FinTech

FinTech

FinTech

The Technology Driving Disruption in

the Financial Services Industry

Parag Y. Arjunwadkar

CRC Press

Taylor & Francis Group

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v

Contents

Introduction.......................................................................................................ix

Author...............................................................................................................xiii

1 Evolution of the Financial Services Industry .........................................1

The Evolution of Banks: Temples to Challenger Banks................................3

The Evolution of the Wealth Management Industry: Merchant

Banking to Robo-Advising ........................................................................10

The Evolution of the Insurance Industry: Lloyd’s of London

to Pay per Mile Insurance..........................................................................18

Emerging FinTechs....................................................................................23

The Rise of FinTechs..................................................................................27

2 Reshaping the Financial Services Industry ..........................................35

FinTechs in the Payments Industry ........................................................... 40

Multichannel Digital Wallets................................................................41

Digital Wallets................................................................................. 42

Applications Supporting Wallets.......................................................47

Onboarding and KYC Applications..................................................48

POS Systems .........................................................................................50

FinTechs in the Lending Industry..............................................................51

Formal Lending ....................................................................................51

Informal Lending..................................................................................53

FinTechs Disrupting the Lending Business ...........................................53

P2P Lending.....................................................................................55

POS Lending....................................................................................60

Online Lending (B2B/B2C) .............................................................67

Payday Lending ................................................................................72

Microfinance ....................................................................................75

Crowdfunding................................................................................. 77

FinTechs in a Wealth Management Industry .............................................80

Financial Advice....................................................................................81

Automated Investing .............................................................................83

Socially Responsible Investing...............................................................86

vi ◾ Contents

Equity Research FinTechs .....................................................................88

FinTechs in the Insurance Industry............................................................89

Ushering in the New Age of Collaborative Insurance through

P2P Insurance.......................................................................................91

On-Demand Insurance: Insuring only When One Wants It .................97

Reducing Healthcare Claims through On-Demand Consultation ......102

Introducing New Ways of Customer Engagement...............................104

Quote to Sell...................................................................................104

Policy Servicing ..............................................................................105

Claims Management.......................................................................106

Technology Reshaping the Insurance Industry....................................106

Leading Innovation in Nontraditional Insurance................................109

3 Technology Disruptions Enabling FinTech Innovations....................113

4G and 5G Networks Fueling FinTech Opportunities.............................120

1G Networks.......................................................................................120

2G Networks.......................................................................................121

3G Networks.......................................................................................122

4G Networks.......................................................................................123

Mobile Applications and Smartphones Reshaping the Customer

Experience...............................................................................................123

FinTechs Making Life Simple by Using Embedded Sensors ................125

Accelerometers................................................................................125

Gyroscopes .....................................................................................126

Magnetometers...............................................................................126

Barometers......................................................................................126

Thermometers.................................................................................126

Air Humidity .................................................................................126

Heart Rate Monitor........................................................................126

Fingerprint Scanners.......................................................................127

Radiation Level Sensors..................................................................127

Cameras..........................................................................................127

Microphone and Speakers...............................................................127

Smartphone Operating Systems......................................................127

FinTechs Transforming the Customer Experience

Using Social Media........................................................................... 128

App Stores Helping FinTechs Expand Globally...................................131

FinTechs Make Payments Seamless Using Mobile Payments...............134

Loyalty Redefined by FinTechs............................................................135

Cloud Computing ...................................................................................137

Anybody Can Start a FinTech Using Pay-per-Use Models from

the Cloud ............................................................................................137

Cloud Service Models.....................................................................138

Contents ◾ vii

Cloud Deployment Models.............................................................138

The Cloud Enables FinTechs to Offer Premium Products at

Affordable Prices .................................................................................139

How FinTechs Are Leveraging the Cloud Service Providers................140

FinTechs Using Web2.0 and Responsive Web Design (RWD) for

Rapid Launches .......................................................................................144

RWD Making Cross-Channel Application a Reality for FinTechs......145

Media Queries................................................................................146

Fluid Grid.......................................................................................146

Flexible Images...............................................................................146

FinTechs Launching New Products at an Unmatched Pace

Using New Age JS (Javascript) Technologies.......................................147

API-fication .............................................................................................149

FinTechs Monetizing Their Platforms through API-fication................ 151

Powered by PSD2, FinTechs Have an Exciting Future ........................ 152

AISP ...............................................................................................153

PISP................................................................................................153

FinTechs Enabling Payment Integration Leveraging API-fication........154

FinTechs Extending Their Wealth Management Platforms..................158

FinTechs Leveraging API-fication to Offer Proprietary Platforms........160

IOT .........................................................................................................161

FinTechs Employing Intelligent Devices to Disrupt

Financial Services ............................................................................. 162

IOT Disrupting the Way Banking, Payments and Insurance

Is Done........................................................................................... 165

Big Data, Analytics and AI......................................................................166

FinTechs Redefining Credit Scoring Using Big Data, AI and

Analytics.............................................................................................167

FinTechs Enabling Just-in-Time Information and Analysis for

Investors..............................................................................................170

FinTechs Encouraging Transparent Lending and Customer￾Friendly Ways of Debt Recovery .........................................................172

Blockchain...............................................................................................175

Blockchain Explained..........................................................................175

FinTechs Adopting Blockchains to Bring in Security and

Transparency.......................................................................................178

4 The State of FinTechs Globally ...........................................................187

The United States: The Revolution Started from Here.............................191

Europe and the UK..................................................................................194

UK: The FinTech Hub ........................................................................194

FinTechGermany: Playing the Catch-Up Game..................................195

Sweden: The Place Where Skype and Spotify Were Born....................196

viii ◾ Contents

France: Gearing Up for the Next Revolution, the FinTech

Revolution ........................................................................................ 196

China: The FinTech Dragon Awakens .....................................................197

India: The FinTech Tiger Is Roaring........................................................199

Africa: A Young FinTech Continent.........................................................203

Australia, New Zealand and Brazil: The Emerging FinTech Countries ....... 206

5 Incubating the FinTechs and Early Stage Funding ............................209

Coworking Space: A Place for FinTechs to Enrich and Rediscover

Themselves...............................................................................................214

Surf Office...........................................................................................217

Incubators ...........................................................................................218

Accelerator Programs...............................................................................221

Impact Hub .............................................................................................223

Established Financial Institutions Incubating Start-Ups..........................224

6 The Road Ahead .................................................................................227

FinTechs as Disruptors.............................................................................230

Compelling User Experience...............................................................230

Tapping the Untapped Opportunity Space .........................................230

Automation for Efficiency and Effectiveness........................................231

Using Unconventional Channels to Market Themselves......................232

Agile and Asset Light ..........................................................................232

Collaboration with Peers and Competitors..........................................233

Recent Failures and Lessons Learned...................................................... 234

Financial Institutions Collaborating with FinTechs to Create an

Ecosystem................................................................................................236

Partnering with FinTechs to Increase Their Offering...........................236

Using FinTech Products by White-Labeling or by Cobranding...........237

Acquiring FinTech Companies............................................................238

Engaging FinTech Companies through Investment/Accelerator

Programs.............................................................................................239

The Future of FinTechs............................................................................239

The New Financial World ...................................................................241

Technology Empowering the Tomorrow Land in Financial Service.......245

Local Solutions for a Global Service....................................................247

Index ...........................................................................................................251

ix

Introduction

The financial services industry from the beginning of human civilization has been

built on trust and the confidence of people to honor the liability they undertake,

being the guardian of finances. The financial industry over centuries developed

into banking, wealth management and the insurance industry. The basic principle

behind the banking and insurance industry was pooling money amongst its mem￾bers, with an underlying assumption that only a small percentage of them will

claim from the pool. The pool of money was therefore required to be invested

further in order to get enough returns for the banking and insurance companies to

make profit, and thus emerged the wealth management industry. The very nature

of the industry demands that there should be high trust between members and the

companies managing the pool of money. Unfortunately, time and again the trust

was broken. The most recent one being the 2008 financial crisis, wherein not only

people lost their invested money and jobs, but also countries lost taxpayers’ money

to keep the crisis ridden firms capitalized.

An after-effect of all this was the emergence of technology start-ups in the

financial domain that started with the premise of operating with complete trust

and transparency. These companies that started disrupting the financial services

business domains were primarily technology companies and were therefore being

collectively referred to as FinTechs. FinTechs by the very nature of their formation

were agile, asset-light and disruptive in nature. Unlike their established peers, they

were starting from scratch. They had to bring about offerings that were superior in

customer experience and were cost-effective at the same time. They were also start￾ing at a time when investment capital was difficult to come by. Even though there

were these and many other challenges in front of FinTechs, they also had advantages

in the form of less regulatory pressure and they were free to offer unconventional

ways of doing traditional business. All of these factors resulted in multiple FinTechs

emerging in the payments, lending, wealth management and insurance space.

The interesting thing about most of these FinTechs is that they were not only

making the customer interface better, but they were also offering products that

could plug gaps in the current offerings of established financial firms. An example

would be the insurance FinTech firm that offers an individual to change his/her life

insurance commitment based on life-changing events, instead of being tied down

x ◾ Introduction

to a single premium for rest of his/her life. FinTechs also started offering services

that were transparent in nature and they would even declare the commission they

would charge for transactions. Peer-to-peer (P2P) lending and P2P insurance is

an example of the same, where companies started acting as a marketplace to con￾nect borrowers and lenders transparently. The P2P theme was new to the market,

and people could see how and where their money was getting used. Some of the

FinTechs went a step further by connecting business with charity. Through these

FinTechs an individual was able to donate money for a cause while insuring him￾self/herself. All of these FinTechs, besides providing a transparent way of conduct￾ing business, were also providing ways to bring superior customer experience at an

affordable cost.

Wealth management FinTechs have started bringing affordable wealth advis￾ing to everybody by using robo-advisors. Additionally, these companies have

dashboards that reflect the investments transparently, including the fees charged

by them. Payment and wallet companies introduced P2P money transfers, thus

bringing an entirely new level of transparency and customer experience using social

networks. Some of the other FinTechs redefined financial planning for customers

by aggregating all the banks accounts in real-time, thus offering an entirely supe￾rior customer experience compared to an in-person financial planning-led session.

FinTech platforms help investors to invest in only those companies that meet the

investor’s values. Though there are established wealth management firms, FinTechs

have been able to differentiate themselves by providing a superior experience at an

affordable cost and at the same time delivering services in areas that established

firms were not able to address.

Technology has also played a decisive role in enabling FinTechs to deliver dif￾ferentiated services. FinTechs being agile, nimble and starting from scratch as com￾pared to their established peers were able to use the new age technologies to deliver

superior customer experience. The first and foremost technology disruption that

influenced the financial services industry and tilted the balance in favor of the

FinTech industry was the introduction of mobile devices. Mobile devices with high

processing capabilities using high data transmission speed, made possible through

4G networks took the FinTech revolution to the next level. Using mobile devices,

FinTechs made banking anywhere, anytime a possibility. Additionally, using

embedded sensors and cameras within mobile devices, FinTechs were able to offer

location-specific promotional coupon offers. Using a NFC chip and biometrics,

FinTechs have completely transformed the payment experience, reducing it to just

tapping or swiping the phone. Internet of things, which is a network of smart sen￾sors, have further simplified the process by helping monitor driver behavior, thus

reducing claims for the insurance industry. FinTechs have gone a step further to

provide pay-per-use insurance using IOT devices. These FinTechs lets an individual

pay for insurance only while the individual is driving his/her vehicle.

FinTechs have also been key catalysts in transforming the traditional ways of

doing business using artificial intelligence and blockchain technologies. Artificial

Introduction ◾ xi

intelligence has been actively used by FinTechs to define alternate ways of deter￾mining credit score as well as detecting the chances of loan default by individual

borrowers. Similarly, finetchs have been able to leverage blockchain to build an

exchange for cryptocurrencies. They have also put blockchain to use in offer￾ing cross-border and other multiparty transactions where trust and consensus is

important.

Initially, FinTechs were being looked upon by the investor community with

skepticism, but with some of the successful investments, a large number of investors

started rushing to invest with a hope of finding the next Apple or Microsoft. With

more than $100+ billion invested across thousands of start-ups and a sizeable num￾ber having valuations more than a billion dollars (referred to as unicorns), and more

investments flowing in every year, the optimism for the success of FinTechs is at

its prime. Increasing investments have also encouraged a large number of first-time

entrepreneurs to take the plunge. To help these entrepreneurs launch themselves

in a low-cost setup and at the same time validate their business models, incubators

and accelerator platforms emerged. A large number of existing unicorns have been

facilitated by some of the renowned accelerator platforms. These platforms have

been one of the crucial elements in the success of some of today’s unicorns. The suc￾cess of FinTechs have also made the established firms take notice. Established firms

have also been quick to realize that they have to be a part of this FinTech revolution

or else they may be left out. This has led them to co-innovate with FinTech firms by

setting up their own accelerators and innovation hubs.

The FinTech revolution started in the United States and soon spread to the UK

and other European countries. The reason for the emergence and success of these

FinTechs have been the same across these countries. Some of the common reasons

for the rise of FinTechs in these countries have been the financial crisis of 2008,

better customer experience from FinTechs and an alternative, yet affordable, busi￾ness model from them. Soon other countries like India and China started their

own FinTech revolution, though the reasons were more centered around financial

inclusion and a better customer experience. FinTechs also soon started emerging

into African nations to solve some of the financial inclusion problems by intro￾ducing alternate currencies like mobile money and Bitcoins. Finetchs in African

countries have also been pioneers in using blockchain for cross-border transactions.

Summarily, it can be said that the FinTech revolution is spreading like wild fire

globally and the established firms stand challenged.

The future of FinTechs is filled with excitement and a journey that is changing

direction very frequently. It is very possible that FinTechs become big enough to

overtake the existing financial firms and subsequently marginalize them. There is

also a possibility that they will coexist in a synergetic relationship. Millenials can

be a big factor in the direction that FinTech firms take in future. It is highly prob￾able that millenials and digital natives start adopting the sharing economy. The

sharing economy would also mean that there is service consolidation and outsourc￾ing. Furthering this cause would be regulations like the second payment services

xii ◾ Introduction

directive (PSD2) and government support. This could make the existence of busi￾ness functions available as a single qualified offerings obsolete and thereby forcing

the established firms to go the FinTech way, i.e., fragment the service offerings into

microservices. Irrespective of what the future is for FinTechs, they are causing anxi￾ety in the industry today and helping build a better and more trustworthy business

environment for the future.

We see more than a million start-ups and FinTech organizations emerging

across the globe, with multiple overlaps of customer journeys. It is evident that

only the ones that address the customer needs and remain profitable will succeed

in the future. Nonetheless, the learning and transformation that these start-ups are

driving will present an entirely new way of managing finances in the next decade,

including probably dismantling the categorization of the industry as a financial

services industry.

xiii

Author

Parag Y. Arjunwadkar is a certified technical architect from The Open Group

Architecture Framework and a certified project management professional from

Project Management Institute. He MBA in international business and BE in elec￾tronics and telecommunication from Pune University, Pune, India. Parag has won

the MahaIntraprenuer 2014 Award—an award jointly established by Praj Industries,

Pune, India, a global process solution company, and Symbiosis International

University, Pune, India, an international university excelling in management sciences.

The award is an acknowledgment of individuals acting as entrepreneurs within their

existing organizations. Parag is a transformation solution strategist with a right com￾bination of techno-functional skills with more than 20years of experience in business

and technology consulting. Parag has been instrumental in incubating multiple COEs

and building industrialized yet disruptive offerings for organizations such as enterprise

gamification, innovation as a service, customer journey transformation, and acceler￾ated delivery platforms. He has been involved in strategizing and implementing the

digital transformation road map for large financial and insurance companies includ￾ing marketplace transformations, re-platforming core banking and cards systems, and

redefining customer journeys. Parag has built an ecosystem of leading multichannel

solutions and leading FinTech organizations in the space of omni-channel solutions,

artificial intelligence, block chain, Internet of things (IOT), security, and customer

experience transformation. He has also conceptualized and built multiple shared ser￾vice development and testing platforms for mobile, IOT, cloud, and omni-channel

solutions. Leveraging the ecosystems and laboratories, Parag has conceptualized and

implemented multiple products and product platforms including financial planners,

on-boarding solutions, mobile application development, and management platforms.

He has been a mentor for one of the finalist teams in a popular techno-functional

television show, elaborating rural inclusion for a large fast moving consumer goods

global organization. Parag has been recognized as an expert in digital customer expe￾rience within his current organization and has written multiple blogs and delivered

multiple presentations on enterprise gamification, payments, and digital customer

experience in various conferences and in social media, including the “Enabling

Superior Digital Engagement” conference hosted by Dun & Bradstreet.