Digital Divide Lecture 4

Fintech for Consumers

What is the general definition of Fintech?

use of digital technologies to deliver financial services (e.g. mobile payments)

How does the FSB define “Fintech”?

tech-enabled innovations in financial services that make new business models + products possible

>it restructures how financial services are built + delivered

What are the three stages for the evolution of Fintech?

1. Fintech 1.0: telegraph & railways replaced typical modes of transportation for money and financial info (overseas transactions took a long time via ship), early bookkeeping systems

2. Fintech 2.0: banking goes digital (ATMs since 1967, SWIFT network, online banking since 1980s, internet banking since 2000s)

3. Fintech 3.0: smartphones, blockchain & AI, non-bank financial services

Explain the “SWIFT network”!

=a shared messaging system created in 1973 by many different countries in the world for international transactions > included instructions about money securely;

What was the trigger for Fintech 3.0?

the global financial crisis in 2008 (decline in trust in banks: trust is the most important thing for financial services)

therefore: entry of non-bank players like Amazon, Google (pay), Kakao/Naver Pay (South Korea)

>possible through big data, AI

What are some important post-crisis reforms?

Basel III, Dodd-Frank

What are some key services that FinTech offers?

• Payments: mobile wallets (Apple Pay, PayPal)

• Credit & Lending: crowdfunding, Person-to-Person Loans

• Investment: online brokers, robo-advisers

• Personal Finance Management: neo-banks (only online > Mint), budgeting & AI-advisors

• Insurance: digital-only, AI risk assessment

• Capital Markets: online trading, risk management

What are some technologies that enable these said services?

• blockchain: cryptocurrencies, smart contracts

• big data analytics: personalized finance, fraud detection

• cloud computing: infrastructure for digital banking/payments

• internet of things: connected devices for new payment methods

• biometric technologies: fingerprint, facial recognition

• ai & machine learning: chatbots, algorithmic trading

Which three drivers behind the expansion of FinTech can be differentiated?

• technological drivers

• institutional/regulatory drivers

• consumer demand drivers

What are some technological drivers for FinTech?

• mobile penetration + broadband expansion: for a growing share of the world, the smartphone is the only way to access financial services

• big data + AI: customized credit scoring, robo-advisors

• blockchain

What are some regulatory + institutional drivers for FinTech?

• decline in trust because of global financial crisis 2008

• open banking & API policies: banks can only share financial data to third parties with the consumer’s consent (EU PSD2, Korea MyData)

• regulatory sandboxes: testing new products in controlled environments

• central banks + financial regulators

What are some consumer demand drivers for FinTech?

• convenience & low-cost: 24/7 access, instant transfers

• generational shift: younger generations (Gen Z, Millennials), prefer mobile financial services compared to older generations

• financial inclusion needs: serving underbanked/unbanked (for people without access to banks) > giving out micro-loans

Why is Fintech so important? What are the risks involved with FinTech?

more accessibility (24/7, low-cost), customized services, financial inclusion

·       risk: fraud, data misuse, over-borrowing

What is important to note about Payments?

most visible + widely used > first contact-point for consumers

shift from cash > card > mobile/digital wallets (Apple/Google Pay)

Name some global leaders and key trends in the payment area!

Global Leaders: PayPal (online payment pioneer), Apple/Google Pay

Key trend: platformization > payments integrated into lifestyle apps (KakaoTalk > KakaoPay)

What are some promises of digital payments?

What are some pitfalls of digital payments?

• fraud + cybersecurity risks (phishing, wallet hacking)

• privacy concern: transaction data is collected by the platform > it learns your routines, risks: data monetization + profiling

• platform monopoly: dependency on few dominant players

• over-spending: less cost salience through frictionless payments  (easier to just use your phone than hand cash over, you feel less “loss” and lose control over spendings faster)

What could be the future of digital payments?

• cross-border instant payments (Ripple, SWIFT gpi)

• CBCDs: Central Bank Digital Currencies

• contactless + biometric authentication (face/fingerprint)

• convergence: payments > credit, savings, investment (e.g. Revolut isn’t only an app to pay but also to invest)

What is important to note about credit & lending? Who are the global leaders?

traditionally, banks were intermediaries

FinTech innovations: direct platforms, embedded lending, alternative scoring

Global Leaders: Crowdfunding (Kickstarter), Buy Now Pay Later (Klarna), P2P Lending (Prosper)

What is the difference between traditional and alternative data?

traditional: focus on individual’s ability to repay (financial info, previous payments, demographic info)

alternative: focus on individual’s willingness to repay (ambition, reliability, social networks)

What are some promises of credit & lending?

·       financial inclusion: for thin-file consumers

·       faster approvals, lower barriers than banks

·       supporting entrepreneurship + innovation through crowdfunding

What are some pitfalls of credit & lending?

• over-indebtedness: dept spirals (several small installment-loans at the same time)

• regulatory gaps + consumer protection issues: credit systems often evolve faster than regulations around it can keep up

What could be the future of credit & lending?

• AI-driven credit scoring

• stricter regulations

• more embedded finance (credit offers in lifestyle/messaging apps and e-commerce)

What is important to note about investment & wealth management? Who are some global leaders?

traditional: brokerages, private bankers; now low-cost digital-first investment services + democratization

Global Leaders: Robinhood, Wealthfront/Betterment

How do robo-advisors work?

robo-advisors: algorithm-driven investment platforms provide automated portfolio management

What are some promises of investment & wealth management?

·       accessibility: lowers entry barriers for young/retail investors

·       lower fees than traditional brokers/private banking

·       automated portfolio management through AI and robo-advisors

·       learning opportunity: because of broader participation

What are some pitfalls of investment & wealth management?

• over-trading: the same game design elements that make investing fun, make investing feel like speculation (gamification)

• risks are underestimated by inexperienced users

• robo-advisors: algorithm transparency, tendency to one-size-fits-all portfolios

• regulatory issues: investor protection, suitability checks

• data security: sensitive financial data in only a few platforms

What is important to note about personal finance & management?

includes Budgeting & expense tracking (Mint, BankSalad), neo-banks (digital-only banks like Revolut, KakaoBank), more and more AI-powered services (Cleo)

What are some promises of personal finance & management?

• accessibility: lower costs than traditional banks and better for underbanked people

• transparency: real-time tracking of your spending

• convenience: all-in-one platforms (pay, save, borrow, invest), nudges for saving/spending control

What are some pitfalls of personal finance & management?

• Digital Divide: elderly consumers struggle with mobile-only banking, as they are not comfortable/familiar with using technology

• data risk: financial data can be used for targeting/ads

• over-reliance on automation: nudges might be too generic to fit every person

• illusion of control: users feel like they know a lot about finances because of the app’s prompts but that is often far from the truth

What could be the future of personal finance & management?

• personalized AI coaches

• linking finance with health and housing (integrated ecosystems)