The relationship between technology and financial
companies is changing at a rapid pace.
Finance companies have always used technology
in their businesses. But now the evolutions made
possible by the internet and fintech - or financial
technology - are changing the way people interact
with money in their daily lives. It affects how they
buy products, pay bills, send money, and invest.
New and innovative start-ups offer services that
used to be done by banks, insurance companies,
and financial management groups.
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1.1 What Is Fintech?
In its broadest sense, the definition of fintech
(financial technology) is the use of technology
as it applies to the financial sector. This includes
areas such as payments, insurance, investment
management, deposits and lending, capital raising,
and market provisioning.
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Finance companies have
always used technology to make their businesses
faster, safer, more productive, and more global. But
now they are disrupting the entire nature of finance.
What is a Fintech Company?
The rise of new and cutting-edge technology
allowed small start-up companies to offer financial
services outside of traditional banking. For the first
time, consumers can bypass the bankers, brokers,
and middlemen. Now, people can deal directly with
businesses or other consumers.
For example, companies like PayPal send payments
directly to merchants or between people. And
peer-to-peer lending companies like Upstart
brings borrowers and lenders together. Bitcoin
and other cryptocurrencies store money digitally,
simplifying international payments and bypassing
governments as well as financial institutions. These
are just a few examples to how fintech leaves banks
out of the equation.
Recently, the term fintech has expanded beyond
financing, or areas like peer-to-peer lending, and
now covers any service or product which once fell
under the remit of the financial sector.
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2
Arner, Douglas W.; Barberis, Janos Nathan; Buckley, Ross P. “The Evolution of Fintech: A New Post-Crisis Paradigm?”, UK report published Oct 1, 2016,
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Arner, ‘Evolution’, pg. 10
1.2 Fintech History
Traditionally, banks, insurance firms, and trading
companies have been among the leaders in using
advanced technology. Breakthroughs started
with the advent the telegraph in 1838 and the
transatlantic cable in 1866. These inventions vastly
increased the speed of communication and allowed
for the globalisation of finance to begin.
Up until the 1950s, transactions were carried out
by phone, mail, or in person. Stocks were kept as
a certificate on paper by a broker or by the client
themself and could be mailed in to redeem the
value of the share. In banking, a loan officer would
usually judge a client’s credit risk based on how
well he knew them personally.
The 1950s brought IBM and computing. Diner’s
Club and American Express introduced the first
credit cards. The fax machine came out in 1964
letting people send documents in seconds instead
of days or weeks.
Barclays Bank put out the first ATM in 1967 and
revolutionised banking. Now people could get
money from their account without speaking to a
teller or even entering the bank. Suddenly, banking
became 24/7. Some consider this the beginning of
the second stage of the fintech revolution.
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Then finance companies began computerising
their systems. They moved from paper to digital.
Payments no longer needed to be sent by
cheque or bank draft. They could be electronically
transferred through the Bankers Automated
Clearing Services (BACS). International payments
went through the Society for Worldwide Interbank
Financial Telecommunication (SWIFT).
In 1971, NASDAQ completely changed trading
by introducing electronic trading. For the first
time, computers handled the price feeds instead
of live traders on the oor of the exchange. This
significantly cut the cost and the time it took to fill
an order.
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Fintech advancements didn’t come problem-
free. The crash of 1987 was probably caused by
computerised trading systems. Investment firms
set up programmes to automatically buy and sell
at pre-set prices. The crash brought this weakness
to light, so regulations and technology stepped in
to correct it.
Starting in the mid 1990s, financial services topped
all other industries in technical equipment buying.
It continues to be the largest purchaser of fintech.
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It uses technology to reduce risk and comply with
regulations, to streamline operations, and of
course, reduce costs and increase profits.
Banks were some of the first companies to offer
their services online. Wells Fargo let customers
check their accounts online starting in 1995.
And 2005 saw the rise of banks that transacted
business only online.
The most significant shift in the world of fintech
was born from the wake of the 2008 crash. At that
time, credit tightened. Many financial professionals
lost their jobs and people started to distrust banks
and financial institutions. It was the perfect storm
for the revolution to begin.
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Tech savvy financial experts looked for ways to
solve customer problems in a novel way.
They found direct solutions that eliminated
traditional financial service providers. For the first
time, technology was used to displace banks and
the fintech of today emerged.
4
Arner, ‘Evolution’, pg. 6
5
ibid, pg. 17
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Factors that contributed to the financial
revolution include:
Digitally skilled population
• Fast-growing international middle class
• Inefficient financial and capital markets
• Shortage of physical banking infrastructure,
especially in third world countries
• People’s changing preferences and expectations
• Failing trust of established financial services
• New market opportunities
• Highly skilled, innovative engineering and
technology graduates
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Fintech Timeline
1866 transatlantic cable
1950 Diner’s Club Card
1951 Ferranti Mark 1 - first commercial computer
1958 American Express Card
1964 Fax machine
1966 Interbank Card (now MasterCard)
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ibid, pg. 23
1966 Global Telex
1967 First handheld calculator
1967 Barclay’s ATM machine
1968 UK Banker’s Automated Clearing Services (BACS)
1970 US Clearing House Interbank Payments
System (CHIPS)
1971 NASDAQ
1973 Society of Worldwide Interbank Financial
Telecommunications (SWIFT)
1983 Online Banking Nottingham Building Society (NBS)
1980s Banks go from paper to computer
1987 Stock market crash, new regulations
1992 European Union
1995 Wells Fargo Bank Internet customer online account checking
2005 Online only banking
2008 Market crash, increased regulations
2009 Bitcoin
2010 eToro Social Trading Platform with Copy- Trading features
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Fintech generally slips into places where traditional
financial services are failing, or where customers
are having a difficult time accessing services.
Anywhere that tech companies can fix those issues
and keep an adequate profit margin, they will.
The World Economic Forum says fintech is taking
over traditional services in these areas:
• Payments
• Deposits and Lending
• Investment Management
• Insurance
• Capital Raising
• Market Provisioning
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See Note 1.
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‘Future’, pg. 30
1.3 How does Fintech Work?
PayPal is the grandfather of online payment
systems but new companies, like Ripple Labs allow,
banks to settle transactions between each other,
bypassing central banks and lowering costs.
Customers can set up automatic bill payments.
They now deposit cheques with a snap of a picture
on their phone. You can use your phone to collect
payments. Voice, face, or fingerprint recognition
and geo-location ensure security.
Players in the field include:
Mobile payments: ApplePay, PayPal, Square, Level
Up, m-Pesa
• Integrated billing: Uber, Order Ahead, iBeacon
• Streamlined payments: MagicBand, bPay,
Shipwallet
• Next-generation security: Nuance, biyo, XYverify
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Today fintech stands to disrupt traditional financial
services by being direct, nimble, accessible, and
customer oriented. For many users, the experience
with fintech is easier and more fun. They feel more
in control of their finances.
Payments: The internet and new technology
make payments simple, fast and secure. Some
companies have one click check-outs. It’s now
possible to eliminate credit cards with direct bank
payments to merchants. Or pay with your phone
and avoid cash or credit cards altogether. and
avoid cash or credit cards altogether.
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9
‘Future’, pg. 87
10
ibid, pg. 127
Deposits and Lending: With fintech, you no longer
need to keep money in a bank. You don’t have to
borrow from a financial institution. Angel investing
and peer-to-peer lending cut out the banks. They use
computerised processes to assess creditworthiness.
You can borrow money for personal or business needs
from private lenders.
Finally, you can now store your funds in alternative
locations from cryptocurrencies to trading platforms.
Players in the field include:
• Peer-to-peer lending: Funding Circle, Lending
Club, CreditEase
• Credit assessment: Lenddo, Kabbage, eCredable
• Automated processing: OnDeck, Prosper, Zopa
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Investment Management: Fintech gives ordinary
investors more control over their money. New trading
platforms offer small traders investment choices
formerly available only to high-networth investors.
You’ll find reduced fees, easier access, and customer
education. You have the freedom to manage your
money without a broker and choose every investment.
Now you can invest with small amounts of money.
You can choose computer assisted trading or social
trading. This way you build on the expertise of others.
With some platforms, you may move beyond stocks,
bonds, mutual funds, and Exchange Traded Funds
(ETFs). You are free to trade bitcoin, currencies, and
other commodities.
Players in the field include:
• Automated management & advice: FutureAdvisor,
Wealthfront, Motif Investing
• Social trading: eToro, Covestor, StockTwits
• Algorithmic trading: CoolTrade, Quantopian,
QuantConnect
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Insurance: Big data now lets insurers set rates based
on your actions, your credit score, perhaps even your
social media profile. Wearable technology measures
our health and fitness. The Internet of Things (IoT)
brings smarter cheaper devices. And self-driving cars
are set to disrupt the insurance industry.
These all impact your life and the cost you may pay
for insurance. But fintech also levels the field. You can
go online to compare rates and insurers as well as
check reviews. You can shop like never before.
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‘Future’, pg. 60
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ibid, pg. 113
Players in the field include:
C o m p a r a t i v e s h o p p i n g s i t e s : B e a t T h a t Q u o t e ,
Money Supermarket, BizInsure
• Shared economy: Airbnb, Getaround, Uber
• Hedge funds and insurance-linked securities:
Leadenhall Capital Partners, Triplepoint Capital
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Capital Raising:
Fintech opened the world of business financing.
Now start-ups and mid-sized companies can find
capital outside banks, hedge funds, or affluent
investors. And ordinary investors can pool funds
with others to gain a share of the company. The
best news? You don’t need lots of money to invest,
so you can spread your money across several
businesses.
Now you can invest in companies before they go
public. Or you may donate to charitable ventures
that may not bring a return.
Players in the field include:
• Crowd approved funding: Seedrs, Spacehive,
iAngels, Kickstarter, Kiva
• Follow the expert: AngelList, SeedInvest
Custom business funding: Abundance Investment,
Crowdcube
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Market Provisioning:
This fintech area uses smarter and faster machines
for machine based trading. It’s the next step past
algorithmic high speed trading. The machines
respond to real-life events. Powerful computers
analyzes huge chunks of information to suggest
trades and trends. They read the news and social
media to predict price changes and potentially gain
a trading advantage. AI and machine learning run
predictive modeling and are self-correcting. This
can improve the accuracy, consistency, and speed
of trading.
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13
ibid, pg. 154
Players in the field include:
• Machine accessible data: Thomas Reuters,
SemLab, SNTMNT
• Big data: SAS, Palantir, Hadoop
Artificial intelligence & machine learning: Sentient
Technologies, Rebellion Research, Ayasdi
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Fintech opens a wide range of financial opportunities
for you. Here are 10 ways fintech can make your life better.
1. Need a loan? Go to crowdfunding and present
your case.
2. Want a place with better returns than the bank?
Loan your money to an individual or business in
peer-to-peer lending.
3. Need auto or life insurance? Check the aggregate
sites to compare companies and policies.
4. Want a different place to keep your money?
Buy cryptocurrency or hold it in a trading platform.
5. Want to invest, but need some help? Use social
trading to give you choices and confidence.
6. Want to invest in start-up businesses pre-IPO
(Initial Public Offering)? Choose your company from
a capital raising site.
1.4 Why Fintech?
7. Want to invest in currency trading? Find a fintech
trading platform that offers. Contract for Difference
(CFD) trading so you can buy fractions of lots.
8. Want to know market trends? Check out big
data driven algorithms to see what AI and
machine learning suggests.
9. Want a place to stay or to take a quick trip?
Use Uber or Airbnb to bypass the large industries
Find something much nicer for less money.
10. Need to send money to a friend or pay a bill?
Skip the bank or cheque and use mobile
payments.
Fintech is all around you. You probably use it every
day to make your life easier and your tasks go faster.
You may feel more comfortable and trust fintech more
than you do traditional banking. It’s never been easier
to control your money and manage your wealth than in
the fintech revolution.
Investments and money management carry risks,
even in fintech startups or large companies.
Investing on trading platforms or in peer-to-peer
lending means you can make or lose money.
Cryptocurrencies and investments fluctuate and can
be volatile. Please research and exercise care before
you invest.
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One of the most exciting innovations in fintech is
the marriage of trading and the social revolution.
First, it’s fun to trade with a group of friends and
enjoy the social experience. Second, new investors
benefit from the wisdom of experienced traders.
And finally, the transparency of seeing exactly how
the trades play out lets you trade with confidence
and trust.
The best platforms help you asses the risks of the
trades. That way, you can match your risk tolerance
with that of other traders. They also help you lock
in profits or minimise losses with built in stop loss
or profit taking points that you set based on your
trading plan.
Small investors are welcome. At eToro you can
start with just a few hundred dollars and build
from there. This new technology lets you practice
trading with a ‘virtual’ account. This gives you time
to gain confidence as you practice trading the
markets and discover different traders you might
like to copy, all without risking real money.
With social trading you can check out the
performance and history of other successful
traders. Learn their investment style. Then you
can allocate a portion of your funds to a variety
of traders, copying their trades, exactly as they
make them. Importantly, you are free to move your
money at any time. You are never locked in.
Social trading takes advantage of the newest in
fintech innovation. Now you can trade and build
your wealth with the same freedom and tools as
the ultra-wealthy. Fintech democratises trading.
It levels the playing field. Check out eToro for the
best in social trading.
your wealth with the same freedom and tools as
the ultra-wealthy. Fintech democratises trading.
It levels the playing field. Check out eToro for the
best in social trading.
Of course, all trading involves risk. Only risk capital
you're prepared to lose. Past performance does
not guarantee future results.
1.5 Why is Fintech Important?
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Fintech opened a new playing field for non-
institutional investors. It has taken contracts
previously only available to high net investors and
created a system for the average investor to trade a
broad range of securities. These high net investors
had access to markets around the world so they
could diversify their portfolios to reduce risk and
seek better returns. Thus they had an advantage
over lower net worth investors.
The instrument they used was based on futures
contracts. It was the promise to buy a commodity
or investment in the future at a price that was fixed
today. Currently 92% of the world’s 500 largest
corporations use this tool to manage their risks.
The instrument is called a Contract for Difference
(CFD). This derivative acts very similar to a futures
contract. It allows two parties to agree on a price
for a certain stock or commodity at the opening
of the contract. The actual settlement takes place
sometime in the future. You can take a position
that lets you to profit as the asset falls. A different
position allows you profit from a rise. Let’s look at
an example so you can see it how it works with
prices either rising or falling.
Say Tony buys a CFD for ABC company at a price
of £100. At some point in the future, ABC goes
to £110. Tony cashes in his agreement and gains
£10 per unit. Or Tony may sell an ABC contract for
£100 expecting the price to fall. In the future, if the
price falls to £90, Tony buys back the contract and
pockets £10 on the drop.
CFDs are different than other instruments because
they trade based on an underlying asset’s price,
without actually owning the asset. With no leverage,
a CFD holds no more market risk than buying stock
in the company. Used this way, it looks and feels
almost exactly like equity ownership. If the equity
pays dividends, you’ll receive them as well. But
there are some impressive advantages to using
CFDs.
1.6 The Fintech-CFD Connection
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Higher Leverage: CFDs are often bought and sold
on margin. You may be able to trade with a margin
as low as 2%. That means your £2 can control £100
of equity. While this can be a good opportunity to
make substantially more money than the actual
capital you have invested, it also carries much
higher risk, since losses are also leveraged.
eToro supports a ‘responsible trading’ policy.
To help traders manage risk, they limit leverage
for certain clients and equip them with many
risk management tools. In addition, eToro does
not allow high risk traders to be copied, thus
maintaining an extra layer of protection for the
social investors.
Smaller Lots: Since there’s no actual ownership of
the asset by the trader, the asset may be traded in
fractions, rather than purchasing the entire share
or futures contract. Traditional hedge funds trade
in 100,000 lots in currency which is probably more
than the average investor could afford. But with
CFDs, investor can trade in small fractions of a lot.
So they need less money to enter trades. Because
they can buy CFDs in fractions, traders have money
left to more easily diversify across more assets.
Global Market Access from One Platform:
Fintech brings multiple markets into one convenient
place, including stocks, commodities, currencies,
and more. You can trade stocks from other
countries that typically could only be found on their
own country’s exchange. Because you are only
purchasing a contract based on the asset’s price,
you have much more freedom to trade. It opens
up trading in Bitcoin and other cryptocurrencies.
Finding all of these assets on one platform
bypasses the hardships of dealing with securities
laws of foreign countries, and legal statements
in other languages. The instantaneous nature of
transactions made on platforms such as eToro,
gives its users the added benefit of high liquidity.
They can easily and instantly buy or sell any CFD so
they can quickly adjust to changes in the market.
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No Day Trading Limits: Certain markets require
minimum amounts of capital to day trade. When
you are actually buying, selling, or writing options
on assets, your broker may limit the number of
daily trades within an account. The CFD market
does not have these restrictions so traders can
move their investments as frequently as they wish.
Avoid Shorting or Borrowing Rules: Certain
markets prohibit shorting. That is, you contract to
sell a security you don’t own. You do this because
you think the asset will drop in price. Then you can
buy it for less, fulfill your contract, and pocket the
difference. Of course if the market goes up, you
still must buy the asset to fulfill your contract. In
that case, you lose money.
Several market crashes have been blamed on
this practice, so now, many exchanges require
traders to own the instrument before shorting
or have a reserve margin to cover the risk. Both
of these practices help reduce the risk of short
trading. However, the CFD market uses a different
instrument to trade. Since ownership of the
underlying asset is not possible with CFDs, it avoids
the short selling rule.
Low Fee Trading: CFD trading platforms are
finding wide appeal with newer and younger
investors because it can be traded around the
world. The increase in CFD users and the nature
of the instrument means that the cost of trades
can be significantly lower than that of traditional
brokerage firms. Instead of high commissions per
executed trade, CFDs are nearly cost free.
The platform makes a profit from the spread.
Buyers must open the trade at the ask price and
sell at the bid price. The spread is the difference
between the two prices. Leveraged trades may
incur an overnight fee for trades held past the
closing bell. The size of the overnight fee depends
on the amount of leverage you choose to use.
Because the contract is between the user and the
company running the platform, contracts can be
sold instantly, at any time, even when opening
a short position. This privilege is sometimes not
available to traditional traders due to costs.
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Your capital is at risk. Cryptocurrencies can fluctuate widely in prices and are therefore not appropriate for all investors. Trading cryptocurrencies is
not supervised by any EU regulatory framework. Past performance does not guarantee future results. This information is for educational purposes
and not investment advice.
Recently, the Financial Instruments Directive (MiFID)
extended regulation of the European financial
services to CFDs for the first time. The increased
oversight of these platforms gives their clients
extra confidence when trading. eToro, for example,
holds both a European MiFID license (CySEC), and
a British FCA license, therefore certifying they
have the highest levels of compliance and risk
management.
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