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

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

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