Fintech, Bigtech and Banks: An Overview

Colloquium: Banks and The Fintech Revolution

Kumar Rishabh, 04.3.2025
This Lecture

- Last lecture in the introductory series

- Last two weeks
- What do banks do
- What are AI and ML? How do they form the fundamental technology on which (a part of) fintech
revolution is based

- This week
- The economics of fintech revolution
- We will get back to some of these themes in the following weeks
What is Fintech?

- Financial technology (Fintech) means different things to different people

- Therefore, any definition that unifies all the views is going to be quite broad
- The FSB defines fintech as:

“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”

- It is better to approach it by characterizing what Fintech broadly entails

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The Fintech Tree

- APIs have made it easier to share data

- Cloud computing has made it easier to
establish a firm as it has severely reduced the
fixed costs of operations
- AI and ML have made it easier to analyze
data and offer personalized services

- This week:
- Last week and the hands-on session today
are about “technologies”
- Today our focus is on “activities”
- You may refer to courses on Blockchain, and
Machine Learning (computational
economics) to get deeper into technologies
- Focus on some “branches” of the tree and
ask how they may disrupt banking
Source: FSB (2020)

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Bigtech

- Bigtechs are large technology companies with established presence in the market for digital services that have
entered into the market for financial services
- The core business model of these bigtechs involves direct interactions among a large number of users giving
them data advantage
- Data as by-product → Use data to offer other services → attract more users (network effects) → generate
more activities → more data
- Bigtech firms often start with payments. Thereafter, some expand into the provision of credit, insurance, and
savings and investment products, either directly or in cooperation with financial institution partners

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How are fintechs and bigtechs disrupting banks
Before We Begin….
- Is this the first time banks are challenged by an emerging technology?
- No (past technological disruptions included credit scoring, ATMs, securitization etc.)
- What is different?
Size of competitors - Speed of tech adoption
Time it takes to reach 50 million users

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How are fintechs and bigtechs disrupting banks
Recap: What do Banks do?
Accept “demandable
Providing deposits” and fund long-
liquidity, term illiquid projects
Maturity
Process card payments,
Banking Services
transformation
Online payments, cash
Payment payments. Keeping a
services centralized ledger of
credits and debits
Information
gathering and Screening projects ‘pre-
monitoring lending’ and monitoring
Wealth mgmt., borrowers ‘post-lending’
Advisory
services To corporations and
individuals on risk and
asset management

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Who is Challenging the Banks?

Providing
liquidity,
Banking Services Maturity
transformation
Payment
services

Fintech lenders, P2P

Information lenders and Bigtech
gathering and
monitoring
Wealth mgmt.,
Advisory
services

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Which bank business segments are challenged?

Distribution of fintechs – by business model

• Source: CCAF report on Fintech (2024)

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Bigtechs as Challengers

Source: FSB (2019, p. 10)

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Some Interesting Issues Relating to Fintechs

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Some Interesting Issues Relating to Fintechs

- We discuss some issues (not necessarily related with each other) that are interesting and will likely form
running themes in the remaining course
- Some of these will be discussed in detail in the lecture sessions or in group discussions
- Topics on which we will not have further discussions during the course are also possible topics for the
essay / podcast

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1. Stylized Facts
Growth of Fintech and Bigtech

- High investment in
financially developed
countries. Possible
explanations:
- Higher financial dev →
high demand for “new”
products
- Expansion in intensive
margin. Providing the
same products but
better. Fintech
represents cost
savings.

CCAF Report on Fintech (2024) 13

1. Stylized Facts
Fintech and Bigtech credit is still small compared to the existing size of
the credit market
• Source: Cornelli et al (2020)
• Alternative credit (Bigtech + Fintech) still constitute
less than 2% of total stock of credit in any major
country

• Source: Beck et al (2022)

• Within Europe Latvia presents an interesting case where
P2P platform Mintos has become big
• Need to interpret Mintos’ number with caution (multi-
country lending)

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1. Stylized Facts
But fintech credit is growing faster than the traditional credit
• Source: Taken from Berg, Fuster and Puri (2022)
• Fintech lending in most segments has grown faster
than the traditional lending
• Fintech lending has grown spectacularly in some
segments
• Examples: US mortgage market
• Example: Buy-now-pay-later
• Is the (US) mortgage market special?
• P2P lending segment has contracted (possible
reasons?)
• We will revisit the P2P in the group presentations

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2. Why fintech growth? Inefficiency of Current Financial System

- One possible explanation for the rise of fintech is the inefficiency of the incumbent banking
system
- New technology increases the contestability of banking markets

- High cost is despite the benefits of

improvements in information technologies,
over past decades
- Improvements have not been passed on as
lower costs to the end users
- Due to less competition in finance

“Finance could and should be much cheaper. In that

respect, the puzzle is not that FinTech is happening now.
The puzzle is why it did not happen earlier.”

Figure from Philippon

(2016)

- Unit cost of financial intermediation in the US has remained

Example: Currency Transfer
at about 2% for the past 130 yrs.

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 3. Why fintech growth? Regulatory Arbitrage

Regulatory burden on banks have increased since

the 2008 crisis. FinTech lenders (and other
nonbanks) are generally subject to fewer
regulations than banks
Buchak et. al. (2019): Mortgages
Share of shadow banks (including both fintech and
non-fintech) has risen from roughly 30% in 2007 to
50% in 2015
Within shadow banks → fintech lenders such as
Quicken loans (now, Rocket Mortgages) and Loan
depot are major players
Rocket Mortgages is the largest originator with
about 6% market share
→ Increasing regulatory burden accounts for about
60% of shadow bank growth during 2008–2015
period, tech growth accounting for another 30%
Source: taken from CFPB (2024): 2023 Mortgage market activity
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4. Fintech and Market efficiency

How does application of technology might improve efficiency of the credit market?

Berg, Fuster and Puri (2022):

A. Technology can be used to improve the customer–lender interaction →for example, with a fully
online application process → results in a better user experience, faster processing times, and lower
operational costs

B. It can be used in borrower screening or monitoring, for example, by using alternative data sources or
machine learning (ML) methods

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 4. Fintech and Market efficiency
A. Customer-lender interaction
US Mortgages (Fuster et al. 2019):
FinTech lenders process mortgage applications
20% faster than other lenders, controlling for
observable characteristics
Faster processing does not come at the cost of
higher defaults
FinTech lenders adjust supply more elastically than
do other lenders in response to exogenous
mortgage demand shocks
Business loans:
3-1-0 model of Ant Financial: Firms active on
Alibaba’s platform can fill out a credit application in
3 minutes, the approval takes 1 second, and the
process involves 0 human interaction
Loans by payment fintechs:
Square, Paypal and others → loan to merchants
Source: Taken from Fuster et al (2019)
using their payment services → automatic
repayment (see Rishabh and Schaeublin, 2021)
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 4. Fintech and Market efficiency
B. Monitoring and Screening and Financial Inclusion
According to the World Bank, 48% of small businesses in developing countries are credit constrained → credit deficit
USD 5.2 trillion (19% of their GDP). Financing gap in Eurozone 3% of GDP, USA, the gap is about 2% of the GDP
Fintech and bigtech has potential to alleviate the informational frictions by making use of non-traditional data sources
and by mitigating enforcement problems
We revisit this in group presentations-2

100
Bureau or registry coverage
90
Share of adults using digital payments
80

70

60
Percent

50

40

30

20

10

0
Low Income Middle Income High Income World
Country groups
20

Source: Both figures taken from Rishabh (2022). 20

5. Smart Contracts

- Contracts determine the terms of agreements and in turn influence the behaviour of the
contracting parties. Contracts usually require a ‘third party’ or a mechanism that can settle
the disputes and ensure contracts are enforced
According to Investopedia,
“Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being
directly written into lines of code. Smart contracts permit trusted transactions and agreements to be carried out
among disparate, anonymous parties without the need for a central authority, legal system, or external
enforcement mechanism. They render transactions traceable, transparent, and irreversible”
- Smart contracts can lower contracting and verification costs and reduce informational
asymmetries
- Example: Automatically locking out of the car
of a defaulting car-loan borrower

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6. Trust

- Trust has an important role in banks (not so much in the way we model banks, though)
- Trust has played a foundational role in banks with regard to their safekeeping and depository functions
- To what extent fintechs and bigtechs can replace banks will also depend on the trust they enjoy
- Currently traditional financial institutions enjoy the most trust in data matters and the bigtechs the least

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7. Some critical observations on the fintech revolution
"Banking is
A. Fintechs are turning into banks necessary –
banks are
Actually, banks might not be necessary, but their licenses not."
certainly are!
Fintech Companies Acquiring Banking Licenses
Original Business License Acquisition Closed Original Reasons?
Fintech Company Year Started Segment or Application Business?
[Link] Access
Lending, Personal
SoFi 2011
Finance
Acquired, 2022 No
[Link] Compliance
Varo Bank 2015 Mobile Banking Acquired, 2020 No [Link] Expansion
Square (Now Payments, Merchant [Link] Reduction
2009 Acquired (ILC), 2020 No
Services
Block)
[Link] of banking

LendingClub 2006 P2P Lending

Acquired (via Radius
Bank), 2020
Yes • In week 5 and week 6 we will
talk about the incentives that
Zopa 2005 P2P Lending Acquired, 2020 Yes govern a successful
intermediation arrangement
Klarna 2005 BNPL, Payments Acquired (EU), 2017 No and evaluate which ones of
them are missing from fintech
N26 2013 Mobile Banking Acquired (EU), 2016 No
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7. Some critical observations on the fintech revolution
B. Banks are actively responding too

“That probably blows away the cumulative dollar value of

investment of all the fintechs in the world that are trying to disrupt
them.” James Shanahan, an analyst with Edward Jones
• Source: Financial Times 2022 24
7. Some critical observations on the fintech revolution
C. How much ‘tech’ there is in fintech?

FinTech lending—known for using big data and advanced technologies—promised to

break away from the traditional credit scoring and pricing models….. [our] study shows
that loan rates continue to rely heavily on conventional credit scores, including 45% higher
rates for nonprime borrowers. Other known default predictors are often neglected. Within
each segment (prime/nonprime) loan rates are not very responsive to default risk,
resulting in realized loan-level returns decreasing with risk. The pricing distortions result in
substantial transfers from nonprime to prime borrowers and from low- to high-risk
borrowers within segment.

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7. Some critical observations on the fintech revolution
D. Fintech innovations haven’t made intermediation cheaper: US mortgage market

Taken from
Edelberg and Steinmetz-Silber
(2023) Brookings. Also see
Gupta (2024)

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 7. Some critical observations on the fintech revolution
D. Fintech innovations haven’t made intermediation cheaper: global payments
market

Net Profit margins of payment card companies vs. others Gross Profit margins of payment card companies vs. others

[Link]
[Link]

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7. Some critical observations on the fintech revolution
E. Payment fintech innovations in emerging economies are encouraging though

Retail Payments by Instruments in India

400
Unified Payment
350
Interface (UPI) is a
fast payment
300 system that allows
interbank person-
250 to-person and
person-to-
INR Trilliion

200
merchant instant
transfers
150

100
We will talk about
the economics of
50 payments in the
guest lecture
0
2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

UPI Retail Bank Transfers Credit Card Debit Cards Other digital Cheques +

Source: Based on calculations on data from RBI

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 8. Future Outlook: Advantages and Disadvantages
Fintechs are ‘Unbundling’ Banking Services

- Many of the banking services come “bundled” because of the ‘economies of scope’ that the banks
enjoy
o Providing liquidity to their customers and offering payment services are complementary
o Deposit accounts and long relationship helps banks screen and monitor their borrowers
o Deposit accounts and relationship helps bank sell third-party products and advisory services

- However, fintech companies usually enter by disrupting one banking service – for example
payments or lending
→ Unbundling of services → economies of scope may be lost
- Bigtech, on the other hand, because of their size and scale, offer all complementary services
- Three predictions
1. Fintech companies will expand into more services – already happening for payments companies.
PayPal and Square have ventured into lending
2. Owing to their disadvantages, fintech companies are more likely to partner with banks. Banks may
actually use their partnerships with fintech to counter the competition from bigtech
3. Bigtech present more formidable competition to banks
See references for more discussion

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Concluding the Intro series

We've concluded the three introductory lectures on (i) Banking, (ii) AI-ML, and (iii) Fintech.
NEXT, we get deeper into some of the themes by first studying a few theories of intermediation that explain…
• The necessity of financial intermediation.
• The incentive structures required to sustain banking as a solution to economic challenges
• The intricate link between what banks do on the asset side and their liabilities
• The circumstances under which these incentives fail

With theoretical lenses to guide our understanding, we will continually revisit fintech after each lecture:
• Assessing the extent to which fintechs address the problems traditionally solved by banks.
• Exploring the potential and promises of fintech and alternative data.
• Understanding why fintechs may not have fulfilled their promises, their areas of success, and their
limitations.

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Thank you
for your attention.
References
BIS (2019). BIS Annual Economic Report. Bank for International Settlements.
Beck et al (2022) Will video kill the radio star? – Digitalisation and the future of banking. Reports of the Advisory Scientific Committee. No 12. January 2022.
Cornelli, G., Frost, J., Gambacorta, L. Rau, R. Wardrop, R., Ziegler, T. (2020). Fintech and Bigtech: A new database. Bank for International Settlements. BIS
Working Papers, 887.
Cong, L. W., & He, Z. (2019). Blockchain disruption and smart contracts. The Review of Financial Studies, 32(5), 1754-1797.
FSB (2019). BigTech in finance Market developments and potential financial stability implications. Financial Stability Report.
Petralia, K., Philippon, T., Rice, T. N., & Veron, N. (2019). Banking Disrupted?: Financial Intermediation in an Era of Transformational Technology. ICMB
International Center for Monetary and Banking Studies.
Philippon, T. (2016). The fintech opportunity (No. w22476). National Bureau of Economic Research.
Rishabh, Kumar, and Jorma Schäublin. (2021) Fintech Lending and Sales Manipulation. WWZ Discussion paper.
Thakor, A. V. (2020). Fintech and banking: What do we know?. Journal of Financial Intermediation, 41, 100833.
Vives, X. (2019). Digital disruption in banking. Annual Review of Financial Economics, 11, 243-272.
Berg, T., Fuster, A., & Puri, M. (2022). Fintech lending. Annual Review of Financial Economics, 14, 187-207.
Fuster, A., Goldsmith‐Pinkham, P., Ramadorai, T., & Walther, A. (2022). Predictably unequal? The effects of machine learning on credit markets. The Journal
of Finance, 77(1), 5-47.
Gupta, Arpit (2024) Why FinTech Failed
He, Z., Jiang, S., Yin, X., & Xu, D. (2022). Investing in lending technology: It spending in banking. NBER working paper.

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Appendix

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Financial Activities of Bigtechs
Amazon
− 100 mn Prime customers, 5 mn sellers
Amazon Pay (Payment Service)
− has 33 mn customers in 170 countries
Amazon Cash
− Depository service for cash at partner brick-and-mortar stores that can be used to spend on Amazon
Amazon Lending
Small Business Lending
− Lending to market place sellers with loan amount ranging from USD 1,000 to USD 750,000 to qualifying merchants
over repayment periods of 12 months
− Amazon issued USD 3 bn in loans to 20 thousand small businesses, between 2011-17 in US, UK and Japan—
including over USD 1 bn loaned between just 2016 and 2017.
− Over the last two decades, the percentage of Amazon sales completed by third-party merchants has increased from
3% to 58% → Huge sales data on which loans can be underwritten
− Repayment is automatically through a deduction from each sale going through the platform
Next?

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Financial Activities of Bigtechs
Mercado Libre
Latin American Market Place (similar to eBay, Ricardo)
− 320.6 mn registered users (2019), 112.5 mn unique active users (Q1-Q3 2020)
Mercado Libre Pago (Payment Service)
− Payment account to process payments of trades made on platform (similar PayPal)
− USD 28.4 bn transaction volume (838 mn transactions, Q1-Q3 2020)
− whereof 45 % of transaction volume (and transactions) is made as platform trades
(93 % of trades made on platform)
− whereof 55 % for other payments outside of platform
Mercado Libre Credito (Lending Line)
− Lending to market place users
− Lending Portfolio of USD 284 mn (Q3 2020)
− Delinquency rate: 10.2% (Q3 2020)
Mercado Libre Fondo (Asset Management)
- Money Market Fund wherein Customers can put idle Mercado Libre Pago balances
- USD 540 mn assets under management, 13.6 mn users (Q3 2020)
- 90% of balances invested in Brazil, 60% in Argentina

Sources: Mercado Libre Annual Report 2019,

Quarterly Report Q3 2020,
Presentation of Quarterly Results, Q3 20202

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Fintech and Inefficiency of Current Financial System Back
Example: Wise currency transfer
- Correspondent bank model vs. newer models
(Wise’s model!)

Source: Taken from [Link]

guide/internationaltransfers/

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5. Fintech and its distributional effects across social classes

Fuster et al (2022)
With application of new technologies → easy to capture non-linearities → non-linear pricing of loans is possible → loan
prices have more variance
This means that some borrowers will always be considered less risky by the new technology (“winners”), while other
borrowers will be deemed riskier (“losers”), relative to their position under the preexisting technology.
A convex quadratic function of the underlying characteristic will penalize groups with higher variance of the characteristic

How are these winners and losers

distributed across important categories
such as race, income, or gender?
Using a large data set from the U.S.
mortgage market, and evaluating a change
from a traditional Logit technology to
machine learning technologies, Fuster et al
(2022) find that Black and White Hispanic
borrowers are predicted to lose, relative
to White and Asian borrowers

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Overall Activities of Bigtechs

Source: Taken from BIS (2019) Annual Economic Report

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Fintech Taxonomy

Sourcs: CCAF et al (2020)

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8. Future Outlook
Advantages and Disadvantages of Fintechs, Bigtechs and Banks

Advantages and Disadvantages of Fintech Firms in Comparison to Banks

Table from Vives (2019)

- How about Bigtech?

- Bigtech have all the advantages above
- No disadvantages → their customer base is enormous, they enjoy network effects, they may
have long-relationships with customers and businesses on their platforms, they are well-
known brands, have access to financial markets
- Except the last disadvantage. Another disadvantage could be the lack of trust, which is very
important in banking, especially if there are data leaks and scandals like Cambridge Analytica

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 Fintechs and Financial Stability
- Fintechs may create forces that dampen or heighten systemic risks
o As financial activities depend more on cloud-based storage technologies, a cyberattack or operational failure
may pose a systemic risk
o As fintechs and bigtech capture more functions of the banks, more and more activities fall out of the purview of
financial regulators and supervisors
o For example, existence of large online money market funds, such as Yu’ebao in China, which are not in
principle insured, and are vulnerable to runs (which are possible, as we learned in the United States during the
2007–2008 financial crisis, and SVB run just last week)
o If Bigtech enters the core of banking, then systemic concerns will increase, since trouble in the nonbank
business of the firm may contaminate the bank and would be very likely to be systemic.

o On the bright side, FinTech and Bigtech may manage to operate with less leverage than traditional banks
o Technology may help increase the availability of risk-sharing and contingent contracts, making debt-financing
less relevant

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