Fintech

When was Fintech 1.0? Its function?

- (1886-1967) - was built to support globalized fin. transaction, move the economy from analog to digital.

When was fintech 2.0? Its function?

- (1967-2008) 1. A switch from analogue to the digitalization of finances led by traditional financial institutions. 2. What we have studied so far. 3. FI took the initiative in fin. innovation. Banks adapting quickly to new tech & successfully evolved. 4. Banks received various guarantees from the government that pp considered it too-big-to-fail. 5. Entry barriers were set by the government, so banks gain trust & loyalty from pp.

When was Fintech 3.0? Its reason to be made?

- (2008-2014) 1. The Subprime Mortgage Crisis changed pp's perception of banks & regulatory. 2. Start-up firms challenged banks & unbundle them. 3. Even though other industries (energy, utility, transportation, retail) went through significant changes, the fin. services industry had been excluded from severe disruption until the early 2010s. 4. Robo advisor, blockchain, Peer-to-peer lending, equity crowdfunding & payment possibilities are the major areas in fintech.

Why did middle-class shrink?

- As workers' wages increases, they were failed to keep up vs the rising cost of housing, education & healthcare. - Suffered from a declining share of national income during the crisis.

Regulatory costs?

- Banks & FinTech firms face different regulatory costs for similar activities bc they are subject to different regulations. For ex, banks have to make sure they don't help customers engage in money laundering, criminal activities. They have to organize their activities so they don't give the appearance of discrimination. • A good example of where FinTech firms exploit regulatory differences is their use of float. The plan for Libra where funds from users would be invested to pay for currency management & reward the founders. If a bank captures float, it is regulated & has to reserve capital. Float also creates risk for a bank, so that banks have to match highly liquid assets to highly liquid liabilities. Without the advantages of unregulated float, FinTech firms lose a major cost advantage. It is hard to believe that this advantage is permanent. In some countries, like China, this float advantage has been reduced through regulation recently.

Why traditional banking haven't been successfully in reducing inequality gap?

- Bc bank credit has displayed distinct socioeconomic biases. - Shortage of credit comes from lack of pp's physical access to bank branches. - More barrier for borrowers lack of documentation/ credit history.

Why innovation at large bank can be less profitable?

- Bc it may cannibalize existing activities. - Top managers may only tempted to protect and grow their fiefdoms instead of working for the good of bank.

Difference of FinTech & BigTech?

- BigTech has the customer base to operate a flatform bank that don't rely on existing banks. While, FinTech rely on banks for many of their services like putting cash in accounts, bank lines of credit, bank payment.

Differences between FinTech & banks?

- FinTech innovate rapidly without fearing mistakes, let customers guide them towards better product, focus on maximixing customer experience. Bc digital tech has huge economies of scale, marginal cost of 1 more customer is small. FinTech benefits from no legacy systems, no need to fight vs vested interests, to get bureaucracy's approvals. They can adapted best IT system for the products they wanna create, set up data for what they want to do (which is hard for older firms to innovate) - Banks can imitate but they are more product centric & slower at innovation, bc they are regulated.

Marketplace lending?

- Funding is partly/ completely open to retail investors. - When it's open to public, platform matches borrowers vs pool of lenders (peer-to-peer (P2P) lending). - If to be open to public investors, platform uses its own funds in lending to borrowers - "balance sheet lending" - If lending against account receivables of business borrowers - "invoice trading". - Has grown rapidly in international marketplace but still a small share of crefit markets

Why is it difficult for Millennials to maintain same social benefits to the previous generation?

- Increased in life expectancy, low fertility rate, elderly increased while working age pp decreased. -> lower fiscal revenues/ higher public pensions spending & healthcare. Tigh loan term made it difficult to own house. - Difficult to maintain for government so Millennials need to proactively ensure proper preivate savings as a substitute for lower public contributions.

Why only 19% of citizen in the US experienced income growth between 2005-2014?

- LT structural trend changes - Lowered trade & fin. barriers allow foreigners to enter the domestic eco. - Decreased in low/medium skilled workers replaced by high tech.

Cost of diversification?

- Large bank are large diversified firms. To manage 'em is difficult, but in order to endure the right outcome, policy and precedures are needed, but they are costly and affect firm's ability to respond quickly to changes.

BigTech credit?

- Non-finance corporations vs a critical location in the supply chain that allows them to access digital footprints or borrowers (telecom, Amazon, safaricom) & use that info for assessing credit risk, identify credit demand.

Why there is general shift in consumer behavior?

- Pp didn't like profit-seeking, corporations & intense competition for winning, they prefer "peer-to-peer" based activity of obtaining, giving or sharing access to good & services. - Digital systems & social media has gone mainstream - easier to for pp & organizations to communicate, make transaction. - People flew from rural to urban area. They are suffered from higher prices & small resources. Sharing economy is a good way to deal with their problems - massive potential to reduce fraud & lifestyle stress by developing open source detection techniques. • Banks weren't an efficient to solve these problems under the new post-crisis environments, which helps opening a market for agile, innovative new companies. - Startups unbundled bank's businesses to provide more customized, efficient services, providing service ownership to customers, democratizing the fin. industry.

What is the general mistrust of the banking industry?

- SM crisis changed public perception of banks, pp lost their trust and didn't hold loyalty to banks. - After the crisis, many banks that responsible for the crisis bailed out, was accompanied by the government's decreasing its expenditures on social benefits. - Unemployment rate out of control, national assets were sold off & public services were wiped out. • Goldman Sachs, notably considered to have an extremely close relationship with the Obama administration of the time, received $12.9 billion. • Banks tightened their loan terms, so pp had to suffer severer fin. burdens. Banks examined the indebtedness of individuals. More people were unbanked and couldn't enjoy banking services.

Why banks reduced credits to low & middle class who are in need?

- They are forced to by regulation to enhance safety, soundness and stability of fin. system. -> Pp and small business that don't hold enough collateral get difficulty access to the bank credit.

Post-crisis regulatory reforms?

- Too-big-to-fail • Dodd-Frank Wall Street Reform & Consumer Protection Act was enacted to promote the fin. stability • Banks was slow to respond to the fintech threat. • Banks were more focus on reviewing fin. models & banking operations to prevent future meltdowns, rather than seeking new ways of doing business. • Fintech companies have been targeting 4 key technological areas: AI, cybersecurity, blockchain & disruptive insurance technologies (insurtech) • The most successful fintechs came vs a tech-focused approach - intrinsic to their working methods & the way companies promoted themselves to consumers. • The rise of smartphone also is a major factor of helping fintech services. • Vs Wi-Fi & internet connectivity, the fin. sector will continue to be disrupted by mobile tech. in the years to come.

ETF?

- Type of investment fund & exchange-traded product. Holds assets, operates vs an arbitrage mechanism designed to keep it trading close to its net asset value (NAV) - Most are index funds, hold same securities in same proportions as a certain stock/bond market index. - A significant portion of active managers have underperformed their benchmarks - direct reason why pp get more interested in ETF. - ETF in some extent could replace an asset manager & reduce the fee

Benefits of Robo advisor?

- lower cost structures/ advisory fees/ mutual fund fees -> allow low income pp to access to investment opportunities - greater customer reach - superior ability to monitor/ score risk - more transparent advice than human one - available from any location & convenient

3 reasons why FinTech can be sucessful outside of banking?

1. Banks' regulation 2. Legacy IT 3. Organizational frictions of diversified firms

What are factors which have converged to ensure the wheels of fintech revolution have been set in motion? (7)

1. Mistrust of the banking industry 2. Post-crisis regulatory reforms 3. Financing gap 4. Operational cost reduction 5. Shift in consumer behavior. 6. Evolution of technology (People favor digital technology.) 7. Macroeconomic trends for the past decades.

How LT structural trends played a considerable role in driving inequalities?

1. Trade & fin. barriers declined, foreigners freely enter the labor market -> increase supply for low income labor. 2. Globalization provides cheap goods from China & affect on domestic-manufacturing wages 3. Rise of tech has declined demand for low/medium skill workers, only high skill workers enjoy increasing wage.

Fintech risks?

1. the vulnerability due to rapid, adverse shocks 2. difficult to monitor 3. a lack of guide like traditional FI (common guidance or cooperation difficult) 4. cybersecurity

Golden age of Fintech?

1960 when banks started to use computers extensively & ATM introduction

4 key areas of Fintech?

AI, blockchain, cloud computing, big data (ABCD) - emerged since the Subprime mortgage crisis

Crowdfunding?

Any funding that partly/entirely open to the public. Marketplace lending is the debt component of crowdfunding.

Why the implementation of big data tech can be done vs almost no capital?

Bc the innovation implementation is not capital intensive & not require a pre-existing infrastructure, firms could exploit it and rent facilities at low cost by accessing cloud services.

What is "non-rival"?

Consumption of 1 good doesn't affect the others' consumption.

What is float?

Float is a major source of profits for many FinTech firms. They collect money upfront & use it, generally paying no interest on it

Source of competitiveness of BigTech?

Its platform.

What bank must focus on?

Pp-centric customer service.

Why there's Robo advisor boom to Millenials?

Since baby boomer tend to make poor decision on fin. management. Millennials embrace digital solution vs many options and advisors that is simpler & cheaper such as Robo advisor than hiring an asset management. - Robo advisor is a low-cost alternative to human one, they are online platforms use algorithms to automatically build and manage clients' portfolio. - Clients are benefited by self-directed robo advice on their full weath allocation. - However, the name, robo advisor is misleading. There's no robot here, just simply online services. Today, it's actually cooperate vs banks instead of disrupting them. - It brought operational cost efficiency solution to what is fundamentally a MKT & client acquisition cost problem. And it comes in different forms.

Why freelance contract are increasing?`

The peer-to-peer economy has created jobs with wide range of skills & on flexible basis - which government are unable to create. Increased job competition made workers less able to be selective in the jobs they accept. But freelance job weaken the bankability of young generation, increase risks related to future career/income vs no income security or employee benefit.

Why BigTech firms are possible to understand how goods' demand/ supply work to target ad and offer to customers?

They are organized around 2-sided platforms that they have suppliers & purchasers of goods, their transactions create huge amount of valuable data, which mades it possible to help BigTech firms understand those.

Why BigTech firms have potentially big advantages compared to banks & FinTech?

They have all the technical knowhow/ up-to-date systems that FinTech aspires to. Have the scale large banks have. Neither the legacy nor organizational issues that banks have. Access to data that banks & FinTech don't.

What is Innocation Labs?

a co-working space - both virtual & physical - in which new ideas can be explored, hands-on project management takes place & lessons learned are documented, shared vs the coowning Division.

What is surveillance capitalism?

an economic system centered around the capture & commodification of personal data for profit-making

What is a hackathon?

an event where pp engage in rapid, collaborative engineering over a relatively short period of time such as 24/48 hours.

What is fintech?

the application of new technological advancements to products & services in fin. industry

How Robo advisor works?

• 1. prospective investor. Automated cognitive selfassessment. Client's personalization is important. • 2. investment advice. LT model portfolios. Account aggregation is important. • 3. execution. Money management (in-house or outsourced). Simplification is important. • 4. rebalancing. Reverting to the optimal model portfolios. (rule-based, discretionary, tax-optimal). Autopilot (less emotional trading) is important. •5. performance report. (standard/ event-driven, narrative/digital). Accessibility & engagement are important.

BigTech?

• Big techs are major tech companies vs market established presence for digital services (ex. Amazon, Apple, Microsoft, and Meta). • Big Tech companies have been criticized for creating a new economic order called surveillance capitalism. • 1 of the most notable developments in recent years is the entry of tech. companies (BigTech, TechFins) vs existing platforms. • BigTech firms can exploit their existing networks & the massive quantities of data generated by them. Then process & use the data including through machine learning models. Bc of their digital nature, their services can be provided at almost 0 marginal cost, they are largely "non-rival."