FinTech:

Shaping the Financial World

May 11, 2020

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Class 12: Overview
• Finance Technology Stack
• FinTech – The Actors
• AI, Machine Learning & Natural Language Processing – Finance
• Open API, Open Banking & Robotic Process Automation
• Credit Scoring & Alternative Data
• Blockchain Technology & Cryptocurrencies
• Sector Review, Competitive Landscape & Coronavirus Crisis
• Conclusions
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Class 12: Study Questions

• What is FinTech & how might it shape the future of money and finance?

• How can one best assess the viability of FinTech project?

• Has this class met your goals? Has it made you more bullish or more
bearish on fintech?

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Finance Technology Stack
? Blockchain Tech, etc. ? >
Sensors & Telematics >
Open API >

AI, ML & NLP >

Cloud >

Mobile >

Internet >
Money, Accounting, Ledgers, Joint Stock Companies, Markets, Derivatives,
Electronic Messaging, Credit Cards, Securitizations, etc. > 4
Customer Interface Chatbots, CI & Voice Assistants (2010s)

Open APIs (2000s) & Open Banking (2015)

Contactless & Cardless Systems (2000s) >

Mobile Payments (2000s) & Wallets (2008) >

Internet (1990s) & On-line Banking (1990s - 2000s) >

Automatic Teller Machines (1970s) >

Credit Cards (1940 – 50s) & Point of Sale Systems (1980s) >

Mortgage Brokerage (1890s) & Automobile Indirect Lenders (1910s) >

Electronic Payments (1870s), Wires (1910s), ACH (1970s) & Direct Deposits (1970s) >

Checks (800s), Negotiable Checks (1500s), & Preprinted Checks (1760s) >

Banking - Tents, Temples, Bricks & Mortar (4th – 1st millennium BCE) >
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Funding & Risk Management
Sensors & Telematics (2010s) >

ML Based Underwriting (2010s) >

Peer to Peer Lending (2005) >

Credit Default Swaps (1990s) >

Asset Backed Securitizations (1970s – 90s) >

Interest Rate Futures (1970s) & Interest Rate Swaps (1980s) >

Consumer Credit Scoring (1960s) & FICO Scores (1990s) >

Consumer Finance Companies & Warehouse Lines of Credit (1920s) >

Private (1880s, 1950s), Government (1930s) & GSEs (1930s) Mortgage Insurance >

Bankruptcy & Secured Lending Laws, Loan Servicing & Collection Agents (Days of old) >

Bank Deposits - (Antiquity) >

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FinTech - Finance’s Fertile Ground

• Digitalization of Money, Securities and Credit

• Wide Public Acceptance of New Tech
• Legacy Customer Interface and Processing Systems
• Vast and Expanding Amounts of Customer Data
• Rapid Expansion of Computational & Analytical Power
• Reliance on Multiple Systems of Ledgers
• Infrastructure Systems’ Costs and Counterparty Risks
• Economic Rents and Centralized Concentrated Risks
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FinTech – The Actors
• Big Finance: Like ‘Fortresses’ w/ Moats, Towers & Sovereign Affiliations
• ‘Towers’: 1) Payments, 2) Balance Sheets, 3) Data, 4) Corporate Structure

• Big Tech DNA Loop (BIS): 1) Data, 2) Networks, 3) Activities

• Start-ups: 1) Disruptive Innovators, 2) Flexibility, 3) Asymmetric Risk Takers

• Official Sector: Goals: 1) Economic Growth, 2) Financial Stability, 3) Guarding

against Illicit Activities, 4) Inclusion, 5) Investor & Consumer Protection

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AI and Machine Learning - Finance
• Asset Management
• Call Centers, Chatbots, Robo-Advising & Virtual Assistants
• Credit & Insurance - Allocation, Extension, Pricing & Scoring
• Fraud Detection & Prevention
• Regulatory – Anti Money Laundering, Anti Manipulation
• Risk Management & Underwriting
• Robotic Process Automation
• Trading
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Image by Lex Fridman. Used with permission.
AI and Machine Learning - Finance
• AI as a Tool
• Big Finance, Big Tech, & FinTech Disrupters
• AI as a Service
• AlphaSense (2011) – Search Engine
• Cape Analytics (2014) – Insurance Property Risk Analytics
• ComplyAdvantage (2014) – Anti-Money laundering & KYC Software
• Dataminr (2009) - Market Sentiment Analysis
• Featurespace (2008) – Anti-fraud Software
• HyperScience (2014) – Document Processing
• Tractable (2014) – Insurance Claims Processing
• Zest AI (2009) – Credit Underwriting Software
• Zesty.ai (2015) – P & C Insurance Risk Analytics 10
Image by Lex Fridman. Used with permission.
Natural Language Possessing - Finance

• Content Generation, Content Summarization, Information

Retrieval, Intent Parsing, Sentiment Analysis, Speech
Generation, Speech Recognition and Translation
• Customer Services
• Chatbots, Conversational Interfaces and Voice Assistants
• Process Automation
• Sentiment Analysis
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Open API & Open Banking

• Open Application Program Interfaces (Open API) allow

outside Developers access to and an ability to Integrate
Permissioned Customer Data into Third Party Applications

• Open Banking initiatives facilitates or mandates Open API for

Non-banks to Share Permissioned Bank Customer Data

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Open API & Open Banking
• Policy Trade-offs of Promoting Competition & Innovation,
Limiting Cybersecurity Risks, and Maintaining Privacy &
Consumer Protections

• EU Payment System Directive (PSD2), UK Open Banking

Initiative, etc.

• Alternatives: Screen Scraping, Reverse Engineering & Robotic

Process Automation
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Robotic Process Automation

• Account Opening & Onboarding

• Loan Processing
• Report Generation
• Screen Scraping

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 FICO Scores

© FICO. All rights reserved. This content is excluded from our Creative Commons 15
license. For more information, see https://ocw.mit.edu/help/faq-fair-use/
Source: ‘What’s in my FICO. Scores?’, myFICO, Fair Isaac Corporation
Alternative Data
• Bank, Checking, Employment, Income, Insurance, Tenant, Utilities
• Cash Flow Underwriting

• Consumption and Purchase Transactional Data

• Educational Background, Employer, Occupation, Work History
• App Usage, Browsing History, Email Receipt, Geolocation, Social Media Data

• Sensor Data - Drones, IoTs, Smartphones, Telematics, & Wearables

• Genetic Testing
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Blockchain Technology &
Cryptocurrencies
• Nakamoto solved the payments riddle - avoiding double spending
• Money is but a social & economic construct
• Append-only logs & multiparty consensus provides a peer-2-peer alternative
• Can address verification and networking costs
• Crypto markets are rife with scams, fraud, hacks & manipulation
• Cryptocurrencies have evolved into a speculative asset class
• Adoption rests on addressing comparative viability & value proposition
• The potential, though, to be a catalyst for change is real
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Payment System ‘Pain Points’
• Chargebacks
• Complexity
• Costs
• Cross Border Payments
• Data Privacy
• Delayed Settlement
• Financial Inclusion
• Fraud
• Public Policy Compliance
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Big Finance

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FinTech – Payments
Big Tech

2003 2007 2007 2011 2013 2014 2014

Startup Unicorns

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Credit & Lending: Market Design
Data
• Alternative Data, Credit Scoring, Cross Selling, Marketing & Underwriting
Funding
• Balance Sheet, Securitization, or Issuer Bank Partner
Marketing Channels
• User Experience & User Interface
Risks
• Credit / Default, Market (Basis, Rate, Spread, Volatility), & Prepayment
• Funding, Liquidity, Model, Operational, & Reputational / Compliance
Roles
• Brokerage / Origination, Underwriting, Credit Enhancing, Securitizing, Credit
Rating, Appraising, Servicing, Collecting / Foreclosing, & Funding
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FinTech – Credit
Big Tech

Credit Unicorns

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Zero Commission Revenue Models

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Courtesy of Altruist. Used with permission. Source: ‘The real story behind commission free trading’, Jason Wenk, Altruist (October 16, 2019)
© LearnBonds. All rights reserved. This content is excluded from our Creative Commons 24

license. For more information, see https://ocw.mit.edu/help/faq-fair-use/ Source: ‘Robo-advisor Industry to hit $1.4trn This Year’ Jastra Ilic, LearnBonds (April 15, 2020)
FinTech – Capital Markets
• Online Brokerage

• Asset Management and Advisory

• Trading and Capital Markets

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InsurTech Opportunities
• Sales, Account Management & Claims UI & UX:
• Digital, Mobile & Conversational Interface

• Underwriting Availability, Pricing & Targeted Products:

• Machine Learning & Alternative Data

• Claims Processing & Underwriting Data Capture:

• Drones, Internet of Thing Sensors, Smartphones Telematics, &
Wearables
• Genetic Testing – Life, Disability & Long-term Care
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Insurance Sector Challenges
• Agent & Broker Fees
• Claims Administration
• Distribution Channels
• Legacy Tech
• Operating Costs & Expense Ratios
• Product Development & Speed to Market
• Regulatory Landscape
• Trust
• User Interface and User Experience 27
FinTech – InsurTech Startups
• Property & Casualty

• Health

• Benefits Administation

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Coronavirus Crisis & FinTech Startups
• Focus on ‘Runway’: Burn Rates, Cash, Revenue & Adoption Rates
• IPOs on Hold
• VC Investment will Slow
• Valuations Decline

• Consolidation likely to Increase

• There will be Winners & Losers w/ Sector Mattering
• Opportunities arise to Serve Fiscal Stimulus & Loan Programs
• Challenges of Delinquencies & Defaults on Horizon

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Courses - Fall 2020
• Blockchain & Money (15.235)
• Tentatively: Tues/Thurs 2:30 – 4 pm

• Collaborative Intelligence Ventures (15.S57/ 6.S077/6.S977)

• Prep for MIT’s spring Collaborative Intelligence Ventures Competition
• Project focus on humans and machines working together collaboratively
• H2 – Tentatively: Wed 3 – 5 pm
• Taught w/ Jonathan Ruane & Julie Shah

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Courses - Fall 2020

• Coronavirus Lecture & Lab Course (TBD)

• Focusing on Coronavirus Crisis
• To include both Lecture and Project Components
• Led by Simon Johnson, Asu Ozdaglar along w/ other MIT faculty
• Tentatively: Tues / Thurs
• Multiple Action Learning Streams tentatively to include:
• FinTech & Coronavirus
• Public Policy & Coronavirus
• Other Project Work Streams
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Pay it Forward Benjamin Franklin, 1784
I do not pretend to give such a deed; I only lend it to you.
When you [...] meet with another honest Man in similar
Distress, you must pay me by lending this Sum to him;
enjoining him to discharge the Debt by a like operation, when
he shall be able, and shall meet with another opportunity.
I hope it may thus go thro' many hands, before it meets with
a Knave that will stop its Progress.
This is a trick of mine for doing a deal of good with a little
money.
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15.S08 FinTech: Shaping the Financial World

Spring 2020

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