FinTech

What is micro-investing?

Investing your left over change

What are the ways in which banks are vulnerable to disruption from the Big Tech firms?

1. Speed 2. Change is Hard 3. Legacy System 4. Customer Experience 5. Retail Branch Network 6. Scale 7. Margin Compression

What are the main properties of "disruptive innovation"?

1. Starts with a fringe or underserved market 2. Begins by avoiding head-on competition with incumbents 3. Starts off with lower profit margins 4. Experiences limited success or failure early on 5. Incumbents may not respond immediately 6. Eventually expands product offerings to move up market 7. Eventually displaces the incumbent

What are the "Seven Sources of Innovation"?

1. The unexpected 2. Incongruities 3. Market/Industry Infrastructure 4. Demographics 5. Process Need 6. New Information 7. Changes in Perception

Are robo-advisors disruptive?

YES- Tapped into fringe market, may not initially be attractive to mainstream, avoids head-on competition with incumbents, starts out with lower profit margins, haven't seen them completely displace incumbents though

Venmo: Disruptor? Why?

Yes, they check off many boxes: started with fringe market, expanded to offering more products by evolving into the payments space

What is an example of traditional banks responding to the FinTech payments innovation?

Zelle- Owned by 8 big banks and licensed out to many other retail banks

How have tech companies in China entered Digital banking?

- WeBank by Tencent - MYBank by AliBaba

What is PSD2? What is the relation to "Open Banking"?

"Payment Services Directive 2" An EU directive to regulate payment services and providers so that they can compete with traditional banks. The goal is to offer more financial transparency to clients and offer consumer protection.

What is Blockchain?

"World-Wide Ledger" serves as public ledger for cryptocurrency transactions, authenticated by data miners

Lending Tree: What type of lending company is it? How have they innovated? Organic or Inorganic?

- Online Exchange - Innovated Organically and inorganically through 8 patents and aquisitions of many companies - expanded products to include auto loans, home loans, student loans, etc.

What are the biggest features in the value proposition in FinTech companies in the payments space?

1. Convenience & Security 2. Moving towards a cashless society

What are two ways traditional financial institutions are getting into cryptoassets?

1. Exchanges 2. Central Bank Digital Currencies

What is the "three-legged stool" that Mr. Brady talked about?

1. Founders/Start-ups 2. Investors/VCs 3. Corporates

What are the 3 driving trends of innovations in payments technology?

1. Globalization 2. Digitalization 3. Regulation

What is the "four party" model of payments?

1. Issuing Bank 2. Acquiring Bank 3. Consumer 4. Merchant

What are three ways the lending space is innovating?

1. Online Exchanges (Lending Tree) 2. Online Lenders (RocketMortgage) 3. P2P (Marketplace lenders like Lending Club)

What are the areas of the FinTech ecosystem?

1. Payments/Money Transfers 2. Lending/Financing 3. Mobile/Online banking 4. Investment Management 5. "Cutting Edge" -Data analytics, Blockchain, Cryptocurrencies

Sources of financing for start-ups?

1. Seed Financing 2. Angel Investors 3. First round equity (Series A- Typically VC) 4. Additional rounds of equity (Series B, C, ...) 5. Capital Markets 6. Mezzanine Financing 7. Exit Strategy

What is a smart contract?

A commuter protocol that facilitates, verifies, and enforces a contract between two parties without requiring a third party.

How can you measure inorganic innovation?

Acquisitions and licensing agreements

What are two examples of digital banks here in the U.S.?

Ally Bank (GMAC divestment) Synchrony Bank (GE divestment)

How do robo-advisors find the right risk-return profile for investors?

Asks investors multiple personality questions and uses algorithms to gage their risk preferences.

What are "robo-advisors"?

Automated web-based wealth management platform that constructs and manages portfolios for individuals based on their specific risk preferences using sophisticated algorithms.

What asset manager acquired FutureAdvisor?

BlackRock

What is the difference between Wealthfront and Betterment?

Wealthfront is strictly focused of technology-driven solutions, specifically the use of AI

What is "disintermediation"? Give an example with FinTech firms.

Disintermediation is the economic phenomenon in which the "middle man" or intermediary is bypassed. Robo-advisors and digital banks are great examples.

Why can adding assets to a portfolio actually reduce the total risk?

Diversification through correlation (uncorrelated assets)

What new technologies appear on the horizon in the payments space?

Facial recognition & other biometrics (retinal, thumbprint scanners) Also, Blockchain

What is FinTech?

FinTech is Financial Technology. Specifically, it is the implementation of new technology to financial solutions for both individuals and firms. It is still in its infancy stage and does not have a widely used definition. It forces firms to rethink their business models.

What does "GAFAMA" stand for?

Google, Amazon, Facebook, Apple, Microsoft, Ali Baba (Ant Financial)

Potential exit strategies for FinTech firms?

IPO, Acquisition, closing business

According to Peter Drucker, what is innovation?

Innovation is the implementation of something new. Specifically, it is doing something differently in order to better the outcome (or yield better results) than previously done. "Changing the value and satisfaction obtained from resources by the consumer"

Why is innovation crucial to the growth and sustainability of FinTech?

Innovation is the implementation of something new. Without it, FinTech would not exist. Thus, it is imperative for the growth and sustainability and is the main driver of FinTech.

What is innovative about SigFig?

Innovative growth strategy: Licensing out their technology to big banks (UBS, Citizens Banks, Wells Fargo)

What type of innovation is a corporate investing in FinTech firms?

Inorganic Innovation

What does it mean that regulatory barriers are a "double edged sword"?

It is difficult for FinTech companies to gain entry into the market because of the regulation barriers, hindering the competition for traditional banks. However, it is also harder for traditional banks to expand their business plan to include moire tech-driven applications.

What is the primary algorithm that underlines "robs-advisors"?

Mean-Variance Optimization by Harry Markowitz in 1952

MasterCard: Give examples of organic and inorganic innovation?

Nearly 3,000 patents 2012-2014: Invested and acquired NFC-technology from the company C-SAM - Shortly after they rolled out "MasterPass"

Is p2p sustaining?

No, disruptive- Checks many boxes

Shape of Mean-Variance space? What is least risky portfolio called? What is the part of the curve called that lies above this point?

Parabola, Global Minimum Variance, Efficient frontier: part of graph that offers as good or better return for little or less risk

How can you measure organic innovation?

Patents

What is a unicorn?

Private start-up valued at over $1 billion

Rocket Mortgage: Who owns them? Sustaining innovation?

QuickenLoans, Online lender, sustaining

How have FinTech firms disinter mediating in lending markets?

Rely heavily on data analytics, cutting out middle man by utilizing technology driven platforms

How have lending FinTech companies started to reintermediate?

Shifting towards a new form of intermediary by collecting transaction fees and pooling together loans, securitizing them, and selling to institutional investors.

How have payments systems evolved over the past two generations?

Started with carbon copy credit cards that could take days to appear in the receiving account. Now we have immediate digital transfers and single service POS.

What is Stablecoins?

Subset of crypto assets that are backed by a real asset (Tether: backed by $USD)

Is MasterCard sustaining or Disruptive? Why?

Sustaining- They don't check disruptive boxes

Capital One: Disruptive or sustaining? Why? Mix of organic and inorganic innovations?

Sustaining- They entered retail banking in early 2000s, extending their product offerings throughout their life without causing disruption. Nice portfolio of patents and multiple acquisitions of retail banks and cyber security companies have allowed them to become a dominant company in tech innovation.

What is a challenger bank? Where are they mostly located? Two Examples.

Tech-driven retail bank, created either as a start-up or a divestment from larger banks that use innovative systems and products to appeal to newer generations and directly compete with incumbents. Mostly in UK: Monzo & Revolut

What is it meant by financial intermediary (for a bank)? What are the roles of banks?

The bank is the middle man between borrowers and lenders, specializing in buying/selling financial contracts. Roles include: mitigate asymmetric info, act as delegated monitor, and ability to shift liquidity of assets.

What is Facebook's biggest impediment to entering FinTech at this moment?

The company struggles with the trust of the public.

What role did the financial crisis play in getting the FinTech revolution started?

The crisis led to new regulations and a need for risk management and data collection. This required an innovative ways to address new regulations, leading to FinTech revolution. We are now seeing a disintermediation effect from it.

What is the "objective function" in mean-variance optimization? What are the duals?

The objective function is to maximize expected return, given a limit of variance. The duals are: either maximize expected return or minimize variance

Mr. Brady said that. some of the best start-ups come out of a crisis. Why?

There are fewer jobs in the economy- start-ups are able to recruit highly talented individuals for a good cost