UNIT 3: BANKING

OPEN ELECTIVE Course: ECONOMICS OF MONEY AND BANKING

 FinTech
• FinTech refers to emerging technological start-ups that challenge
traditional banking and financial players, offering services like crowd
funding platforms, mobile payment solutions, online portfolio
management tools, and international money transfers. Major FinTech
products include Peer to Peer lending platforms, crowd funding,
blockchain technology, distributed ledgers, Big Data, smart contracts,
and robo advisors.
• FinTechs are attracting interest both from users of banking services and
investment funds. In continuity the retail groups, and telecom operators
also tend to explore the potential in the same segment about the future
financial landscape.
What is FinTech?
• FinTech is an umbrella term coined in the recent past to denote technological
innovation having a bearing on financial services.
• According to Financial Stability Board (FSB), of the BIS, “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”.
• FinTech innovations have the potential to deliver a range of benefits, in particular
efficiency improvements and cost reductions.
FinTech and its impact on global Financial Services
FinTech innovations, products and technology
This categorization does not represent a comprehensive review of all
FinTech innovations, it highlights those regarded as potentially having the
greatest effects on financial markets
Payments, Deposits, Market Investment Data Analytics
Clearing and Lending and provisioning Management and Risk
Settlement Capital raising Management
Mobile and web Crowd funding, Smart contracts Robo advice Big data
based payments: Peer to peer Cloud computing Smart contracts AI & Robotics
Digital currencies lending E-aggregators E-Trading
Distributed
Ledger
BlockChain
Technology
1. Payments, Clearing and Settlement
Innovations are targeted at improving the speed and efficiency of payments,
clearing, and settlement, reducing cost and changing the ways people access
financial services and conduct financial transactions.

a. Mobile and web-based payment applications

• The majority of developments in the areas of payments are based on mobile
technology by providing wrappers over existing payments infrastructure.
• Examples include Apple Pay, Samsung Pay, and Android Pay, which sit on top
of existing card payment infrastructure enabling the user’s mobile devices to
act as their credit/debit cards. There are also mobile payments built on new
payment infrastructure, for example mobile phone money services, such as M-
Pesa in Kenya and IMPS in India.
Major web based payment services
in India are:
1.NEFT
(National Electronic Fund Transfer)
2.RTGS
(Real Time Gross Settlement)
3. IMPS
(Immediate Payment Services)
b. Digital currencies (DCs)
• Digital currencies (DCs) are digital representations of value, currently issued by
private developers and denominated in their own unit of account. They are
obtained, stored, accessed, and transacted electronically and neither
denominated in any sovereign currency nor issued or backed by any government
or central bank.
• DCs are not necessarily attached to any fiat currency, however, are accepted by
natural or legal persons as a means of exchange and can be transferred, stored
or traded electronically. DC schemes comprise two key elements:
(i) the digital representation of value or ‘currency’ that can be transferred
between parties; and
(ii) the way in which value is transferred from a payer to a payee.
• Facilitate peer-to-peer exchange, possibly at lower cost for end-users and with
faster transaction times, especially across borders. DC schemes are also known
as ‘crypto currencies’ due to their use of cryptographic techniques.
c. Distributed ledgers Technology

• Distributed Ledger Technology (DLT) is a digital system for recording the transactions
of assets in which the transactions and their details are recorded in multiple places at
the same time. Unlike traditional databases, distributed ledgers have no central data
store or administration functionality.

• DLTs provide complete and secure transaction records, updated and verified by users,
removing the need for a central authority. These technologies allow for direct peer-to-
peer transactions, which might offer benefits, in terms of efficiency and security, over
existing technological solutions.

• The major benefits are reduced cost; faster settlement time; reduction in counterparty
risk; reduced need for third party intermediation; reduced collateral demand and
latency; better fraud prevention; greater resiliency; simplification of reporting, data
collection, and systemic risk monitoring; increased interconnectedness; and privacy.
d. Block chain Technology
• Block chain is a distributed ledger in which transactions (e.g. involving digital currencies or securities) are
stored as blocks (groups of transactions that are performed around the same point in time) on computers
that are connected to the network.

• The ledger grows as the chain of blocks increases in size. Each new block of transactions has to be verified
by the network before it can be added to the chain. This means that each computer connected to the
network has full information about the transactions in the network.

• Block chain potentially has far-reaching implications for the financial sector, and this is prompting more
and more banks, insurers and other financial institutions to invest in research into potential applications of
this technology.

• Frequently cited benefits of Block chain are its transparency, security and the fact that transactions are
logged in the network.

• While the disadvantages currently include the lack of coordination and the scalability of this technology.
One of the best-known applications of Block chain technology at the present time is Bitcoin. Transactions
in this virtual currency are largely anonymous. This creates ethical risks for financial institutions dealing
2. Deposits, lending and capital raising services
Alternative models of lending and capital raising are gaining prominence, potentially changing
the market dynamics of traditional lenders and affecting the role of traditional intermediaries.
A few examples of the products offered by FinTechs are as under:

a. Peer-to-peer (P2P) lending

• Peer-to-peer (P2P) lenders connect lenders and borrowers, using advanced
technologies to speed up loan acceptance. These technologies are designed to
increase the efficiency and reduce the time involved in access to credit.
• While P2P lending originally involved direct matching of individual lenders and
borrowers on a one-to-one basis, it has evolved into a form of marketplace lending
where institutional and high net worth individual investors lend into a pool that
borrowers can access.
• The principal benefit of P2P lending for borrowers is the fast and convenient
access to funding, while for investors it is the potential for high returns.
• Some of P2P platforms in India are LenDenClub, Mobikwik Xtra, Cred Mint etc
b. Crowd funding
• Crowd funding is a way of raising debt or equity from multiple investors via an
internet-based platform.
• Securities and Exchange Board of India (SEBI) has released a paper and
defined crowd funding as “solicitation of funds (small amount) from multiple
investors through a web-based platform or social networking site for a specific
project, business venture or social cause.”
• Some jurisdictions have chosen to enact special legislative regimes to determine
the conditions under which this service can be made available to retail
investors. The platform matches borrowers / issuers with savers/investors
• Providers of the platform offer a range of information about the potential
borrowers/issuers, ranging from credit ratings (for most peer-to-peer loan
arrangements) to business model to verification of information and AML(Anti
Money Laundering) checks of firms that want to raise equity capital.
3. Market provisioning services
Advances in computing power are facilitating faster and cheaper provision
of information and services to the market. A few of these innovations are:

a. Smart contracts
• Smart contracts are computer protocols that can self-execute, self-
enforce, self-verify, and self-constrain the performance of a contract.
Development of smart contracts in relation to financial services
could have a large impact on the structure of trade, finance or
derivatives trading, especially more bespoke contracts, and could
also be integrated into Robo-advice wealth management services.
The widespread adoption of smart contracts in financial services
could be facilitated by the establishment of distributed ledger
technology.
b. E-Aggregators
• E-Aggregators provide internet-based venues for retail customers to compare the
prices and features of a range of financial (and non-financial) products such as
standardized insurance, mortgages, and deposit account products.
• They can also be firms that provide services that allow users to aggregate and analyze
their data on their payment patterns, across separate accounts and products (example-
paisabazaar).
• E-Aggregators also provide an easy way to switch between providers and may become
a major distributor for a variety of financial products.
• Reserve Bank of India has issued directions regarding Account Aggregators which
requires that no entity other than a company can undertake the business of an Account
Aggregator, no company shall commence or carry on the business as an Account
Aggregator without obtaining a certificate of registration from the RBI and every
company seeking registration with the RBI as Non-Banking Financial Company -
Account Aggregator shall have a net owned fund of not less than ₹ 2crore or such
higher amount, as the RBI may specify. Provided that, entities being regulated by other
financial sector regulators and aggregating only those accounts relating to the financial
assets of that particular sector will be excluded from the registration requirement.
c. Cloud computing

• Cloud-based IT services can deliver internet-based access to a shared pool of

computing resources that can be quickly and easily deployed. Infrastructure,
Platform, Service and Mobile backend as a service are offered under cloud based
services.

• The use of these services is an important enabler for new entrants to the financial
services arena to set up quickly and with low start-up cost, with easy options to
expand their capability as the firm grows. This enables the financial institutions
to reduce their data storage costs with a pay-as-you-go pricing model.

• Depending on the type of services of the cloud service availed, it can potentially
pose several challenges including the ability of jurisdictional enforcement
authorities to effectively ensure security of data.
d. Big data
• As more business activity is digitized, new sources of information are
becoming available.
• Combining these data sources with the availability of increased computing
power is delivering faster, cheaper, and more comprehensive analysis for
better informed decision-making.
• Big Data allows FinTech companies to keep an eye on a user’s payment
behavior and their communication with other financial firms.
• FinTech uses Big Data to examine market patterns, financial information and
investing tactics, allowing the organizations to make better trading and
investment choices.
• For example, wider use of increasingly large datasets could deliver material
improvements in credit risk assessments. Financial institutions may desire to
monetize aggregated data by selling them or bundling them with other
products and services offered.
e. Artificial Intelligence (AI) & Robotics
• AI provides a competitive edge to the companies where in the
companies need to work through the implications of machines
that can learn, conduct human interactions, and engage in other
high-level functions at an unmatched scale and speed.
• AI often requires, for example, a new structure, of both
centralized and decentralized activities, that can be challenging
to implement.
• All companies might benefit from this approach, but it is
mandatory for AI-enabled processes, to undergo constant
learning and adaptation for both man and machine.
4. Investment management services
Automated systems have the potential to transform the business of investment
management. Few commonly used applications in investment management
services are :
a. Robo advice
• “Robo-advice” is the provision of financial advice by automated, money
management providers, thereby disintermediating human financial advisors and
reducing costs. It can offer more investor choice, especially for low and middle
income investors who do not have access to the wealth management divisions
of the banks.
• They use client information and algorithms to develop automated portfolio
allocation and investment recommendations that are meant to be tailored (to a
greater or lesser degree) to the individual client.
b. E-Trading
• Electronic trading has become an increasingly important part of the
market landscape, notably in fixed income markets.
• Innovative trading venues and protocols, reinforced by changes in
the nature of intermediation, have proliferated, and new market
participants have emerged.
• This, in turn, has had implications for the process of price discovery
and for market liquidity.
• It could also lead market structures to evolve from over-the-counter
to a structure where all-to-all transactions can take place.
• The development of e-trading platforms contributes to improving the
efficiency of market orders and to reducing average trading costs.