Many Types with Similar Objectives: Innovate Financial Services
Lately there is much talk about Fintech. The word is used with different meanings. It seems worthwhile to try to make a classification.
At the basis of Fintech, there is always the pairing of financial services and technology. Some might think that the technology must be necessarily advanced. In reality, it is not so. Some Fintech companies use technologies relatively old and not necessarily those of the last hour. But FinTech companies use technology in innovative ways. Fintech are not alone in using digitization, which is one of the most pervasive solution ever invented. The reason lies in its intrinsic flexibility and agility, due to its unique combination of hardware and software. The reason of the interest in Fintech is that the innovation acts on a very old job in the world: banking. And the problem is that banking has remained rather static on respect to other sectors which had used technology in surprising ways.
This post aims to start providing some theoretical basis that will help to develop a Fintech business model for enterprises by investigating the current status of Fintech corporations and their specific business models.
From Banks to Banking
A bank is a financial institution that creates credit by lending money to a borrower, thereby creating a corresponding deposit on the bank’s balance sheet. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial system and influence on national economies, banks are highly regulated in most countries.
A well renowned dictionary defines banking as:
- The business of a bank.
- The occupation of a banker.
As a matter of fact this is not correct. It is possible to define banking in a different way. Banking is to engage in the business of keeping money for savings and checking accounts or for exchange or for issuing loans and credit and so on.
In more formal way, banking can be defined as having two basic functions:
- The filing function which consists in the possibility made available to individual customers to deposit their savings as a convenience. An interest will be paid to these in the form of the base lending rate;
- The lending function is the traditional loan disbursement activities (such as for instance. mortgages) to an active interest rate, through which there is an allocation of the savings of depositors to those applicants (individuals or companies or public administrations) considered worthy or with appropriate financial coverage.
FinTech makes possible to uncouple banking from banks. It enables companies to gain the best-in-class methodologies without requiring organizations to devote additional internal technological resources or personnel. Many of these solutions reduce costs, while dramatically improving value for the customers at high service levels. Ever variable trends in the economy, aggressive demands from customers, new and disruptive technologies, and continuous regulatory changes have increased competitive pressure for companies. Companies must seek to lower costs, improve productivity and increase profits while complying with constantly evolving regulations and especially provide values to their customers. FinTech provides financial services companies the capability to exploit value-added, customer-centric functions while reducing resources (such as for instance assets) in operations.
The Classification of FinTech Companies
It is possible to classify Fintechs in several ways. In order to analyze the potential criteria for the classification, it might be interesting to refer to a sentence of Ruyard Kipling in his book: The Little Elephant. This classification is based on the so-called Five Ws, and one H. According to Kipling, a problem to be considered complete must answer these questions starting with an interrogative word. In the case of Fintech, this would mean to answer to these questions:
- Why a Fintech was born?
- For Whom it was born?
- What is the product it aims to provide?
- Where did it take place?
- When did it take place?
Some authors have added a sixth question to the list of Kipling: “how”.
- How is Fintech working?
Fintech can be classified based on these five Ws and one H.
Fintech were born to provide services. One possible classification is based on the aims of the services provided by FinTech:
- Customer Service: processes and services that deal with the customer at the user interface level as well as at the back-end level;
- Financial Service: applications and processes;
- Financial data analysis;
- Risk management;
- Portfolio rebalancing;
- Performance attribution;
- Systems integration;
- Compliance: methods for a company to comply with external and internal regulations;
- Business Processes: technology a company uses to maintain and access critical information and data;
- Decision support.
Another possible classification is on to whom the Fintech want to provide services. In this case, it is possible to consider:
B2P – Business to Person Services, such as:
P2B – Person to Business Services, such as:
P2P – Person to Person Services, such as:
B2B – Business to Business Services, such as:
Provision of advanced services and packages to the banks
Credit for SME
Support to the internationalization of the Businesses
Another possible classification would be based on the what FinTech can provide. It is then possible to talk about:
- Loans (for instance, crowdfunding)
- Payments (for instance, virtual currencies, such as Bitcoins)
- Electronic transfers and remittances (for instance, Instarem);
- Mortgage (for instance, MortgageBot);
- Insurance (for instance, Insurtech)
- Trading (for instance, robo)
- And so on
Another possible classification is based on the ownership of the Fintech. Under this point of view, Fintech can be divided into:
- Companies or inititiatives by traditional financial services, such as banks and insurance companies.
This classification tends to blur up, since in a certain number of the cases, traditional financial institutions buy start-ups or even set up a separate division or separate company (most of the times fully owned) to foster the birth of start-up ideas.
In other cases, start-ups collaborate with traditional financial services institutions in a sort of co-petion.
From the point of view of When provide services, Fintech can be classified into two categories, in accordance with their service characteristics and types
- Traditional Fintech; and
- Emergent Fintech.
The existing Fintech companies hold five business models:
- Supplement type;
- Deferred payment type;
- Escrow-based type;
- Cash transfer type; and
- Credit purchase type.
Another classifications is connected with the how FinTech innovate. It is possible to define Fintech based on:
- Product Innovations
- Process Innovations
- Organization Innovations
- Business Model Innovations
Another possible classification would be based on the how the Fintech is planning to provide services. So Fintech are active in:
- Mobility (for instance, mobile banking);
- Big Data Analytics;
- Internet of things;
- Cloud Computing;
- Artificial Intelligence;
- Social networks;
- And so on
On the “how” provide services, there is an excellent technology introduced by FinTech which can really revolutionize the financial services. It is called BlockChain.
This technology was invented to create the peer-to-peer digital cash Bitcoin in 2008. Blockchain algorithms enable Bitcoin transactions to be aggregated in ‘blocks’. These blocks are added to a ‘chain’ of existing blocks using a cryptographic signature. The Bitcoin ledger is constructed in a distributed and ‘permission-less’ mode. Anyone can add a block of transactions if they can solve a new cryptographic puzzle to add each new block. Anyone with access to the internet and the computing power to solve the cryptographic puzzles can add to the ledger and they are known as ‘Bitcoin miners’.
In essence, a blockchain is a public ledger of all transactions that have ever been executed in a specific domain. It is constantly growing as ‘completed’ blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order. Each node (computer connected to the specific network using a client that performs the task of validating and relaying transactions) gets a copy of the blockchain, which gets downloaded automatically upon joining the specific network. The blockchain has complete information about the addresses and their balances right from the genesis block to the most recently completed blocks.
The possible uses of Blockchain could go much more beyond virtual currencies. To go into this direction Blochchain must be considered what they really are: a distributed ledger. A distributed ledger is essentially an asset database that can be shared across a network of multiple sites, geographies or institutions. All participants within the network can have their own identical copy of the ledger. Any changes to the ledger are reflected in all copies in a very short time: minutes, or in some cases, seconds. The assets can be financial, legal, physical or electronic. The security and accuracy of the assets stored in the ledger are maintained cryptographically through the use of keys and signatures to control who can do what within the shared ledger. Entries can also be updated by one, some or all of the participants, according to rules agreed by the network.
Is one of these classification be preferable to the other ones? Not necessarily. Very much will depend on the use of the classification. At the end, all these classifications are useful, for instance to evaluate the risks or the probability of survival, or the need of funds, and so on.
The classification I prefer is the one based on the types of innovations, since at the basis of each Fintech there is an innovation. Not coincidentally one of the most interesting conferences on Fintech is called Finovate. The pairing between services and innovation is indeed the most important category of the Fintech.