Katya Malinova PRO
I am an Associate Professor, Mackenzie Investments Chair in Evidence-Based Investment Management at the DeGroote School of Business, McMaster University, Canada.
Intro to FinTech
MBA F741
Instructor: Katya Malinova
This slide deck was developed in collaboration with Andreas Park (University of Toronto)
What is FinTech?
Finance
+
Technology
usually post 2008
outside of traditional financial institutions
goal: disrupt existing FIs
this is really squishy ...
The world of Finance as we know it is over
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?"
Ratio of the income of financial intermediaries to the quantity of intermediated assets
Workers in the Finance Industry benefit greatly from growth of finance
- Philippon and Reshef (QJE 2012):
- 1980: wage financial services=wage other industries
- 2006: financial services=170% x other
-
Goldin & Katz (AER 2008)
- 1969-74: 6% of Harvard grads went to Fin Industry
- 2006: 28%
-
Oyer (JF 2008):
-
wages Stanford GSB grads in finance industry
- 300% of wages in non-finance
-
wages Stanford GSB grads in finance industry
What drives high wages?
Deregulation or complementarity to IT?
Source: Philippon & Reshef (JEP 2013)
What explains high wages?
- High quality?
- Bai, Philippon, Savov (JFE 2013): No, markets haven't become any better/more informative.
- Better allocative efficiency?
- Aguiar and Bils (AER 2015): no improvement in risk sharing.
- No evidence that allocative efficiency has improved (typically measured by "total factor productivity" (TFP)).
- There is a dispute whether growth in finance has actually brought benefit to society ...
And then there's this:
which led to ...
High cost industries with high rents?
What do we know from the long history of capitalism?
Disruptive entry is bound to take place!
Why disruption from outside?
- Financial Industry is self-contained
- for many years, hired a "certain" type of person
- "fixed" set of tech vendors
- access to financial infrastructure essential
- outside disruption difficult
- Technological advances have the capacity to break into the industry
Example: One of the first segments that were disrupted from the outside: equity trading
Technological Innovation has always affected trading ....
Old days of trading: highly specialized humans
Modern Day Trading
Autonomous Algorithms run the show
Modern Day Trading
Trading floors are more suited for parties and journalists
Modern Day Trading
And the former heart of Wall Street is now in a faceless & glamourless suburb of Mawah, NJ
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).
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
- ....
The result?
entire career streams disappear
MIT Technology Review, Feb 07, 2017
Markets get better: the post earnings announcement drift had been a long-standing puzzle in finance. ... It's gone.
And what's the result?
Source: Martineau (UofT) (WP2017)
Main Structural Change
Main Structural Change
Main Structural Change
Fastest Computer in 1985!
Main Structural Change
Moore's Law
"the number of transistors per square inch on integrated circuits had doubled every year since their invention."
Moore's Law: the future
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
Source: "Unlocking the human opportunity: Future-proof skills to move financial services forward"; PwC report for the Toronto Financial Services Alliance, April 2018
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
2 years ago many haven't heard of it!
Source: EY FinTech Adoption Index 2017
18%
Obstacles
Source: Philippon (2017)
- non-integrated IT systems
Things are changing ...
- non-integrated IT systems
Things are changing ...
- non-integrated IT systems
Things are changing ...
- non-integrated IT systems
Clayton Christensen: customers don’t buy products; instead, they hire a solution to help them complete a specific job at a specific time.
https://youtu.be/sfGtw2C95Ms
Three types of FinTechs (?)
- Those that start outside of FIs and would like to collaborate with FIs.
- 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
Payments
5% to cab firm and 10-day delay
International remittances: $600B (U.S.) p.a.
all in: 10% fees
Payments
https://www.brookings.edu/opinions/real-time-payments-can-help-combat-inequality/
Importance of Real-Time Payments
Text
https://www.brookings.edu/opinions/real-time-payments-can-help-combat-inequality/
Payments
500M users in India
free international transfers at Interbank rates
used by >60% of total population in Denmark
- 1 billion WeChat users
- >150K in Greater Toronto
Lending and Borrowing
price for loan
effort required to get loan
Lower losses than competitors
Example: Upstart
Tools?
AI& Machine Learning
Example: Lending Club
Source: Jagtiani & Lemieux, 2017, Philly Fed Working Paper 17-17
Future: Scalability
Source: Jagtiani & Lemieux, 2017, Philly Fed Working Paper 17-17
Big Data, Machine Learning, AI
WealthTech
- availability of investment products
- fee transparency
- regulatory changes
- mobile savvy users
some key changes in recent years:
Type 3: Those that want to "blow up the banks"*
*= disintermediate
everything
Nokia's market shares for devices:
- 2007: 49.4%
- 2012: 3%
Little bit of history ....
Paid-for vs. valued
- Keyboard
- Security
- Being businessy
- Cool and cutting edge
- Being Canadian
- Independence from desk
What did they pay for?
What do people value?
- Mobile email
- Brand name
- Easy access to branch
- Great product range
- Fair prices
- Great advice
- Latest tech
- Friendly tellers
- Safe-keeping of assets
- Moving money around
As banks move data into "the cloud," why do we need banks?
Blackberry vs. a Generic Bank
Key Insight: Open Platforms provide value
What took the place of Blackberry?
App stores
Intro to FinTech
By Katya Malinova
Intro to FinTech
This deck is for the first lecture of F741 'Intro to FinTech". The slides are organized in a 2x2 array. It is intended to be viewed "column by column" (i.e., go "down"first and then "right").
