 (CB Insights, 2019).
8. Fintech Business Models
According to a recent Accenture report (2016a), more than $50 billion has been
capitalized in nearly 2,500 companies since 2010, as these Fintechs redefine the
ways people store, save, borrow, invest, spend and protect money. Six Fintech
business models activated by the growing number of Fintech startups have been
identified, payment, wealth management, crowdfunding, loan, capital market and
insurance services. The value propositions, operating mechanisms and key Fintech
companies in each model are outlined below.
8.1 Payment Business Model
Payments are fairly straight forward compared to other financial products and
services. Fintech companies that focus on payments are able to acquire customers
quickly at lower costs and are among the fastest in terms of innovation and adoption
of new payment features. The two markets for payment fintechs are: (1) consumer
and retail payments and (2) wholesale payments. Payments are one of the most
widely used retail financial services on a daily basis, and also one of the least
regulated financial services. According to BNY Mellon (2015), consumer and retail
payment fintechs include mobile wallets, peer-to-peer (P2P) mobile payments,
foreign currency, real-time payments, and digital currency solutions. for customers
looking for simplified payment in terms of speed, convenience and multi-channel
accessibility.
Mobile payment services that can be conveniently and securely deployed on mobile
devices are a popular business model. The approaches to mobile payments are not
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limited to telephone billing, Near Field Communication (NFC), barcode or QR code,
a credit card on mobile websites, a card reader for mobile phones and direct mobile
payment without using a card credit companies (Li, 2016).
The most popular NFC-based mobile payment applications are Google Wallet,
Apple Pay and Samsung Pay. Another popular payment business model is P2P
payment services. Users can pay each other back with apps like PayPal and Venmo
for free.
8.2 Wealth Management Business Model
One of the best-known wealth management fintech business models are automated
wealth managers (robo-advisors) who provide advice. These robo-advisors employ
algorithms to suggest a mix of assets to invest in based on the client's preferences
and investment characteristics (Ask the Algorithm, 2015). This business model
benefits from demographic changes and consumer behavior that favor automated
and passive investment strategies, a simple and transparent pricing structure and an
attractive unitary economy that allows for low or no investment minimums (Holland
FinTech, 2015). A survey by the CFA Institute in April 2016 found that most survey
respondents are more concerned about the disruptive characteristics these fintech
companies would have in the wealth management industry (Sanicola, 2016). Wealth
management fintechs include Betterment, Wealthfront, Motif and Folio.
8.3 Crowdfunding Business Model
Crowdfunding fintechs allow networks of people to examine the creation of new
products, media and ideas and are raising funds for charity or venture capital
(International Trade Administration, n.d.).
Crowdfunding involves three parties, the project promoter or entrepreneur in need of
funding, contributors who may be interested in supporting the cause or project, and
the moderating organization that facilitates engagement between the contributors and
the promoter. The moderating organization allows contributors to access information
on various initiatives and funding opportunities for product / service development.
Reward-based, donation-based and share-based crowdfunding are the best-known
crowdfunding business models.
Reward-based crowdfunding has been an attractive fundraising option for thousands
of small businesses and creative projects. In the event that there is interest to be
charged on the premium-based crowdfunding amount, the borrower sets the interest
rate he is comfortable with and can guarantee a repayment within the defined time
period (Mollick, 2014). In exchange for a fund from the backers of a project, the
company usually offers a reward. Donation-based crowdfunding is a way to raise
money for a charity project by asking donors to contribute money to it. In a
donation-based crowdfunding, the lender receives nothing more than some form of
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non-monetary rewards. Share-based crowdfunding is an attractive option for small
and medium-sized enterprises (SMEs) as higher capital ratio requirements for
traditional banks make lending to SMEs less essential than traditional banks. Sharebased crowdfunding allows entrepreneurs to reach investors interested in having
shares in their startup or other small private business.
The key difference between stock-based crowdfunding and other types of
crowdfunding is that in stock-based crowdfunding, entrepreneurs looking for funds
grant a portion of the ownership in exchange for the funds. Examples of rewardsbased crowdfunding companies include Kickstarter, Indiegogo, CrowdFunder, and
RocketHub. Donation-based crowdfunding companies aimed at raising funds for
charitable causes include GoFundMe, GiveForward, and FirstGiving. Stock-based
crowdfunding companies include AngelList, Early Shares, and Crowdcube.
8.4 Lending Business Model
P2P consumer lending and P2P commercial lending are another major trend in
fintech. P2P lending fintechs allow individuals and businesses to lend and borrow
with each other. Through 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 difference from a bank is that these fintechs aren't
technically employed in the loan itself, as they are matching lenders to borrowers
and collecting fees from users. Due to this distinction, P2P lending fintechs
nowadays do not need to meet the capital requirements that affect the total loan
amount, while banks have become increasingly limited in the loans they engage in
(Williams-Grut, 2016).
Fintech innovation in lending is found in the use of alternative credit models, online
data sources, price risk data analysis, fast lending processes and lower operating
costs. However, the success or failure of this business model generally depends on
how interest rates behave, something that companies have no control over. P2P
lending and crowdfunding serve a different purpose. While the basic purpose of
crowdfunding is project financing, the primary purpose of P2P lending is debt
consolidation and credit card refinancing (Zhu, Dholakia, Chen, and Algesheimer,
2012). Lending fintechs include Lending Club, Prosper, SoFi, Zopa, and RateSetter.
8.5 Capital Market Business Model
New fintech business models take inspiration from a full range of capital market
areas such as investing, foreign exchange, trading, risk management and research.
An encouraging fintech area of the capital market is trade. Trading fintechs allow
investors and traders to connect with each other to debate and share knowledge,
place orders to buy and sell commodities and stocks, and monitor risks in real time.
Another area of capital market fintech business models is foreign exchange
transactions.
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Foreign exchange transactions have been a service dominated by financial
institutions. Fintechs reduce barriers and costs for individuals and SMEs transacting
in foreign currencies around the world. Users can see prices in real time and send /
receive funds in various currencies securely in real time, all via their mobile device.
The fintechs that offer this service are able to do so at a much lower cost, through
payment methods that are much more familiar to individual customers or businesses.
Capital market fintechs include Robinhood, eToro, Magna, Estimize and Xoom.
8.6 Insurance Services Business Model
In insurance fintech business models, fintechs work to enable a more direct
relationship between the insurer and the customer. They employ data analytics to
calculate and match risk, and as the pool of potential customers increases, customers
are offered products to meet their needs. They also simplify healthcare billing
processes. The insurance fintech business model appears to be the most well
embraced by traditional insurance providers. The technology allows insurers to
expand their data collection to non-traditional sources to complement their
traditional models, improving their risk analysis. Insurance services fintechs that are
revolutionizing the insurance industry include Censio, CoverFox, The Zebra, Sureify
Labs and Ladder.
9. Conclusions
This article has illustrated the evolution of fintech through three major areas,
culminating in today's FinTech 3.0 which is characterized by new competition and
diversity, thus highlighting the need to consider both opportunities and risks.
In developed markets, this shift to FinTech 3.0 emerged in 2008 and was driven by
public expectations and demands, the movement of technology companies in the
financial world, and political demands for a more diversified banking system. After
talking about the evolution, some of the main definitions of this phenomenon have
been provided both nationally and internationally.
Finally, six main fintech models were analyzed, payment, wealth management,
crowdfunding, loan, capital market and insurance services.
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