The future of fintech

• DOI: http://doi.org/10.1111/fima.12297
• Date: 01 December 2019
• Author: Sanjiv R. Das
• Published date: 01 December 2019

DOI: 10.1111/fima.12297

ORIGINAL ARTICLE

The future of fintech

Sanjiv R. Das

LeaveySchool of Business, Santa Clara

University, Santa Clara,California

Correspondence

SanjivR. Das, Leavey School of Business at Santa

ClaraUniversity, Santa Clara, CA 95053.

Email:rsdas@scu.edu

SanjivR. Das is the William and Janice Terry

Professorof Finance in the Leavey School of Busi-

nessat Santa Clara University in Santa Clara, CA.

Abstract

This article describes the growing field of financial technology (fin-

tech) and the different financial paradigms and technologies that

support it. Fintech is primarily a disintermediation force where dis-

ruptive technologies are the drivers. This framework discusses 10

primary areas in fintech comprising a taxonomy, which categorizes

research in the field and also proposes a pedagogical structure. Pit-

falls of fintech are also analyzed. Overall, the great strides made in

computing technology, mathematics, statistics, psychology, econo-

metrics, linguistics, cryptography,big data, and computer interfaces

have combined to create an explosionof fintechs.

KEYWORDS

fintech, blockchains, trading,payments, robots, AI, regtech

Financial firms are rapidly using technology to transform their businesses. In this article, I survey 10 areas in which

fintech is poised to deliver high value to firms, markets,and regulators. Much of this value is created through the use of

machine learning technology,big data, cloud computing, and cryptographic methods.

Fintech refers to various financial technologies used to automate processes in the financial sector, from routine,

manual tasks to nonroutine, cognitive decision making. Variousareas of finance are subject to disruption, such as pay-

ment systems, contract checking, trading, risk management, quantitative asset management, lending, mobile banking,

customer retention, and investment banking. Annual fintech financing in 2018 was $112 billion, comprised of 2,196

deals, doubling over that of the previous year (2017: $51 billion).1Figure 1 presents one representation of the fin-

tech landscape.

Fintech may be characterized bytechnological change in three broad areas of finance: (a) raising capital, (b) allocat-

ing capital, and (c) transferring capital. Fintech is disrupting all three. For example,payment systems efficiently trans-

fer capital. Firms such as CommonBond (https://commonbond.co/)are using technology to revolutionize how capital is

supplied. Likewise, robo-advising platforms are changing the waycapital is allocated.

Definition. Fintech is any technology that eliminates or reduces the costs of financial intermediation.

Definitions of fintech vary depending on source, and the definition here is a general approach to capturing the main

flavor of what is currently understood as fintech. For example, the Bank for International Settlements (BIS) defines

c

2019 Financial Management Association International

1https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/02/the-pulse-of-fintech-2018.pdf.

Financial Management. 2019;48:981–1007. wileyonlinelibrary.com/journal/fima 981

982 DAS

FIGURE 1 The fintech landscape. These “lumascape” diagrams show a sampling of a business domain and firms

within it. See https://pbs.twimg.com/media/CYOHdfgW8AERjdO.png[Color figure can be viewed at

wileyonlinelibrary.com]

fintech in credit to “broadly include all credit activity facilitated by electronic (online) platforms that are not operated

by commercial banks” (see BIS Quarterly Review, September 2018, p. 31).

What is the long-run driver for fintech as a disruptor? The main factor is the high cost of financial intermediation.

This has historically always been so. In an interesting study,Philippon (2016) shows that the average cost of interme-

diation has held steady at around 2% of transaction amounts. Figure 2 shows that this cost has hovered around this

level since 1880 until current times, for an astonishingly extendedperiod of more than a century. While one may spec-

ulate about the reasons for this high cost of financial intermediation, such as lack of competition on the supply side, or

ignorance of consumers on the demand side, the fact remains that these rents accruing to large financial institutions

are now ripe for the picking by smaller,agile, fintech players. Technology is often a cheaper intermediary and a driver

of competition. Over the last two decades, employment in the financial sector has expanded from 5% to 6.5% of the

workforce, as shown in Figure 3. Fintech may very likelyreduce this number dramatically.

Fintech applications range from simple automation to complex decision making. Many rely on big data, and

necessitate investments in cloud infrastructure and analytics. Successful fintech applications display some common

characteristics. First, it is valuable to develop models from a theoretical foundation before bringing in data. This helps

both in preparing the data based on extant theory,and makes interpretation of the results facile as they are seen from

the backdrop of a theoretical foundation. For example,automated lending models are based on a theoretical founda-

tion of financial concepts, such as leverage, and customer behavior,which suggests the econometric specification for

the data. The variables used in the model, denoted as “features” in machine learning (ML) models are better chosen

using theoretical ideas, especially when causal models are intended. Second, sharp definition of the problem statement