LECTURE-1: FINTECH OVERVIEW 1

1. Definition of FinTech

Defining FinTech is complex because it means different things to different people. What you
define it as depends on how you're approaching it. Here, we give you four different perspectives
on FinTech: the perspective of a large firm, a startup, a consumer and an investor.

a) From the perspective of the large firms, FinTech is not

FINANCE AND TECHNOLOGY
new. We've been doing FinTech for decades. We can LARGE FIRM VIEW
argue that we've been using technology and finance for
• This is nothing new
more than 100 years, of different types of technology, • Finance firms have used
different perspectives. But some things are new, and technology to improve
some things are different. A CIO of a large bank services for a longtime.

expressed "What's new is smartphones. What's new is the FIN TECH

iPhone and the Samsung and others, Android phones • According to Paul Volcker
because that puts at your fingertips capability you never (former chairman of the Fed
had before for computing technology and it changes and inspiration of the Volcker
Rule), ATM is the most
consumers' view and interaction with many things in important financial
their world." So there are new capabilities. innovation.
b) From the consumer perspective. It's not new for banks to OLD BANKING TECH
deal with finance, but it is new that consumers are so
• Mainframe Computer
powerfully enabled by technology. It has changed • Telephone
consumers' perspective and what they expect, what they • Telex
want, what they get. FinTech is not necessarily about new • Typewriter
• Post
finance or new tech. It's about new attitudes towards
IMPACT OF TECHNOLOGIES
apps, new attitudes towards convenience, new attitudes
of consumers and fragmentation of value chains that were • Technology and Efficiency
o Wang Machine
before closed and proprietary, which are becoming more
o Digitization
and more open and more and more subject to competition • Technology and Time
or new startups. o Fax Machine
o Algo, HFT and Speed
c) From the Startup Perspective. FinTech has open-up
• Information Proliferation
opportunities for new startup firms that never could have
WHAT’S NEW
existed before. FinTech is real, some of it is open API,
some of it is new technology. We'll look at the tech. There • The rise of Fintech
• Or the rise of China
are many, many, many new businesses being started up.
• Data monetization
So, this is a proliferation of opportunity you've got to hear • Data overload
from one CEO. But there are hundreds of FinTech CEOs • Apple-ization of Finance
starting up new businesses and new opportunities. Some • Impact on jobs

of which are just joining in the bandwagon and maybe

they're just fraud or maybe they're noise or maybe they

Dr. Mohammad Anisur Rahman, Department of Management Information Systems, University of Dhaka
 LECTURE-1: FINTECH OVERVIEW 2

will fail. Many startups fail. So, this wouldn't be

surprising. Some of which are going to change our world. FINANCE AND TECHNOLOGY
LARGE FIRM VIEW
d) From the perspective of investors. This is a roller coaster.
To a lot of people, roller coasters are fun. And they're WHAT’S THE DOWNSIDE

enjoying it. They're enjoying the ups and downs. Many • Who owns the data
people in banking and finance say, Risk is bad, and we • What can they do with it
• Can it be stolen
should manage risk. And we should carefully control risk
• If it happens, what can you
and we want to limit risk. We want to diversify. But some do
people say, I like casinos. I like amusement parks. I like • Who regulates what
risks for the sake of risk. Some investor enthusiasm about SCARY STUFFS
FinTech is simply that it is so volatile. With many other
• “AI designing AI” – Antoine
assets, our investments, are so stagnant as to be incredibly Blondeau, CEO, Sentient
boring. It's kind of fun, it's an adventure. That's a Technology, Creator of Siri
• “Hype in AI comes from
perspective of an investor that maybe a large bank doesn't
success which are widely
quite get. But it's a young investor perspective. If I lose, I publicized. We don’t hear
lose. So what? At least it had been a fun adventure. People about failures.” – Dr.
Eberhand Schoneburg, PwC
go to a casino for a reason. Not because they want to lose
their money. They will, probably on average and maybe
some of this is going to result in losses, but maybe some THEN VS. NOW
of it will and has resulted in wealth. We don't know, but ENTREPRENEUR VIEW
• IT has always served a critical
there's a lot of volatility. role in banking
• Financial data was closed
• Banking API Opening
• Direct connection to Stock
2. Difference between FinTech and TechFin? Exchanges
o Used to have to be a
FinTech is basically financial institutions using technology to member
improve their processes, and TechFin is technology institutions o Now just have to comply
providing financial services. For Example, Alibaba, Alipay, with regulations
• Dependence on traditional
Tencent, etc. Of course, when we think of FinTech today, even banking reduced
though technology has been used by financial institutions for • Regulations can be good and
centuries, we associate it mainly with the big giants from China bad
• Cybersecurity was and is a big
that have totally revolutionized the financial markets in China. issue
• Level playing field for all
Think about how Alibaba created a whole new world for money
CONTROL OF DATA
markets with Alipay. So, in the mind of the general public, and
• Who controls the data
o Checks and balance
o Trust but verify
o Distributed ledger
technology
o Banking is now a data
business

Abridged from the lecture of Prof. Theodore Henry King Clark, Hongkong University of Science and Technology on FinTech Foundation and Overview Course.
 LECTURE-1: FINTECH OVERVIEW 3

in the mind of the industry, FinTech is very closely associated

ENTREPRENEUR VIEW
with China. And it's very clear that in China, those technology WHAT’S NEW NOW
platforms has enabled the country to leapfrog over a lack of • End-user computing
o Data Extraction
financial development from the incumbent.
o Customization
• Online Services
Now, it's all about information. It's all about data, and the
o Loan and financing
business model of a lot of these platforms is about making money o Low fees overall
out of data, in other words, data monetization. At the same time, • Managing IT people is hard
it's all about analyzing the data. We have a lot of information, but • Bank started funding Fintech
companies
it's information overload. It's not vetted, it's not analyzed. How o Lower risks
are we going to deal with that data? o Different approach to
innovation (open
There's also a lot of discussion about the technology platform innovation)
model, and particularly when you think of a firm like Apple, UNDERSTANDING CONSUMER

relies a lot on developing an entire ecosystem around it. Are we • Many companies struggle to
understand their consumers
talking about the Apple-ization of finance, or are we looking at a • Media consumption is very
different model to run the industry? And most importantly, different nowadays
when I think of my students, I think, what about the jobs? What BANKING OF TOMORROW
are the jobs going to be tomorrow, in an industry that is going • “We will always need
banking, but we will not
through profound changes?
always need banks.” – Bill
Gates
• Banking services must involve
o Business model
3. What's the downside of FinTech?
o Innovation model
o Technology model
The first thing, information, and data is the key. Who owns it? Is o Data management
it the person who produces it? Is it the person who analyzes it? Is
it the person who uses it? So who owns the data? Let's look at an
example if you look at stock exchanges, all right? Stock exchanges INVESTOR VIEW
CRYPTOCURRENCY AS
get a lot of information from all the transactions that go through INVESTMENT
the platform. Does that information belong to them? Does it • In the future when people
talk about their investments
belong to the users? And what can they do with it? Can they sell
they will mention crypto.
it? Stock exchanges are now for-profit organizations, and they • Young people are more likely
work for their shareholders, as opposed to working for their get into crypto
o It’s related to tech
members. So is this data belonging to them? Does it belong to the
o In general, they are less
government and the regulators? Does it belong to the users? risk averse
What can they do with it? Can they charge you for access to your o Stock vs. crypto
• Things move super-fast in the
own data? That data, can it be stolen? This is not physical, this is
world of crypto
something digital. So if somebody accesses this data, is it stolen? o Earning revenue today
Or does it still belong to you? And if it happens, what can you do o Building systems for
future
about it? Who can you complain to? Which brings about the
problem of regulation, which has been a very tough problem.

Dr. Mohammad Anisur Rahman, Department of Management Information Systems, University of Dhaka
 LECTURE-1: FINTECH OVERVIEW 4

Because regulators operate within national boundaries, and in

the real world, but technology has no borders, or difficult to put INVESTOR VIEW
CRYPTOCURRENCY AS
borders in place. So who is the regulator? And I think these are INVESTMENT
• Lots of opportunities
big challenges that we're facing today.
o ICOs are all over the
place (need to be
Moreover, as we are now moving into an area of artificial
cautious)
intelligence, deep learning, machine learning. So again, who • 2000+ coins but most of the
owns the data? What can you do with it? And when you think money in the upper 10
• Bullish about blockchain
that eventually, you will have artificial intelligence problems,
• Skeptical about crypto
artificial intelligence, designing, artificial intelligence programs,
how do we control this?

Also, we have a very positive, very optimistic outlook on CONSUMER VIEW

ONLINE BANK
technology from the younger generation. We don't look so much • Convenience drive innovation
at the failures. And hype has come from successes, which are • Security First Network Bank
(1995)
very widely publicized, as Dr. Eberhard Schoneburg said
o Internet only bank
recently. We don't hear so much about the failures, maybe we o No branches
should be looking at them more carefully. o Low cost structure
• Within three years other
banks started offering online
banking
o Free internet banking +
physical branch combo

FINTECH REVOLUTION
Case Study • Convenience and edge of use
is the king
• New ways to doing business
The Capital One opens up new doors
• New interactions with
companies lead to new
opportunities.
It’s a case study of a FinTech pioneer, early adopter, an early • Banks fall in financial crisis in
success story that became a dinosaur and then struggled. It's 2008 and looking inward
• Tech firms looking outward
doing okay today, but it went through some rough years. Well, • Consumer trust and use tech
let's talk about this company, Capital One. Their game plan over firm services as mush or
time disrupted the industry, was destructive innovation, more than their banks

disruptive technology. They succeeded in it transforming the

banking industry because the other banks were left with higher risk customers at the same price,
which means they were going to lose money. But it didn't work like magic, and it didn't work
overnight.

Abridged from the lecture of Prof. Theodore Henry King Clark, Hongkong University of Science and Technology on FinTech Foundation and Overview Course.
 LECTURE-1: FINTECH OVERVIEW 5

Capital One started out with five guys with a smart idea. Five
CAPITAL ONE
consultants to the banking industry and they said, "We have an NEW IDEA
idea for a new way of doing banking. A new way of increasing • Focus on the most profitable
profitability. We're going to focus on the most profitable customers: highest returns &
lowest risk
customers. We're going to focus on a segment that has the highest • Utilize data mining or Bigdata
returns and the lowest risk." Now, they went around and pitched
THE EARLY YEARS
to other banks, "We have this great idea, let's just focus on the • Lost money for 3 years
profitable customers." Bankers said, "What? Come on. I mean, • Refined the model and stated
making profit
we're already doing that, or this can't be done. You can't identify
• Become very good at-risk
customers in a particular segment who are riskier or less risky. assessment
We already do credit scores and other things." • Dominated credit card
market
They said, "No. It's more than that. We're going to use big data, OTHER BANK RESPONDED
and analytics, and data mining, and we're going to do this in • The threat of capital one was
creative ways so that we can understand much more about the too great
• Other banks made their own
customer than they even understand about themselves. We'll be systems and copied capital
able to find people who carry large balances and pay interest one
every month on their credit cards but never will default. So, we'll CAPITAL ONE’S MISTAKE
take a low risk, high revenue customers, and we'll offer them a • Started to expand to
traditional banking
better deal. We'll say, if you come to switch to our bank, we'll give o Mortgages
you a lower interest. We'll cut your interest rate in half." o Real-estate
Customers said, "That's a good deal, but we only want the low- • 2008 Sub-prime crisis hit
them hard
risk guys." • Went from innovator to copy-
cat
Signet bank in Virginia, small regional bank said, "We like it. Let's
RETURN TO THEIR ROOTS
try it." So, they started up, they spun off their credit card business
• Went back to their core
into a separate venture which they overtime renamed Capital competency
One. They put these guys in charge and said, "Take the data we o Stumbled but recovered
o 10th largest bank in the
have, find other data, do some analysis, and figure it out. If you
USA by assets
said you could do this, show us." For three years, they lost o Started from the bottom
money. They spent a lot on data analytics, they spent a lot on and transformed the
industry
testing and learning different models, different ideas, and it took
BANK INDUSTRY TODAY
them three years to get things right.
• Not alone banks adopted.
During that time, management or the owners of the bank, Industry is more efficient and
better at evaluating risk
shareholders, and the board had to be patient. In some cases, • Most Fintech firms will not
they're getting a little frustrated. Really, you guys told us you're remain alone for very long
going to make money. All we're seeing is losses. What gives? But
they said, "Bear with us, we're working out the model, we're
getting some things refined and we'll be there." After three years,
it started working. It started working really well. They started

Dr. Mohammad Anisur Rahman, Department of Management Information Systems, University of Dhaka
 LECTURE-1: FINTECH OVERVIEW 6

figuring out who were the customers they were trying to target, and they got very good at risk
assessment, and they became the fastest growing bank in America. They were dominant with
credit cards and offering a lower price than any other consumer bank for their credit card
customers. Lower interest rates, but had a lower risk by far than the average pool of customers.
So, other banks were left with a higher risk customer, higher cost and started losing money.

The other banks discovered the only way to respond to this is to do the same. It's to develop their
own data mining capability, their own data analytics because you cannot ignore this, this is the
nature of FinTech, that you cannot ignore a powerful technological disruption to your industry
and just say, "I don't want to do that. I don't want to play that way." For example, one investment
bank CEO was looking, talking to other bankers at a conference and says, " Did you know what?
Every year we invest more money in IT, and every year we're making fewer profits. Why don't
we just stop? Let's just quit investing in technology and stay where we are." Another CEO says,
"Why don't you do that and let us know how it works out." Well, obviously that's a silly idea, and
it's not going to happen. Margins are under pressure and if you stop, if you don't invest, if you
don't continue to improve and innovate, you're gone, you're dead.

Capital One became very successful. By 10 years later after the bank, it founded as Capital One
was created. 2005, 10 years after their founding or creation, they had become one of the largest
banks in the United States. They were all about consumer lending. They were not like other banks,
they were a credit card bank but they were very good at what they did. They came up with some
other innovations that were exciting. But one of the things they decided to do, is to invest in more
traditional banking services, to end up invest in things like sub-prime mortgages.

They became big, they had a lot of capital, they had a lot of money, they had a lot of profitability.
They said, "We want to be like every other bank. Every other large bank has all of these things,
they're investing in mortgages and real-estate and all this cool stuff. All these innovations were
getting left out and other people are growing faster in those areas. We can do that too." By 2008,
they're in trouble. Sub-prime meltdown, banking crisis. They had to be bailed out along with
many other banks by the US government. This was not unique, but they had gone from their
pioneering innovative start to say, "We want to be like the other dinosaurs. We want to be like
every other bank and not stick to what it is they did that was unique, original and powerful that
created the wealth." After some stumbling and some problems, they got back to their consumer
roots.

Capital One has done well since then. They're primarily still a credit card-based business. They've
sold off their mortgage creation business and some of their other businesses. They have come up
with some other pioneering innovations, intriguing things. But they did stumble as they said,
"We can be just like every other bank" and they were. They failed, just like every other bank. But
they were an early pioneer in data analytics, AI, expert systems, Big Data, risk assessment,
knowing your customer better than anyone else. They did a lot of things really well, and they
were FinTech pioneer.

Abridged from the lecture of Prof. Theodore Henry King Clark, Hongkong University of Science and Technology on FinTech Foundation and Overview Course.
 LECTURE-1: FINTECH OVERVIEW 7

Why do I call them FinTech even though that the 10th largest bank in America today buy assets?
Because they started with almost nothing and they grew to be huge, and they transformed the
industry, they put other banks out of business in some cases, or other credit card businesses out
of business, they forced other people to copy their pioneering innovations or go broke. You either
have to develop capability as Capital One had, and they had pioneered and it had an advantage
in, or you had to get out of the credit card business. Because the only customers that Capital One
didn't want were the ones you also didn't want. There were less profitable customers and that
was difficult. Now, today the industry is much more efficient, much better at assessing risk and
Capital One is similar to many other very large and successful banks. They're not alone.

Most FinTech firms will not be alone forever. They will be copied or bought out and the other
banks will adapt or die. So, this is an example of a FinTech pioneer who transformed an industry,
changed the nature of consumer lending via credit card business, and succeeded marvelously in
the process. But then stumbled as they became a giant, and didn't transition well to a different
managerial challenge, and market environment. So, that's maybe an analogy that we can draw
and say, "What might happen to other FinTech firms? How might they succeed? And how might
success even sow seeds for its own problems as you try to move from success to greatness."

Dr. Mohammad Anisur Rahman, Department of Management Information Systems, University of Dhaka