the future of fintech - integrating finance and technology in financial services (2017).pdf

Palgrave Studies in Financial Services TechnologyIntegrating Finance and Technology in Financial ServicesBernardo NicolettiThe Future of FinTechPalgrave Studies in Financial Services Technology Series EditorBernardoNicolettiRome,ItalyThe Palgrave Studies in Financial Services Technology series features orig-inal research from leading and emerging scholars on contemporary issues and developments in financial services technology.Falling into 4 broad categories:channels,payments,credit,and governance;topics covered include payments,mobile payments,trading and foreign transactions,big data,risk,compliance,and business intelligence to support con-sumer and commercial financial services.Covering all topics within the life cycle of financial services,from channels to risk management,from security to advanced applications,from information systems to automa-tion,the series also covers the full range of sectors:retail banking,private banking,corporate banking,custody and brokerage,wholesale banking,and insurance companies.Titles within the series will be of value to both academics and those working in the management of financial services.More information about this series at http:/ Future of FinTechIntegrating Finance and Technology in Financial ServicesPalgrave Studies in Financial Services TechnologyISBN 978-3-319-51414-7 ISBN 978-3-319-51415-4(eBook)DOI 10.1007/978-3-319-51415-4Library of Congress Control Number:2017932557 The Editor(s)(if applicable)and The Author(s)2017This work is subject to copyright.All rights are solely and exclusively licensed by the Publisher,whether the whole or part of the material is concerned,specifically the rights of translation,reprinting,reuse of illustrations,recitation,broadcasting,reproduction on microfilms or in any other physical way,and trans-mission or information storage and retrieval,electronic adaptation,computer software,or by similar or dissimilar methodology now known or hereafter developed.The use of general descriptive names,registered names,trademarks,service marks,etc.in this publication does not imply,even in the absence of a specific statement,that such names are exempt from the relevant protective laws and regulations and therefore free for general use.The publisher,the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication.Neither the publisher nor the authors or the editors give a warranty,express or implied,with respect to the material contained herein or for any errors or omissions that may have been made.The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.Cover design by Samantha JohnsonPrinted on acid-free paperThis Palgrave Macmillan imprint is published by Springer NatureThe registered company is Springer International Publishing AGThe registered company address is:Gewerbestrasse 11,6330 Cham,SwitzerlandBernardoNicolettiRome,ItalyvThis book is the result of the last several years of research on financial services,where several people are worthy to be acknowledged for their support,useful comments,and cooperation.A special mention should be made of Prof.Gustavo Piga,Prof.Corrado Cerruti,and Prof.Andrea Appoloni at the Universita di Tor Vergata a Roma.Moreover,I acknowledge the support from Dr.Gian Marco Balletti in collecting and evaluating some basic materials during his thesis at the same university.A special thanks also to Aimee Dibbens from Palgrave Macmillan for her continuous support and encouragement.This series started with mobile banking,continued with digital insurance,and now analyzes fin-tech initiatives.I acknowledge my family,whose constant support and patience made this book happen.Bernardo NicolettiAcknowledgmentsvii1 Introduction 12 Financial Services andFintech 33 Model andClassifications 314 Fintech Innovation 815 Critical Success Factors 1616 Responses ofTraditional Players 1777 Regulations 1958 A Business Model forInsurtech Initiatives 2119 A Case 251Contentsviii Contents10 The Future:Financial Services asPlatforms 26111 Conclusions 275Glossary 279References 309Index 321ixABI Associazione Bancaria ItalianaACH Automated Clearing HouseADAS Advanced Driver Assistance SystemsAFI Alliance for Financial InclusionAI Artificial IntelligenceAML Anti-Money LaunderingAPI Application Programming InterfaceApp Application(mostly for mobile)ATM Automated Teller MachineB2B Business to BusinessB2C Business to ConsumerBaFin Bundesanstalt fr FinanzdienstleistungsaufsichtBCBS Basel Committee on Banking SupervisionBI Business IntelligenceBMC Business Model CanvasBMI Business Model InnovationBPM Business Process ManagementBTC BitcoinC2B Customer to BusinessCA Controlling AuthorityCB CommerzbankCBA Commercial Bank of AfricaList of Abbreviations and Acronymsx List of Abbreviations and AcronymsCD Compact DiskCFO Chief Financial OfficerCIB Corporate and Investment BankingCIO Chief Information OfficerCKM Customer Knowledge ManagementCLV Customer Lifetime ValueCPU Central Processing UnitCRM Customer Relationship Management or Credit Risk ManagementCSR Customer Service RepresentativeDLT Distributed Ledger Technology(aka Blockchain)ECB European Central BankECM Enterprise Content ManagementECN Electronic Communication NetworkEMV Europay,MasterCard,and VISAERP Enterprise Resource PlanningESA European Space AgencyEU European UnionEY Ernst&YoungFCA Financial Conduct AuthorityFINMA(Swiss)Financial Market Supervisory AuthorityFintech Financial TechnologyFINTRAC Financial Transactions and Reports Analysis Centre of CanadaFMA First Mover AdvantageFTE Full-Time EquivalentFX Foreign ExchangeGPU Graphics Processing UnitHR Human ResourceGSM General System for Mobile CommunicationICAAP Internal Capital Adequacy Assessment ProcessICR Intelligent Character RecognitionICT Information and Communications TechnologyID Identification DataIIN Issuer Identification NumberIMSI International Mobile Subscriber Identity xi List of Abbreviations and Acronyms ING ING-DibaIOU I Owe YouIPO Initial Public OfferingIxD Interaction DesignKBA Knowledge-Based AuthenticationKPI Key Performance IndicatorKYC Know Your CustomerLAN Local Area NetworkMFI Microfinance InstitutionMNO Mobile Network OperatorMVP Minimum Viable ProductNASA National Aeronautics and Space AdministrationNFC Near-Field CommunicationNIST National Institute of Standards and TechnologyNLP Natural Language ProcessingOCR Optical Character RecognitionOEM Original Equipment ManufacturerOTC Over the CounterP2P Person to Person or Peer to PeerPC Personal ComputerPCI DSS Payment Card Industry Data Security StandardPDCA Plan-Do-Check-ActPED Project Entropia DollarsPFM Personal Finance ManagementPII Personal Identifying InformationPOS Point of SalePPC Pay per ClickPSE(EU)Payment Services DirectivePwC PricewaterhouseCoopersROI Return on InvestmentS2S Service to SaleSDK Software Development KitSDM Secure Domain ManagerSEO Search Engine OptimizationSEPA Single European Payment AreaSG&A Selling,General,and Administrative Expensesxii List of Abbreviations and AcronymsSIFIs Systematically Important Financial InstitutionsSIM Subscriber Identity ModuleSMEs Small-and Medium-Sized Enterprises or Subject Matter ExpertsSMS Short Message ServiceSTP Straight-Through ProcessingTAM Technology Acceptance ModelTCO Total Cost of OwnershipTSM Telecommunication Management System UBI Usage-Based InsuranceUI User InterfaceUICC Universal Integrated Circuit CardUN United Nations.UPC Universal Product CodeUSC Utility Settlement CoinVC Venture Capital or Virtual CurrencyVoC Voice of the CustomerVoIP Voice over Internet ProtocolxiiiFig.2.1 The Fintech ecosystem(adapted by the author from EY 2016)20Fig.2.2 Status of Fintech in different regions 24Fig.3.1 Fintech specialization share(elaboration from“Fintech 100,Leading Global Fintech innovators,Report”2015)47Fig.3.2 Percentage of enablers and disruptors(elaboration from“Fintech 100,Leading Global Fintech innovators,Report”2015)50Fig.3.3 The organization and its elements 54Fig.3.4 The V4 business model framework 56Fig.3.5 The business model canvas(adapted by the author from Osterwalder and Pigneur 2010)60Fig.3.6 PayPals business model canvas(adapted by the author from multiple sites)62Fig.3.7 Crowdfundings business model canvas(adapted by the author from multiple sites)63Fig.3.8 Components of an effective marketing plan 71Fig.4.1 A model for an integrated innovation strategy(Nicoletti 2016)87Fig.4.2 Services in mobile banking 93Fig.4.3 Fintech business model canvas 96Fig.4.4 Mobility focus in the business model canvas 97Fig.4.5 The objectives of Big Data analytics 104Fig.4.6 Kreditechs self-learning algorithm 119Fig.4.7 The V4 business model framework 120List of Figuresxiv List of FiguresFig.4.8 The V4 business model framework for Betterment 121Fig.4.9 The V4 business model framework for Kreditech 144Fig.4.10 The business model applied to robo-advisors 145Fig.4.11 The extended technology acceptance model 153Fig.5.1 Evaluation of critical success factors for a fintech ABC 173Fig.6.1 Fintech and financial services partnership 178Fig.6.2 Structure of fintech initiatives 179Fig.8.1 Technology impact on insurance industry 215Fig.8.2 Insurtech business model 218Fig.8.3 Insurance issues and business model 219Fig.8.4 Top insurance issues and business model 221Fig.8.5 Partnership components 223Fig.8.6 Social media benefits 238Fig.8.7 High-level processes of an insurance business 240Fig.9.1 Roboticas business model canvas 253Fig.10.1 The 4 Ps:the players in a platform ecosystem 264xvTable 2.1 Market size and investments of some regions 22Table 2.2 Fintech evaluation of some regions 22Table 3.1 Traditional versus emergent fintech(elaboration of the author on Ernst&Young(EY)2014)49Table 3.2 Fintechs impact on customer centricity(PwC 2016)67Table 4.1 Innovation classification 82Table 4.2 Innovation in financial services(adapted from Lopez etal.2015)83Table 4.3 Most used Fintech services(Ernst&Young 2016)94Table 4.4 Characteristics of the three generations of analytics (adapted from T.Davenport 2013)111Table 4.5 Potential applications of blockchain technologies 131Table 6.1 Characteristics of accelerators and incubators(Cohen and Hochberg 2014;Hoffman and Radojevich-Kelley 2012;Miller and Bound 2011;Slaats 2015)186Table 6.2 Potential relationships between fintech and traditional financial institutions 189Table 8.1 General Big Data analytics guidelines 232Table 9.1 Robotica and its customer experience 255List of Tables1 The Author(s)2017B.Nicoletti,The Future of FinTech,DOI10.1007/978-3-319-51415-4_11IntroductionFinancial technology,commonly called“fintech”,is now a highly used buzzword.Startups competing with traditional financial services,offering customer-centric services capable of combining speed and flexibility,are spreading throughout the world.They are radically changing the expecta-tions and the engagement of customers.Customers enjoy more and more a digital perspective,characterized by a nearly complete immediacy and availability of the information,enabled by technological devices such as smartphones and tablets,and by other trends such as the Internet of Things(IoT).Traditional financial organizations,such as banks and insurance com-panies,are changing,with the aim of narrowing the technological gap between them and the fintech startups.Nevertheless,their paths toward change and innovation are full of hurdles.Old routines never overhauled and rigid business models are one of their primary issues to tackle.Fintech companies are involved in a process of“disintermediation through innovation”1:Big Data,blockchain,robo-advisors,Internet of 1 https:/ 1 August 2016.2 Everything(IoE),contextually with a by far more effective exploitation of digital channels and mobile devices,are levers that are allowing them to reshape the financial services industry.These solutions provide the mar-ket with innovative adding-value solutions,backed by forward-looking strategies and cutting-edge business models.This book has a twofold aim:on one hand,it aims to provide the big picture of the fintech initiatives,not only by giving insights on their evo-lution,their status,the main delivered innovations,but also by presenting business cases of successful companies.On the other hand,it aims also to provide organizations with guiding principles,lumped together and centralized in a business model presented and applied throughout all the chapters.The model has its most comprehensive application in Chap.8,which analyzes an Italian business-to-business(B2B)fintech company.The Future of FinTech3 The Author(s)2017B.Nicoletti,The Future of FinTech,DOI10.1007/978-3-319-51415-4_22Financial Services andFintech IntroductionFintech organizations,mainly startups,are reshaping the financial ser-vices industry,offering customer-centric services capable of combining speed and flexibility,backed by forward-looking strategies,and cutting-edge business models.This chapter aims to provide the big picture of this fragmented uni-verse.It starts with the history of fintech initiatives,dealing with the different waves that have characterized their paths.The rise of fintech ini-tiatives depends on many factors.They include supply-side factors,with the onset of the digital transformation,and demand-side factors,with the emergence of new life models.The 2008 financial crisis also played an important role by prompting tighter regulation of traditional players and a growing sense of mistrust among customers toward traditional financial institutions.This chapter provides some insights about the financial services industry altogether,identifying the“breaches”where fintech companies 4 are leveraging with the aim of disintermediating traditional financial organizations.Eventually,this chapter provides an analysis of the most relevant fin-tech regions and ecosystems from a worldwide perspective,presenting the possible developments and evolutions of the whole sector.Changing EnvironmentIn the last few years,there have been substantial changes in the banking and financial sectors.The reasons are several,such as the impact of the 2008 financial and economic crisis,the increasing regulation of incum-bent players,and the social and behavioral changes in the customers.In the last few years,the digital transformation is the most important cata-lyst behind the fintech phenomenon.The Financial Crisis,Regulation,andTrustThe 2008 financial and economic crisis triggered a series of major upheav-als in the financial services sector.The first was the realization that the activities of the major financial institutions can generate systemic risk.This led to the development of different measures designed to quantify that risk.Regulation gave directions and forced actions to mitigate them.In particular,the notion of a financial entitys contribution to systemic risk led to the definition of systematically important financial institu-tions(SIFIs).The Bas