2. FinTech Activities and Business Models: Analogies and Differences with the Traditional Financial Channels

Contrary to what has been done elsewhere, we exclude Tech firms from the FinTech category as these do not offer financial services but develop technological solutions that can be applied to the financial markets and hence develop product and services that are instrumental or functional to the financial intermediation process. On this, see Arner et al. ( 2016) and FSB ( 2017a).

Big data derives from the acquisition of a huge amount of detailed information generated and disseminated by a wide range of tools and sources including tracking information on websites, cookies, analysis of online consumer spending habits, social networks and so on. Analysis of this information is designed to assess social preferences, individual spending models and activities by companies.

The importance of data and the use of data in a digitalised “data-driven” economy have been described by Nakaso ( 2017): “ To describe how data utilization has evolved over years, I would like to use the example of maps. Over the years, many people have attempted to make maps as accurate as possible, which have provided us with remarkable benefits. Even today we enjoy the benefits of using geographical data, such as ‘Google Maps’. However, what is different from the past is that we are no longer users of data only. Our access logs to these services themselves constitute a new set of big data , and potentially have their own value to be utilized. In today’s society, data is a kind of resource, and power belongs to those who are able to collect and efficiently utilize such big data. It is analogous to the economic power of countries with large amounts of petroleum resources, which was increased after they enhanced their processing capacity and sales channels”.

On the differences between “hard” and “soft information” and their application to financial markets, see Liberti and Petersen ( 2018).

As has been well described by Gobbi ( 2016): “ The markets where banks are likely to suffer the most are those for services, where the production function is highly intensive in data processing such as payments, standardized consumer credit, brokerage of securities, and passively managed funds. If technology allows soft information to be sufficiently substituted with an effective analysis of big data , other markets, such as small and medium enterprises loans, could also be at risk”.

Customer experience can be defined as clients’ experiences during their interaction with the companies from which they acquire products and services.

Several analyses have underlined that BigTech firms have built a reputation that makes them appealing to a large share of consumers (Sperimborgo 2016; Barba Navaretti et al. 2017; OICV-IOSCO 2017), also as compared to incumbent firms (Baker et al. 2017; Jakšič and Marinc 2015). For instance, back in 2013, a survey by Viacom showed that the 75% of interviewees would consider buying financial products from big e-commerce platforms (Google, Amazon, etc.), rather than those offered by traditional financial intermediaries. Additionally, most users showed a marked aversion to bank visits, preferring a visit to the dentist (Viacom 2013).

Note that “ unbundling is a method to break down products and services into parts so only necessary parts can be provided according to need; for example, unbundling makes it possible to provide a limited scope of services, such as payments and loans, instead of providing all banking services including payments, deposits, loans, and asset management all together” (Fujitsu 2018).

To the best of our knowledge, Worthington and Welch’s paper ( 2010) was the first to cite this expression.

The UK, and London in particular, has always had a more innovation-focused financial market and one which is more similar in some ways to the powerfully market-oriented US experience. For this reason the UK has attracted a significant number of FinTech initiatives native to other countries. These FinTech firms were able to set up in the UK and, in the case of restricted activities, request licences from the British supervisory authorities and work in Europe on the basis of the mutual recognition principle. In the wake of the UK’s decision to leave the European Union and with the prospect of a Brexit “no deal”, certain firms have already got to work on guaranteeing continuity of service to their European clients, applying for the permits required in other countries. Of these, for example, Satispay obtained authorisation to work as a payment institution from the Luxembourg authorities in the first months of 2019 (Finextra 2019).

In the European context, Italian FinTech development has been delayed. In particular, FinTech investments are still limited as compared to other European countries such as the UK, Germany, France and the Netherlands (Banca d’Italia 2017; PWC 2018). The most recent estimates by PWC (PWC 2019) show that, as compared to a total of 216 billion dollars transacted in the UK, Italy has registered transactions worth 38 billion dollars, a fifth of the UK figure, a third of the German total and half that of France. Despite this slow development, in Italy, too, expected growth rates are important in terms both of numbers of firms and revenues and transacted volumes.

See Schena et al. ( 2018), in which a sample of 71 FinTech companies operating in Italy in March 2018 was analysed in depth.

Think, for example, of the impact generated by different tax laws or planned regulation in the various countries.

Services accessible via apps and telematic links have acted as strategic levers to FinTech’s development in Africa. Similarly, in China, FinTech’s ultra-intense development has been accompanied by an increase in the spread of financial services and greater inclusion of segments of the population who previously did not use banks (Hau et al. 2017).

InsurTech identifies the insurance and pension services offered via innovative channels and using advanced technologies which enable the risks linked to insurance activities to be managed in interesting ways. On this matter see, amongst others, OECD ( 2018) and EIOPA ( 2017).

For further information, see CGFS-FSB ( 2017), Bofondi ( 2017), and Claessens et al. ( 2018).

Some of the criteria used to this end by FinTechs are the following: sufficient wealth, previous working experience in the finance sector and/or specialist educational profiles (economics graduates) or being part of a business angel network.

On risk translation phenomena between FinTech and regulated financial intermediaries (banks and institutional investors), see FSB ( 2017b), Appendix 6 (“Lending-based crowdfunding in the euro area: credit provision outside of the banking sector” contributed by Christian Weistroffer and Lieven Hermans at the ECB). Kirby and Worner ( 2014) had previously highlighted “ Interconnectedness through securitisation practices and bank involvement: there have been recent examples of the securitisation of peer-to-peer unsecured loans. This opens the market to new investment , but also opens the rest of the financial market to exposure to packaged loans which are predominately unsecured in nature. (…) Even subprime loans were partially backed by some form of collateral”.

See Chap. 5 for further considerations on the regulation theme.

With reference to the European context, see the analysis by ECB ( 2018). In the Italian national context, where the presence of SMEs is especially high, the demand for credit by such firms is still today much higher than banking system supply. The rapid development of the main FinTech operators, including Credimi (invoice trading operator subject to regulations) and Borsa del Credito (lending marketplace) testifies to the ability of these firms to penetrate markets in which the banks have not succeeded in formulating an adequate response to the financial demands of SMEs.

As regards the US market the Federal Reserve Bank’s 2017 report highlighted the fact that, whilst profitability is improving, SMEs find it difficult to access bank loans and, for this reason, are turning increasingly to online lenders not subject to regulation.

While PayPal has provided loans since its inception, we feel it is most appropriate to classify it as FinTech despite the fact that many studies classify it as BigTech, presumably because it is one of the largest players in the world and because, in 2002, it was bought up by eBay, the online auction and sale site. Subsequently PayPal was made independent of eBay in 2015, the year in which it was also listed on the US stock exchange NASDAQ.

Kirby and Worner ( 2014) report that “ Investors can and do make decisions based on personal biases and persuasive narrative, rather than on financial experience, due to the social networking aspect of peer-to-peer lending platforms . Neither government reviews nor the media have highlighted this point but it has been demonstrated substantially in academic work on the use of soft information, narrative, trust and pictures in peer-to-peer lending”.

As Claessens et al. have pointed out ( 2018) China has rapidly become the principal world market in P2P lending (followed by the USA and the UK) thanks to an initially very favourable legal framework. In 2016 new loans granted by Chinese FinTech platforms were equivalent to 40% of bank loans. However, cases of platform difficulty and default have been so numerous as to prompt regulatory intervention before the risks are transformed into market stability problems. The Chinese authorities intervened in 2016 and 2017, banning P2P lending platforms from gathering funds for themselves (i.e. with conflicts of interest), selling insurance policies unless they are authorised intermediaries and granting loans to students. Furthermore the laws regarding ultra-short term loans (cash loans) were made stricter. This has led to a significant contraction in the number and operational volume of Chinese lending platforms. Some platforms have closed down and others have been merged but not without generating especially negative effects on clients.

See Sect. 5.​2.​2 for a more in-depth examination of the European crowdfunding regulation proposals.

For a more in-depth examination of automatised financial advice and its implications in operational and regulatory terms, see Capgemini-EFMA ( 2017), Consob et al. ( 2017), Pia ( 2017), and ESAs ( 2018).

See Sect. 5.​2.​3 for an in-depth look at the robo advice regulatory regime in Europe.

On the various ways in which wealth management is defined (with or without human intervention) and the functioning of algorithms, see Di Mascio ( 2018). On the more general theme of the opportunities and risks linked to the use of algorithms and artificial intelligence in the financial sector, see BaFin ( 2018) who also refers to previous studies on this theme carried out by the European Supervisory Authorities and the Financial Stability Board.

As an example, in several countries ATMs enabling clients to top up their Bitcoin wallets exist. Though supplied by a BigTech firm, an example is Amazon cash which enables a client’s Amazon account (i.e. an electronic wallet expressed in legal tender usable exclusively on Amazon) to be topped up at certain partner outlets. Via cash deposits Amazon clients can transfer cash to this electronic wallet.

Quadriga, the main crypto currencies platform in Canada is an interesting case in point. In 2019, the sudden death of the portal’s owner, the sole holder of the platform’s access passwords and the only person who knew them, led to crypto currencies worth around 200 million dollars being frozen. Investors were denied access to their crypto currency wallets hosted by the platform (Forbes 2019).

PayPal currently leads a group listed on the stock exchange and made up of subsidiaries (Venmo and Xoom) which are authorised as money transmitters by the supervisory authorities with jurisdiction over the individual geographical areas in which they work. Furthermore, the PayPal Europe subsidiary is an authorised credit institution in Luxembourg and is supervised by Commission de Surveillance du Secteur Financier (CSSF). The group offers various web services including PayPal Cash, PayPal Credit (revolving credit), prepaid credit cards and payment and lending services for businesses (merchants).

With reference to the technology underlying certain innovative payment systems known as DLT and Blockchain, it is worth remembering that the European Commission constantly monitors the development of these technologies for potential application on financial markets, including in the context of transaction validation and safety. This same commission has created a European working group (EU Blockchain Observatory & Forum) which identifies trends and development initiatives in this technology, fostering European level information and know-how exchange on blockchain and formulating advice for policy makers ( www.​eublockchainforu​m.​eu).

See Sect. 5.​2.​5 for a review of the principal legal initiatives on crypto currencies undertaken at the European and international levels.

Innovation is continuous over time. Think, for example, of the growing application of the crowdfunding model to the real estate sector, in which the funds gathered serve to buy real estate (new or for renovation) to earn money from or to sell on for capital gains purposes. Moreover, the specific features of the real estate market have implications which prompt consideration of the risks for clients linked to the opaque nature and limited liquidity of the FinTech generated market.

PWC ( 2017) has estimated that over 18,400 FinTech firms exist globally and of these only 4000 were set up after 2012. Furthermore, in the payment sector alone over 1500 firms are involved, 369 on which have been set up over the last five years. This shows that the majority of these companies is no longer in the start-up phase and some are now extremely large and operate in multiple countries. As far as the market value of these firms is concerned, the mobile wallet segment alone is worth 2.4 billion dollars in investments while mobile-Point of Sale (or mobile-POS) is worth 2.2 billion. In China alone FinTech firms number 940 and, of these, firms working in lending have attracted 7.8 billion dollars of investments and InsurTech and FinTech credit companies account for 1.2 billion each. The 2019 PWC report (PWC 2019) shows that 4 of the 10 most important FinTech firms are Chinese and almost half of the top 100 were founded and work in emerging countries. In India, for example, where the sector has grown significantly where there are now 1650 firms, of which only 213 set up a maximum of five years ago and thus to be considered start-ups. Europe is behind as compared to the US and Asian markets but is showing significant growth rates, including in attracting funding from venture capitalists. The data from the first three months of 2019 show that Europe has achieved 15% of world venture capital funding relating to FinTech (PWC 2019).

Looking to the European context, an example is Funding Circle which was listed on the London Stock Exchange in late September 2018. This P2P lending platform set up in 2010 is subject to English Financial Conduct Authority supervision and works in various areas (credit broking, debt administration, debt-collecting and operating an electronic system in relation to lending) enabling investors (comprising banks, asset managers, insurers, government-backed entities and funds) to fund medium-small firms in Great Britain, the USA, Germany and the Netherlands. Since inception in 2010, in total the platform has issued 7.8 billion pounds of loans to around 60,000 small businesses, thanks to over 85,000 retail and institutional investors’. Even in markets in which FinTech development has been more limited, such as Italy, a listing process has begun. An example is Crowdfundme, an equity crowdfunding platform which launched a roadshow for its Initial Public Offering (IPO) at Alternative Investment Market (AIM) in November 2018, a process which concluded on 25 March 2019, making it the first listed Italian FinTech firm.

Recent cases include the merger between Finnest, an Austrian peer-to-peer lending company, and Invesdor, a Finland-based crowdfunding operator which has generated a platform which operates at the supranational level, drawing on a wider investor pool located in a range of countries (Austria, Germany, Switzerland and Northern Europe as a whole) (Reuters 2019).

European statistics show that lending transactions to firms and individuals account for a market value of 7.78 billion euros for a total of 1 billion transactions ( www.​statista.​com). The growth forecast is for an average increase of 4.7% annually until 2023. Of the total, around 5.2 billion is accounted for by business contracts. The average loan to firms via the platforms is around 75,000 euros approximately while those to individuals average 2000 euros approximately. If we take the Italian market as an example, despite it is not having achieved full maturity, its movement’s accord with these trends. In particular, with reference to FinTech activities, from 2016 to 2017 taken together such operators registered a turnover increase of 30%, reaching 118.5 million euros (PWC 2019). This sum is principally accounted for by subjects working in the payment sector (56%). Lending and crowdfunding have an overall turnover of around 19 million euros (16% of the total). Furthermore, certain statistics referring to lending crowdfunding show an average sum invested per investor of 3800 euros in the 2014–2018 period, with a maximum value of approximately 9800 euros (registered in 2014) and a minimum value of 3600 euros (in the first semester of 2018). The investor pool is also growing from 134 in 2014 to around 8300 in 2018. In reference to equity crowdfunding a significant increase in the number of issuer firms and the overall value of deals per year took place from 2016 to the first quarter of 2018 with an average sum down from 5800 to 3200 euros, reflecting a significant increase in retail investors ( www.​crowdfundingbuzz​.​it).

In just over two years the Borsa del Credito platform has enabled over 32 million euros to be lent to 450 SMEs, thanks to private and institutional investors.

ART SGR S.p.a. is authorised to manage alternative investment funds exclusively for professional investors. These funds lend money via the BorsadelCredito.it platform. Launched in October 2017 to invest in platform credit with a target of 100 million euros, Fondo Colombo was undersigned to the tune of 10 million euros by Borsa del Credito’s own shareholders.

Workinvoice is a pure marketplace working in Italy which generated 143 million euros of business invoice funding from 2015 to 2018 on the strength of private and institutional investors. This latter included Factor ^@Work which buys loans on partner web platforms, securitises them and sells the securities deriving from this to professional investors.

Credit securitisation operations implemented by FinTech firms, already widespread abroad, are becoming more common in Italy, too. A recent example of this is the consumer credit securitisation operation implemented on the strength of a partnership between a P2P platform (Prestiamoci) and small bank (Banca Valsabbina). See Allegreni ( 2018).

As Moneyfarm reported, Vaamo’s goal was further enlargement of its individual client services and digital solution provision to important European financial institutions on the strength of Vaamo’s experience in its partnership with N26 and 1822direkt (online subsidiary of one of Germany’s principal investment banks). The important development of the Moneyfarm platform (regulated in Italy by Consob, in the UK by the Financial Conduct Authority and in Germany by BaFin) has attracted the interest of many institutional investors: the firm’s main partners are Allianz, the Cabot Square Capital investment fund, United Ventures, Endeavor and Fondazione di Sardegna.