FINTECH What is it? What’s its impact on financial markets and banking system?

Josh Anzenberger Nicolo Squeo Michał Tutko WHAT IS THE DEFINITION OF FINTECH?

« Technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services » - Financial Stability Board (FSB) Storyline Starting off as a back-office support function, it is now defining a whole industry

● Fintech 1.0 (1866-1967): is about infrastructure ○ financial globalization; first time rapid transmission of financial information across borders ○ telegraphs, transatlantic cable, Fedwire, credit cards ● Fintech 2.0 (1968-2008): is about banks ○ shift from analog to digital ○ first ATM, establishment of NASDAQ & SWIFT ○ online-banking & e-commerce business models ○ bank’s internal processes and communication fully digitized by beginning of 21st century ● Fintech 3.0 (2008-now): is about start-ups ○ distrust of the traditional banking system caused by the financial crisis → shift in mindset ○ emergence of new players in the financial markets ○ release of followed by the boom of ○ mass market penetration of Smartphones ○ Google Wallet and FinTech’s Development differs regionally

North America Europe Asia Pacific Latin American Middle East and and Caribbean Africa

FinTech Biggest Well-funded FinTech FinTech startups are european Southeast startups are startups are enabling any FinTech Asian startups lending to enabling online startup to winners are are in an arms underserved and offline become a looking to race to become consumers and payments FinTech acquire the next SMBs company customers super-app (like abroad WeChat)

→ Depending on the region, FinTech has developed and is developing at a different pace; Whereas in Europe and North America FinTech startups more and more shape the economic landscape, in Africa and the Middle East FinTech is enabling standards which developed countries have been taking for granted for decades FinTech - Revolut’s example

Revolut is a digital banking alternative for instant payment notification and free international money transfers and global fee-free travel. It includes a prepaid , currency exchange, and peer-to-peer payments.

● based startup founded in July 2015 ● Founders: Nikolay Storonsky and Vlad Yatsenko ● Total Funding Amount: 836,9M$ (amount raised in 14 rounds) ● Allows Transferring money abroad in 29 currencies ● Cash machine withdrawals in 120 countries ● A crypto-currency exchange (Converting currencies into Bitcoin, , ,...) ● Vaults for budgeting and saving money “Revolut is beating the banks at their Revolut’s Milestones own game” — The Guardian

● April 2018 - Revolut reaches a total valuation of $1,7 billion and becomes a “unicorn”

(held startup company valued at over $1 billion)

● December 2018 - Revolut securises a specialised bank licence from European Central

Bank. Revolut is authorised to accept deposits and offer consumer credits.

● December 2018 - Revenue grew to £58.2m in 2018, from £12.8m in 2017

● July 2019 - Revolut launched commission-free NYSE & NASDAQ stocks trading within its

app for customers in its "Metal" plan.

● December 2019 - the company claimed to have 10 million users and over 2000

employees globally

StartUp Investment - Venture Capital

Venture Capital is financing given to startup companies and small businesses that are seen as having the potential to break out and grow rapidly in the long term. This financial help is needed because those companies don’t usually have the access to traditional capital markets. The funding for this financing usually comes from wealthy investors, investment banks, and any other financial institutions. The investment doesn't have to be just financial, but can also be offered via technical or managerial expertise.

Venture capital is often seen as the next source of capital for a company once it has raised a seed round from other sources such as business angels. Venture capital funding rounds are often referred to in an alphabetic order with the first venture capital round called the Series A round, the second the Series B round, and so on. Private Equity

Private equity is equity—shares representing ownership of, or an interest in, an entity that is not publicly listed or traded.

Private equity is a source of investment capital that comes from high net worth individuals and firms. These investors buy shares of private companies or gain control of public companies with the intention of taking them private and ultimately delisting them from public stock exchanges. Large institutional investors dominate the private equity world, including pension funds and large private equity firms funded by a group of accredited investors. Key Differences

1. PE firms mostly buy mature companies that are already established. Venture capital

firms, on the other hand, mostly invest in startups with high growth potential.

2. Private equity firms mostly buy 100% ownership of the companies in which they invest.

Venture capital firms invest in 50% or less of the equity of the companies.

3. Private equity firms invest $100 million and up in a single company. Venture capitalists

spend $10 million or less in each company since they mostly deal with startups with

unpredictable chances of failure or success.

ECONOMIC ANALYSIS OF THE

HYPOTHESIS: 1) There are 3 agents in our simple economic model:

- Households

- Non-financial corporations

- Financial intermediation

2) Constant returns to scale FINANCIAL INCOME

The financial income of this simple economic model is calculated as the ratio between the added value of the financial sector end the GDP THE ADDED VALUE OF THE FINANCIAL SECTOR

b - consumer credit m - value of the assets providing liquidity service k - value of the assets owned by corporations, via financial intermediary

ψ -unit cost of intermediation determined by technology FINANCIAL MARKET AND DEVELOPMENT

- There is an immense literature investigating the casual link between finance and development theories.

- Countries with deeper credit market (calculated with the ratio between credit stock and GDP) during 60’s, had a faster development between 1960 and 1995.

- Levine (2005) says the capital-allocation plays the main role in the relationship between financial market and development

-However it is clearly recognized that the relationship between credit and development is not monotonous FINANCIAL MARKET AND DEVELOPMENT

Link between credit and development FINANCIAL MARKETS & CREDIT SECTOR - In this section, we are going to analyse the main problems of the financial market, concerning especially the credit sector

- The recent works in the economic literature underline two main causes of the inefficiency of the financial system:

1) Limited competition

2) Entry barriers LIMITED COMPETITION

- How to assess the level of competition of the banking system?

HHI INDEX LERNER INDEX

where P is the market price set by the firm and where s is the market share of firm i in the i MC is the firm's marginal cost. The index ranges market, and N is the number of firms. from a high of 1 to a low of 0, with higher There is also a normalized Herfindahl numbers implying greater market power. For a index which ranges from 0 (monopoly) to perfectly competitive firm (where P=MC), L=0; 1 (perfect competition). such a firm has no market power. When MC=0, Lerner's index is equal to unity, indicating the presence of monopoly power. UNIT COST OF THE FINANCIAL INTERMEDIATION (Sources : Philippon (2015) pour les données de 2012 ; nouvelles données obtenues en mai) 2016.) WHAT IS THE IMPACT OF FINTECH IN THIS SCENARIO?

- Fintech work with a Peer-to-Peer mechanism in the credit market.

- Peer-to-peer (P2P) lending enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman.

- They use advanced technologies in order to improve communication and information between lenders and borrowers and they are remunerated only for the risk analysis. WHAT IS THE IMPACT OF FINTECH IN THIS SCENARIO?

1) They can reduce financing costs, through new technologies of communication and information. Welltrado (2018) estimate that the exploitation costs are 2,7 % of loans in Lending Club, against 7% for the traditional banks.

2) They can have a better interpretation of the market and people needs, without the problem of changing obsolete structures, just as traditional banks

3) They have a better credit quality, with faster, transparent and practical procedure WHAT IS THE IMPACT OF FINTECH IN THIS SCENARIO?

Furthermore:

- The access to the credit is easier in order to include who is considered too much risky or unprofitable by the traditional institutions - The lack of confidence in the traditional banks, is a reason why more and more people use Fintech services. LIMITS TO THE FINTECH REVOLUTION

1) Too big to fail

2) Traditional banks have competitive advantages thanks to their activities with the deposit business

3) Traditional banks have competitive advantages in the credit markets with information asymmetries, thanks to their ability to obtain soft-info

4) Traditional banks offer greater caution in case of a default Future of Fintech

● Digital banks and investment advisors have become the rule, not the exception ● Share of investments into Fintech from 5% to 20% ● FinTech Start-Ups move out of niche use cases and begin to operate on scale ● Investments into FinTech increase

→ Broad FinTech adoption faces a number of hurdles, including diverse regulatory stances, incumbent competition and challenging macroeconomic environments. Looking at 2019, FinTech startups have gained scale, moved into new geographies and continued to build a financial stack from the ground up and those trends are expected to continue.

The discussion is no longer about how FinTech startups will find mass adoption, but WHEN. CONCLUSIONS

- Fintech can have a significant impact on the bancary market thanks to their advanced technologies. However they will not bring to a revolution of the entire system.

- Fintech’s spread and popularity are strictly linked to the type of the credit market. Their structure makes them more suitable for consumer loan, while traditional banks still are more suitable for loans to small and medium size enterprises.

- Traditional banks can count on the advantages achievable thanks to the scope economies.

- We have seen also traditional banks achieving merger goals and purchasing portfolios of various Fintech (in France: Akea-Younited Credit and La Banque Postale-Kiss Kiss Bank Bank ) Thank you very much for your attention!

If you have any questions, feel free to ask! BIBLIOGRAPHY

T. PHILIPPON, “L'OPPORTUNITÉ DE LA FINTECH”, Revue d’économie financière, 2017/3, pp. 173-206

L. WEILL, “ L’IMPACT DES FINTECH SUR LA STRUCTURE DES MARCHÉS BANCAIRES”, Revue d’économie financière, 2019/3, pp. 181-192 https://www.researchgate.net/publication/313364787_150_Years_of_FinTech_An_Evolutionary_Analysis https://newsroom.mastercard.com/wp-content/uploads/2020/01/Start-Path-_-CB-Insights-2020-Trends-Report_FINAL.pdf https://www.e-zigurat.com/innovation-school/blog/evolution-of-fintech/ https://www.bbc.com/news/business-47768661 https://www.latribune.fr/entreprises-finance/banques-finance/nikolay-storonsky-ceo-de-revolut-notre-objectif-est-d-etre- rentable-d-ici-la-fin-de-l-annee-838319.html https://www.investopedia.com/ask/answers/020415/what-difference-between-private-equity-and-venture-capital.asp