FinTech and Transformation of the Financial Services Industry

------SSE Executive MBA

Dr. Robin Teigland Stockholm School of Economics

robin.teigland@hhs.sewww.slideshare.net/eteigland

@RobinTeigland

January 2016

Today’s scheduleMorning: Financing Innovation

−9:00 to 10:30 Lecture Michal Gromek, PhD SSE, FundedByMe, Lendico, Rocket

Internet−10:30 to 11:30 Groupwork: Funding your Startup−11:30 to 12:00 Group presentations

Afternoon: FinTech and Industry Transformation?−13:00 to 15:00 Lecture−15:00 to 17:00 Discussion: Disruptor vs Industry

Incumbent Anna Felländer, Digital and Futuring Economist,

Swedbank Henrik Rosvall, CEO and Founder, Dreams

Groupwork: Funding your startup

Prepare a max 5 minute presentation−How much funding do you need to get your idea

off the ground?−Which form(s) of financing will you go after? And

When?−What will you give in return for financing? E.g.,

equity, reward, nothing−How long will it take for you to provide the return

for your “investors”?−What do you need to do to prepare for raising

financing?

If the rate of change on the outside exceeds the rate of

change on the inside, the end is near....

-Jack Welch

What triggers industry transformation?

Johnson & Scholes 1997

Politics and government

Environment Technology

Legal structure

Social and demographic

structure

International/nationaleconomy

Industrystructure

Two dimensions of transformation

Core activities – Recurring actions a company performs that attract and retain suppliers and buyers (profit-making activities)

Core assets – Durable resources, including intangibles, that make a company more efficient at performing core activities

McGahan, HBR, 2004

Trajectories of industry transformation

McGahan, HBR, 2004

1980-1999 US Industries’ Share of Transformation

McGahan, HBR, 2004

Industry transformation

Picture: http://andrewkarpie.com/wordpress/?p=469

Number of firms in industry over transformation

Economies of scale

What trajectory is the financial services industry on?

McGahan, HBR, 2004

Digitization of the banking industry

Further changes…

Screenshot from Factom.org

Banking is essential,

but banks are not.

Bill Gates

What is FinTech?

Accenture/CB Insights

Technologies for banking and corporate finance, capital markets, financial data analytics, payments, and personal financial management

Finance TechnologyFinTech

What is Fintech?

FinTech World

Personal Finance

Payments Bitcoin & Blockchain Currency

Currency Remittance & FX

Lending

Crowdfunding

Robo-investing & Asset Management Tech

Consumer Banking & Saving

The Wharton FinTech Club

What is FinTech?

FinTech Overview

http://www.slideshare.net/eteigland

1950 1960 1970 1980 1990 2000 2010

1959, Bankgirot founded

1985, Swedish financial and credit markets deregulated

1968, World’s first online ATM in Sweden

First wave of electronic trading software companies emerges

2003, First BankID issued in Sweden

1990s, Sweden invests in Internet infrastructure, today country with 3rd highest Internet penetration

2010, iZettle founded

2010, Neonet $160M exit 2014,

iZettle raises $55M

2014, Klarna raises $125M in PE

1967, First ATM installed in Sweden

1984, Optionsmäklarna (OM) opens in Stockholm, Sweden’s first stock option market, electronic trading introduced

2012, TriOptima, $160M exit

2005, Klarna founded

1998, Merger between Stockholm’s Stock Exchange and OM Stockholm

2007, NASDAQ acquires OMX Group

Unicorns such as Skype, King, Spotify and Mojang founded

2014, FinTech Funding in Stockholm Explodes

Long history of “FinTech” in Stockholm

http://www.slideshare.net/eteigland/stockholm-49722748

In just the past few years in Stockholm…

Company Founded BusinessKlarna 2005 E-commerce payment servicesMyLoan 2006 Loan brokerTrustly 2008 Online paymentsiZettle 2010 Mobile paymentsFundedByMe 2011 Crowdfunding, crowd equityKivra 2011 Digital mailboxTink 2012 Personal financeSafello 2013 Cryptocurrency exchangeKnCMiner 2013 Cryptocurrency mining equipmentToborrow 2013 P2P lending for companiesCryex 2014 Cryptocurrency clearing house

Stockholm #2 FinTech city in EU

2010-2014 investment

● $532 Mln

2014 investment● $266 Mln

Top 2014 Investments in

Stockholm FinTech Companies (USD Mln)

Klarna $125

iZettle $55

Trustly 29

Bima Mobile $22

KNC Miner $14

http://www.slideshare.net/eteigland/stockholm-49722748

”Innovative Lending & Investing” emerging

2013 Stockholm FinTech revenue

Cryptocurrency0%

Transfers2% Innovative Lending

5%Wealth Man-age-ment9%

Other FinTech12%

Payments33%

Trading & Banking Tech39%

& Investing

Our report: http://www.slideshare.net/eteigland/stockholm-49722748

Crowdfunding rapidly growing in Europe

Crowdfunding growth 2012-2015

USD 34 bln E

But in China alone in 2015…

http://www.crowdfundinsider.com/2016/01/79612-report-china-p2p-lending-topped-150-billion-in-2015/

Four forms of crowdfunding   Form Benefits for funders

Donation-based Donation Intangible benefits.

Reward-based

Donation or pre-purchase

Rewards in addition to intangible benefits.

Equity-based Investment

Return on investment if company does well. Rewards sometimes also offered and

intangible benefits may motivate too.

Loan-based LoanRepayment of loan with

interest. Alternatively intangible benefits if loan

given interest-free.

Democratizing innovation and investment?

Women in USA <30% of business

owners <15% of angel

investors <10% of venture

capitalists

Marom, Robb and Sade 2014

Women on Kickstarter

35% of project leaders

44% of investors Women invested in

women project leaders (>40% of projects)

VS

Competing for investment?

Crowd equity

New forms of ownership…crowd equity

One step in the financing chain

Using the crowd to identify investment opportunities

Nesta

zopa

P2B lending in Sweden

Enabling local community?

http://www.fundable.com/blog/crowdfunding-infographic---the-jobs-act-explained

Emerging forms of collaborative investing

Crowdsourced hedge fund

Activist hedge fund

+

Developing investment skills online

https://www.quantopian.com/home

Enabling financial inclusion

Cryptocurrency mining equipment

http://techcrunch.com/2014/09/04/kncminer-raises-14-million-to-take-bitcoin-mining-to-the-moon/

Transforming insurance

What is a cryptocurrency?

DigitalDecentralized, peer-to-peer (P2P), i.e., no

central, third party

Uses cryptography to validate/secure transactions

Also uses cryptography to generate currency itself

Non-technical explanation of Bitcoin−https://www.youtube.com/watch?v=t5JGQXCTe3c

Within 6 years: Challenging

the fiat money system?

Bitcoin – An emergent phenomenon• Open source project on SourceForge in Jan 2009 • Original source code by “Satoshi Nakamoto” –

pseudonym?• Developed by self-organizing community of

thousands of strangers across globe• Approx USD 6.5 bln market cap and approx 180,000

daily transaction volume of USD 101 mln• 1 BTC = USD 431 (Jan 14, 2016)

Teigland, Yetis, Larsson 2013 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263707

How does Bitcoin work?

Screenclip from: How Bitcoin Works under the hood, by “Curious Inventor”

Blockchain • Shared public

ledger • All transactions

ever made logged• Chronology and

integrity enforced by cryptography

Enabling records, oversight

Image from the FT

Screenshot from the Economist

But also Vendor Transparency AML and KYC Features…

IoT and smart contracts

Ownership attached to asset/property (e.g., real estate, shares) and can be verified

Run on Bitcoin ledger, execute legal rules between two entities: people, organizations, machines

Trustless because no center, no one in middle – the network is the middleman

Example: I run a private weather station using neighbors’ sensors. Smart contracts enable payment to neighbors for data sent from their sensors to my weather station.

But time will tell… uses we cannot imagine today.

https://www.youtube.com/watch?v=JsC4ptn2Aik

IBM + Samsung

From “trusted”, centralized human authorities

to trustless, decentralized networks

IBM Institute for Business Value (PDF)

La’Zooz – Decentralized transportsharing

http://lazooz.org/

FinTech World

Personal Finance

Payments Bitcoin & Blockchain Currency

Currency Remittance & FX

Lending

Crowdfunding

Robo-investing & Asset Management Tech

Consumer Banking & Saving

The Wharton FinTech Club

What is FinTech?

FinTech – An increasingly crowded space

• Growing number of entrepreneurs with experience from established finance industry

• Increasing number of FinTech incubators • Collaboration among established banks• Open innovation through open APIs• Other big non-banking entrants

Industry transformation

Picture: http://andrewkarpie.com/wordpress/?p=469

Trajectories of industry change

McGahan, HBR, 2004

Responses to disruptive strategic innovation

Charitou, C. D., & Markides, C. C. (2012). Responses to disruptive strategic innovation. MIT Sloan Management Review

Why not embrace

disruption?

Charitou & Markides, 2003

Incumbents running incubators

Actor Incubator LocationCiti Mobile

Challenge Americas, EMEA, Asia Pacific

DBS & Nest Investment Accelerator Hong KongWells Fargo Startup

AcceleratorUSA

Accenture and Bank of America, Merrill Lynch, Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, UBS

Innovation Lab

NY, London, Hong Kong

“Innovation labs are a sign that banks are taking the FinTech threat seriously as they recognize that we’re coming to eat their lunch.”

-FinTech Entrepreneur

Opening up innovation…

Citigroup Capital OneBBVA Compass Silicon Valley BankBank of America

P2p industyry incumbents

Betting on the Blockchain - Together

Goldman Sachs, JPMorgan, Credit Suisse, Barclays, Commonwealth Bank of

Australia, State Street, RBS, BBVA,

UBS, Nordea, SEB, + ……

+

FinTech challenges

Regulation

Privacy

Security

Untested in periods of high interest rates, increased risk, and reduced investment

Previously…

In the eight-year period between the Netscape IPO and the acquisition of PayPal (one of the winners of this era) by eBay, more than 450 attackers – new digital currencies, wallets, networks, etc. – attempted to challenge incumbents.

Fewer than five of these survive as stand-alone entities today.

McKinsey, 2015

Underperformers vs outperformers

Two models of industry transformation

McGahan, HBR, 2004

Thomas Jefferson (1816)“Laws and institutions must go hand in hand with the progress of the human

mind.”

The problem is that the human mind itself can’t keep pace with the advances

that computers are enabling. 

http://wadhwa.com/2014/04/15/mit-technology-review-laws-and-ethics-cant-keep-pace-with-technology/

The future is already here, it’s just not very

evenly distributed.

- William Gibson

Robin Teiglandrobin.teigland@hhs.se

www.slideshare.net/eteigland@robin.teigland

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