FinTech

in Canada

Andreas Park

in a nutshell: why people choose to work in finance

relative wage=avg wage in finance/avg rest of economy

Source: Philippon (AER 2015) "Has the U.S. Finance Industry Become Less Efficient?"

The Growth of Finance as % of GDP

Source: Philippon (AER 2015) "Has the U.S. Finance Industry Become Less Efficient?"

... and unit costs are flat!

Source: Philippon (AER 2015) "Has the U.S. Finance Industry Become Less Efficient?"

Main Structural Change

Main Structural Change

Moore's Law: the future

And then there's this:

which led to ...

TFSA study on the Future of the Financial Industry

GTA: 800,000 jobs in FI

50% of executives believe that 40% or more of these jobs will change fundamentally over the next 3-5 years

TFSA study on the Future of the Financial Industry

TFSA study on the Future of the Financial Industry

TFSA study on the Future of the Financial Industry

TFSA study on the Future of the Financial Industry

What is FinTech?

Key features

  • focus on positive customer experience
  • Willingness to apply technology in novel ways.

Approach: Propositions that are

  • simpler, seamless
  • more convenient,
  • more transparent and
  • more readily personalized.

based on EY 2017 FinTech report

Consequence of FinTech

Impact on incumbents:  struggle to deliver the seamless and personalized user experience.

Consequence: ripple effect 

  • consumers expect convenience for all financial products and from all service providers
    • retail banking,
    • wealth management or
    • insurance.

based on EY 2017 FinTech report

Problem for incumbents

  • FIs focus on their needs and wants
  • => are not customer-centric

You haven't heard much about it? 

Source: EY FinTech Adoption Index 2017 

18%

Three types of FinTechs

  1. Those that start outside of FIs and would like to collaborate with FIs.
  2. Those that started outside of FIs and now collaborate FIs.

4. Big Tech Firms

3. Those that work to replace or change the financial system as we know it.

Some Core Functions of Financial Institutions/Banks affected by FinTechs

Lending and Borrowing

Wealth Management

Payments

Investment Banking Services

Lending and Borrowing

price for loan

effort required to get loan

Example: Upstart

Source: upstart.com

Tools? Machine Learning

Source: ​Jagtiani & Lemieux, 2017, Philly Fed Working Paper 17-17

Future: Scalability

Source: ​Jagtiani & Lemieux, 2017, Philly Fed Working Paper 17-17

Payments

5% to cab firm and 10-day delay

International remittances: $600B (U.S.) p.a.

all in: 10% fees

Payments

500M users in India

free international transfers at Interbank rates

used by >60% of total population in Denmark

WealthTech

  1. available invest products
  2. fee transparency
  3. regulatory changes
  4. mobile savvy users

main changes in recent years

New, low-cost Investment Products: Exchange Traded Funds (ETFs)

US data: https://www.seeitmarket.com/what-are-etf-and-mutual-fund-flows-trends-telling-investors-now-14449/

Help from financial advisors is useful for the average investor but ...

... all evidence points to severe conflict of interest

In addition: Regulatory Changes force structural changes in fund management

  • ban on trailer fees
  • for funds: separation of research fees and commissions 
  • best interest vs suitability

=> automation = Robo Advisors!

Trading

  1. electronically accessible venues
  2. vast improvements in computing power

main changes in recent years

Old Days of Trading: highly specialized humans

Old Days of Trading: highly specialized humans

Modern Day Trading

Autonomous Algorithms run the show

Modern Day Trading

And the former heart of Wall Street is now in a faceless & glamourless suburb

Why?

  • Many trading strategies are more-or-less mechanical/probabilistic
  • computers are
    • faster,
    • cheaper, and
    • more reliable 
  • Computer algos allow much wider scope

Source: Bloomberg News, Feb 20, 2015

Note: The biggest disruptors (the HFTs) came from the outside of the traditional system (kinda).

And what's the result?

entire career streams disappear

The HR Component

  • Old skill-set of an equity trader
    • good and fast with numbers
    • brash
    • strong vocab in profanities
    • whatever this koala has...
  • New skill set
    • programming
    • stats/data
    • econometrics
    • => increase scope

And what's the result?

Markets get better

Source: Martineau (future UofT faculty) (WP2017)

And what's the result?

Markets get better: the post earnings announcement drift had been a long-standing puzzle in finance

Source: Martineau (future UofT faculty) (WP2017)

Source: Park and Wang (former UTM UG) (WP2018)

Does it spread to asset pricing?

Source: Park and Wang (former UTM UG) (WP2018)

Does it spread to asset pricing?

correlation of algo trading and CAPM fit ~ 80%

Examples of Canadian FinTechs

RegTech
Compliance
Security

Crowdfunding

Payments

Lending and Borrowing

Digital Wealth
Personal Finance

Platforms,
Accounting

Data and Analytics

InsurTech

Blockchain, DLT
Cryptocurrencies

Type 3: Those that want to "blow up the banks"*

*= disintermediate

     everything

Stock transfers are complicated!

But with blockchain...

Step1: Design smart contract = limit order

Step 3: Send money
to smart contract 

Step 4: BC confirms trade and changes accounts

Step 2: register on blockchain

...you can do this all in one go!

You can even create your own security ("token") in a snap!

Initial Coin Offerings are now a reality

source: coinschedule (data from Sept 5, 2018)

Transformations

But: not all problems call for a blockchain

Summing up

  • Major technological transformations
    • driven by small firms
    • forcing big banks to think -gulp- about CUSTOMERS!
    • both disruptive and collaborative
    • Canada still at the beginning, so much good still to come
  • bigger changes are coming
    • strong drive by big tech firms
    • in 10 years, banks and jobs of bankers will be entirely different
  • Blockchain wildcard
    • if the decentralized internet takes a foothold, the digital world will look entirely different
    • neither banks nor tech firms nor the public sector will be anything like they are today

For this course

  1. Focus on two main tools
    • blockchain technology
    • machine learning
  2. Applications:
    • lending
    • payments
    • wealthtech
  3. Fostering your creativity and imagination
    • analyze existing products/firms
    • come up with your own idea

First Lecture MGT415

By Andreas Park

First Lecture MGT415

I used this deck for the first hour of my MGT415 class

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