Financial Information Systems

This article talks about how despite the push of mobile payments from banking and technology companies, many retailers have been slower to adopt this FinTech.

In my experiences and opinion, the article is accurate about the primary reasons why this is the case. I haven’t seen many people use mobile payments in stores, and  when it comes to credit cards, my experiences tell me that people don’t like change. For example, when cards started having security chips, I saw many consumers initially express annoyance with them, even though the chips were beneficial. Why? Because people weren’t used to them, and made people break their established ways. In addition, even though mobile payments are supposed to be safer, major security breaches in technology (Target, Yahoo, etc.) seem to get more attention from the media than card fraud. Because of this, many people might still think that putting credit card info on phones is unsafe. I think another reason for the struggle for acceptance is that too many stores may be developing their own system. It may be hard to convince consumers that they need to download Apple Pay and Starbucks payment and Wal-Mart payment and CVS payment and so forth when they can just use a single physical card for all these stores.

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http://digiday.com/brands/retailers-struggling-adopt-mobile-payments/

While originally many startups tried to compete with traditional financial institutions, currently, there has been a shift toward collaboration between them through partnerships or acquisitions. Thanks to technologies like robotics, cloud computing and data analytics, “we are now in a golden age of fintech”. Globally, the number of investments in fintech startups competing against the traditional financial institutions versus that of investments in startups pursuing to collaborate with them has remained steady over the past five years (“with 62 percent of deals going to competitive companies”). The move is pretty much obvious in North America, especially at New York. It is surprising that “in the first quarter of 2016, New York received more fintech financing than Silicon Valley for the first time ever. I do agree with the article that collaboration, and eventually a real adoption instead of competition will strongly continue and help fundamentally change the banking ecosystem. Of course, there are still definitely a lot of work for banks and regulators to seamlessly adopt new technologies which provide solutions for many problems simultaneously.

Source: https://www.accenture.com/t20160724T221504__w__/us-en/_acnmedia/PDF-26/Accenture-FinTech-New-York-Competition-to-Collaboration.pdf#zoom=50

With $19.1 billion invested in fintech companies in 2015, investors are beginning to question the true value of companies categorized as fintech. The term fintech has been used to describe a wide range of companies. Subprime lenders that state that fintech can lower default rates is one area of concern by investors. An example of this is Elevate Credit and LoanDepot. Both companies sought to go public, but pulled their I.P.O.s due to concern from investors in the true value of the companies.

The rapid investment in fintech can be compared to the “.com” bubble of the early 2000s. Within the industry there is a mix of financial companies utilizing technology and technology companies that are in finance. The main area of concern for investors is the worry that companies are categorizing themselves as fintech in order to appear more attractive. Overall, fintech is a relatively new industry and it is time that will aid investors in determining the true value and category that fintech belongs.

Reference:

The small business industry is one of little interest to large banks due to their risk-averse outlook on investing in companies. A recent study has been conducted where it was discovered that smaller institutions were 18% more likely to invest in smaller businesses and those that partnered with larger banks had a 51% satisfactory rate. With the recent rise in fintech companies and attributes, competition in the banking industry has grown significantly due to the success of the technology’s processing method and rate. Companies such as Kabbage and Trustly have processed over $1 billion in small business loans each and have provided a more cost effective and efficient way to process payments. Other SMEs are the ones taking advantage of fintech and disrupting the market for the larger institutions. It operates all under one contract for all market, thereby lowering admin costs and performs other functions such as refunds and splitting payments. Fintech allows you to eliminate the middlemen and save the extra money it would cost to process. Its no surprise that fintech is disrupting the status quo of the investing business and that banks are paying the price for it because of its inconvenience. In order to reclaim the market they are slowly losing, large institution must utilize a way to adapt fintech to their advantage and the place to start would be the small business market. I believe in the future we will see larger corporation invest more in the smaller businesses and soon will reclaim the market they have lost.

URL: https://smallbiztrends.com/2017/01/fintech-trends.html

Lehman Brothers was created in 1850 and over its 108 year lifespan, was the fourth biggest investment bank in the United States.  As highlighted in films such as “The Big Short” the housing market crash of 2008 significantly impacted Lehman Brothers and caused them to file bankruptcy soon after.  However one topic that’s oftentimes swept under the rug is the financial fraud committed just prior to its bankruptcy.

Following a poor financial showing in the later half of 2007 and the beginning of 2008, Lehman Brothers manipulated its financial statements in order to misinform investors.  This manipulation occurred three times, each time hiding overall losses.  In total, Lehman Brothers hid 138.1 million dollars in debt by temporarily making sales of toxic assets to Banks in the Cayman Islands with the promise of buying them back.  However; rather than classifying these as the loans they clearly were, the accountants recorded them as overall sales and therefore were able to manipulate the overall losses.

This fraud is only possible with the help of many regulators whose job is to prevent this as well as accountants willing to break the law.  If it wasn’t for the lone person who brought this fraud to the public, do you think they would have gotten away with this fraud?

 

http://www.forbes.com/2010/03/19/lehman-brothers-markets-streettalk-dick-fuld.html

Lezner, Robert. “Lehman Lies But Nobody’s In Jail.” Forbes. Forbes Magazine, 19 Mar. 2010. Web. 05 Feb. 2017.

 

 

Robo-advisory was one of the first use of financial technology in the investment space. Robo-advisors provide an online wealth management service based on their proprietary software. This has reduced the advisory costs as there is less human involvement therefore reducing their cost per client. This has enabled greater use of technology to achieve simplicity and avoid the unnecessary paper work involved. The current generation in particular can use these services with ease as these are provided through apps and with an increase in the smartphone usage, these could be perceived to be more user friendly. This technology also helps you to invest on your own without having to interact with any representatives and some Robo-advisors even offer significantly less fees as compared to the traditional wealth management firms. The financial technology in these Robo-advisory firms is developing fast and with this they have eliminated minimum investment amounts and targeting younger people and also allow people to try and invest with smaller amounts to build confidence. This to me is a great revelation and use of FinTech to provide investment services to the common man.

 

https://investorjunkie.com/37307/5-ways-robo-advisors-changing-investment-industry/

While fintech continues to be adopted by more and more people, there are still a few challenges that fintech must face in order to be an accepted method for the mainstream public.  One of the issues are that many developing countries do not have the infrastructure or cloud services that are needed for many fintech firms to succeed. Another challenge for fintech services entering developing markets is that there is not much data for these companies to learn about their potential environment. With more data, fintech firms can make smarter and more advised decisions on how they can market and offer their products to developing communities.

Lastly, much of the world’s population are living paycheck to paycheck and do not see the need of the fintech’s offerings. However, fintech firms are continuing to adapt their product lines and services in order to successfully adapt to these new developing nations. I believe the rise of fintech can have a very positive affect on the people in developing countries, but there are a few issues that are currently in the way. However, I think fintech firms will continue to learn and tailor their business to fit the needs of these markets.

https://hbr.org/2017/01/fintech-companies-could-give-billions-of-people-more-banking-options

In the world of mobile payment ecosystem, there is a new emerging technology: Contactless Cash. Apart from making payment using smartphone’s, users can now use their smartphone even to withdraw cash from their ATM’s.

Working of this technology is similar to Point-of-Sale mobile payment that uses NFC (Near field Communication) technology.

Major advantage is that using your smartphone for ATM withdrawal removes the risk of magnetic card skimming and distraction fraud.

Spain’s Caixa Bank has provided app-enabled ATMs since 2011 and now with improved technology there are is a rapid growth in Contactless Cash industry. Last year, BMO Harris Bank rolled out cardless ATMs in the U.S. using QR codes for authentication. Most recently, Bank of America rolled out NFC-enabled ATMs in the U.S. this year, Barclays bank is rolling out a new NFC enabled ATM system in branches across the U.K. that lets Android users take out money with just a tap of the device.  Chase and Wells Fargo are expected to launch this feature soon.

With all banking giants making shift towards Contactless Cash, could result in a vital new category of mobile payment industry in near future.

(Reference: http://money.cnn.com/2016/11/21/technology/barclays-atm-contactless-cash/

http://www.yourphx.com/news/finance/barclays-new-atms-withdraw-money-with-a-tap-of-your-phone/611183403

http://www.digitaltrends.com/mobile/wells-fargo-wallet-nfc-atm/ )

At the Economist’s Finance Disrupted event in London, COO of UBS’ Wealth Management Arm, Dirk Klee, wants banks to collaborate with fintechs rather than compete with them. According to Klee, “We are embracing fintechs and actually we believe that there is great innovation. We need to find very smart ways to partner up and improve our existing business model.” Klee also references roboadvisors, who are online wealth managers that “rely on a high level of automation to adjust portfolios,” and how UBS is building its own roboadvisor product that leverages human investment experience to bring more value to clients.

We’ve seen traditional banking systems adjust to the modern technology environment in different ways – some banks allow you to deposit checks from your phone, and some, like Chase, even have their own mobile payment products. With the rising popularity of fintech, it makes logical sense for banks to leverage automation to bring greater value to clients.

However, regarding Klee’s aim to use both automation and human experience to improve investment advice, I would caution that human experience only goes so far. When comparing index and managed funds, many investment professionals find that passively managed index funds (where the portfolio mirrors the market index) are simpler and often outperform actively managed mutual funds (where the portfolio is managed by managers who try to beat the market). I believe that experience is not a crystal ball, and that experienced managers can completely predict where the market is going to go next.

Sources:

http://www.businessinsider.com/ubs-dirk-klee-fintech-roboadvice-china-2017-2

http://www.investopedia.com/university/quality-mutual-fund/chp6-fund-mgmt/

I discussed the benefits of fintech in previous blogs, such as reduced costs and increased efficiency in financial transactions. Today, I will share some interesting opinions on risks associated with fintech.

Mark Carney, governor of Bank of England, stated in a conference that fintech would pose risks to the stability of bank funding, credit quality and even the broader economy. However, I found his statement not convincing.  Carney did not give any concrete examples of risks posed by fintech, but his only reasoning is that fintech can increase cyber risk and that history has plenty of examples where financial innovations led to early boom but eventually busted. In my opinion, many fintech, such as Block Chain, could actually decrease the risks of fraud and increase transaction security.

On the other hand, I am with Carney on the point governments should assess existing rules for fintech and adjust policies accordingly to ensure that fintech develop in a direction that maximizes opportunities but reduces risks. Admittedly, some fintech can facilitate money laundering and terrorism financing if not governed properly.  For example, Alipay, a Chinese fintech that allowed unlimited free money transfer, was put on a cap of CNY 20,000 by the government for anti-money-laundering.

Source: http://www.businessinsider.com/mark-carney-on-fintech-and-systematic-risk-2017-1