Fintech

Application Programming Interfaces (APIs)

Interfaces between software applications within an organization, and between one organization and another -use standard set of requirements -Interface easy to use -Possible to protect quality

Important attributes of banking services

-Accessibility -Competence -Accuracy -Friendliness -Flexibility -Security -Care -Availability

4. Need for a transparent performance

-Asymmetrical information -Availability of info presented by financial provider

From customers perspective fintechs have Value in

-Being easy to use -Offering faster service -Providing a good experience

What does innovation regard?

-Business models -Channels -Products -Process -Markets -Experiences

Pros of internet and evolution of digital services

-Can expand amount of customers supplied -Reduce transaction costs -With standardization easier to compare things over internet

Recent impacts on financial services industry result from

-Changing technology e.g. cloud, AI, Big data -Deregulation -Mergers -Increasingly demanding consumers -Increased competition e.g. Fintechs

Needs inference: New banking

-Commoditized distribution -Differentiated products (upside down triangle)

Public good

-Good/service providing benefit to everyone -Creates positive externality -Free-riding problem -Under-provision of public goods -> market failure

Financialization process (list 5) (the process by which financial institutions, markets, etc., increase in size and influence)

-High profitability of banks -Increase in lending -Excess leverage and under-capitalization of banks compared to risk undertaken -Systematic under-estimation and underpricing of risks -Internal reward & bonus structure

1. Service provider has implicit fiduciary responsibility !!!!!!

Development of trust/confidence take place after experience and are crucial for long-term relationship

Retail banking

Is the typical mass-market banking in which individual customers use local branches of larger commercial banks

Diversification def

When business develops new products & expands to new market 1. Traditional diversification 2. Diversification by adding more independent risks of given sale

Closed API

Interface that opens parts of an organisation's data and application functionality for use by users within that organization *Internal collaboration

Technologies transforming the industry

-AI -Big data -Distributed computing -Cryptography -Mobile access internet

Customization is

"changing something in order to fit the needs or requirements of a person, business, etc."

The most important wave is how services are

-Conceived -Developed -Delivered

Problems of diversification

-Conflict of interest -Increased complexity -Increased risk-taking -Increase systematic risk (Systematic risk refers to the risk inherent to the entire market or market segment)

Asymmetric information

-Consumers must trust seller's judgement of quality -Consumers rely on info provided by sellers -Can lead to economically inefficient outcomes

Banking incorporates many businesses such as

-Corporate banking/business banking/investment banking More important to fintechs -Retail banking -Private banking -Wealth management

Advantages of fintechs

-Customer base -Ability to forecast evolution of the industry -Knowledge of existing regulations -Not held back by existing systems -Willing to make risky choices

6. Financial services not often purchased frequently

-Customer has little experience to learn from it -Customer lacks confidence -Leads to mis-selling

Current pain points in private banking & wealth management

-Dealing with financial firm is risky & complicated -Impersonal treatment -Customer not in control -Customer gets no help engaging with friends/peers/family

Themes of service innovation (list 4)

-Degree of change -Type of change -Newness -Resources used to operationalize the innovation

Needs inference: Old banking

-Differentiated distribution -Commoditized products (upright triangle)

The different degrees of innovation in FSI

-Disruptive innovation -Radical innovation -Incremental innovation

Dimension (what the Fintech is focused on)

-Dominant technology (IT is driver for business model) -Value proposition -Delivery channel (focus on how g/s distributed) -Customers -Revenue stream -Product/service offering

Imperfect competition

-Due to network effects & economies of scale -Large banks achieve market dominance and high entry barriers -> Suppliers can set excessive prices and provide poor quality (network effects = a phenomenon whereby a product or service gains additional value as more people use it)

Factors leading to financial crisis

-Excess leverage & under-capitalization -Systematic underestimation and underprices of risks -Internal reward structures created bias

Biased market participants

-Financial markets are biased in decision making -Leads to misallocation and price deviation from theoretical equilibrium

Corporate banking aspects

-Formed by shareholders -Governed my banking charter, articles, by-laws etc. -Governed by board of directors

New frameworks for services

-Important of service encounter -Attention to customization and personalization -Achieved through customer data & predictive technology

Aftermath of crisis (list 4)

-Increase regulation -Falling profitability -Update their risk management systems -Faster/more complex market conditions

Fintechs thrived post-crisis due to (list 4 factors)

-Increasingly digitized customer base -Inefficiency and lack of trust in banks -Unexploited market niches -Favorable regulatory framework

3 Sources of market imperfections

-Information asymmetries -Matching asymmetries -Transaction costs

Main results from shift from traditional to modern retail banking

-Large numbers of customers -Variety of products and services -Prices as competitive tool -Cross subsidization pricing policy (charging different types of consumers different prices) -Increasing level of dependency on technology

The FSI provides key services to the economic system (FSI = financial service industry)

-Liquidity and transactions (trading systems for buying and selling) -Matching individuals who have excess funds with those with those who need the them (financial intermediation) -Risk sharing (diversification)

Banking services are: (list 3 qualities)

-Low in search qualities -High in experience qualities -High in credence qualities

Rise of internet and evolution of digital services (3 points)

-Need for upholding your reputation -Need for large funds for role a financial intermediary to transform assets -Distribution of products cheaper & easier

5 characteristics of financial markets for analyzing necessity of government intervention

-Negative externalities -Asymmetric information -Biased market participants -Public goods -Imperfect competition

Financial crisis main results for banks overall (list 5)

-Non-performing loans (NPLs) -Low profitability -High cost-to income ratio -Capital requirements increased -Less resilient business models

Product perspective

-Payment services -Financial fundraising activities -Debt financing -Investment financial activities

Service innovation classifications

-Product innovation -Innovation in the process -Organizational innovation -Market innovation -Ad hoc innovation

Can classify fintechs according to 4 factors

-Product perspective -Dimensionality -Their different modus operandi (particular way of doing something) -Supervisory perspective (if you're supervised and who by)

Managerial consequences of digital technology

-Relationship between providers & customers changing -Economies of scale for 1st time in services -Connectivity and convergence among industries -Technology as source of innovation

Reasons to diversify

-Revenue economies of scope -Cost economies of scope -Risk diversification Economies of scope=a proportionate saving gained by producing two or more distinct goods, when the cost of doing so is less than that of producing each separately.

Key factors considered useful to classify innovation

-Risk are different -Replicability -Defensibility

3. Poor comparability

-Scare number of identifiable attributes

Properties of consumer products influencing consumer behavior (ease of evaluation)

-Search qualities: qualities discerned before purchase -Experience qualities: discerned after purchase -Credence qualities: qualities impossible to evaluate

Financial intermediary aspects

-Serves as financial go-between -Fosters economic development -Acts as community's economic engine

Because of digital technologies

-Service capable of being mass-consumed -Standardized, customized or personalized basis

4 services tech innovation dimensions

-Service concept: new value proposition -Client interface -Delivery system/organization -Technological options

Unique features of financial services (list 6)

-Service provider has a fiduciary responsibility -Low comparability -Need for transparent performance -Long term maturity of some financial services -Rarely one off purchases -Not purchased frequently

What makes innovation possible (list 4)

-Technology -Competition -Demand evolution (attitudes & behavior) -Regulation

The hype of fintechs includes (list 3 qualities)

-Unbundling -Modularity -Re-bundling

3 distinct strategy layers

1. Corporate strategy e.g. overview broad role 2. Main portfolio strategy e.g. business coordination and performance 3. Single line of business strategy e.g peculiarities of each business

Two types of structural diffusion (types of structural reform)

1. Institutional structural reform (diversifying & new players) 2. Market structural reform (Barriers eroded)

Relevant features of services (IHIP factors) IHIP is an acronym commonly used to refer to the four pillars of service research

1. Intangibility 2. Heterogeneity 3. Inseparability 4. Perishability (meaning that unused capacity cannot be stored for future use or sale)

Things to note when evaluating different types of non-interest incomes

1. Look for non-correlated/anti-cyclical activities to stabilize revenue 2. Diversification shouldn't cannibalize other services 3. Should always focus on the customer

Primary functions of retail banks

1. Making payments 2. Saving for future 3. Insure themselves against life's vicissitudes

The private banking/Wealth management business deals with

1. customers (pyramid of wealth) 2. bank offer 3. customer value proposition

Negative externalities

Adverse effects of one entity on other entities -Can lead to market failures -High correlation of financial risk & real economy -Can lead to moral hazard problems

Asymmetric information phenomenon introduced 2 situations

Adverse selection (before the transaction) Moral hazard (after the transaction)

A business is ...

An organization or economic system where goods and services are exchanged -Each business must have a value proposition

Innovation definiton

Anything that is not presently being done, processes of introducing new things, new to your organization

The main advantage for a fintech is the development of a

Application programming interface (API) economy

Why are financial intermediaries useful

Are useful because there are costs in the financial system 1. Transaction costs 2. Information costs

Transaction costs

Costs of buying & selling a financial instrument -Financial intermediaries reduced transaction costs by exploiting economies of scale

Shadow banking

Creation or transfer of bank-like risks outside the banking system

Unbundling phenomenon

Deconstruction of value chains into different modules of products or services and combining them

3 Degrees of innovation

Disruptive innovation: linked to variations in business models & new markets Radical innovation: Focus on long-term impact and may involve displacing current product, altering relationship between customers and suppliers, new products/services Incremental innovation: helps firms stay competitive in short term (help firm stay in the game)

financial services industry (FSI)

Financial institutions that help consumers, businesses, and governments manage money. These institutions can be depository or not. CEHCKKECJA

First vs Second wave of fintechs

First wave: banking as-a-service Second wave: API's

Innovation

Fitting within existing frameworks

How to financial systems work?

INSERT IMAGE

Financial inclusion

Individuals and businesses have access to useful and affordable financial products/services that meet their needs

Fintech defintion

Innovative service, business model or a new-technology start-up in the financial industry

Intangibility applied to financial services

Lack of physical form, Inability to be seen

Finanical services industry are different around the world -in the USA, UK & Asia -in EU

Market based economy in USA, UK, ASIA More bank-based economy in Euro area

Value proposition of modern retail banking

Products: Focus on family saving, particular attention to selling mutual funds. Traditional services offered as well Customers: More segmented according to financial assets Distribution: Branches but also other channels, especially focused to support customers

Value proposition of traditional retail banking

Products: focus on saving, payments & settlements. Less activity in securities & mutual funds Customers: Local & similar among them Distribution: Branch driven

Open API

Publicly available for all developers to access. Allow developers, outside of an organisation's workforce, to access backend data that can then be used to enhance their own applications -Open APIs increase revenue

Rebundling

Re-bundling the financial value chain because of open API's

Disruption

Requirements development of new rules

In digital business there is always a shirt to a ___

Service-centered logic -Value is embedded in the use process -The real core business is the value delivered to customers (more than being customer-centric it means collaborating with and learning from consumers and being adaptive to their individual and dynamic needs)

Services are

Services are problem solving solutions and every company involved in developing services exchanges applied knowledge and skills

Inseparability applied to financial services

Simultaneous production and consumption of services, Leads to co-creation of services

Service module

System of components offering a well-defined functionality via a interface with which a modular service is composed, tailored, customized and personalized

Personaliziation is

The system tailors an experience based on a consumer's previous behaviors

5. Long-term maturity of some financial services

There is no guarantee or warranty attached -Consumers' future welfare dependent on performance of the contract -If firm becomes insolvent during maturity of the contract its value may be lost

2. Rarely one-off purchases

Two-way info flow enables collection of useful info to enhance relationship-building capabilities

Heterogeneity applied to financial services

Variation in quality of service caused by difference in customer's service needs

Vision Strategy Tactics

Vision: overriding idea of what organization should be Strategy: plans deployed to achieve its vision Tactics: specific actions, sequences of actions and schedules a company will use to fulfill its strategy

Benefits expected from modularity

customization & personalization

Banks and banking has moved from _____ APIs to _____ APIs

moved from closed to open APIs

Information costs

the costs that savers incur to determine the creditworthiness of borrowers and to monitor how they use the funds acquired