FinTech Ventures and Innovation

FinTech Ventures

• Financial technology companies utilize technology to deliver financial services and products to customers
• Goal to improve efficiency, convenience, and accessibility of financial services
• Aims to challenge traditional financial institutions
• Examples include online payment systems, robo-advisors, peer-to-peer lending platforms, and digital banks

Innovation of Startups vs Banks

• The 2008 economic crisis in the USA / Lehmann Brothers bankruptcy impacted Europe
• Banks focused on cleaning up their own issues rather than innovation due to budget
• Banks pushed away innovation to survive

Relevance of Fintech

• Transforms how financial services are delivered to consumers and businesses
• Fintech companies offer more accessible, convenient, and affordable financial products and services through tech
• Increased competition in the financial sector
• Provides consumers with greater choice and better experiences
• Plays a role in driving innovation and improving financial inclusion, particularly in underserved areas
• Sell products with clear information, unlike banks, which sell the brand with credibility
• Reduced customer prices and broadened consumer choices

FinTech Analysis Framework

• Includes problem, model, impact, regulation, and funding
• Model involves a business model, specifically B2C vs B2B
• Impact involves client, supplier, and competitor relationships with incumbents
• Regulation primarily focuses on European and USA regulation
• Funding involves venture capital money

Relevant Criteria

• Suppliers should provide solutions for banks
• The relationship with incumbents involves selling products
• DeFi has the political idea of no such institution as a bank
• Banks main function is to safeguard assets, DeFi believes in self custody

Risk-Weighted Assets

• Financial assets are assigned a weight or score based on the level of risk associated
• Used by banks and other financial institutions as part of their regulatory capital calculation to meet regulatory requirements and protect against potential losses
• A higher-risk asset will be assigned a higher weight, requiring more capital to be held against it
• A lower-risk asset will be assigned a lower weight, requiring less capital to be held against it
• Calculated using creditworthiness of the borrower, the type of collateral securing the loan, and the volatility of the asset

Tier 1 Ratio of Banks

• Measures a bank's financial strength and stability
• Represents the amount of high-quality capital that a bank holds relative to its total risk-weighted assets
• Includes secure and stable forms of capital like common stock, disclosed reserves, and non-cumulative perpetual preferred stock
• Intended to absorb losses in times of stress and protect depositors and other creditors
• Regulatory bodies set minimum Tier 1 capital ratio requirements for banks to ensure they can absorb losses and continue operating
• Ranges from 4-8%

B2C Fintechs

• Financial technology companies that aim to simplify and enhance traditional financial services using technology
• Offer various services like digital banking, payments, investments, personal finance management, and insurance
• Target underbanked populations
• Examples include Robinhood, Revolut, Square, and Chime

Neobanks

• Digital or online banks that offer financial services exclusively through a digital platform
• Allows them to offer services at a lower cost and reach a wider audience
• Provide a range of services, including personal and business banking, loans, savings and investment products, and card services

Payments for SMEs

• Methods for businesses to accept and make payments
• Fintech companies offer payment solutions specifically for SMEs.
• mPos is a mobile point of sale systems that allow businesses to accept payments using a smartphone or tablet
• Online payment gateways can be integrated with e-commerce platforms
• Invoice financing provides businesses immediate funding based on outstanding invoices
• Virtual terminals allow businesses to accept card payments over the phone or through email
• Electronic funds transfer (EFT) solutions allow businesses to make payments directly from their bank accounts

Alipay

• Offers mobile and online payments, peer-to-peer money transfers, bill payments, micro-lending services, investment products, and insurance products.

M-Pesa

• Enables users to send and receive money, pay bills, and make purchases using their mobile phones
• Provides financial services to people excluded from the traditional banking system, including those in rural and remote areas
• Users deposit cash into their mobile wallets and then use their phones to make transactions
• Allows users to access various financial services, such as savings and credit products, through a network of agents

Advantages vs Regular Banking

• Convenience in terms of growing users or customers
• Digital natives do not need to go to branches as internet changed to a self service system

Super App Logic

• Apps compete for screen time and want to become the go to app
• Customer Centric/Simplicity are necessary
• Regulatory abritrage can be done using Geographic and Institutional forms
• Data-oriented: They target ads based on your projected choices, use data to reveals your true preferences
• Payments are embedded for the future: cashless, back of mind, easy access, data-driven, low cost

Banks Response

• Tap into the market with new similar value propositions by creating new brands
• Ex. Marcus by Goldman Sachs
• Capture Deposits: The idea that deposits are the cheapest liability is very attractive
• Develop innovate apps and be clever regarding the approach of avoid being banks to be less regulated
• People dont change their banks many times, attracting new customers is key
• They can focus on Cross and Upsell on their network
• Upselling encourages a customer to purchase a higher-priced version of the product
• Cross-selling involves offering a complementary product or service to a customer

Neobanks and Payment Companies

• Innovate through marketing through positioning and customer outreach
• No difference in terms of infrastructure but difference in the way they sell it

Pure Transactional Business Models

• Focus on facilitating transactions between buyers and sellers, without taking ownership of the goods or services being exchanged
• Goal to make transactions faster, easier, and more efficient while generating revenue
• Online Marketplaces: Amazon and Ebay
• Payment processing companies: Paypal, Square
• Delivery and logistic companies : FedEx and Ups
• Travel booking websites: Expedia, booking.com

Fintechs (B2C Payments) vs Banks

• Fintechs are Leaner , Faster to adapt, and ahead in customer experience, UX UI
• Banks More structure , More money but lack the IT flexibility
• Solutions involve Fintechs being aquired by banks for simplicity, that banks dont.
• Fintechs becoming banks due to compliance
• Bankrupcy eventually

Marketplaces

• Online platforms that connect buyers and sellers, facilitating transactions between them for a fee or commission
• Provide a centralized platform for buying and selling goods or services, and allow buyers and sellers to interact with each other in a single place
• Lending marketplaces connect borrowers with lenders, providing an alternative to traditional banks
• Investment marketplaces enable individuals to invest in a variety of financial products like stocks, bonds, ETFs, mutual funds, and alternative investments
• Insurance marketplaces offer a variety of insurance products, like health insurance, auto insurance, and enable customers to compare different insurance products
• Payment marketplaces offer payment solutions for individuals and businesses, like credit card processing, mobile payments, and e-wallets
• Foreign exchange (FX) marketplaces provide currency exchange services for individuals and businesses.
• Crowdfunding marketplaces enable individuals or businesses to raise funds from a large number of investors
• Personal finance management (PFM) marketplaces provide tools and services that help individuals manage their finances more effectively

Deposit Marketplaces

• Online platforms that match savers with banks or other financial institutions seeking to raise funds
• Offer savers higher interest rates on their deposits while providing banks and other financial institutions with a source of low-cost funding Equity marketplaces
• Also equity crowdfunding platforms, online platforms connect investors with startups, small businesses, and other companies seeking equity financing

WealthTechs

• Provide technology-driven services for managing personal financial assets.
• Robo-advisors, digital investment platforms, PFM apps, online financial advice
• Automate and streamline wealth management, enhancing accessibility and convenience
• Discount brokerage offers trading services at reduced fees, allows self-directed investment services with revenue from transaction fees, and appeals to investors comfortable making their own decisions

WealthTech Innovations:

• Act as intermediaries in the trading of financial securities and facilitate transactions through a fee or commission
• Discount Brokers provide "Free Trading" services and derive revenue from Price and Oder Book aggregation
• Investment Approaches: Exposure vs. Custody of Assets:
• Revolut as Example, offers commission-free trading, earning through spreads and exchange fees.
• Financial Regulation: MiFID II: EU regulations to increase transparency and investor protection

Lecture 3 – B2B FinTechs

• B2B fintechs provide technology-based solutions to other businesses in the financial services industry such as banks, insurance companies, investment firms

B2B fintechs services

• Payments and processing, compliance and risk management, data analytics, and capital markets
• B2B companies: the enablers" to help other businesses operate more efficiently and effectively
• Issue: Banks were able to incorporate technology to its process and adding technology over technology means complexity.
• B2B companies offer more personalized and targeted services and solutions to their customers

Payment Processors

• Payment processors streamline by cutting middle man, such as an online platform, reduce the number of intermediaries and potentially lower costs
• Cross-border payments involve SWIFT (Society for Worldwide Interbank Financial Telecommunication)
• Payment across Border from the EU to the USA can involve multiple intermediaries, increasing fees and the risk of errors/delays

Open Banking

• Financial data from banks and other financial institutions is accessible through APIs to third-party developers so they can build applications and services
• Typically driven by regulatory initiatives, such as PSD2
• Aim to promote innovation, competition, and greater transparency in the financial services sector
• Examples of open banking services include Account aggregation, Payment initiation, Account verification, Budgeting tools, Loan origination, Personal finance management, and fraud detection.
• The Payment Services Directive 2 (PSD2 aimed at creating a common market for financial services.

PSD2

• Increased competition in the financial services sector, created two new financial institutions, Account Information Service Providers (AISPs), and Payment Initiation Service Providers (PISPs).
• Account Information Service Providers (AISPs) give users a clear and comprehensive view of their financial data from different institutions account data using APIs
• Payment Initiation Service Providers PISPs, allows users to initiate payments online without directly interacting with their account's payment service provider
• Banks use fintech companies

RegTechs

• Companies that use technology to help financial institutions comply with regulatory requirements more efficiently and effectively
• Automate compliance processes, reduce costs, and improve risk management
• Services includes regulatory reporting, data management, risk assessment, and identity verification based on analyzation of large amounts of data
• Regtech solutions help financial institutions to comply with anti-money laundering(AML), know your customer (KYC), and data privacy law.

Banking as a Service

• Banks open their APIs (Application Programming Interfaces) to third-party companies
• Allows them to access their financial infrastructure and develop customized banking solutions
• BaaS allows non-banking companies, such as fintechs or retailers, to provide banking services to their customers.
• Third-party companies can offer services such as payments, loans, credit checks to their customers

Conversational AI platforms

• AI platforms that enable users to interact with machines through natural language conversations, such as kasisto
• Conversational AI platforms are designed to provide customer service and support to users
• Regulatory implications and financial institutions to have clear policies and procedures
• Automation can help reduce costs for financial institutions