Fintech Unit 1

Financial Technology
Unit 1
By : Sapna Kataria
The services provided by FinTech are in collaborations with the mobile network
operators, software and technology providers, mobile device manufacturers, IT
developers (Lee & Shin, 2018; Shim, 2016) with limited regulations by the
government and the regulators (Zavolokina et al., 2016; Leong, 2017; Lee & Shin,
2018; Goldstein et al., 2019). The regulators, government agencies and public
sector entities keep a track of the quality of the innovation, come up with laws
and track sales practices (Au & Kauffman, 2008; Zavolokina et al., 2016;
Anagnostopoulos, 2018; Gomber et al., 2018; Gabor & Brooks, 2017; Ozili, 2018).
This innovation in the f inancial industry has led to cost reduction, high ef ficiency,
rapidity, innovation, f le xibility and improvement in the business processes
(Zavolokina et al., 2016; Lee & Shin, 2018; Thakor, 2020). FinTech also embeds
innovations in f in ancial education and literacy, investments, retail banking and
cryptocurrencies (Gomber et al., 2018). The business models have transformed to
provide customized services to the consumers without geographic or time-zone
barriers as most of the services are automated. In addition, FinTech has helped in
disintermediation (Thakor, 2020) and provided online platforms for trading, lending
(crowdfunding and peer-to-peer, P2P) and asset management, for instance, robo-
advising (Gomber et al., 2018; Alt et al., 2018; Lee & Shin, 2018; Puschmann, 2017).
This intermediation is also achieved by infrastructure development, data analytics,
big data and mobile devices (Lee & Shin, 2018).
The FinTech ecosystem is the complex network of interaction between FinTech
startups, regulators, investors, government and talented institutions with a
common interest in the FinTech startups ecosystem. No specif ic def inition was
found in the literature regarding the FinTech ecosystem. However, various
stakeholders were identif ie d in academics. Banks and other f inancial institutions
have limitations due to high regulations imposed on this industry (Leong, Tan, Xiao,
Tan, & Sun, 2017; Puschmann, 2017; Alt et al., 2018; Goldstein, Jiang, & Karolyi,
2019; Jagtiani & Lemieux, 2018). The f in ancial institutions include insurance
companies, banks, credit grantors and exchanges (Alt et al., 2018; Lee & Shin,
2018). In addition, FinTech is helping its consumers to handle their assets by
themselves by providing them with automated platforms.
These platforms use robo-advisors and are run based on certain algorithms (Gabor &
Brooks, 2017). These are automatic and have replaced wealth and asset managers
(Goldstein et al., 2019; Gomber et al., 2018). On the other hand, bankers are very
interested in FinTech as they may consider having strategic partnerships with FinTech
as a potential strategic direction (Anagnostopoulos, 2018).
What Is the Shadow Banking System?
The shadow banking system describes financial intermediaries that participate in
creating credit but are not subject to regulatory oversight.
Banks play a key role in the economy, underpinning the credit system by taking money
from depositors and creating new credit to make loans. Banks usually have to operate
with plenty of scrutiny from financial regulators in their home countries and around the
world. Shadow banks, often known as nonbank financial companies (NBFCs), can
usually operate with little to no oversight from regulators.
Examples of shadow banks or financial intermediaries not subject to regulation include
hedge funds, private equity funds, mortgage lenders, and even large investment banks.
The shadow banking system can also refer to unregulated activities by regulated
institutions, which include financial instruments like credit default swaps.
•The shadow banking system consists of lenders, brokers, and other credit
intermediaries who fall outside the realm of traditional regulated banking.
•Shadow banking is generally unregulated and not subject to the same kinds of risk,
liquidity, and capital restrictions as traditional banks are.
•The shadow banking system played a major role in the expansion of housing credit
in the run-up to the 2008 financial crisis.
•Even so, shadow banking has grown in size and largely escaped government
oversight since then, posing potential risks to the global financial system.
•FinTech uses big data analytics to better understand the consumers’ behaviours,
needs and demands to come up with the best possible solutions, which were once
done by the big data companies and cloud technology companies (Leong et al., 2017;
Shim, 2016). By the end of the day, FinTech has affected the general public as a
whole, not just the consumers only or small and mid-size enterprises (SMEs) . It
played a vital role in making payments to non-governmental organizations (NGOs)
and charities as it is efficient, fast with low transaction costs as it is not associated
with the bank account.
 DARKER ASPECTS
As per Christensen, (as cited in Au & Kauffman, 2008; Shin & Lee, 2011;
Anagnostopoulos, 2018) when a small company that has fewer resources can
challenge the established business, also known as the incumbent, and continue to
move-up market, the process is called disruptive innovation. As a result, new
business models promise efficiency, security, more flexibility and thus, opportunity
and profitability than the incumbents. As a disruptive innovation, FinTech comes up
with innovative alternatives in terms of product and services and increase
competition in the financial industry (Goldstein et al., 2019). Disruptive innovation has
its issues such as stability, sustainability (Leong et al., 2017) and security . However,
disruptive innovation has the potential for the welfare of consumers and regulators,
supervisors, and the financial service industry in terms of reputation.
Based on Clayton Christensen’s disruptive innovation model, catalytic innovations
challenge organizations by offering simpler, good-enough solutions aimed at un-
served groups. Catalytic innovation shares the same traits as disruptive innovation
but focuses more on social change. Catalytic innovation can be def in ed as the
phenomenon of using technology or innovation, in general, to improve the life of
people and have a social impact. Industry convergence means new connections
evolving between formerly unrelated industries in terms of technology areas,
businesses, work processes, supply chains, and even the entire industry sectors as
a whole. This connection generates innovation and can cause significant disruption.
Industry convergence occurs as technologies, businesses, processes, and
industrie s me rge into e ach othe r till the y are one . FinTe ch applie s ne w
technologies to develop innovative products or services that serve as the solution
for the consumers of the financial industry .
FinTech business models FinTechs offer businesses and individuals financial products
and services using a full-stack business model. Full-stack startups refer to the
startups which have full control over all aspects of the operations. This means that
they have full control over production, distribution and support for their products. The
authors identified the FinTech business models’ value propositions identified by the
researchers in 22 papers with the frequency of each of the identified models. The
data collected is presented in terms of the radar chart in Figure 4.

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