PowerPoint Presentation
The Why of FinTech:
Overview
Professor David LEE Kuo Chuen
1
Let us start with
FinTech!
In the beginning
2
Fintech Growth
400
500
600
700
800
900
1000
1100
1200
0
5000
10000
15000
20000
25000
2011 2012 2013 2014 2015
Funding
Deals
Global Fintech Financing Activities
In
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There was a
159% increase
in the number
of deals to
1202 in 2015
with more
than USD23b
investment,
with a CAGR
of 75%
$23
Billion
$12
Billion
$4.4
Billion$3
Billion
$2.5
Billion
Source:
USD2.2b raised for Millennials
Fintech
Tilt, GoFundMe
Moven, Osper
Venmo, Square
Level Money,
Homeslice, Hello
Digit, Acorns, Even,
Qapital
Wealthfront,
Betterment,
LearnVest, Sigfig,
Personal capital,
WiseBanyan,
Rebalance IRA,
FutureAdvisor
CommonBond, SoFi, Upstart, Affirm, Earnest, Vested, Vouch, Pave, Tuition.io,
Valorie
Loyal3, Motif, Robinhood, Kapitall, Tip’s Off, DriveWealth, Openfolio, eToro, Stox, TradeHero
Valorie
Sector Business process
Customer
segment
Interaction
form
Market position
• Bank
• Insurer
• Payments
• Investments
• Financing
(e.g. crowdfunding)
• Insurance (e.g. risk
management)
• Advisory
• Cross-process (e.g. big
data analytics and
predictive modeling)
• Infrastructure (e.g. security)
• Retail
banking
• Corporate
banking
• Private
banking
• Life
insurance
• Non life
insurance
• C2C
• B2C
• B2B
• Bank/insurer
• Non-bank/insurer –
bank/insurer-
cooperation
• Non-bank/insurer –
bank/insurer-
competition
FinTech refers to new solutions which demonstrate
innovation development of applications, processes,
products or business models in the financial services
industry. These solutions can be differentiated in at least
five areas:
Core Difference: Silo Versus Flat
Traditional Financial Services Fintech
In
fr
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to
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Core Difference: Liability Versus
Mission accounting
Traditional Financial Services
Infrastructure
Product
Platform
Channel
Medium
Custom
Fintech
customers
Computing
application
Data
Financial Technologies and
Disruption
• Lower margin businesses like micro-finance and micro-
insurance will become not only viable but profitable
• Additional services such as credit rating, e-commerce, O2O
(Online-Offline), LBS (Location Based Services) can
enhance stickiness and profitability
• Consumers will be attracted by the low costs and
convenience these new technologies will bring
• Traditional financial institutions with heavy assets and large
fixed costs will be unable to respond to these disruptions and
will be disrupted
• Compliance cost and political resistance will be lowered by
aligning with the governments’ social, economic and
financial inclusion agendas with skillsfuture job creation as a
priority
Unbundling the bank with Fintech
• Why is unbundling the trend?
• Millennials demand personal control and
transparency of their financial interactions
from banking to insurance
• Less than half of Millennials (46%) see
themselves staying with their current financial
services companies over the next few years
• 76% of affluent millennials would seek
information about personal investing on a
social network, as opposed to just 18% of the
affluent Gen Xers
How does Fintech do it?
Low Costs with
Technology
Innovative Use of
Technology
• Social Networks
• Crowd Knowledge/Wisdom
• Big Data:
▪ Market Analysis
▪ Credit Scoring
• Artificial Intelligence
• Cyber Security:
▪ Private Key
▪ Touch Recognition
Lower Margins
Asset Light
Scalability is High
Compliance
• Align with
Government’s
Mission of
Social,
Economic and
Financial
Inclusion
• Light
Regulation or
Compliance Is
Not Necessary
Rebundling the Bank
• Some Fintech companies expand into
other financial services after initial success
• Next, we look at some examples of how
this re-bundling occurs
– Telecom Fintech: MPESA
– Social Media Fintech: Fidor Bank
– E-commerce Fintech: Alibaba and Alipay
M-PESA
• Launched in 2007, M-PESA (pesa
meaning money in Swahili) is a mobile
money transfer service introduced by
Safaricom (a telecommunications provider
in Kenya)
• It drives financial inclusion by providing
money transfer services, local payments
and international remittance services
M-PESA
• As of 2014, M-PESA has
• 81,025 agents
• 122,000 registered merchants (24,137 active),
• 19.3 mil registered customers (12.2 mil active)
• It accounts for 18% of Safaricom revenue and has
penetrated 90% of Safaricom’s customers
M-PESA
Figure 5. Percentage of Safaricom customers registered on M-PESA
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
0
5
10
15
20
25
FY08 FY09 FY10 FY11 FY12 FY13 FY14
M-PESA: Percentage of Safaricom Users
M-PESA Users (mil) Safaricom Users (mil)
Penetration Rate for M-PESA
M-PESA
• M-PESA has since expanded to Tanzania,
Afghanistan, South Africa, India and Eastern
Europe
• It has also expanded into more products:
– M-Shwari, a paperless banking platform with loan
services
– Lipa Na M-PESA, payment for goods and
services
– Lipa Kodi, rental payments to landlords
– Pay bills, public transport, insurance premiums
– Receive pension or social welfare payments
Fidor Bank
• Fidor Bank was established in Germany in 2007
• It is the world’s first online-only bank that operates
only through the internet and using social media
• In 2014, Fidor has more than 300,000 people
registered and 250,000 community members
• €200m worth of deposits, and its lending totals
about €160m
• Only 34 staff and no branches
• Cost of only €20.00 to set up a customer with full
banking, the overheads are low compared with
traditional banks
Fidor Bank
• Fidor Bank is a leader in innovative
banking processes with several awards
including:
• Most Innovative Bank for Social Media-
Germany (2013, Global Banking and
Finance Review Award)
• Most Innovative Bank- Germany (2013,
International Finance Magazine)
• Bank Innovation Award (2013,
Bankinnovation.net)
Fidor Bank
• Ways they engage customers through
social media
Fidor Tecs
• fidorOS is an open middleware software on
top of local core banking systems and
provides next generation community,
payment, and banking service solutions
• fidorOS is also a middleware written
specifically for modern banking which
enables:
– Send money instantly to friends via Twitter, Email
or mobile number
– Lend money to friends
– Social trading, Social lending
– Crowdfinance: Funding & Investing
Fidor TECS
• Using public APIs, Fidor seeks B2B clients to
do for banking what Apple did for mobile
applications with iTunes
• A completely new technology that is not tied
to any legacy code
• Flexible enough to be used on nearly any
core banking system and powerful enough to
be used by banks as white label
• Full white label: look and feel can be
customized
• Content of In-Account App-Store can be
defined by white label partner
Alibaba and Alipay
• The Alibaba Group is a Chinese e-
commerce company started in 1999 by
Jack Ma
• It provides c2c, b2c and b2b sales
services via the internet
Alibaba and Alipay
• In 2004, Alipay was established as a payment
platform and provide an escrow service
• It quickly expanded to include movie, plane and
lottery tickets, ordering of takeaways, insurance,
payment of utility bills
• Soon, it went offline and is used as a POS system by
small businesses
• However, the payment platform was just the
beginning
Alibaba and Alipay
Rebundling:
Lessons Learnt
Institutions with large existing consumer base have the most
potential
The integration of social networks with technology is
innovative and crucial
The provision for innovative and
specialized fintech products
through large trusted entities
Agent Based, Risk Capital Based or
Insurance Based
LASIC Principles
Start Low to:
• Attract & Build Critical
Mass
• Prevent Competition
LOW MARGINS
Ride on Existing Infrastructure
• E-Commerce
• Telecom Companies
ASSET LIGHT
• Expandable without Exponential
Costs
• Technology allows for Large Scale
Changes
SCALABLE
• Use of Technology such as Social Media
to find Untapped Markets
• Disruptive & Inclusive (NOT Exclusive)
• Solves Real Issues/Problems
INNOVATIVE
• Great Likelihood for Gov’t
Support
• Lowly Regulated
COMPLIANCE EASY
CHARACTERISTICS
Lee, David K.C. and Teo, Ernie G. S., Emergence of Fintech and the Lasic Principles
(September 30, 2015). Available at SSRN: http://ssrn.com/abstract=2668049
DESCRIPTION
http://ssrn.com/abstract=2668049
FROM LASIC To CLASSIC
Principles
The Economics of Financial
Inclusion
• The global emergence of mobile technology
will play a large goal in enabling financial
inclusion
• Through mobile and other smart devices
– Many unbanked and underbanked segments
of the world will be able to gain access to
financial services.
Source: mashable.com
The Economics of Financial
Inclusion
Figure 2. Active mobile phone subscriptions
The Economics of Financial
Inclusion
Figure 3. Active mobile phone subscriptions per 100 inhabitants
The
Economics
of Financial
Inclusion
• The problem of financial exclusion does
not just exist in undeveloped countries
• 7.7% of US households are unbanked
and 20% are underbanked
• The underserved in the world turn to
non-traditional forms of alternative
financial services such as those provided
by cheque cashers, loan sharks and
pawnbrokers
• For example, illegal workers in the US
who cash cheques via agents such as
cheque cashing depots or convenience
stores
The Economics of Financial
Inclusion
• The global picture of the unbanked and underbanked is even more
skewed
• Only 50% of adults in the world have an individual or joint account at a
formal financial institution (Demirguc-Kunt and Klapper , 2012)
• There are 2.5 billion adults in the world with no formal bank accounts,
most of them in developing economies
Source: newsroom.mastercard.com
Forbes
rank
Bank HQ location
Mobile
banking
customers
annual mobile
growth
Online banking
customers
Total
customers
Mobile
percentage
of customers
1
Industrial and
Commercial Bank of
China
China 100 million + 49.5% 390 million 432 million 23.2%
2
China Construction
Bank
China 117 million 38.9% 150 million 291 million 40.2%
3
Agricultural Bank of
China
China 83.0 million N/A 110.9 million 320 million 25.9%
4 JPMorgan Chase USA 16.4 million 24% 35.0 million N/A N/A
8
Wells Fargo &
Company
USA 12.5 million 23% 23.8 million 70 million 17.9%
9 Bank of China China 52.1 million 24.6% 101.1 million N/A N/A
13 Bank of America USA 14.4 million 19.8% 30.0 million 50 million 28.8%
14 HSBC Holdings UK 2.5 million N/A N/A 60 million 4.2%
16 Citigroup USA N/A N/A N/A 100 million N/A
24 BNP Paribas France 1 million N/A N/A N/A N/A
37
Mitsubishi UFJ
Financial
Japan N/A N/A N/A N/A N/A
43 Banco Santander Spain 2.6 million N/A 11.6 million 106.6 million 2.4%
Source: Banks 2013 annual reports
Except JPM and WFC: Q1 2014 report.
Via © mobiThinking
Mobile banking customers at the top 12 global banks
https://mobiforge.com/news-comment/revealed-mobile-banking-customers-worlds-largest-banks-huge-tiny-and-awol
Mobile (Internet) Banking Penetration
July 2015
What can banks do?
Accenture (2015), “The Future of Fintech and Banking: Digitally disrupted or reimagined?”,
http://www.fintechinnovationlablondon.net/media/730274/Accenture-The-Future-of-Fintech-and-Banking-
digitallydisrupted-or-reima-.pdf
Act open
Engage with external
technology solutions early
Open own IP to generate
new ideas
Collaborate
Co-innovate
Within industry: SWIFT,
Mastercard
Engage with startups:
Fintech Innovation Lab
Challenge: Organizational
Culture
Invest
Venture investing in
startups
http://www.fintechinnovationlablondon.net/media/730274/Accenture-The-Future-of-Fintech-and-Banking-digitallydisrupted-or-reima-.pdf
Insurance Tech
• Goggle Insurance Tech Moves
– Investments: Collective Health, OSCAR,
Gusto, The Climate Corporation
– Partnerships: American Insurance,
CoverHound, Liberty Mutual Insurance, VSP,
AXA
In Q2 2015, Zhong An and Zenefits invested USD1.4b
The Rise of China FinTech
• China P2P (Peer-to-Peer) market is 5 times
larger than the US and UK combined
• Supply Chain Financing is growing
substantially
– RMB10b market in China
– Aggressive acquisition in logistic facilities and
companies outside and inside China
• Crowdfunding is also expanding rapidly
– Debt, Equity, Donation and Reward Based
– Real Estate Crowdfunding
– Movie Crowdfunding
The Rise of eICBC
The Ranking of Rong e Gou is Number 3 in 2014
Rong e Gou JD Alibaba
Transaction volume 70,000 260,200 2,300,000
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
M
il
(R
M
B
)
Transaction Volume in 2014
Sources:
Rong e gou: http://finance.people.com.cn/money/n/2015/0112/c218900-26369498.html
JD: http://tech.gmw.cn/jd/2015-03/04/content_14993388.htm\
Alibaba: http://news.xinhuanet.com/fortune/2015-01/29/c_1114184822.htm
By 2015 H1, Rong e Gou Has Overtaken JD
Rong E Gou JD Alibaba
Tranaction amount ¥204,400 ¥202,300 ¥1,273,100
¥-
¥200,000
¥400,000
¥600,000
¥800,000
¥1,000,000
¥1,200,000
¥1,400,000
M
il
(R
M
B
)
Transaction volume in 2015 Q1-Q2
Period: Jan 2015 – Jun 2015 (6 months)
Rong E Gou JD Alibaba
Register users 18 105 367
0
50
100
150
200
250
300
350
400
M
il
Total register users
Sources: Alibaba交易额: http://tech.sina.com.cn/i/2015-05-07/doc-icpkqeaz3326433.shtml （为阿
里巴巴2015第一季度的数据，京东和融E购数据是上半年的）
阿里巴巴Q2：http://www.yocajr.com/news/detail/3056
京东交易额：为两季财报公布交易额的加总：878亿+1145亿
融E购交易额：http://news.xinhuanet.com/fortune/2015-08/06/c_128100835.htm
京东活跃用户: http://news.xinhuanet.com/tech/2015-05/08/c_127780088.htm
融E购活跃用户: http://www.ggjrw.com/zixun/xinjinrong/2015-06-16/4297.html
2014nian
Alibaba活跃用户：http://tech.sina.com.cn/i/2015-05-07/doc-icpkqeaz3326433.shtml
The Battle of Internet Finance and Internet Banking
China FinTech is Ready to Disrupt
the World
• Quick Loans
• Wealth Management
Products
• Supported by policies
on Big Data, Artificial
Intelligence, Internet
Plus (O2O, LBS),
Internet Finance, and
Financial Inclusion
41
• Capturing of capital outflow
from China
– Tourist expenditure
– E-commerce consumer
expenditure
• Locking in Lending to
Suppliers from Abroad
• Infrastructure Financing via
Asia Infrastructure
Investment Banks
• Acquisitions by Chinese
State Owned Banks and
Internet Finance
Companies
Chinese Article that
presented arguments
for using “Blockchain
Technology” for
Singapore to expand
into ASEAN with 600m
people and to use the
Financial Inclusion
model of China and
Kenya for Singapore’s
neighbours.
-David Lee and Yan Li
15th May 2015, Lian Zaobao
42
They said it is not possible for China and some ASEAN countries to dispel all reservations and
cooperate merely on the basis of economic gains. Trusted by both sides, Singapore can act as a
platform for China to enter the ASEAN market. Furthermore, Singapore could adopt the strategy
supported by “Smart Nation” policy to set up infrastructure to boost internet finance and inclusive
investment, which will not only improve the quality of life in underdeveloped regions in ASEAN
countries, but further sustain Singapore’s leadership.
While Chine focuses on hardware, Singapore should focus on Smart Finance and Smart Nation
initiatives.
They also commended the Monetary Authority of Singapore for setting up the new FinTech and
Innovation Group to enhance efficiency and competitiveness of Singapore’s financial sector, and
guide the transformation of Singapore’s leading traditional financial institutes.
One Belt, One Road. One Net and One Fund.
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US Fintech: Mindset
and Eco System
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Half the Unicorns are backed by a Corporate VC
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Corporate VCs: Financial Services
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Silicon Valley Eco System – The 3Cs
Community Compassion Creativity
• Crazy ideas are
rewarded (table
tennis, sleeping
bags)
• It is all about having
fun: free, open,
cool, awesome and
happy
• Failure is a badge of
Honor (What have
you learnt?)
• Success is how high
you bounce after
hitting the bottom
• A Sense of Mission
(What problems are
you trying to solve?)
• Supportive – funding,
mentorship, fiscal
• Sharing of information,
network, knowledge,
food, bicycles
• Accelerators, VCs,
R&D, Universities,
Parents, Industry,
Regulators, Sponsors,
BATS, listed
companies, SMEs,
startups
49
BBVA: Disappearing Act
Fintech acquisitions
Online-only bank – for
consumers (Europe)
Online-only bank – for
businesses
Online-only bank – for
consumers (US)
Laying the groundwork for future potential acquisitions and
strategic partnerships
Reinventing services by investing in start-ups that set the pace
for how people borrow, lend and spend money in the future
50
BBVA: Disappearing Act
Investing activities
challenging the incumbents:
investing in technology-driven
companies that are Rethinking
and Rebuilding financial
services
February 2016
Moved in-house BBVA Ventures to Propel
Additional 150M, on top of current 100M fund
Investments
Earnest – Loan financing platform
Coinbase – Digital currency platform to buy,
sell and use bitcoin
DocuSign – Digital transaction management
software
http://www.smu.edu.sg/podcast/cryptocurrency-revolution-and-its-impact
Concluding Remark
of A Podcast in Oct
2014:
This “Revolution” is
about
Decentralised
Blockchain
resulting in a
Reduction in Business
Cost!
51
The Future of Blockchain
http://www.smu.edu.sg/podcast/cryptocurrency-revolution-and-its-impact
52
• http://mashable.com/2016/03/03/bitcoin-
blockchain-explainer#jCtLR6NNgkqI
What is Blockchain?
http://mashable.com/2016/03/03/bitcoin-blockchain-explainer#jCtLR6NNgkqI
53
Network Types
A single, centralized ledger shared by all participants.
E.g. In UK, Faster Payments Service.
Typically expensive and, as their data and processing is centralized, they
often must be integrated with each participant’s own systems.
Alternatively, many decentralized databases can sit around the edges of
a network while messages move between them.
Distributed databases synchronizes thousands of computers in a
distributed network via the internet. It is able to avoid time-consuming
reconciliation processes.
This technology could replace certain aspects of paper-based banking with
processes that operate in a much speedier and paperless way.
54
Cost Saving
Centralized
Distributed
(100% Decentralized),
Trustless, and Transparent
The Cost Saving is most promising
somewhere between Centralised
and Distributed!
55
Distributed ledgers using merkle tree
Nonce Nonce Nonce
1
2
3
4
5
Timestamp Timestamp
Step 1: Each transaction in the set
that makes up a block is fed through a
program that creates an encrypted
code known as the hash value.
Step 2: Hash values are further
combined in a system known as a
Merkle Tree.
Step 3: The result of all this hashing
goes into the block’s header, along
with a hash of the previous block’s
header (proof of work) and a
timestamp.
Step 4: The header then becomes a
part of a cryptographic puzzle solved
by manipulating a number called the
nonce.
Step 5: Once a solution is found, the
new block is added to the blockchain.
Source: https://21.co/learn/bitcoin-mining/#the-merkle-root
https://21.co/learn/bitcoin-mining/#the-merkle-root
56
Distributed Ledger taxonomy
Single User
Owner group
Permissioned, private shared ledger
e.g. Bankchain, a clearing and
settlement network
Anyone
Who maintains
the integrity of
the ledger?
Trusted ledger owners
or actors, by validation
Any user, by untrusted
consensus
Permissioned, public shared ledger
(i.e. a decentralised or distributed
ledger)
e.g. Ripple, a global financial
transactions system
Permissionless, public shared ledger
i.e. Distributed Ledger)
e.g. Bitcoin, a cryptocurrency
Who can use
these copies?
Distributed
(100% Decentralised),
Trustless, and Transparent
Centralized
D
is
tr
ib
u
te
d
L
e
d
g
e
r
Te
ch
n
o
lo
g
y
C
o
ve
rs
a
B
ro
a
d
S
e
t
o
f
U
sa
g
e
s
Traditional Ledgers
e.g. Personal Bank Account
57
US Compliance Costs have
Skyrocketed!
• Research from American Action Forum has
suggested banks have so far paid $24bn and
allocated 61 million employee hours to
comply with Dodd-Frank, passed in the US
amid outcry over the financial crisis.
• Even smaller banks have been hit with added
burdens, with 83% reporting their compliance
costs had escalated by 5% following the rule,
according to Mercatus Center.
• Any cost savings here would be of benefit to
financial institutions
• Is Blockchain the solution?
Bitcoin
58
Source: Economist
59
Beyond Bitcoin
60
Digital Currency
61
• Switching the Focus from Bitcoin to Blockchain
– From Blockchain to Consensus Ledger
– From Consensus Ledger to Distributed Ledger
• Estimated Cost Saving: USD15-20b annually from
2022 by Santander
– From disruption to cost saving (Goldman reports)
– From Permissionless (non-permissioned) to Permissioned
• Estimated Increased Spending: USD400m by 2019 by
an independent research firm AITE Group
– From Permissioned to Open Data
– From Open Data to Open API
– Open API will fuel Smart Contract with Proof of Identity!
From Dark Lane to Wall Street
Blocktech in financial services
62
UK has been most OPEN and SMART!
63
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Is a Fad?
BLOCK
CHAIN
Talent Collaboration
Uses
Regulatory
Legacy
Aging IT infrastructure in Banks
Active collaboration with
different industry players
results in an ever
evolving tech ecosystem
At present a lightly
regulated industry,
resulting in interesting
growth opportunities
The very best minds in
the Finance and IT
sectors are helping to
shape development
Plenty of innovative
ways to harness its
distributed computing
technology
https://bitcointalk.org/index.php?topic=1337008.msg13640148#msg13640148
65
Who is at the core of bitcoin?
https://bitcointalk.org/index.php?topic=1337008.msg13640148#msg13640148