Fintech Study Guide Quiz 1

The advantages of the establishment of the NASDAQ include which of the following? I. It helped reduce the bid-ask spread.II. It ended fixed securities commissions.III. It led to the proliferation of ATMs.

I and II only

The 2018 Cryptocurrency Crash rocked the crypto market. Experts said that this dramatic drop wasdue largely to the speculative nature of cryptocurrency and point out that cryptocurrency differsfrom money on three main accounts. Which of the following are noted as the main differences? I. Cryptocurrency is not a good means of payment.II. Cryptocurrency is not a good unit of account.III. Cryptocurrency cannot be held as an investment.IV. Cryptocurrency is not a suitable store of value.

I, II, and IV only

Bitcoin and other digital currencies are underpinned by ______ technology, which is an electronicledger or database that records and verifies transactions made using the currency.

distributed ledger

The term ______ refers to the billions of physical devices around the world that are now connectedto the internet, all collecting and sharing data.

internet-of-things

In 2017, former Citigroup chief Vikram Pandit predicted that ______ percent of banking jobs couldbe wiped out by artificial intelligence by 2022.

30

By 2019, global smartphone penetration reached:

66.9 percent.

What is a regulatory sandbox and how have regulatory sandboxes been introduced globally in thepast few decades?

A regulatory sandbox is a framework set up by a financial regulator to allow early-stage fintechstartups to test out their offerings in a controlled environment under the regulator's supervision. Thefirst regulatory sandbox was launched by the UK Financial Conduct Authority in 2015. There arenow sandboxes that are in development across Hong Kong, Australia, Indonesia, Malaysia,Singapore, Switzerland, Thailand, and United Arab Emirates. In 2018, Arizona became the first U.S.state to launch a sandbox.

Why might digital ledger technology (DLT) be beneficial to the financial industry? What impact mayDLT have on transparency? Are there any risks to DLT?

Advantages of DLT include:Reduction in complexity.Improvement of end-to-end processing speed and thus availability of assets and funds.Reduction in the need for reconciliation across multiple record-keeping infrastructures.Increase in transparency and immutability in transaction record keeping.Improvement in network resilience through distributed data management.Reduction in operational and financial risks. DLT may aid in market transparency as information on the ledger is shared with participants,authorities, and other stakeholders. Risks of DLT include:Potential uncertainty about operational and security issues arising from the technology.The lack of interoperability with existing processes and infrastructures.Ambiguity relating to settlement finality.Questions regarding the soundness of the legal underpinning for DLT implementations.The absence of an effective and robust governance framework.Issues related to data integrity, immutability, and privacy.

The OCC fintech charter would do all but which of the following?

Allow non-bank fintech companies to take deposits

Why are some critics cautious of cryptocurrency as a substitute for money? Are their concernsjustified?

As discussed in the text, the general manager of BIS, Agustin Carstens, is skeptical ofcryptocurrencies because they do not fulfill the three purposes of money: to serve as payment, toestablish a unit of account, and to store value. These concerns seem to be justified because thevalue of cryptocurrencies fluctuates so rapidly that it would be difficult to establish an asset's value.Imagine if the price of each item at the grocery store changed value instantaneously throughout theday. It seems that a reduction in speculation regarding cryptocurrency and an increase in stability ofcryptocurrency is needed before it can seriously be considered as a replacement for money.

Which of the following is not one of the advantages that retail banks maintain over fintechs?

Banks are known for having greater agility and a more innovative mindset.

The launch of Marcus by Goldman Sachs is an example of which stage of the evolving relationshipbetween banks and fintech?

Banks developing in-house fintech arms.

BNP Paribas' acquisition of Compte-Nickel is an example of which stage of the evolving relationshipbetween banks and fintech?

Banks taking stake in fintech startups.

______ is a particular type of DLT that organizes data into batches of transactions which are heldtogether in an append-only data structure.

Blockchain

Open Banking standards do all but which of the following?

Eliminate all risk in the online banking system

What measures the fintech users as a percentage of the digitally active population?

Fintech adoption rate

The partnership of Avant and Regions Bank to underwrite unsecured loans is an example of whichstage of the evolving relationship between banks and fintech?

Fintech firms providing technology and infrastructure to banks.

Why has high frequency trading (HFT) lost favor over the past few decades? What implications doesthe HFT evolution have for fintechs?

High frequency trading has enabled very rapid placements of buy and sell orders, with some trades being made in micro-seconds. As of 2005, HFT accounted for 21 percent of all U.S. equity market volume but grew to 61 percent by 2009, before dropping back to only 50 percent by 2018. The recent decrease in HFT popularity led to some companies exiting the market altogether. Proprietary trading companies are finding it increasingly difficult to compete on speed alone and there is little else that can differentiate them. This trend may foreshadow the fintech environment. Because customers have access to many competing companies at their fingertips, fintechs will have to find unique ways to differentiate themselves to avoid facing the same fate as HFT companies.

Which of the following regarding banking-as-a-service is/are true? I. It has restricted the financial transparency options for account holders.II. It is an end-to-end process that allows fintechs and other third parties to connect with banks'systems directly via APIs.III. The process begins with a fintech or other third-party provider paying a fee to access theplatform.

II and III only

Explain the European Union (EU) regulations: Payment Services Directive 2 (PSD2) and GeneralData Protection Regulation (GDPR). How are fintechs impacted by the regulations?

PSD2 is a regulation for electronic payment services. It seeks to make payments more secure in Europe, boost innovation, and help banking services adapt to new technologies. GDPR is the world's strongest set of data protection rules, which enhance how people can access informationabout them and places limits on what organizations can do with personal data. PSD2 has greatly benefited fintechs because it regulates the emerging payment services industry and increases competition by allowing participation of fintechs. The primary purpose of GDPR is to protect consumer data. Heightened protection measures make it easier for fintechs to gain trust amongconsumers. By gaining trust and requiring an opt-in model for data collections, the GDPR willincrease the amount of data available which will benefit fintechs in determining usage patterns andaiding in their development of new products targeted at their consumer base.

Though fintechs are growing in popularity, why might banks still remain relevant in the evolving financial atmosphere?

Retail banks maintain a hold in the industry as a result of three main factors, often referred to as the"big Cs": customers, compliance, and capital. Compared to fintechs, banks have tens of millions ofcustomers, decades of compliance experience and trusted legal teams, and a cost of capital that isclose to zero. Fintech companies are still relatively new and untested. Fintechs also generally havemuch higher cost because of their capital funding structures.

______ are online services that use algorithms to automatically perform many investment tasksdone by a human financial advisor.

Robo-advisors

What is the internet-of-things and what has been the easiest "win" for banks in this area thus far?

The internet-of-things encompasses everything connected to the internet, but, particularly, howthese things talk to each other. It refers to the billions of physical devices around the world that areconnected to the internet and share data. Connecting all of these devices and adding sensors tothem provides digital intelligence and real-time data without having to involve humans. The easiest"win" so far for banks has been in the wearables space. The growth in this space has been hugeand there is relatively low cost for consumers to get started using them. Many banks now offer appsthat are compatible with the wearable devices and some banks have even launched their owndevices.

The financial crisis of 2008 eventually led to the growth of fintech. Which of the following is a truestatement regarding this causal relationship?

The pullback of banks during the crises was due to increases in regulatory burdens andrisk aversion, which allowed new fintech players to enter the marketplace.

Discuss the use cases for artificial intelligence (AI) and machine learning.

There are several potential use cases discussed in the text. They include: FIs and vendors are using AI and machine learning methods to assess credit quality, to price andmarket insurance contracts, and to automate client interaction.FIs are optimizing scarce capital with AI and machine learning techniques, as well as back-testingmodels and analyzing the market impact of trading large positions.Hedge funds, broker-dealers, and other firms are using AI and machine learning to find signals forhigher and uncorrelated returns and to optimize trading execution.Both public and private sector institutions may use these technologies for regulatory compliance,surveillance, data quality assessment, and fraud detection.

Discuss the demand factors that have led to the growth in fintechs.

There are two main demand factors that have led to the growth in fintechs: 1. The increasing prevalence of mobile technology. Smartphones and apps have enabledconsumers to have a bank at their fingertips. It also has led to penetration in countries all overthe world, including developing nations. 2. Changing demographics. Millennials became the largest generation in the labor force as of2016. As a result, the financial, economic, and sociopolitical prominence of the millennials isgrowing rapidly. Millennials have grown up using technology and are optimistic about its uses.

What are the supply factors that have led to the growth in fintechs? Briefly describe each factor andits role in the emergence of fintechs.

There are two main supply factors that have led to the growth in fintechs: 1. The global financial crisis of 2008. The crisis left the brand image of banks fractured. Banksfaced added regulatory burdens and developed heightened risk aversion, leading them toretreat from some lending activities. This allowed newer fintech players to enter the market.Fintechs used innovative technologies that overcame some of the advantages held byincumbent banks. 2. Changing macroeconomic conditions. This was made most evident by the low interest rateenvironment that put downward pressure on profits and increased cost-cutting at incumbentbanks. The use of technology by fintechs helped them to streamline processes therebyreducing costs.

The Payment Services Directive 2 (PSD2) is a European regulation for electronic payments services.The purpose of the PSD2 is to regulate the emerging payment services industry and increasecompetition by:

allowing participation by non-banks.

The application of computational tools to address tasks traditionally requiring human sophisticationis broadly termed:

artificial intelligence.

Since gaining a high level of interest in 2015, the interest in ______ has cooled.

blockchain

The two main monetization strategies of BaaS include:

charging clients a monthly fee and charging a la carte for each service used.

The Financial Stability Board defines fintech as "technology-enabled innovation in financial servicesthat could result in new business models, applications, processes or products with an associated________ effect on the provision of financial services."

material

A ______ is an application that runs exactly as programmed without any possibility of downtime,censorship, fraud, or third-party interference.

smart contract

In 2011, the introduction of Google Wallet (which later became Google Pay) allowed consumers touse smartphones equipped with near-field communication chips to make:

tap payments.