Literature Review on Financial Technology

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Introduction

The globalization of financial service can be seen as the integration of the nation’s financial system with international financial markets and institutions (REF), it requires that the nation or regional government to liberalizes the financial and capital market sector. Especially, past World War II, the movement of financial globalisation was mainly impelled by the Western or developed countries, with their active participants in the financial globalization process, whereas the remaining developing countries jumped on the financial globalisation train at a much later time, which happened approximately around the early 1980s  and started to participate in the process of financial globalisation (REF).

With the emergences of financial globalization, the general goal for most financial institutions was to evolve from traditional banking business  (REF) and to tap into the global financial service sector and to gain and obtain a greater competitive advantage through cultivating strategic alliances and partnerships with other financial and non-financial service institutions, so as to provide a more diverse financial goods and services to consumers. Particularly, the advancement of internet technology has shifted the global financial services industry approach, scope and competitive landscape and at the same time the move of most developed nations to privatize and to deregulate their financial sector, to provide a unique mix of customer segments and to becoming more customer-focused. The globalisation of the financial service sector is not a new phoneme (REF), however, today’s global financial interconnection and depth dependencies have made the majority of the financial service institutions to be more flexible in terms of innovation and technology (REF).

As the financial service has gone through a tremendous change from local banking towards a more global presence and due to the technology advancement, customers demands and needs has evolved at the same pace. In the late 1970s and the early 1980s that are seen by many as the golden age of the modern investment banking (Di Muzio 2014), many financial service institutions started to invest heavily into the revolutionary technologies. These steep development reached its heights during the Dot-Com era, where firms like Google, eBay, Paypal or Amazon managed to outlive the Dot-Com Bubble (ref) to become nowadays an absolute market leader in their industry and other like Pets.com or Broadcast.com did not survive the bubble and were labelled as a total flop.

The traditional banking business has always been a key component in the financial service sector, however, the swift development of technology around the world has changed the economic and financial service industry. As Zavolokina et al. (2016) have pointed-out that the traditionally known financial service and capital market is rapidly disrupted and transformed by the phenomenon of Financial Technology or for short FinTech (Schueffel 2016) and Lee (2015) describes FinTech in his report as the amalgamation of overall financial goods and services available to end consumers through new technological innovation and digital solution. Not only has the new disrupted innovated FinTech has changed and at the same time created numerous new business models, but also it has changed the customer’s needs and demands (Zavolokina et al. 2016). These visible changes have changed and disturbed various forms of the finance, capital and economies such as the banking and financial regulations, investment and banking industry and payment and transaction services (Accenture 2015).

Although technology has been one of the cornerstone’s of the financial service sector, it was only after the financial crisis that altered the mindset and laid down the foundations for the future of the FinTech (ref). Arner et al. (2016) suggested that the root and cause of the recent Global Financial Crisis, could be traced to the financial infrastructural and regulatory inefficiency and market failure and a new approach was more than needed as a new channel that needs to have the capabilities to fill the gap in the financial service market. The increasing interconnection of Internet and Personal Computer (PC) not only in the operations of various financial and non-financial business but at the same time, for the general public, has created new electrical services that have the power to reduce the disparity between the financial service sector and the customer’s needs (PwC 2016). These new types of solutions are tailored to be used with ease (PwC 2016) by the end customers and at the same time to use the highest level of technology and digital transaction speed and are less centralised in their business models that allows them to work more independently from the larger multi national corporate financial service enterprises.

Since the 1980s, where the first banks started to introduce digital based service over the Internet to their customers (Allen et al. 2002), the financial service sector has continuously undergone a digitised transformation (Deloitte 2016), from the online payment gateway Paypal to the decentralised online cryptocurrency BitCoin (González 2004), the new era of online based financial service has just begun. The rise of FinTech has facilitated emerging firms such as FinTech start-ups (Ref) to provide an alternatives forms of services to the overall public in the fields of payments, borrowing and lending, investment and most important security in financial transactions.

In this part of the Literature Review we will outline the current researches, reports and academic literature on Financial Technology. For the Purpose of common understanding, we will refer to Financial Technology as FinTech.

Literature Review of FinTech

Why FinTech

The year 2016, can be said was the year of uncertainties. First, with the Brexit referendum of United Kingdom (UK) perminantly leaving the European Union (EU) and second, the election of the Donald Trump as the President of the United Stated (US), has created a event of fragility. Although the election of Trump has pushed the NYSE and NASDAQ to record high returns (Authers et al. 2016), other variables have formed a more unease prediction for the Financial Service sector and alternatives to the traditional finance was needed. Undoubtably FinTech had an unbelievable glodrush vibe over the past 5 years (ref). With year after year, where Venture Capital (VC), Private Equity (PE) and also through Merger & Acquisition (M&A), new investment has been put in new promising and emerging technology in Finance. In 2015, it was the peak of the FinTech hype with a total annual global investment of over $47 Billion (KPMG 2017) in Fintech companies, which was an increase of over $18 Billion to 2014 (Vucicevic 2017 and KPMG 2017). Graph 1 below illustrates the annual global investment in FinTech between 2010 and 2016, where a clear trend in FinTech investment can be observed from 2012 to 2015.

Nontheless, 2016 was a demanding and difficult for the global investment in FinTech sector. As mentioned earlier, the uncertainty of the Brexit vote outcomes and the impact of the negotiation between the UK and the EU, has caused many global FinTech investors to switch into a caution mode and awaite the results of the negotiation. The first signs of these uncertainties has surfaced, where almost one year after the Brexit referendum vote, many major Financial Service organisation has decided to relocate their operation from London (which is or was the global financial service hube), to other European Cities. With This in mind, many FinTech start-ups or companies will most likely follow the same trend.

Another worrying event in 2016 was the US presidential election of Donald Trump. Although many expert believed that the newly elected US president would have a negative impact on the US economy, quite the contray happened. The NYSE and NASDAQ gained all time record profit, but on the other hand the market volatility has increased by over 10% at the same time, where it reflects a greater uncertainty of the overall market.

The KPMG (2017) report shows that the global FinTech sector is recovering steady from the 2016 shocks (ref). At the same time the recsent FinTech trends as illustrated in the KPMG report (2017) that in 2017 there will be more confidence from VC and PE to invest in FinTech again. Nonetheless, many eyes are currently focused on the US adminstration, as it plans to put a more stricter restrictions on the skilled foreign labour. These expertise are desperatly needed in the FinTech hubs such as New York (with its sheer concentration of financial service institutions and especilly Wallstreet (Ref)) and Silicon Vally (the epicenter of the global tech movement). Many FinTech firms are aiming for a more easygoing approach from the US administration, with the hope that it could boost talented and skilled workers in the area of FinTech. Another major FinTech hube is London (ref) and with the UK government’s “devorce strategy” (wired 2017) of an “Hard Brexit” (wired 2017), the free movement of labour could could be put on halt from March 2019 onwards and many UK based FinTech companies would lose out their “passorting right” (wired 2017) to operate within the EU and various FinTech companies could rethink their UK operations and could decide to relocate their operations to other EU member states.

As there are other macro or external events that could potnetially have either positive and negativ impact on the FinTech development, nevertheless, the current advancement of the FinTech phenomenon has a resembling corallation with the Dot-Com boom era of the late 1990s (ref). Especially when comparing FinTech with Dot-Com companies, a similiarity is that both had a high growth of firms entering the market and being valued in billions (ref). However, since the Dot-Com bubble various variable have change, so as to avoid another “tech bubble” (ref). For one firms that aim to go publich through IPO need to have at least $100 million in annual revenue (ref). Another point it that many FinTech do not intend to reinvent the wheel again, whereas the majority of FinTech companies are focused to find new and unorthodox solutions for existing issues and problems in the financial service sector from a technological viewpoint (ref).

NEEDS to put refernaces in

Figure 1. Source: (KPMG 2016)

Current Trends and Investment in ‘FinTech’

The fast growth, the steady establishment and the disruptive innovative power of FinTech has shocked and surprised the financial service and banking systems at the same time (PwC 2017). An Accenture (2016) report outlines that between 2010 and 2015 the global financing activity rose by almost 1250% within 5 years. Graph X illusrates that in 2010 there was an investment activity of $1.791 Billion in FinTech companies with 338 closed deals. This number dramaticlly increased to over $22 Billion in 2015 as well as over 1100 deal closed. Graph x also reflects that the majority of the FinTech investment was done in the US which account of over 80% in 2014 and 75% in 2015.

When Looking at the current development, we can catigorise FinTech companies in two different types (Accenture 2016). The First is the competitive type of FinTech companies, that directly contest and challenge the existing financial service organization incumbents and the second one is the collaborative type of FinTech companies that provides services and solutions, so as to advance and improve the current position of the already existing financial service incumbents (Accenture 2016). By focus on graph y, we can see that the majority of the FinTech financing activity is mainly aimed towards the sompetitive segment of FinTech. In 2014, the ratio was 71% of the investment gone into the competitive FinTech type and only 29% towards the collaborative FinTech type. However, as shown in graph y, in 2015 the investment into the collaborative FinTech type rose to 44% of overall with the agenda that collaborative Fintech companies aiming to create a long-term collaboration with the financial service industry to generate and to constitute a more edge in the financial and capital market. Nonetheless, the competitive FinTech still accumulates the majority of the investment. This shift of trends suggests that long-established financial service institutions have started to acknowledge the necessity of the FinTech expertise and knowhow, where the collaboration could guarantee future sustainable growth potential and at the same time to pioneer new innovation (ref).

Historical Orgine of FinTech

With the groundbreaking journal ‘The Evolution of FinTech’ Arner et al. (2015) outlined that theterm FinTech can be backed to the early 1990s and it specifies “the Financial Service Technology Consortium project that was initiated by the Citigroup” (Arner et al. 2015). However, the term FinTech came first known to the public, when it was first publiched in 1993 in an article of the Amercian Banker magazine (Hochstein, 2015a), as a new trendy term to dircribe the technology that Citigroup was researching in the area of intergration of modern Personal Computer and Internet in the banking and investment operations (Hochstein, 2015b). Back then, the understanding of “FinTech” was the technology which were in use in the financial service sector and not to be mistaken by the current usage of the term of FinTech.

Arner et al. (2015) and Prabook (2016) underlined in their research that the term FinTech was used already in the 1970s, in an academic research article. It outlined the theoritical models on how to analyse and solve the day-to-day problems that financial service instituations are confronted and that technology could provide the needed tools to overcome it. At the same time, the first definition of Financial Technology was ”FinTech is an acronym which stands for financial technology, combining bank expertise with modern management science techniques and the computer” (Bettinger 1972, p.62).

Since the first use, the meaning of FinTech has reinterpreted a various time event and occasions. In the next section, we will look at the definition of FinTech.

Defenition of FinTech

When applying the term “FinTech” to Google and analysing it with Google Trends from June 2014 to June 2017, as illustrated in Figure 1, it had on average a monthly score of over 255,000 searches worldwide on google.com for the month on June 2017 (Google 2017a). This number of hits might not seem as very high, but when comparing it to the term “Financial Service”, with an average search of 45,000 per month (Google 2017b), as we can see in Figure 2, that past January 2016 term “FinTech” became more relevant. However, when scaling the search between the least search google entries and highest search request from January 2016 on a scale from 0 and 100, the observation shows a significant rise in the general interest for FinTech with an average score of 75 from 100 for the past 18 months and an average score of of 88 from 100 from January 2017.

Fig. 1. Popularity of the term “FinTech” in Google Search Engine

Fig. 2. Comparing the popularity of the terms “FinTech” (Blue) vs. “Financial Service” (Red)

Having had a brief view at the popularity of the terminology of FinTech, we will show the orgine and meaning of FinTech that has been outlined in various reports and journals.

Looking at the meaning of FinTech one of the academicly recognised dicitionary defines FinTech as “Computer programs and other technology used to support or enable banking and financial services. Fintech is one of the fastest-growing areas for venture capitalists” (Oxford English Dicitionary 2017). A more widely used online source has defined FinTech as “FinTech is the new technology and innovation that aims to compete with traditional financial methods in the delivery of financial services” (Wikipedia 2017). Altough, it is argueable to the reliability and contemporary of the above sources a more siencetific definition is needed from various point of view so as to better comprehend the overall definition of FinTech.

Although, it took less than a decade for FinTech to disrub the global financial service sector, there isn’t still a common understanding of the defintion of FinTech (Schueffel 2016). A 2017 survey in Germany highlighted that 70% of the financial service customers did not know how to define FinTech (Absatzwirtschaft 2017). These recsent survey illustrates that it is necessary to outline academic understanding of the meaning of FinTech.

Arner et al. (2015, p.1) discribe FinTech as an onging development process where finance and technology have merged together, that has led to new “disruptive and incremental innovations” (Schueffel 2016). Likewise have Chishti and Barberis (2016) outlined in their book that the “marrige between finance and technology” (Schueffel 2016) in the financial sector has created firms that were not on the radar of the financial service prior the 2008 Financial Crisis (Chishti and Barberis 2016).

Below we have created a table of various academic and non-academic defintion of FinTech between 2014 and 2017.

Definition Refernance Type
“Financial Technology, also know as ‘FinTech’, is a new sector in financial industry that incorporates the whole plethora of technology that is used in finance to facilitate trades, corporate business or interaction and services provided to the retail consumers.” Micu and Micu 2016 Journal
“’FinTech’ can be broadly defined as technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets, financial institutions and the provision of financial services.” Carney 2017 Conference Speech
“’FinTech’ is an economic industry composed of companies that use technology to make financial systems more efficient.” Williams 2017 Blog
“Recent advances in information and communications technology (ICT) have led to the rapid development and expansion of new and innovative financial services, often termed ‘FinTech’.” Jun and Yeo 2016 Journal
“’Fintech’ is a new financial industry that applies technology to improve financial activities.” Schueffel 2016 Journal
“The term ‘FinTech’, which is the short form of the phrase financial technology, denotes companies or representatives of companies that combine financial services with modern, innovative technologies.” Dorfleitner et al. 2017 Journal/Book
“’Fintech’ is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century. Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions.” Investopedia 2017 Website
“’FinTech’ companies are defined as those that offer technologies for banking and corporate finance, capital markets, financial data analytics, payments and personal financial management.” Accenture 2016 Report

As presented in the above table, there is not clear guidelines and common understanding how to define FinTech. As we can see in the table most of the definition on FinTech are relatively new. Schueffel (2016) aregues in his publication “Taming the Beast: A Scientific Definition of FinTech”, as the technology on and around FinTech eveloves so does the understanding and definition of it. As an example he uses Investopedia, where the definition of FinTech got updated or changed altogehter over 7 time between 2014 and 2016 (Schueffel 2016). We have to acknowledge that websites such as Investopedia or Wikipedia, cannot be used as a reliable source of scientific and academic evidance of definition and terminology. As the majority of FinTech companies are still in the early phase stages, the needed research and further studies will provide a more in-depth understanding of the meaning and while the large number of FinTech companies are start-up. However, there are also firms that have passed the start-up phase established themselves and managed to become integrated international organisation. An Example is Stripe, which was found in 2011 and has valuation of over $9 Billion as of 2017. Stripe has eveolved itself from a start-up and is a internationally active FinTech payment service provider. It goes without saying that such a new fast growing industry is change at a rapid pace and through further investment in the FinTech sector, new disruptive innovation will emerge.

The overall goal of FinTech companies is to attract new customers with their innovative and revolutionary goods and services that (ref) is more customer orianted, productive, efficient, user friendly and secure. In comperision many trational financial service and especially banks have to some extent neglected over years their technology and are faced with new competition (Machanzie 2015). Chiu (2016) suggests that the majority of FinTech do not solely focus on financial service related activities, but in the past years other sub-brenches of have gained great attention, such as Insurance Technology (InsurTech) and Regulatory technology (RegTech). Breaking it down into simple terms, “FinTech companies just simply provide the technology (software solution) to financial service provider” (Dorfleitner et al. 2017).

The Driving Force Behind ‘FinTech’

New Generation of Consumers

In the past decade, the change in the preference and behaviour of consumers have evolved, in particular due to the technological integration that has become a necessity for many people and businesses (Leonard-Barton and Kraus 1985, Peppard and Ward 2016) and most of organisations as well start-ups are see in this trend a new “goldrush” (Boccardi et al. 2014). As the new emerging technology finds itself more and more into the daily lives of general consumers, they as well try to embrace the new technologies at a more faster pace (Gunther McGrath 2013), collecting, gathering  and obtaining information for alternative sources (Ratchford et al. 2014) and as well as the PwC (2014) “Retail Banking 2020 Evolution or Revolution?” report shows that the consumers have become more vary and their loyality has shifted from their traditional banks and financial service institutions towards a more demanding of level “personalisation, convenience and immediacy” (Pollari 2016).As the economic contribution of the Baby Boomers and Generation X is decreasing (IMF 2017) and the new Millennials generation is growing that accounts of over 1/3 of world population (ATKearney 2016). As Millennials will be the driving force of the future financial, capital and economical market, the new disuptive FinTech sector is trying to lead the developments and trends in the greater marketplace and satisfy these new demographics demand. A recsent survey of Wharton FinTech (Manji 2016) show that the majorty (73%) of Millennials do not think that traditional financial service institution fully meets their excpetations and over 57% stated that actively use alternative channals of transacting their business.

Digitalisation

Certain sectors have managed to maintain their traditional business infrastructure, such as commodity trading, where contract, licencing an other document are still printed physiclly. However, the “digitalization movement” (Lasi et al. 2014) has pushed various sectors and industries to shift their business on to the digital platform (Parmar et al. 2017). With the swift adoption of mobile telecommunication devices (Smartphones, Tables, Smartwatch, etc.), has created a newopportunity for many business andcomsumers. A rescent research report of eMarketer (Murphy 2017) showes that there are over 2.4 Billion Smartphone users in 2017 and at the same time over 3.5 Billion people around the world are using on a daily bases the Internet, additionally by 2019 eMarketer predicts that half of the world population will access the Internet through a Smarthphone (Murphy 2017). The Pew Research Center survey (Pouchter 2016) outlines, although the internet access and smartdevice usage is more dominat in develped nations, emerging and developing countries such as Brazil, China, India, Indonesia or Russia continue to advance in the digitalization of their economy. Moreover, The survey suggests that the emerging and developing economies over 64% of their population between the age of 15-45 years (Pouchter 2016). New payment Platforms, Online Transaction Server or Online Wallets aren’t more a small niche or just for certain cliental, but they have become a essential and alternative approach for many consumers and businesses. Furthermore, the advcancement, development and implementation of Internet of Things (IoT) or Artificial Intelligence (AI) has shown great promise. A Ernst & Young (2016) report indicates that by 2020 there will be over 30 Billion IoT devices connected globally which shows that the digitalization will be more relevent in future.

The digitalisation trend continue to grow and many FinTech start-ups and companies have already created a entire segment to it and as most business transaction are conducted digitaly it will continue to grow. As of August 2017, the 5 most valueable companies are in the segement of technology, Alphabet (Google), Amazon, Apple, Facebook and Microsoft (ref). Even though, these companies provide different goods and services, undoubtably the movement is shift more towards digital serivces, such as cloud commputing, data management & analysis and online transactions (ref).

The Pace of Technological Change

In many industries the pace of technological changes have increased, due to the rise of competion and the fall entery barriers (Gunther-McGrath 2013). As Porter and Millar (1985) mentioned in their HBR report the information technology is advancing faster than technologies for physical processing. The costs of information storage, manipulation and transmittal are falling rapidly and the boundaries of what is feasible in information processing are at the same time expanding”. As adoption of technology evolves at a much higher pace, some revolutionary and ground breaking past technology could these days be replaced by much newer and advanced technology through disruptive innovation (Paap and Katz 2004). Even certain business sectors have been disrupted by newer one, particularly those sectors that understood the importance of technology, e.g. Uber that will revolutionise the transport business, AirBnB will change the hopitality industry, Tesla will turn the entire automible industry upside down. It took these organisation only few years to reach the brand recognition and gain market share and to challenge the incumbents. An example of pace increased technology is that it took telephone over 60 years to to be available to 80% of the US households, on the otherhand it took cellphone only 15 years to reach the same amount.

graph x (source: Harvard Business Review 2013)

graph y (source: Harvard Business Review 2013)

Firms with competitive advantage in advanced and disruptive innovative technology have to move as well as advance faster, so as to capture and at the same time to maintain the chances and opportunities that they have obtained and acquired. By looking at the US S&P 500 Index, where in 1935 on average most firm remained an approx. of 90 years in the index, in 1965 the tenure was approx. 30 years, by 1990s the number shruk to about 20 years, in 2010s this number felt to approx. 14 years and some estimation suggest that by 2030 this number could only be only around 5 years (Minutemen 2014). In a fast changing global technology and digital economy, losers and winners will come and go at higher rate.

Barriers to Entery

Technology and timing alone is not enough to create and to sustain competitive advantage for firms (Brezni 2012), especially in Tech-Centric business environments, where barriers to entry have dramaticlly fallen. This could be due to new start-up firms focusing on the same technology by similar metheodolegy, tools and applications for the same end product. As Carr (2003) pointed out, that in an industry where the barrier to entery is relatively low or non-existent and at the same time the vast majority of firms have access to the same technology, only early stage pioneers will benefit from competitive advantage. Furthermore, Carr (2003) suggests, that comperative advantage will not last for long, because others will always catch up with the early stage pineers. An example would be the case of Finnish mobilephone pioneers Nokia. Nokia was able to dominat the mobilephone market from the late 1980s & early 1990s until the mid-late 2000s and at its peak in 2007 it had over 41% of entire mobilephone market share (Alcacer et al. 2014). With new advanced and emering technology becoming widely available to market players, firms that are unable to compete through e.g. economic of scale, cost leadership or brand differential will either fall behind and lose their market or they will become irrelevant (Reed and DeFillippi 1990, Barney 1991, Hesterly and Barney 2010). The rise of Apple and Android Smartphones as the new benchmark for mobile devices, replaced and drove out Nokia as the market leader (Alcacer et al. 2014) and in 2014, only 6 years after its peak, Nokia mobilephone segment was fully acquire by Microsoft (Pierce 2013). The Nokia example shows that currently the technology sector is expericing a non-existance of barriers to entery and firms around the world are able to create the same or simliar devices as their direct competitors, e.g. OnePlus or Xiaomi.

Trust Issues

After the 2008 Global Financial Crisis, a fundamental shift in trust became noticeable (Tonkiss 2011), where an alternative to the old-established financial services organisations was desperately need. In her Ted-Talk presentation Botsman (2016) stated that in the years of post crisis“a cloud of mis-trust” is hovering over the large financial institutions and a large bloc of society has start to turn their back on the on them and funnily enough they are palcing their trust in new alternative technology based firm, also know as FinTech. Botsman (2016) further expresses that the distribution of power and trust is rearranging and shifting away from “the centralised and top-down systems” and is heading towards a “more distrubuted and decentralised  connected communitiey”. Notably many FinTech start-up have placed special empahsis on creating services where others can conduct business with any other party without trusting them at, in other words paltforms and channals available (e.g. through encrypted technology) that enables and allows all parties to maintain their anonymity as well as to eliminate the varibale of trust from the equation. An example is the Blockchain application that allows anyone to create a platfrom to varify their transaction without disclosing or revealing too many details. It also facilitates strangers a new way to do business without trusting each other, on the contrary many financial service organisations were building their relationshig on trust with the consumers.

Another remarkable trust issue arises from the influence and ascendancy of the social media paltforms, such Facebook, Twitter or WikiLeaks (ref), where opinion of people is easily influced by strangers and people have become prone to trust the opinion of stranger over what they see as “the establishment” (ref). This new social network communities have become espacially for millenials’ somewhat the primary source of information (ref) and have shaped the consumers views and opinions of the financial service organisations, even more than the information available on the organisations own internet platform and webpages.

Financial Service Sectors Reactions to ‘FinTech’

The long-established financial service sectors institutions cannot just hold still to watch and wait. The financial service incumbents are “rechanging, remodeling, reorganising and restructering” (ref) their approach towards the priviously “sneering” (ref) FinTech sector. This view has dramatically changed and  the financial service sector has realised that the invetments and collabrations in the early stage FinTech start-ups will certainly provide a more broder and also diversified range of new innovative new opportunities and ideas (ref). In the past, a large part of the financial service incumbents mainly invested into a small pool of technology vendors for new innovations and it was also done without any cooperation of outsider, as most innovations were done in-house (close innovation approach) (ref). As the FinTech sector is becoming more relevant, many financial service firms have nowaday what they call a “In-House FinTech Lab or Incubator”, where they basically provide financial capitals, space, resources and also to some extent expertise or knowledge to the FinTech start-ups. In return the financial service incumbents anticipate to gain a greater insight into new innovative approach or just to acquire a potential future competitor (ref).

As it would appear more than natural that financial service incumbents would react to disruptive innovation of FinTech through business model adjustment some researchers (Chandy and Tellis 2000) argue that incumbents are somehow not capable to respond objectively to the threats. (Christensen et al. 2015) state that incumbents reaction towards newcomers are unimpressive, as distruptions doesn’t occure suddenly and usually takes time and incumbents are usually less likely pay attention and disregard or ignore emergining disruptive innovation of the new kids on the block. (Christensen et al. 2015) also mention that even if financial serive incumbents notice the FinTech disrupter, they are reluctnat to recognise the potential of the FinTech disrupters and tend be typically ver slow to invest in them. An example is in early stages of Google, where Yahoo had the opportunity to acquire for only $1 million. However, accroding to (Hsu 2014) from Wharton Business School that disruptive innovation does not necessarily lead to the failure of an incumbents, where FinTech disrupter with their innovative technology are more likely to collaborate through strategic alliances, mergering or licensing to the financial service incumbents.

In rescent years, the majority of financial service industry is heavily investing in the FinTech sector (ref). In 2015, over ¼ of the closed FinTech deals were conducted by financial corporate investors (KPMG 2016). The increasing trend of financial corporate backed investment suggests that the financial serivce incumbents have started to appriciate the FinTech disrupters as “enablers rather than intruders” (ref). These shift of changes can be seen as an Open Innovation appraoch from Chesbrough (2010), where firms should look outside of the companies border for more capable and knowledgable people and firms should combine inside resources and knowledge as well tap into the external technologies and ideas to advance their own technology. According to CB-Insights (2015), which is illustrated in Graphs x and y, where the 6 largest US Financial Service Incumbents, Bank of America (BoA), Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo have placed strategic investments either through Venture Capital (VC) segment such as Citi Venture or simpily through Merger & Acquasitions (M&A) in FinTech Start-ups and Companies between 2009 to 2015.

Graph X

Macintosh HD:Users:shahodashti:Desktop:Screen Shot 2017-08-05 at 18.22.39.png

Source: CB Insights (2015)

Graph Y

Macintosh HD:Users:shahodashti:Desktop:Screen Shot 2017-08-05 at 18.21.54.png

Source: CB Insights (2015)

As a reaction to the FinTech disrupter (as mentioned earlier there are either competitive or collaborative type FinTech approaches towards Financial Service Incumbents), from the financial service standings, they have two approaches; they can either “defend or attack” (ref). The incumbents would most likely follow the “defence” (ref) strategy towards FinTech companies, if they believe that the disrupters could threaten their current business models through innovative technology. This approach was mainly followed during the early stages of the FinTech disruption and when the majority of the financial service organisations did not have a clear plan how to approach and to deal with FinTech. On the other hand, nowadays most financial service incumbents have a much approachable strategy towards FinTech companies. Most financial service firms have come to realize that the innovative technologies should not be seen as a threat but rather as an opportunity for the future to expand and diversify their portfolio of customers’ as well as to advance at the same time their existing knowhow, expertise and capabilities for the future revenue stream.

FinTech Segments and Business Models

Remittance

Remittance is relatively a niche segment of the FinTech sector. Chishti and Barberis (2016) define Remittance as a money transfer by a worker in a foreign country to either individuals or family member in his/her native country. A 2016 report of World Economic Forum (Torkington 2016) has estimated that in 2015 the overall global Remittance transaction was $582 Billion which was an increase of $146 Billion from 2014 (total Remittance in 2014 $436 Billion). A World Bank report has calculated that in the Q1 2017 the global remittance free was on average 7.45% and in Q4 2016 was 7.4%, which is a all time high (World Bank 2017). The World Bank (2017) suggests by cuting 5% of the overall remittance fees and charges could save up to $16 Billion a year. Chishti and Barberis (2016) point out that most workers in foreign countries are facos hidden costs and fees, such as in the US transaction to certain countries involves a cost of authority background checking, as well different regions would have different fee structures. E.g. due to the international sections on Iran any international financaial serivce and credit institutions would not be active there and they would charge additional fees on top of the above stated fee (Chishti and Barberis 2016). Many disruptive FinTech start-ups such as Currency or Veem have managed to raise large fundings and are becoming a serious competitors towards long-established incumbents such as MoneyGram or Western union. The latters are both operating in over 96% region around the globe and hold a monopoly (World Bank 2017). Both Western Union and MoneyGram account for ¾  of all money transactions and transfer to Africa, 2/3 to India and over 2/4 to China, which are by far the largest remittance transfer inflow (Chishti and Barberis 2016). Due to the fact that most remittance start up operate digitally or online and most remittance transaction goes in regions of the world, where the internet connectivity are not as advance or developed as most developed or wester countries, thus only 10% of total remittance transfer and transaction were conducted online. Therefore, it is rather challanging for most remittance FinTech companies to gain foothold and compete against the Western Union and MoneyGram.

Digital Banking

As mention in the “Digitalisation – Driving Factors Behind FinTech” the digital banking movement has deeply embedded itself into the cosumers daily life and also revolutionised the way people do business nowadays. Epecially the rise of smart devices has pushed this revolution across the world, where one is able to check, update or transfer money even from remote locations. According to the research center of Gratner Institute (2016) that by 2020 over 75% of the US households with have a smart device and that over 80% of the sold smart devices around the world will be smartphones. In this new digital envirnment the key roles of financial service organisations will be to bridege the trasmission between personal banking and digital (Chishti and Barberis 2016). These organisation should provide and offer user-friendly , strightforward and transparent platforms to their customers and at the same time stepping away from the traditional customer service approach and advance reinforce a channal for a more personal relationship with their customers through social media (Kietzmann et al. 2011). This Digital application are causing great concerns for various financial serivce incumbents, as they have for far long underestimated the innovative digital potential of FinTech firms and are facing great difficulties by catching up with these distrupters. According to Padmaavathy and Adalarasu (2015) the top future digital prediction and trends in banking will be: 1. Increased Use of Customer Analytics, 2. Expedited Deployment of Digital Delivery, 3. Focus on Mobile-First Design, 4. Increased Digital Selling, 5. Acceptance of Mobile Payments, 6. Focus on Security and Authentication, 7. Industry Consolidation, 8. Enhanced Customer Incentivization, 9. Investment in Innovation, 10. Increased Impact of Digital Disruptors.

The digital banking trend forces banks to re-evaluate and reaccess their old traditional bricks and mortar business models and based on the interview BBVA (2017) during the World Economic Forum BBVA’s Global Executive Chairman Francisco González said that in the future the majority of banks in the future will be more a software company than to a traditional bank as we know it today and trying to avoid or to resist the innovative digital development in the financial service sector would be the same as one would try to stop an avalanche. The banking service sector has over the past centuries has managed to adjust its business model to the needs of its customers, however, the current trends of FinTech digital banking, where traditional banking approach are on the verge to sink to insignificance. With growth of online based business transaction and mobile usage the customer behaviour has changed drastically within a very short periode (European Banking Federation 2015), such as the first Apple smartphone was launched in 2007 and it enabled its user to used the internet as easily as another device. In 2015, although internet banking channels were already widely used, it still increased from 54% in 2014 to 71% in 2015 and at the same time the newly introduced mobile banking channels rose from 16% in 2014 to 36% in 2015, the latter roseover 120% within one year (Capgemini 2016). In 2015, over 47% of the Eurozone population had accessed online banking sites and Finnland with 87% by far the leading country (European Banking Association 2016) and in 2016, in Norway over 91% of internet userd had accessed online banking (Statista 2017). The growing mobile banking sector had 61 million in 2013 customers in the EU, 42 million used there smartphones and 19 million used tablets and this mobile banking usage is estimated to grow to over 2014 million by 2018 (European Banking Association 2016). On the global level most African nation would lead online banking usage, see please grpah x below:

Graph x

source: (WorldAtlas 2017)

Near Field Communications (NFC) and Mobile Payment Applicaions

The implementation of NFC on various smart devices, such as smart phones or smart watchs is fundamental for “mobile proximity payments” (Mainetti et al. 2012). NFC system enables customer to use their smart devices as a digital wallet (Ghosh et al. 2017). The connection between the NFC chips and termerinals allows to exchange the needed data or information without acutal physical interaction (Pham and Ho 2015). This mobile payment approach allows for a simpler, quicker and more comfortable non-cash business process and transactions as well as for businesses and espacially for customers. Based on the emperical research of Pal et al. (2015) the personal-related & product-related factors, the perceived risk and the diversity & variety of other payment alternatives available to customers would influence their likelihood to use the NFC technology. The NFC technology is particularly convenient for customers due to it hassle-free and customer-friendly usage and set-up, as most smart phones already provide the NFC infrastructure for ready to use (Ghosh et al. 2017). Currently, Apple and Andriod (Google) Pay are the leading organisations that provide the architecture and infrastructure for NFC in both IOS and Android smart device operating systems. Figure X illustrates how a NFC mobile payment platfrom is constructed.

Macintosh HD:Users:shahodashti:Desktop:Screen Shot 2017-08-07 at 01.20.50.png

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