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Advanced Corporate Finance > Week 4 FinTech > Flashcards

Week 4 FinTech Flashcards

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1
Q

What is FinTech?

A

Use of technology to provide new and improved financial services

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2
Q

Describe the historical perspective of FinTech.

A

Information technology made most products and services cheaper and more functional. The unit cost of financial intermediation has remained at around 2% for the past 130 years.

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3
Q

Technology has always been a part of finance. What’s new?

A

It’s fast. The speed at which new technologies are introduced into finance is faster than ever.
It comes from outside. Startups and big technology companies from outside finance are disrupting incumbents.

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4
Q

What are the six FinTech areas?

A
  1. Payments (Mollie)
  2. Digital lending
  3. Digital banking (Every large bank)
  4. Blockchain and digital currencies (FTX)
  5. Investment management (Robinhood)
  6. Insurance (Root)
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5
Q

What are three drivers of investment in FinTech?

A
  1. Higher regulatory quality
  2. Better developed financial markets
  3. Higher innovation capacity
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6
Q

Who are the 5 FinTech Unicorns in The Netherlands?

A

Adyen (Payments), Mollie (Payments), Bunq (Neobank), Flow Traders (Trading), BitFury (Crypto-blockchain)

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7
Q

FinTech in the Developing World; describe the situation of M-Pesa.

A

In 2007, the main phone operator in Kenya launched M-Pesa, a mobile-phone money transfer service. By 2012, there were 17 million subscribers and it expanded to several African countries. It lifted 2% of Kenyan households out of poverty through better financial resilience, savings, more efficient allocation of consumption and labor.

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8
Q

What are three types of Digital Lending?

A
  1. Lenders relying on fully online application process, no access to deposits, funded via securization. FinTech lending is a more efficient application process. (Buy-Now-Pay-Later lenders had >100% growth in 2016-2020)
  2. Peer-to-peer / Marketplace lending. Platform providing online market where borrowers and lenders match directly.
  3. BigTech lending
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9
Q

Who are the two main players in marketplace lending?

A

Borrowers are required to provide credit information. Platform verifies info, approves borrower, gives credit score, and sets limits on loan interest rate, maturity and amount.

Lenders choose which loan and how much to finance among approved borrowers, based on borrowers’ info on the platform. They can also choose diversified portfolio of loans delegating to platform investment decision.

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10
Q

How are interest rates set in marketplace lending?

A

Interest rates can be set by platform, borrowers or lenders through auction.

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11
Q

What are the four main platform models in marketplace lending?

A

Traditional
Notary
Guaranteed return
Balance sheet

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12
Q

Describe the traditional P2P lending model.

A

Loan contracts between borrowers and lenders, not with platform.
Platform makes profits from fees, absorbs portion of credit losses.

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13
Q

Describe the Notary Model in marketplace lending.

A

Loans originated by partnering bank who acts as intermediary between borrower and lender, platforms perform matching process.
Loans can be packaged (pooled) and sold to institutional investors. (Securization)

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14
Q

Describe the Guaranteed Return Model in marketplace lending.

A

Similar to traditional model, but platform guarantees lenders’ principal and interests.

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15
Q

Describe the balance sheet model in marketplace lending.

A

Platform originates and retains loans in their balance sheet. Platform funded with debt, equity and securization.

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16
Q

What are supply side advantages of marketplace lenders?

A
  1. Technology; FinTech lenders make more use of digital innovation automating processes, which leads to lower costs.
  2. Ability to scale; standardized processes and a platform environment make it less costly to scale up.
  3. Regulatory arbitrage; FinTech lenders are not subject to capital and liquidity requirements as high as traditional banks.
  4. Underserved borrowers; Unprofitable for traditional banks to serve some segments of borrowers (high risk, micro firms)
  5. Decreased value of banks’ franchise; Large banks face agency and coordination costs due to diversified nature
17
Q

According to research, what can be said about US FinTech lenders?

A

They have faster mortgage processing times and they select safer mortgages.

18
Q

How does the Credit Scoring of FinTech work?

A

FinTech lenders use alternative data for credit scoring. For example, borrowers’ digital footprints. That is information that users leave online by accessing or registering on a website.

19
Q

What is Open Banking?

A

Open Banking policy allows bank customers to share their financial transactions data with other financial service providers to promote fintech entry, competition and financial inclusion.

20
Q

Through which channels does OB data sharing work?

A

New lenders can underwrite more effectively, entrants can improve product quality.

21
Q

What are disadvantages of OB data sharing?

A

Negative distributional effects, reallocation credit to best.
Borrowers opting out from data sharing sends negative signal, might be primary target of financial inclusion.

Social privacy preferences can help overcome negative distributional effects.

22
Q

Which borrowers do Fintech lenders target when entering?

A

Credit constrained underserved by traditional banks.
Most creditworthy attracted by convenience.

23
Q

How is fintech credit used?

A

Repay existing more expensive debt, increase consumption and spending

24
Q

What are four Demand Side Advantages of FinTech lenders?

A
  1. Customer expectations; digital economy increased demand for convenience, speed, user-friendliness, network effects.
  2. Demographic factors; new generations more responsive to new technologies.

3, Mistrust in banks; financial crisis undermined trust in traditional lenders.

  1. High returns; profitable investment for lenders, investors, consider fintech loans as asset class to diversify their portfolio.
25
Q

What are risks of FinTech lending?

A
  1. Operational risk; cyber-security concerns due to extensive use of digital processes, computing/data storage providers.
  2. Credit scoring; no consistent evidence on performance of credit risk models, not tested through full credit cycle.

3, Moral hazard; most platforms don’t hold loans in balance sheet, incentive to originate high risk loans.

  1. Investor confidence; hard to attract and retain investors.
  2. Low profitability; most US and UK platforms have been operating at loss, need to adjust their business.
26
Q

How are traditional banks responding to the threat of FinTech lending?

A
  1. Retreat from segments where platforms have advantages.
  2. Acquire or set up own FinTech credit platform.
  3. Invest directly in loans from FinTech platforms.
  4. Cooperate with FinTech platforms to use their technology.
27
Q

What are BigTechs?

A

Biggest technology companies worldwide

28
Q

Why did BigTechs enter payment services?

A

To overcome lack of trust between buyers and sellers on their platforms

29
Q

What can BigTechs do with their E-Money licenses?

A
  1. Issue electronic money and store client funds.
  2. Profit from data exploitation activities.
  3. Create super app with financial and other services (WeChat)
  4. Access payment data from multiple banks and providers.
30
Q

What are 3 benefits of BigTech Credit?

A

They have better credit scoring measures through their extensive database and network.

Cheaper borrowers’ screening and monitoring through their data.

Financial inclusion and growth of unbanked borrowers.

31
Q

What are 3 potential risks of BigTech Credit?

A

Market power due to dominant platform and network effects, BigTech might favor their own products.

Anticompetitive use of data through price discrimination –> use data to identify highest interest rate that customers are willing to pay for credit.

32
Q

What is a potential solution for the anticompetitive use of data by BigTechs?

A

They should be subject not only to financial regulation, but also to competition and data privacy rules.

Advanced Corporate Finance (5 decks)

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