W.
2 - FinTech Overview
Most banks organise their activity for responding to the opportunities and
challenges posed by the digital revolution as a ‘digital transformation (DT)
programme.
Key fintech topics that we will explore over this course:
o The technologies and applications
o Its impact on the operating foundations of incumbent models
o The role of the regulator
o What the future might hold in terms of the way we interact with financial
services organisations
o The media we use as value exchange on both a wholesale and retail level
How fintech came to be and the history of its journey from upstart
to collaborator?
What fintech is, how it came to be, what the implications are for
financial services, and What the future might hold?
There have been solutions to meet the financial needs of those involved in trading.
The technology of the day has been there to provide a solution to the financial
needs of the population.
In ancient times, may have been started with grains and shells, then to coins and
notes, electronic transfers/payments, plastic debit/credit cards, ATMs, and
culminating in digital or cryptocurrencies and fiat (government-backed) options.
The aim has always been to use technology for the mutual benefit of both
the customer and the financial service provider
It is the same when considering fintech and it is in the fintech DNA for technology to
be used to meet the financial needs of its users. The fundamental nature of
financial technology (fintech) is to utilize technology to address and
satisfy the financial requirements of its customers.
Financial services drastically transformed due to:
1. The introduction of smartphones in 2007, enabling constant financial access.
2. The 2007–09 financial crisis, which decreasing public trust in traditional
institutions (Spillover Effect).
3. Limited funding access for specific segments, such as SMEs.
4. The rise of the millennial generation who prioritize usage over loyalty.
Customers' ability to carry a bank in their pocket and their preference for providers
based on cost, transparency, and speed, along with investors seeking returns in a
near-negative interest rate environment, such as: Switzerland, Sweden and
Denmark, led to the emergence of fintech and alternative finance in the market
The unique characteristics, size and breadth of the global fintech
ecosystem and the implications, challenges and opportunities for
incumbents in financial services
The combined will, technological, political and financial power of these
institutions and organisations allowed intelligent entrepreneurs to
harness technology to:
Create operational efficiencies
Open new distribution channels
Raise capital from investors driven by who had the fear of missing out
Gain stakeholder support
Lobby power from governments (ranging from benevolent (charity)
investment vehicles to industry-specific visas, and support for accelerators
and incubators to shape, refine and super-charge FinTech’s on to a global
stage).
Initially adversarial, this once nascent group of challengers have evolved to
become adolescent competitors and collaborators with their previous incumbent
foes, setting the scene for symbiotic relationships by prioritising the customer.
Originating in the supportive UK ecosystem the movement has now expanded
worldwide with no signs of this ‘fourth industrial revolution’ slowing down.
Fintech as a Challenger
Regulatory bodies
Treasury departments
Governments
Universities
Accelerator programmes
FINTECH as a CHALLENGER
1. Create operational
efficiencies
2. Open new distribution channels
3. Raise finance
4. Garner support
5. Lobby power from governments
The disruptive impact of fintech on business models in financial
services and the factors behind their evolution
Bricks and Mortar is face-to-face trading and dealings ideology
Instead of using the expensive ‘bricks and mortar’ infrastructure models of a
traditional or incumbent financial institution
Now FinTech’s are built on more streamlined, cost-efficient operating models
that take advantage of technology advances like “factors”:
1. Consumer appetite for speed (Need for Speed)
2. Transparency
3. Hyper-personalisation
4. Lower costs.
FinTech’s offer lower cost cloud-based solutions, versus expensive and inefficient
onsite deployment, and are more modular in construct than incumbents.
5. Demand for omni (multi) channel: seamless shopping experience
6. 24/7 access from providers
FinTechs make use of application programming interfaces (APIs); such as: Social
Media Bots and enterprise software to construct leaner, more agile solutions.
APIs (Application Programming Interfaces): These are sets of rules and
specifications that allow different software systems to communicate and exchange
data.
Example,
A digital bank may set up a marketplace platform, in Java or Java+, offering a
variety of products and services connected to the platform via APIs that take
advantage of the features and benefits of regulations such as Open Banking. This is
an example of a platform model.
Platform model: A digital marketplace that facilitates exchanges between two or
more interdependent parties, which may or may not comprise banking and nonbank
products and services.
Open Banking is a regulatory and technological framework that allows third-party
financial service providers to access customer banking information (with their
consent) through secure Application Programming Interfaces (APIs).
FinTech: Peer-to-Peer Lending and Payment Solutions
Peer-to-Peer and Digital Lending
another example of a platform model using a platform and algorithms to score,
assess and match lenders and borrowers and technology, like artificial intelligence
(AI) and machine learning to generate personalised and embedded offerings to
both individuals and SMEs.
These models are much less expensive to construct and maintain but can be much
more difficult to scale and take longer to reach profitability than a traditional
financial institution.
Other fintech verticals or sub-sectors
1. Payments
2. Remittances
3. Foreign Exchange (FX)
4. Investment (Wealth management and Robo-advisory)
5. Equity Crowdfunding
6. Embedded Finance
FinTech Funding Models
Most FinTech’s are funded through a mix of:
1. Venture capital
2. Platform investing
3. Government-backed initiatives
4. Institutional investors
The difficulty in reaching profitability is a hotly debated topic in the
industry.
FinTech’s Services:
- Digital Payments and Transfers
- Crowdfunding Platforms
- Peer-to-Peer Lending
- Robo-Advisors
- Regulatory Technology (RegTech)
Automation in products or services delivered using the internet,
Reduce or unpacked of different financial services traditionally offered by service
providers like banks and investment banks
FinTech Payment and Transfer Solutions
- Aevapay: Enables quick and safe transactions by allowing deposits from
debit/credit cards or Fawry machines into a wallet.
- InstaPay: Provides real-time access to bank accounts and enables 24/7
instant transfers via mobile devices.
- Paymob: An SME payments platform offering a wide range of solutions
including online payments, digital wallets, mass payouts, subscriptions,
and POS systems.
Common Characteristics of FinTech Business
The key components of a bank digital transformation
programme
Digital Transformation (DT): Key Components
DT starts with a clear vision—often, the goal is to become a tech company operating
in financial services.
Strategy includes defining
1. target customers,
2. understanding their needs,
3. evaluating competitors,
4. identifying potential partners.
Incumbent banks often face constraints due to legacy IT systems, which are
expensive and inflexible. By contrast, some banks still treat ‘digital’ as a project
or a department.
The bank then needs to decide which markets it intends to operate in and study
those markets in detail to define a propositional approach, covering questions such
as:
- Who are our target customers?
- What problems are we trying to solve for the customers?
- What choices do customers have today? Which option do they choose and
why?
- How could we provide a much better solution?
- Who are our competitors and what are their strengths/weaknesses?
- Who could we partner with to deliver our propositions?
- How do we organise ourselves?
Systems renovation can be tackled through a ‘big bang’ core system replacement,
progressive renovation of key processes or the ‘greenfield’ approach
Banks must explore new technologies like machine learning and robotic process
automation to reduce costs and enhance services, which raise the question of
whether to collaborate with third-party specialists for these unfamiliar areas
Big bang system replacement the act of switching off one system at the same
time as turning on the replacement.
Greenfield approach Creating a brand-new system in parallel with running the
existing system and then gradually migrating customers across.
Cultural Transformation in DT
Culture plays a crucial role in DT. Traditional banking culture is typically risk-averse
and hierarchical. Digital banks prioritize empowerment, collaborative approach,
encouraging experimentation and disruptive thinking.
When considering culture in terms of DT, the following points may be
considered:
- clarify cultural principles
- Agile working
- Leadership and board composition
- Staff recruitment and motivation
The Impact of Regulation
Everywhere in the world, there is a debate on whether regulation helps or hinders
innovation in fintech and financial services.
FinTech’s often operate under multiple regulators depending on the jurisdiction.
Regulators are increasingly engaging early via sandboxes, enabling product
experimentation with oversight
Depending on jurisdiction, an organisation could be under any number of regulators
playing their role in evaluating, assessing, monitoring and guiding fintech solutions
to protect the public, open new commercial corridors for regulated entities that
enter the space, and educate consumers as to what is on offer and the implications
for interacting with fintech products and services
When fintech gained momentum around 2012/2013, most regulators were unaware
of these new companies' offerings, business models, potential consumer impacts,
and appropriate regulatory measures. Initially, the regulators were catching up, but
it developed into a mature relationship through mutual learning.
Example:
Regulators are now able to get involved in the product development stage via
sandboxes
Sandbox: Virtual layers between banks of all sizes/types and the fintech solutions
that they consider possible partners. A sandbox provides a space to experiment and
test new or improved products and services, while giving the regulator oversight
Risk Factors in Digital Banking
1. Lack of knowledge of new technologies
2. Dependence on third parties
3. Adaptability
4. Cybersecurity threats
5. Cultural shifts in recruitment and governance
6. Need for adaptive governance models
1. Traditional banks may be unfamiliar with the digital initiatives that raise new
types of risk (Lack of Knowledge)
2. The increased use of outsourcing and dependency on third parties requires
radical new risk models (Dependability)
3. The stakes are further heightened by the growing and constantly changing
threat of cyber-attacks (Security Issues)
4. Culture change drives a distinctive set of risks- how to recruit, retain and
motivate new types of staff working in new ways (Cultural Threat)
5. Reducing the cycle time of innovation from years and months to days and
weeks requires fresh approaches to governance (Adaptability)
6. When operating with largely autonomous business units, newme chanisms
are required to provide guard rails without stunting creativity (Integration)
How digital financial services is evolving in emerging
markets
These mobile money schemes evolved an operating model, which uses an omnibus
corporate bank account to hold the aggregate of customer funds in a regulated
bank account, giving the benefits of regulatory overview and connectivity to the
interbank payments system, while also enabling individual user accounts to simply
comprise a record of balances- avoids the overhead of a ‘full-fat’ bank account.
In emerging markets, digital financial services address gaps for the unbanked.
Internal remittances are a major issue.
Mobile money schemes use corporate bank accounts to hold user funds, enabling
regulatory oversight and system integration. Interoperability remains a challenge.
Smartphones reduce barriers to entry and provide access to authentication
capabilities -GPS, microphone, camera, customer experience- multi-language, and a
new source of electronic data, which can be used as the basis for machine learning
for services such as credit
Leading Exponents of DT - The Four incumbent banks
Nordea: Comprehensive services and partnerships across regions.
DBS (Singapore): Transformed with agile training and tech-first mindset.
BBVA (Spain): Active in fintech investments and innovations.
MDI (Egypt): Banque Misr’s digital-native bank initiative tailored to
Egypt’s needs.
Nordea, from the Nordic region of Europe, presents its key DT
initiatives on a single page in its annual report.
The breadth of its activity spans:
1- new services for corporate, SME and personal customers.
2- collaborative initiatives with other banks in the region.
3- collaboration with mobile wallets such as Apple Pay.
4- fintech partnerships and venture investments.
DBS Bank in Singapore embarked on a remarkable transformation
to become a tech company by replacing its entire IT stack from the
ground up and put a huge proportion of its 22,000 staff through
agile training. A ‘dare to fail’ award was introduced to overcome traditional
antipathy towards experimentation and hackathons were used to identify
prospective recruits. The bank claims to have the world’s largest banking API
portal and is striking how much of the drive for this initiative came right from
the CEO
BBVA Based in Spain also a substantial player in North and South America,
the bank’s top leadership has driven an extraordinary amount of activity, with
an active venture capital arm investing in fintechs, acquisitions and a slew of
experimentation. In the early years of the programme, activity was most
visible than outputs, but there is now evidence of the benefits, flowing all the
way down to the bottom line.
Based in Egypt, Misr Digital Innovation (MDI) was created by Banque
Misr- Egypt’s second biggest state lender - as the company responsible for
launching its 1st digital native bank in Egypt. The digital bank aims to create
innovative solutions tailored to serve the needs of the banking customers in
Egypt by giving all Egyptians instant access to the evolving financial
universe, offering them an easy & personalized customer experience, making
their lives simpler and unleashing their financial potential. The launch will
come as part of the central bank of Egypt (CBE) efforts in launching new
regulations for licensing and supervising digital banks 2023, aligning with
global trends in financial technology and catering to the needs of Egyptian
customers.
