The Fintech Disruption

The financial crisis of 2007–2008 revealed that centralized finance (CeFi), which relies on large, interconnected financial institutions, is easily destabilized. Since the crisis, significant regulatory tightening, monetary easing, and new competitors (e.g., fintechs) have created significant pressure on profit margins and CeFi business models. Recently, a new form of financial intermediation that functions independently of centralized intermediaries has emerged, namely decentralized finance (DeFi). DeFi relies on public, permissionless blockchains and uses so-called smart contracts to perform financial services such as borrowing, lending, and trading in a transparent and automated fashion. This paper gives an overview of DeFi and discusses its advantages and disadvantages compared to CeFi. In it, we analyze different scenarios pertaining to the future paths of CeFi and DeFi, and conclude that a convergence scenario is the most likely.

Financial technology (or fintech) has received global attention as the challenging technology (the technology that has potential to revolutionize the banking industry) that would empower firms to compete effectively in the twenty-first century. This chapter analyzes the diffusion of fintech-based innovations in the banking industry through the lens of systemic innovation. This research attempts to fill a significant gap in the empirical literature on the systemic characteristics of innovation. Systemic innovation is one where the benefits of an innovation increase disproportionately with the use and diffusion of the innovation among users, and where most of the benefits are external to the particular innovator of the product or process and accrue to a wide range of users and uses. The development of systemic innovation models provides insight into the relations between the complexity of the innovation and the capabilities of innovators in managing fintech-based innovations. The systemic innovation model can be used as a dynamic tool to track the progress and pattern of fintech diffusion. The analysis shows that systemic characteristics are the outcome of interactions between the complexity and the capabilities of innovators in managing fintech-based innovations. The findings have shown that the diffusion of fintech-based innovations has different levels of systemic characteristics which would influence the process of technology diffusion. The COVID-19 pandemic acts as a catalyst in transforming the banking landscape whereby the development of crypto super apps has pushed further bank disintermediation.

Mutated market conditions, the advent of new players, and a significant regulatory push have changed the banking industry profoundly in the past fifteen years. Banking business models have shifted from a vertical integrated paradigm, where production and distribution mostly belong to the same entity, to a platform driven model in which a combination of modular solutions can take place and evolve consequently according to an ecosystem market approach. A higher level of openness toward third parties and an increasing number of modular services bundled together have rebooted the way financial service formats can be conceived, delivered, and consumed by individuals. Digital platforms are driving open innovation and different formats are evolving in the market, driven by multilateral relationships. In this regard, open banking is becoming increasingly popular in many jurisdictions, especially in regard to stages of development, approaches, and scope. This paper explores how, through an affiliative approach, banks are seeking to retain customer loyalty as they respond to the ways in which FinTechs and BigTechs have developed more innovative financial service formats. This is also boosted by new legal frameworks—such as open banking and open finance—where many new services will be developed thanks to the sharing of customer-permissioned data, by offering customers new, more efficient payments; improved online account services, and other set of new services. The first part of this chapter highlights which trends are impacting the next banking frameworks as well as the evolving relationships between banks and FinTechs. The second part outlines the main outcomes of the evolution of new financial services and their impacts on value chains. Finally, the last section presents conclusions and describes upcoming opportunities for all the players, and identifies the next big challenge as the ability of these services to make a difference so that differentiation in value propositions, features, etc., is needed to give the customer a reason to choose a particular service.

We explore the current development of the Latvian fintech companies, corresponding challenges, and expected future results. In 2021, we identified 93 fintech companies in Latvia. For these companies, we analyse essential characteristics and performance data. Moreover, we conducted a survey among these companies in the summer of 2021. We received 31 responses which allowed us to analyse the characteristics of their business models, identify current challenges for fintech companies, and allowed us to speculate on the future of the fintech market. We find that the main financial services provided by fintech companies are digital lending, digital payment, and digital wallets. An interesting new digital finance trend in the Latvian market is the B2B2C (business-to-business-to-consumer) business model with simultaneous fintech aid for small businesses and customers. Fintech companies currently struggle with the lack of availability of qualified personnel and/or experienced managers compared to earlier years when regulation was the most urgent problem.

This paper explores the new world of non-fungible tokens (NFT), which are unique digital assets providing proof of ownership and verification of authenticity held in the blockchain. After describing what a NFT is, we shed light on the main reasons it has value both as a financial instrument and as a new product. Second, we discuss the various types of existing NFTs, including digital artworks, play-to-earn video games, and (digital) real estate. Third, we explain how NFTs and smart contracts are created. In doing so, we discuss some technical aspects such as blockchain, non-fungible versus semi-fungible, and minting. Finally, we give an overview of existing marketplaces followed by a more general discussion of how NFTs could help improve some of market inefficiencies and could contribute to the social welfare and banking industry.

Open banking is a framework where consumers and businesses can share their banking data with third-party providers through secure channels. Starting in the United Kingdom, open banking is on the rise in many countries. Thanks to open banking, consumers and businesses can access innovative financial services and products easily and securely. However, open banking also imposes risks and challenges on consumers, financial institutions, and regulators. This chapter gives an accessible overview of open banking, describes its status around the world, and discusses lessons learned from early implementations of open banking.

The recent developments in regulation, ICT technologies and purchase and consumption habits of customers are profoundly changing the competitive scenario of the financial services market. In particular in the European context, PSD2, although limited to the payment services segment, is promoting a greater level of competition and efficiency within the market, reducing barriers to entry for new payment service providers (called TPPs, which also include FinTech firms). To this purpose, PSD2 explicitly empowers account holders with the authority to share payment data, removing the financial institution’s role as gatekeeper and starting the Open Banking phenomenon. When banks actively comply with PSD2, new credit and financial ecosystems and Open Banking platforms can arise, in which participants share information through Application Programming Interfaces (APIs) and develop, produce and distribute innovative and value-added financial products and services for the customer. This chapter aims to theoretically examine to what extent information sharing, although limited by regulation, reduces banks' ability to generate value through the management of information asymmetry issues and their ability to build long-term relationships. We argue that banks’ ability to generate value can be negatively affected to the extent that banks decide to preserve their status quo, thus the way in which banks decide to comply with PSD2 is the crucial factor to consider.

The recent event related to the war in Ukraine has further sparked interest in cryptocurrencies and raised questions about their regulatory oversight. In November 2021, the cryptocurrency market capitalization reached a staggering US$3 trillion, which included more than 8,000 cryptocurrencies, and it is one of the most dynamic markets in the world (Crypto Market Sizing Report, 2022). There is significant exposure of the cryptocurrency ecosystem via a multitude of direct and indirect interlinkages into the banking sector. These include activities such as direct issuance and ownership of cryptocurrencies, intermediation services for customers, clearing of contracts that reference cryptocurrencies, or services for cryptocurrency issuers such as underwriting initial coin offerings or stablecoins. However, since 10 January 2020, all existing businesses carrying on cryptocurrency operations in the United Kingdom (UK) must be compliant with the Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017 and be registered with the Financial Conduct Authority (FCA) in order to be able to in the business. This change of the rules had a significant impact on the cryptocurrency ecosystem and its effect on the banking industry. The FCA also reported that around £60 million was lost due to social media investment scams in 2020. This leads to the main discussion of this chapter—what is the appropriate level of regulations in the market in the context of the UK as a comparison to recent EU regulatory development? Also, how does the existing regulation impact the real-world cases from the UK banking industry and if there is any possible solution for crypto-risk and how it can be avoided?

The ecosystem of a country shapes the way fintech organizations provide services to the poor. Yet, very little attention is given to the financial inclusion agenda and how ecosystems create opportunities and challenges for fintech organizations. This chapter looks at policy, culture, human capital, finance, market, and support domains to present a preliminary analysis of two ecosystems in South Asia, to identify system level challenges and opportunities for fintech organizations. The findings highlight that established fintech organizations in a mature ecosystem have different challenges and opportunities than an ecosystem with emergent fintechs. Hence, addressing the needs of the poor requires balancing multiple domains within the ecosystem by aligning them with the level of maturity of the system.

This research was conducted when individuals were under lockdown at home because of COVID-19 and could not go out to purchase food and other supplies. This is an incredible opportunity to encourage financial technology services to pay for daily transactions instead of cash. This research aims to examine the elements that influence the adoption of fintech services during COVID-19. In addition, this study predicts which factors might influence the use of financial technology (fintech) services post-COVID-19 lockdown to become a new normal behavior of customers. The number of fintech services’ users has grown exponentially during the COVID-19 lockdown. However, to ensure consumer’s continued use of these services, firms need to predict the critical factors affecting the intention to use fintech. This study offers a mode which can be used to assess which components of fintech are most useful. We collected data via Mechanical Turk (MTurk) and used structural equation modeling to predict the factors that influence the intention to use fintech loyally post-COVID-19 lockdown. The findings suggest that COVID-19 lockdown, trust, data security, privacy, and especially employee service influence users’ intention to use fintech. In return, the benefits can build consumers’ loyalty toward fintech services and is considered a new normal behavior. This research sheds light on how fintech firms develop their capabilities and increase their competitive advantages. Both theoretical and practical implications are also discussed.

Financial inclusion is identified as a driver of sustainable development and a necessary condition for social and economic development. Yet, most people in developing countries face numerous constraints and barriers that exclude them from the financial system. The recent fintech developments and their ability to reduce these constraints promise to be a potentially useful strategy to enhance financial inclusion. In this chapter, we discuss financial inclusion and provide insights into the current state of fintech in the developing world particularly, Mobile Money—on financial inclusion and development outcomes. Being global leaders in mobile money, Sub-Saharan Africa have set the standards for other developing countries to replicate for enhanced financial inclusion. We also show that the implications and impacts of different forms of fintech on financial inclusion, and through financial inclusion on social and economic outcomes, represent one of the most exciting and important research frontiers in the field of development finance. The rapid evolvement of fintech products however poses regulatory challenges and calls for careful assessment of regulatory approaches for instance innovation offices, regulatory sandboxes, and RegTechs in regulating the financial ecosystem.

Small and Medium Enterprises (SMEs) are considered to be an important engine of an economy. Given the impact of cash holdings on the survival of SMEs, it is important to assess the factors that enhance SMEs’ cash holdings. Adopting the Generalized Method of Moments (GMM) and using member countries of the Organisation for Economic Co-operation and Development (OECD) from 2011 to 2018, we find that fintechs increase cash holdings of SMEs. Further, we find that better institutional quality strengthens the positive relation between fintechs and cash holdings. Our results suggest that managers may utilize fintechs to enhance cash holdings. Moreover, our findings are in line with the regulators’ steps toward enhancing fintech startups.

This chapter analyzes the competitive impacts of fintechs in the Brazilian financial industry. It focuses on payment institutions, as regulated by the Central Bank of Brazil (BCB), and evaluates how, and through which channels these firms are affecting the profit rate of incumbent banks. We use data from the balance sheets of Brazil’s main universal banks and larger payment fintechs to build indicators to assess which traditional banking revenues would potentially be under threat from such fintechs. We conclude that empirical evidence shows that payment institutions are putting pressure on the service revenues of the main private banks—especially in the credit card segment—but those effects are not yet significant enough to influence revenues and profitability of large banks in the period 2018–2020. Drawing on our case study, we suggest that material changes in the financial systems’ competitive landscape induced by fintech startups can be limited and highlight the importance of defining relevant markets when analyzing the competitive impacts of fintechs.