Introduction to FinTech Lecture 1 Digitalization disruption account for survey What is FinTech Academic definition Business definition New financial industry that applies technology to improve financial activities Business that leverages technology in order to improve financial services for consumer and business includes companies of all kinds Long term technological trends Is not as new as you might think tally stick livestock as money est of bank notes introduction of stock companies communication devices digitalization Disruptive innovations not as surprising as people think UNIVAC LARC IPHONE 6 Digitalization the origin Miniaturization Moores law Moores law first long term trend Number of IC transistors doubles every 18 month More transistors more complex chips Shorter electric paths for the same money Faster computer Effects of digitalization on financial markets Computerized trading Market crash because of automated execution of sell orders Black Monday 19 1987 Internet adoption second long term trend Individuals using the internet of population broadband and mobile access Exponential decline in computing storage cost and growing network capacity mass adoption of internet Disruption of existing industries first wave Information transmission Deliver information on physical media Forward information Business did not know they were in the information business music industry Disruption of publishing industry Publisher thought selling quality journalism broadcasting information In addition Social Media Moreover Smartphone Disruption of existing industries second wave Growing internet use Growing information advantage of tech firms Growing willingness of users to lend their trust to internet technology Consequence risk for business models that Rely on customer trust or are based on knowing customer characteristics Provide services which can be substituted by an digital agent E g Travel agencies Hotel business cab drivers Disruption of existing industries Business models currently at risk of disruption are information centric or trust based models of intermediation Introduction to FinTech Lecture 2 Disruption of banks as informed intermediates Banks bridge information asymmetries E g information about riskiness of borrowers and lend money that other people deposit in their bank These information asymmetries are not there anymore Facebook other media pages also have these information s Moral hazard Adverse selection Deal with regulations Distrust in banks Why banks are not innovating themselves They are pretty good in innovation internet banking ATM checks credit cards BUT Financial crises caused economic downturn unemployment increase from 5 10 Regulation increased cost of capital for banks Many young people got laid off had to get creative Increase of fines because of the regulations Lack of resources to foster innovation Emergence of Start ups Start ups challenged existing players in financial sector Temporary in nature and intention to scale up rapidly What are the main Fintech areas Risk management and operations Payments and Infrastructure Finance and investment Data Security Customer Interface Disruption also bears risk Grow rapidly from too small to care to too big to fail Challenging for regulators Classical bank lending Key business acquire information See slide Bank lending Relationship lending Informed banks can react more flexible to shocks in liquidity Can create a hold up situation in which banks may charge higher interest rates Most banks have close relationship to their borrowers Median borrower is about 4min away to lender Information about borrowers decreases with increasing distance Personal relationship do not play a big role if technology is involved Indirectly they might play a role No still in and not opposed to using FinTech New technology provide massive opportunities to save costs Banks were among the first to provide internet banking Back to FinTech See slide So are banks out Investment in Fintech Is increasing What do banks do in regards to FinTech The role of banks Liquidity and Investments Autarky Example see in slides Illiquid assets assets that cannot be immediately liquidated without a loss Introduction to FinTech Lecture 3 Banking and Fintech What are CBDCs Digital tokens How could they work Pegged to the value of countries fiat currency currencies not backed by physical commodity Issued and regulated by CB Reduce expenses Facilitate seamless flow of money Improve financial inclusion Provide safe access to money through digital channels CBDC confirm empirically that the existence of safe deposits other than banks can trigger bank runs More accessible to the majority Does tech affect giving P amount one individual out of the crowd lent X full amount the crowd lent 200 0 002x 3 0 006x Banking and Fintech Motivation Classical vs Behavioural view Classical econ view Communication of incomplete contracting is cheap talk Behavioural view Communication increases cooperation in situation where opportunistic behaviour is possible Motivation Risk in Credit Markets Most of pre contractual communication studies exist in deterministic no risk environments In Reality economic transaction involve risk and uncertainty Important to examine effect of pre contractual communication under incomplete information and economic uncertainty Motivation Changes in Lending Technology Relationship lending Online lending platforms Brown et al 2018 Research Question How does precontractual communication between borrowers and lenders affect credit and repayment Person to Person Lending experiment Study effect of economic conditions on pre play communication in credit markets Three key ingredients 1 Varies the ability to communicate exogenously 2 Varies the underlying risk in the market exogenously 3 Varies the information about borrower behaviour exogenously Implemented repeated stochastic trust game with stranger matching and borrower communication Behavioural Assumptions Borrower Blue bar communications Orange bar no communication Summary and Conclusion Benefits of pre contractual communication to cooperation is weakened if economic uncertainty allows agent to hide opportunistic behaviour Pre contractual communication can promote personal lending if opportunistic borrower behaviour can be revealed ex post Implications and lenders New technology like online lending may limit communication between borrowers Pre contractual communication has a limited impact in environments