Disruptive Technology in Banking and Finance

FinTech has garnered the interest of the public, industry practitioners, regulators, researchers and policy makers worldwide. Its disruptive and transformative potential transcends country borders and is having real impact on the way financial services are provided and forcing existing financial institutions to adapt. FinTech can enhance competition and financial inclusion to deliver tailored financial services at more affordable prices and at greater convenience. The emergence of FinTech directly challenges the business models of incumbent financial intermediaries like banks, which are adapting through in-house patents, acquisition of emerging FinTech firms and partnering with FinTech and large technology firms. This chapter provides the reader with a short overview of key trends and a preview of the content in the reminder of the book, organized according to chapters.

This chapter provides a contextual background to understanding the contemporary FinTech revolution through the exploration of the history of disruptive technologies. Even at a very early stage (late 1860s–1960s) technology and finance had a strong relationship. Ever since, technology has contributed to the development and advancement of banking and financial solutions: two examples being the introduction of credit cards and ATMs. Later on (1960s–2008) the relationship between technology and finance became increasingly strong and intertwined—heavily impacting financial products and processes, and gradually digitalising the payment system, banking channels and securities markets. Beginning in 2008, and lasting up to 2020, the FinTech and digital economy revolution spurred many new disruptive innovations, such as cryptocurrencies, peer-to-peer marketplaces and robo-advisory services. Furthermore, the unprecedented effect of technological innovation in financial markets had an impact on the competitive environment, due to the entry of new (often unregulated) providers with innovative business models. These novelties ultimately affect the sustainability of the traditional business models of financial intermediaries and raise policy concerns related to financial stability and consumer protection. The chapter concludes by discussing the future developments suggested by recent trends in technological innovation, regulatory and supervisory approaches and the need to grasp the benefits of digitalisation by the financial sector.

This chapter provides a detailed overview of the importance of innovation in the financial sector and highlights key areas of FinTech growth. It is divided into two main parts. In Part 1: Introduction to Innovation we begin by outlining an important role for innovation in driving economic change, based on the seminal work of (Schumpeter, J. A. (1939). Business cycles (Vol. 1, pp. 161–174). New York: McGraw-Hill.) and his concept of ‘circular flow’, which attempts to explain how innovation can be a driver of economic change. Having established a theoretical importance for innovation as a harbinger of economic change and development, it then proceeds to discuss the role of innovation in the financial industry including the main drivers of innovation and channels through which innovation can improve economic welfare. In Part 2: A Taxonomy of FinTech Innovation based on Patents. the second half of the chapter focuses on identifying and discussing the major areas of FinTech based innovation. We begin by identifying key area of FinTech development based on worldwide patents filed with the United States Patent and Trademark Office (USPTO). From the patents data we identify four broad areas of FinTech development and then proceed to discuss FinTech development within these four areas.

This chapter offers an overview of digital currencies beginning with a background to the digitalization of money. The chapter then proceeds to discuss central bank issued digital currencies, a highly topical area of recent development, and issues surrounding the regulation of digital currencies. The second half of the chapter begins by providing the reader with a short history of ledgers and explains the differences between centralized and decentralized ledgers. Next cryptocurrencies are discussed in detail including issues surrounding their adoptions, and how they work including the various consensus algorithms employed to secure and validate cryptocurrency transactions.

The fourth industrial revolution (technological innovation) is transforming business models and enabling new ways of communication and information sharing in the insurance sector. New challenges emerge, attributable to major changes in customer needs and demands and to the increasing use of new technologies. This chapter explores the impact of technological innovation within the insurance sector and discusses how technological innovation is strongly impacting all phases of the insurance value chain, providing new opportunities and posing new risks. The second half of the chapter provides an empirical study which evaluates how stock markets react to the announcement of incumbents’ investments in InsurTech start-ups.

This chapter enriches discussions from earlier chapters to explore in further depth the evolving relationship between FinTech and Banking. It discusses the extent of impact of FinTech disruption on incumbent financial institutions, and by explaining how the relationships between new FinTech firm entrants and Banks have been evolving over time. More specifically, by providing a detailed overview of the competitive–collaborative relationship between FinTechs and banks. Furthermore, it offers a detailed overview of the contemporary FinTech ecosystem, including an analysis of the services offered by new competitors, as well as how the FinTech phenomenon has grown since its emergence.

This chapter provides the reader with an overview of FinTech cultures and organizational design applied to financial service providers in response to FinTech disruption. It makes the important point that, in order to successfully analyse the FinTech innovation revolution, one must also consider relations between FinTech with corporate culture and organizational changes. Literature to date has so far largely neglected the importance of corporate culture and organizational design for financial service providers in the context of FinTech disruption but we show in this chapter their relevance and importance by establishing a framework from which such relationships can be understood.

This chapter presents a practitioner’s perspective on the disruptive power of digitalization in financial services. It outlines the main challenges faced by incumbent financial institutions and considers the adoption of disruptive technologies, including cloud-based computing, APIs and AI. It reports on the digitalization of several financial services sectors before exploring the role of key stakeholders, including the regulator.

This chapter builds on earlier discussions of regulation in previous chapters (such as Chapter 8) to deliver a more comprehensive discussion of current regulations applicable to the banking and financial sectors with a focus on the European context. This includes an overview of the drivers of regulatory changes, as well as a thorough examination as to how regulation of the sector, including FinTechs, may evolve in the future. Finally, while the focus of this chapter is the European context, the international context is also considered.

FinTech has been promoted as an economic policy opportunity, for example, in the UK and in Singapore, with interventions made to support FinTech start-ups through favourable regulatory treatment. This has included the use of regulatory sandboxes, favourable tax treatment, and some limited financial support for start-up firms, alongside wider pro-competition policies in banking and payments. This chapter provides an economic analysis of these policies, arguing that they can lack coherence. Policies should focus on the broader and more significant challenge of digital transformation—using digital technology to address market and organisational failures across financial services—and addressing the governance challenges that restrict this digital transformation of finance. This requires measures, such as open banking, to eliminate barriers to competition. It further requires substantial regulatory engagement and dialogue with the industry on the development of the information and data infrastructures that will allow them to properly support customer needs, control prudential and systemic risk, and meet other key regulatory objectives. This argument is illustrated with reference to the UK, looking at both the promotion of FinTech as a policy goal and the ongoing digital transformation of UK insurance.

This chapter examines the light and dark sides of fintech through the lens of the supranational agencies responsible for monitoring the impact of developments in market structure on the stability of the global financial system. While fintech is fast growing and offers opportunities to enhance quality of financial services, improve customer satisfaction, increase financial inclusion, support economic growth and welfare gains, the potential exists for known and new risks to emerge and threaten financial stability, economic growth, and social welfare. This chapter discusses how fintech is challenging incumbent financial institutions and identifies benefits and risks associated with the democratisation of financial services. Assessing the effect of fintech on market structures is rendered difficult by a paucity of established data; therefore, the second part of this chapter syntheses relevant data from various sources with predictions from theoretical models alongside empirical and survey evidence to shed light on how markets are evolving and participants are behaving.