The Digital Transformation of FinTech: Disruptions and Value Paths

September 8, 2020


The latest tech-enabled financial services supported by the blockchain technology promises to disrupt the strategic positioning of financial institutions and pave the way for FinTechs and TechFins to gain financial centrality. While there has been a growing number of studies on blockchains, we lack a comprehensive view of their nature and implications in the financial industry. Moreover, numerous novel blockchain-enabled financial instruments emerged in recent years expanding global finance ecosystems and the provided services. In this study, we shed light on the main features of blockchain and identify the range of services offered by FinTechs. More importantly, we inductively develop a Blockchain Fintech Fitness Framework that maps the most suitable blockchain technologies – conceptualized along eight features – to the different categories of financial services offered by FinTechs . The framework identifies the structural changes and organizational barriers that FinTech ecosystems need to grapple with to actualize the technology’s capabilities.

During recent years, FinTechs and TechFins have disrupted the financial industry gaining rapid market centrality. According to EY, one third of digitally active consumers now use two or more FinTech services (EY, 2017). In the United States, a country where FinTech penetration is below average (Gulamhuseinwalaet al., 2017), 36% of all personal loans in 2017 were extended by FinTechs (Claessens et al., 2018), up from less than 1% in 2010. The personal loan market reached a staggering $138 billion in 2017 (Corbett, 2019). Fintech lenders’ mortgage market share increased to 18% in 2016, up from two percent in 2010 (Lorenzo, 2019). Two years ago, Alipay, a leading FinTech company, processed 1.05 billion transactions, in a single day, during the Global Shopping Festival (Millward, 2016). In addition, government authorities in numerous countries introduced financial technology projects and programs aimed at facilitating financial transactions Pollari and Ruddenklau, 2019). The Hong Kong Monetary Authority, Australia, UK, and Singapore Maritime and Port Authorities, and Dubai Customs Authority initiated financial technology related projects as well. Despite its infancy, global investment in FinTech soared at a record pace in the first half of 2018 to reach $57.9 billion (Miller, 2018) surpassing the capital that was invested in 2015 (Nonninger, 2019).Novel financial instruments are replacing conventional ones (Altamirano & Beers, 2018). For instance, micro financing instruments like M-Pesa and Amazon Cash as well as payment instruments like Alipay and Amazon Pay are replacing credit cards and loans (Wenner et al. 2018). Digital funding via initial coin offerings (ICOs) and crowdfunding platforms; internet-based international trades with virtual currency swaps, and buyer-led supply chain financing; all have changed the financial playbook, disrupting the banking sector to its core (Cumming et al. 2019). Conventional banks, on the other hand, are curtailed by their bureaucratic inertia to adapt to a technology-enabled, yet under-regulated, financial ecosystem, what led Gartner to publish an article titled: “Digitalization Will Make Most Heritage Financial Firms Irrelevant by 2030” (Moore, 2018). According to EY, traditional bank’s current level of engagement with FinTech is insignificant, where only 25% of banks are extensively exploring novel FinTech products (Gulamhuseinwala et al., 2017). A recent report reveals that only 7% of legacy banks have set up fintech labs and the majority favored being passive investors in FinTech start-ups than initiating their own programs (Graham, 2018). This has led to the dominance of FinTech companies in the personal banking sector, taking over the international personal lending services in 2016, from a mere 5% market share only three years back (see figure 1 below). It is thus evident that FinTech “achieved initial mass adoption in most markets” (Gulamhuseinwala et al., 2017).

Despite the exponential growth of FinTech, relevant academic research only emerged in the past two years. According to web of science (queried on February 20, 2019), publications that fall under FinTech were merely 7 journal articles in 2015. This number increased to 120 publications in 2018

Notwithstanding the scant literature on FinTech, the relevant publications are distributed over a wide range of subjects in the fields of business (finance, management, and economics), computer science (information systems and software engineering), and law (see figure 3). Alas, the academic literature on FinTech is scant and lacks an in-depth understanding of what services fintech encompasses and its varied applications in the disciplines of finance, technology, and law. As with every business field in its infancy stage, a better comprehension can be attained by examining white papers published by leading firms like Price Waterhouse Cooper, Deloitte and Ernst and Young.

Additionally, a review of the literature on novel financial instruments such as P2P borrowing and ICOs often highlights blockchain as a disruptive and enabling technology. Blockchain, and distributed ledger technology (a.k.a DLT), became known through the introduction of the cryptocurrency, bitcoin, that grew in value from less than $5 in 2012 to reach $20,000 in 2018 (Piscini et al., 2017). Nowadays, there are hundreds of blockchain technologies including Bitcoin, Factom, Universa, Cypherium, Ethereum, Multichain, R3, Monero, Ripple, Hyperledger, Corda, etc. Each blockchain technology has its own traits which can be a benefit or a detriment, depending on the context in which the technology is exploited (Lee et al., 2018). For instance, bitcoin being a public is unsuitable for bank settlements whereas R3 is a federated DLT designed specifically for consortiums to exchange value through the automated agreement logic designed as “smart” contracts agreements (Wang et al., 2019). In this paper, we shed light on the field of FinTech and its many derivatives. We also specify the financial services that FinTechs offer. To do this, we turn to FinTech white papers as well as to the existing academic literature. More importantly, we conduct a thorough review of the qualities that the main blockchain technologies offer in order to develop a Blockchain FinTech Fitness Framework (BF3) that maps the various fintech services to the most appropriate features of blockchain technology. In this endeavor, we answer the following research question: Which blockchain is most suitable for the financial services that are being offered by FinTechs. Another objective of this research is to derive a set of factors that curtail the rapid adoption of blockchain in the financial industry. The paper is structured as follows. First, we review the literature on FinTech, its derivatives, and its underlying blockchain technology. We, then, use this literature to develop the Blockchain FinTech Fitness Framework. In this section, we explain the framework development methodology adopted and identify the FinTech building blocks and principal blockchain’s features that map to FinTech financial services. Finally, we discuss the framework, as well as, the barriers that the traditional banking industry facees and provide a conclusion.

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