"Fintech and banking: What do we know?" Thakor, Anjan Flashcards
What is Fintech?
Fintech is “technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions, and the provision of financial services”.
What are the factors that promote appearance of fintech companies?
Investments in fintech companies are higher in:
● More financially-developed countries
● Countries with less competitive (more concentrated) banking systems
● Countries with higher lending interest rates and lower deposit interest
What are the goals on fintech?
● Lower search costs of matching transacting parties
● Achieve economies of scale with large data
● Achieve cheaper and more secure information transmission
● Reduce verification costs
What are the services fintech offers?
● Credit, deposits and capital raising services
○ P2P (peer to peer) lending (no intermediary, firm compensated with origination fees and late payment fees)
○ Shadow Banks (provide commercial bank services but don’t finance with deposits)
● Payments, clearing and settlement services (cryptocurrencies, DeFi)
● Investment management services (high-frequency trading platforms, e-trading, copy tradings, Robo advising for diversification benefits)
● Insurance products (big data, and internet of things, allow for more precise insurance contracts)
How do we modify financial intermediation theories to accommodate banks, shadow banks and non-intermediated solutions? (What to keep in mind trying to come up with a theory)
● Little incentive to regulate P2P platforms (P2P providers have no skin in the game, get paid upfront for creating a deal, investors concerned about trust)
SOLUTION: Platform collects part of borrower’s repayment instead (gives incentive to give more reasonable loans)
● Differences between P2P platforms and banks
○ Banks make careful loans, offer wider intermediation services, benefit from relationship banking
○ P2P platforms have lower operating costs
Impact of fintech on credit, deposits and capital raising: will P2P lending replace bank lending?
● Trend of loan migration from banks to P2P
○ P2P loans are riskier, but not cheaper
○ Can go to P2P when bank denies the loan, but banks have better funding access and trust
○ Migration bigger in countries where banking services are less used
● Competition from P2P
○ Competition lowers bank’s fees/interest rates –> borrowing is cheap –> borrowers less incentivised to take more risk –> decreases default risk
○ Empirically, banks improve profitability, asset quality and stability when facing competition
○ Thus, P2P might actually not be the end for bank lending
On payments, clearing and settlement, what will be the role of cryptocurrencies vis-a-via fiat money?
● Digital wallets – Combine various services payments, keys, tickets, IDs; somewhat competitors with banks; most important role in developing countries, where people sometimes have limited access to financing.
● Currency – (some think of crypto as currency, some as investment) Crypto already act as payments but banks do not (yet) use them in their services –> crypto has a competitive edge but it has volatility problem –> should be perceived as investment.
How will crypto affect central banks?
Central banks are introducing digital currencies since:
○ DCs have higher settlement efficiency and are cheaper to produce than cash
○ Central banks want more control over commercial banks and monetary policy (DC provides that)
If central bank has full supervision over DC, it’s easier to realize negative interest rate policies.
How will Blockchain-technology-assisted smart contracts transform the financial market, including investment management and insurance?
● Blockchain technology/smart contracts provide benefits
○ More contract opportunities
○ Trustless system with no central authority
○ Lower contacting, intermediary, verification costs
○ Increased accuracy
○ More tailored options (car insurance connected w car, driving style data can adjust contract terms)
● Banks are likely to adapt and use smart contracts, as they are more trusted with personal data (privacy concerns tho)
