Paper within Advanced Topics in Finance [630451]

Thesis topics

Paper within Advanced Topics in Finance
Author: Alina Toganel, Mengyao Zhu
Tutor: Prof. Dr. Agostino Manduchi
Jönköping December, 2016

i Table of Contents
1 Background to the topic ………………………….. ……………………… 1
2 Problem discussion ………………………….. ………………………….. .. 1
3 Planned theory and relevant literature review …………………… 2
4 Thoughts on method and empirical material …………………….. 4
5 Conclusions ………………………….. ………………………….. ………….. 4

1 1 Background to the topic

In the last 20 years, the global economy was transformed under the influence of Internet,
terrorist attacks, wars, and, more recently, e-commerce, social media and mobile de-
vices. Financial institutions considered themselves somehow protected against these in-
fluencers, because, even if they were temporally suffering some repercussions due to
the global interconnections, they still had the trust of their customers.

Although, the situation has changed dramatically after the Global Recession in 2007 and
several factors contributed to the disruption that banks is fighting today. Firstly, the
consumers’ trust in financial institutions was severely damaged. Secondly, banks were
obliged to compel to more severe regulations in lending, capital requirements, and risk
managemen t. Therefore, they had to be more careful when granting loans, denying many
individuals’ or SMEs’ financing requests. Finally, the advancement of technology and use
of mobile devices made consumers rise their expectations in respect to the services and
products received.

All these created a gap in the market quickly filled by FinTech . FinTech is a converged
industry, consisting of mainly start -ups, that employ technological innovations in order
to improve the way financial services operate. The industry is considered one of the
most promising since 2014. The amount of VC investments in FinTech start-ups in-
creased by 75% in 2015 to 22.3 billion dollars, according to a report published by a
consulting company (Accenture, 2016).

Reluctant at first, banks began to realize in the last years that these new companies are
more than just a passing trend. Moreover, this digital disruption is severely affecting their
revenues. By 2025, millennials are going to be the major revenue contributor to the
banks, as this generation is moving to its prime spending years, and as a research called
The Millennial Disruption Index shows that 53% of them don’t think their bank offers any-
thing different than other banks, nearly half are counting on tech start -ups to overhaul the way
banks work and 73% would be more excited about a new offering in financial services from
Google, Amazon or Facebook.

2 Problem discussion

FinTech start-ups target the direct customer relationships and the most important dis-
ruption is set to occur in origination, sales, and distribution. In order to fight this, banks
have approached different strategies. JPMorgan partnered with OnDeck Capital to re-
duce funding time from one month to one day, Citi partnered with DemystData to in-
tegrate various fragmen ted data sources and BNP Paribas, together with the lending
direct investment platform SmartAngels “have taken a major step forward in crowd-
funding history by signing a strategic partnership for the use of Blockchain technology”,
as advertised on the bank’s website. Other banks, predicting this FinTech momentum,
have constructed their own portfolio of start -ups, like ING, Santander and Citi. BBVA
and Goldman Sachs have bought some of their small competitors.

2 These strategies have both good and bad co nsequences for the banks’ overall situation,
and considering the increased number of competitors a bank is currently facing, it might
be interesting to see what is the best strategy to be followed for the upcoming decade.

The vast majority of banks is still using the same core banking systems it was using 40
years ago, which slow down the performance and do not have a customer -friendly in-
terface. However, improving or changing them is becoming less costly and risky. Under
the threat of FinTech, banks ar e now improving their IT systems to face the challenge.
In payment sectors, banks are promoting online payments and electronic virtual ac-
counts. In financing and borrowing sector, they use big data to achieve the customer
segmentation. In financial service sector, some investment advisors have been replaced
by robot consultants. According to Credio , a finance database, Bank of America closed
over 1,370 branches in US since 2007, while Citigroup Inc. reduced the number of US
branches by two -thirds and HSBC h as eliminated approximately 1,600 US locations. In
the same time, some of these banks have also closed their subprime -lending business. In
Europe, Nordic and Dutch banks have reduced their number of branches at around
50%. Losing a small segment of their c ustomers and investing in IT systems meant to be
the main channel of interaction between banks and their clients, helped these institu-
tions achieve pretax -profit growth because of overall cost reduction. The major charac-
teristics a user is expecting to thr ough digital experience are: security, clarity, personal-
ization and speed.

According to a report by Citigroup Inc., 73% of capital deployment in 2015
in FinTech went to Personal/SME sector, 10% to Asset Management, 10% to Insurance,
4% to Investment Ban king and 3% to Large Corporations sector. This means that the
start-ups are threatening all the 4 big banking segments: Retail and Personal Banking,
Corporate Banking, Investment Banking and Insurance, although not to the same de-
gree. Until now, most of th e companies are disrupting the consumer finance, SME lend-
ing and payments sub -segments. A more detailed analysis of the current situation and
damage assessment by banking sectors might reveal interesting information.

While researching more and more about FinTech , we came across a new, emerging
industry called Regtech . Regtech , or Regulatory Technology, as the Financial Conduct
Authority from the United Kingdom describes it, is the “adoption of new technologies
to facilitate the delivery of regulatory requ irements”. While FinTech is causing a disrup-
tion among banks’ systems, Regtech aims to help these institutions comply better and
faster with the stringent regulations imposed by Supervisory Authorities. The available
technology that these start -ups would most likely used consists of big data, data visuali-
zation techniques, blockchain technologies and some artificial intelligence elements.
While there is not a great amount of data available at the moment, as the ecosystem is
currently on the verge of a mome ntum, this subject is both challenging and interesting
to elaborate.
3 Planned theory and relevant literature review
At this moment, most of the information and relevant statistics related to digital disrup-
tion or the FinTech industry can be found in numero us reports published by banks like
JP Morgan, Citigroup Inc., consulting industries like McKinsey, PwC, KPMG, Deloitte and
more. There are also a few papers written about the dinamics between banks and

3 FinTech, but most of them focus at what determined thi s immense momentum or the
technologies that start -ups are employing in order to gain a share of the market.
A paper published by a research team from Quebec this year, called A digital tsunami:
FinTech and Crowdfunding, emphasizes the rise of start -ups an d the digital ecosystem.
According to this paper, Artificial Intelligence, Internet of Things, Digital platforms and
the tech -savvy generation are offering FinTech companies reasons to enter the market:
fulfilling customers’ needs using the technology avai lable. The analysis conducted focuses
on digital payment platforms, the technology employed and the type of consumers they
are attracting. One of the conclusions the authors reached is that, in the next decade,
human involvement will be less and less relev ant, and banks are due to suffer a digital
transformation if they want to survive.
A Special Report published by The Economist in 2015 looks at the symbiosis between
financial institutions and FinTech ventures. One of the articles claims that the start -ups
are not interested in replacing banks entirely; they do not want to be too heavily regu-
lated. But they are, however, seizing the most profitable add -ons from the latter, more
exactly from loans, financial advice and payment services. One example in the article
emphasizes: if a bank has its business disrupted by the following start -ups “Prosper for
loans, Currency Cloud for holiday money and Future Advisor for investment” , it would
become harder in the future to support its core activities. In conclusion , is not one
technology oriented start -up that is threatening to replace the entire system of the
banks, but small, numerous firms that are unbundling banks' customer oriented opera-
tions.
In an article written for the Financial Times, Emma Dunkley (2016) focuses on the rea-
sons why the digitally focused start -ups are so successful – mostly because they found a
niche to fill and are free from tough regulations – and how can banks fight these “true
disruptive” players. In conclusion, the report states that mo st financial services firms,
used to be overwhelmed by old IT systems, can work with financial technology compa-
nies as a more effective way to bridge the gap in their business models. “Banks, asset
managers and insurers could ultimately move to acquire fin tech companies once they
have become more established, as a low -cost way of delivering cutting -edge services”.
The BI Intelligence (2016) reported that some FinTech firms want to cut ties with banks
because working on their own can give these companies bac k their independence, more
freedom to differentiate their products and services from traditional providers, which
could lead to increased competition in the financial services industry. However, another
report from BI Intelligence argues that 25% of global banks would buy a fintech company.
“Acquiring a fintech provides banks with full control of the solution, enabling them to
shape it to their specific needs, while also allowing them to market innovations under
their own brand”.
Francesca Dinardo (2016) focused her thesis on ‘how the evolution of disrupting Alter-
native Finance is reshaping the sector of financial services and what are the major impacts
on incumbents’. She claims that the number of large financial institutions approaching in
a coop erative manner and gradually replacing financing solutions is increasing. The exist-
ing business and the Challenger are forming strategic partnerships, thsu creating win -win
situations.

4 In the research paper published by KPMG and CB lights in 2016, the au thors present the
trends and data on equity trading in financial technology companies supported by global
venture capital. It is stated that FinTech covers a diverse array of companies, business
models and technologies, companies generally including lendin g tech, billing tech, per-
sonal finance management, money transfer, blockchain, capital markets tech, equity
crowdfunding and insurance tech .
Douglas Arner, Janos Barberis and Ross Buckley (2016) state that the development of
the financial technology industry has attracted the interest of regulators, who are now
evaluating the best way to support the market development. The movement towards a
forward -looking approach by regulators is welcomed, because i t allows markets to grow
more efficient and competitive, finally benefiting consumers and the economy.
The research papers or reports cited above are just a few of the secondary sources
considered relevant for this topic. However, our research is only at t he beginning, and
more papers, reports or books will be considered in the upcoming thesis.
4 Thoughts on method and empirical material
In order to write this thesis, the best suited approach appears to be a qualitative analysis,
using data provided by Resear ch Reports on FinTech from the Big Three (McKinsey,
Bain and BCG) and Big Four (PwC, KPMG, Deloitte and EY); these consulting and audit-
ing international companies have an easier access to important players in the banking
and FinTech industry, which contrib uted with their boards’ knowledge and insight or
hard data. Also, Annual Reports and Letters to Investors from various financial institu-
tions might provide insight about the general path followed by them to fight a digital
disruption. Moreover, we also con sider conducting semi -structured interviews among
various contacts in the industry.
5 Conclusions
Although there is a large amount of research done about the dynamics between FinTech
and banks, since this new industry is threatening to re -shape the whole st ructure of old,
traditional financial institutions, we believe that we identified several niches that are not
yet fully explored. This paper shows the beginning of our research, which we will con-
tinue to expand. The previous chapter sums the authors’ ideas based on the current
knowledge, but the exact analytical formulas and methods we believe will be determined
after further discussions with our professors and future supervisor.

5 References
BI Intelligence, Here's why some fintechs want to cut ties with banks[J] . Business insider
nordic, 2016
BI Intelligence, 25% of global banks would buy a fintech company[J]. Business insider nordic,
2016
Dunkley, E. Fintech start -ups put banks under pressure [J] . Financial Times, 2016
Dinardo, F. The rise of alternative finance: How FinTech companies are revolutionizing the
financial services and the traditional bank financing[D]. University of Padova, 2016
Douglas Arner, Janos Barberis, Ross Buckley, The evolution of fintech[D] . University of
New South Wales Law Research Series, 2016
KPMG and CB Insights, The plus of fintech[J] , Q3 2016
Lacasse, R. M., Lambert B., A. et al. (2016). A Digital Tsunami: FinTech and Crowdfunding,
International Scientific Conference on Digital Intelligence, Quebec, Canada
The Economist, Slings and arrows[J]. Special Report: International Banking, 2016