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R. Shneor et al. (eds.), Advances in Crowdfunding,
https://doi.org/10.1007/978-3-030-46309-0_11
11
The FinTech Industry: Crowdfunding
inContext
PaulGriffiths
Introduction
e last three decades of the twentieth century witnessed the adoption of
information and communications technology (ICT) by business corpo-
rations at an increasing rate and banks were leaders and trendsetters in
this process. However, this leadership role of banking in the development
of corporate ICT was lost in the second half of the rst decade of this
millennium. is chapter intends to shed light on the process that led to
this. In so doing, it addresses the questions: Why did FinTech emerge as
an industrial sector, independent of banking?
e author is strongly connected to the world of ICT transformation
and of banking as an information intensive industry. He entered the busi-
ness world as a young graduate during the mainframe-based, bespoke
systems age; he then oriented his career towards management consulting,
where he carried out and led technology-enabled business transformation
P. Griths (*)
EM Normandie Business School, Métis Lab, Oxford, UK
e-mail: pgriths@em-normandie.co.uk
242
projects in the enterprise resource planning (ERP) era and the customer
relationship management (CRM) and e-commerce solutions era; he
replaced legacy core-banking systems by more modern client-server plat-
form ones. On the academic side, he went back to university and enrolled
on a doctoral programme that he researched into strategy-technology
alignment in banks from which he graduated in 2005. He then became a
full time academic and for the last three years has been researching the
industrial organization of the FinTech sector. So, it is from this broad
background that bridges across the practitioner and academic worlds in
banking and technology that he sets out to address the above questions.
e rest of this chapter is organized in the following way. Section
“Twentieth Century: ICT Emerging and Evolution” will give an over-
view, based on the author’s professional experience, of the evolution of
ICT in the last three decades of the twentieth century. From the specic
perspective of banks, it will show that the nancial sector in general, and
banking in particular, was a driver of the ICT evolution during that
period, until the mid-2000s. Section “Advent of the Tipping Point: Why
Did Banks Lose Control?” will, based on current literature, identify three
root-causes for banks to have lost control over the ICT agenda in the
nancial sector. In having lost control of the evolution of ICT, Section “A
New Industrial Sector: e Emerging of FinTech” will give a framework
to understand how the FinTech sector is structured based on a classica-
tion of the players according to the functional services they oer and the
types of technology they apply. It will emphasize the role of crowdfund-
ing in this landscape. Section “Discussion” will oer a discussion on the
ndings, and Section “Conclusions” will draw some conclusions.
Twentieth Century: ICT Emerging
andEvolution
e last three decades of the twentieth century witnessed the adoption of
information and communications technology (ICT) by business corpo-
rations at an increasing rate. During the 1970s and 1980s it was large
systems developed and running on mainframe computers, with bespoke
P. Griffiths
243
applications of narrow functional scope and weak integration with other
functional applications. ICT was essentially about number-crunching
large volumes of at les, initially fed in by perforated cards and later in
the period by magnetic tapes and discs. It was a domain restricted to the
largest corporations, prominent amongst them the big banks, govern-
ment institutions and universities. Systems were all corporate and man-
aged by large IT departments with battalions of in-house programmers,
analysts and systems engineers complemented by professional sta
belonging to the large systems companies (that later called themselves
‘integrators’) such as IBM, Honeywell-Bull, ICL, Unysis. e technology
platforms on which these corporate applications were developed were
proprietary, with no convertibility from one vendor’s platform to another
vendor’s: Client lock-in was the name of the game.
Democratization of ICT and its access to the smaller corporations and
companies came in the mid-to-late 1980s and early 1990s with the
advent of the mini-computer, the table-top personal computer, local area
networks, handheld devices and, very importantly, the relational data-
base. Democratization turned into revolution with the access to, and
popularization of, the Internet.
e until then reigning mainframe computer and its centralized archi-
tecture ceded part of its domain to the distributed client-server architec-
ture. e mainframe did not completely go away as those organizations
who had them tended to keep the mainframe as database server due to its
low cost per transaction for large volumes of transactions.
In parallel with client-server a signicant change in the 1990s was the
advent of the enterprise resource planning (ERP) systems with a new key
player that with time became the dominant player in the corporate appli-
cations world, breaking the until then hegemony of the Anglo-Saxon
companies: SAP from Waldorf, Germany. Being the four founders of
SAP ex-IBM engineers, the rst versions of their ERP ran on mainframes,
but they really took o with their rst client-server version that they
called R/3. ere were competing providers such as Oracle (with its
Financials), JDEdwards, and PeopleSoft. is wave responded to a sig-
nicant change in philosophy and the name of the game now had two
dimensions: (a) it was all about packaged solutions, that is solutions that
did not need code developed from scratch for each corporation, but that
11 The FinTech Industry: Crowdfunding in Context
244
would be standard with the possibility of conguring parameters for lim-
ited adaptation to each company; and (b) integration was dominant over
best-of-breed solutions, that is that now it was more important to have
integration across functional applications than to have the best individual
and isolated application.
Integrated packaged solutions brought with them another signicant
change: the concept of ‘leading practices’ in business processes. While the
bespoke systems of the mainframe era were modelled in line with the
processes of each company, in the ERP era the company would adapt its
processes to the leading practices in-built in the solution. e implica-
tions of this is that the implementation of an ERP system would lead to
signicant changes in processes that, in turn, radically changed people’s
jobs. us, change management became an important component of
implementation projects, with a focus on stakeholder management and
training of people in entire processes, not just their specic task in a large
process as was the case before.
Another change that came with the ERP wave is how projects were
organized. e conguration of a systems project team was no longer a
team of highly technical analysts and programmers, but people who were
versed in business processes. e bulk of the work was not in coding but
in parameter conguration and change management activities. So, the
project teams were integrated mainly by non-technical systems people.
ERP projects were not referred to as systems or technology projects any-
more, but as business transformation projects enabled by technology.
Ripples of ERP in 1991–1993 became waves in 1994–1998 and
turned into tsunamis approaching 2000 and the generalized policy of
implementing ‘vanilla’ ERPs to sort the Y2K problem (this term was
coined by Gartner Group and refers to the fact that the early mainframe
systems had only two-digits for the year in dates, so it was suspected that
they would all fail with the advent of the new millennium). With the
advent and establishment of ERPs, came the reduction in the size of the
IT departments in corporations. In eect, what adopting and imple-
menting ERP meant was that the development of new functionalities to
adapt to changes in the legal and tax environment, or to the need for new
functionalities, was outsourced to the ERP vendors.
P. Griffiths
245
Of course, ERP were not the panacea that appears at rst sight.
Signicant amount of coding to ensure integration with legacy systems or
vertical industry-specic applications were still necessary. Although ‘big
bang’ projects were highly promoted, common sense and risk manage-
ment led to many projects being piloted and phased in, which meant that
temporary interfaces had to be developed. And although the ERP ven-
dors did produce their solutions with specic avours for dierent indus-
tries, this was still not enough and corporations demanded having some
of their vertical functionality developed outside of the ERP. For example,
SAP achieved a highly competent footprint in the consumer packaged
goods (CPG) and in the utilities industries, but never managed to pro-
duce convincing solutions for the core-banking functionalities despite
having invested heavily in its solution for that sector. In other words,
coding and development eort for integration did not entirely go away.
After the ERP binge running up to Y2K came the hangover in the
form of a relative slowdown in the ERP market, but that did not stop the
corporate-systems business as a whole. At around the time that ERP
slowed down e-commerce and client relationship management (CRM)
solutions emerged with force. E-commerce was the hottest product but it
was severely impacted by 9/11 and the implosion of dot.com, recovering
afterwards but growing at a more moderate pace.
With the slowdown of the ERP market and of the global economy
after 9/11, came a consolidation within the corporate ICT solutions
industry. SAP expanded its functionality into CRM, e-commerce and
business intelligence through internal developments but later broke this
tradition by entering the acquisitions path. Oracle, on the other hand,
acquired PeopleSoft, Siebel (the leading CRM provider), JDEdwards,
and many others, with signicant pains in converting all these indepen-
dent applications into a coherent, seamless oering to its clients. Oracle
also moved into the hardware space by acquiring SUN Microsystems and
SAP moved into Oracle’s traditional realm, the database layer, through
acquisition, too. Oracle articulated the concept of ‘stack’, from hardware
to enterprise application, through operating systems, databases, integra-
tion layers and others. Oracle publicized itself as being able to oer the
whole stack or just some of the layers.
11 The FinTech Industry: Crowdfunding in Context
246
e strong narrative of ERP vendors in terms of the importance of
integration started weakening with the advent of intelligent middleware
communications platforms that made unnecessary the dreaded point-to-
point, or one-to-one, interface development. e nightmarish spaghetti-
style interfaces that haunted CIOs and kept them awake at night, could
now be substituted by simpler to understand middleware layers into
which applications could easily be plugged in. Another highly signicant
concept that was materializing and coming of age at the turn of the cen-
tury was the API (application programming interface—term that was
coined decades before by Cotton and Greatorex 1968), a set of subrou-
tine denitions, communications protocols and tools for building soft-
ware. As will be seen in Section “Discussion”, APIs would play an
important role in the FinTech world.
e prior paragraphs give an overview of how corporate ICT in gen-
eral developed from the 1970s to the early 2000s. e eect on business
transformation of the adoption of ICT was highly signicant, but
nowhere more than in banking. Banking is an information-intensive
industry, by which it is meant that dierentiation comes exclusively from
their intellectual capital and information or, in other words, their people,
processes, relationships, and technology (Clayton and Waldron 2003;
Griths 2003, 2005; McKeen and Smith 1996; OECD 2003,
pp.65–66).1
Driven by this dependence on information, banks played very much of
a leading role in adoption and development of ICT, and the trajectory
they followed diered from the mainstream CPG, retail, industrial prod-
ucts, and utilities corporations. Banks were clearly ahead of the pack in
the early phase of that period, that of the bespoke systems running on
mainframe computers. ey were so heavily vested in those technologies
and had such high numbers of transactions compared to the other indus-
tries, that they could not make the business case for moving to client-
server. is, together with the fact that banking processes and applications
had become highly sophisticated and business critical at an extreme, dis-
incentivized the ERP vendors to develop vertical solutions for banking in
the early days of ERP. Eventually SAP did propose a banking-solution,
but its adoption was disappointingly slow and hardly ever with an end-
to- end footprint but limited to fragmented pieces of the business.
P. Griffiths
247
Essentially, the largest banks are trapped, to this day, in their legacy
systems.
Indeed, banks have adopted standard packaged solutions in many
parts of their business, particularly the highly technical middle oce, but
the back oce remains on the legacy systems. at is not to say that there
have not been any client-server solutions for banks, but the more success-
ful ones have been developed by specialized companies and not the lead-
ing ERP vendors. For example, Citi co-developed a client-server core
banking system with a company called i-Flex in India, to implement in
its smaller operations around the world (it later divested from i-Flex and
a few years later i-Flex was absorbed by Oracle). So, essentially, banks did
not participate in the ERP part of the prior narrative.
Notwithstanding their attachment to the legacy mainframe systems,
banks did make some memorable breakthroughs, of which the ATM is a
notable example. e generalization of ATMs in the 1980s enabled banks
to give 24×7 service and signicantly lower their banking transaction
costs. is led the self-service kiosk technology that is still in the process
of being adopted by other corporations in most other industries and
government.
e ATM was followed by the waves of phone banking, home bank-
ing, and Internet banking. ey all had in common pushing their clients
out of the branch oce and lowering further the costs of banking trans-
actions and brought with them the need for omni-channel, that is the
need to show the same face to the client independently of what channel
the client chose to interact with her bank. So, the big banks that had
departed from mainstream in the ERP age, took leadership again in the
CRM phase. With this came the transformation of the banking branch
oce, that until the 1990s was a mini-bank in its own right with all func-
tionalities in the branch. From the turn of the century banks took all the
back-oce and middle-oce functionalities (e.g., bookkeeping and
accounting, credit scoring, loan origination) from the branch to the head
oce, and most of the transactional activity out of the branch to remote
channels. e branch oce became far smaller and focused on value-
added client services.
is narrative brings us to the mid-2000s when a tipping-point with
several fronts was reached in the ICT world as will be developed in later
11 The FinTech Industry: Crowdfunding in Context
248
sections. As has briey been outlined in this section, ICT in business and
government went from a rarity in the 1970s to complete inltration and
dissemination in the early 2000s. What this story is telling us is that dur-
ing this period of study the world, or at least what we generally refer to as
the Western world, almost unperceptively migrated from an industrial
economy of predominantly tangible assets, to a knowledge one where
intangible ones overwhelmingly predominate over the tangible. is is a
new era where the application of ICT radically changed, and where banks
lost their grip on its development.
e importance that ICT took on in the business world in general, but
especially so in such an information-intensive sector as is banking, makes
the research question stated in Section “Introduction” of the utmost rel-
evance both to the practitioner and to the academic world. e process
through which this happened is described in the next section.
Advent oftheTipping Point: Why Did Banks
Lose Control?
Overview
A thorough review of the literature on the emerging of the FinTech sector
was carried out—the emphasis was put on academic papers from 2012
onwards, as it is thought that before then would be too close to the events
for clarity and that it has been found by Zavolokina etal. (2016, p.9, g.
1) that article publication numbers started growing that year. Based on
that search this section identies three root-causes that, although unre-
lated to each other, happened to coincide in time and lead banks to have
lost control over the ICT agenda in the nancial sector. e narrative in
Section “Twentieth Century: ICT Emerging and Evolution” brings us to
the mid-2000s and it announces that around that time several major
events happened in the banking, the ICT world and society in general
that led to the emerging of a new industrial sector that we nowadays call
FinTech as a contraction of nancial technology. e Basel Committee
on Banking Supervision (BCBS) denes FinTech quite broadly as
P. Griffiths
249
[t]echnologically enabled nancial innovation that could result in new business
models, applications, processes or products with an associated material eect on
nancial markets and institutions and the provision of nancial services.
(Claessens etal. 2018; Palazzeschi 2018)
So for BCBS FinTech is a form of innovation, but a very broad one at
that, as it includes business models, applications, processes, or products.
Doreitner et al. (2017) while admitting that there is no universally
accepted denition of FinTech, take a more cautious approach and refrain
from proposing a denition based on that while accepting that most
companies in the FinTech sector share certain features, there are always
enough exceptions to render them inadequate for producing a general
denition. ey opt to give a summary description of the dierent ser-
vice domains of FinTechs, that they group in four: (a) nancing, (b) asset
management, (c) payments (in which they include cryptocurrencies),
and (d) other FinTechs. e latter includes a hotchpotch of things such
as insurance; search engines and comparison sites; technology, IT and
infrastructure; plus ‘other FinTechs’. Both approaches have limitation:
BCBS stay at a conceptual level, and Doreitner etal. (2017) are far too
broad and encompassing, which unsurprisingly gives place to so many
exceptions.
In this chapter we will overcome those problems and propose and
adopt a denition. We will overcome the BCBS limitation by dening
FinTech as a company/organization, and we will narrow the service oer-
ing domain. We will limit the services to banking services, that is services
where the core competence is managing credit risk, market risk, or bank-
ing operational risk. So, by FinTech in this chapter we understand not the
technology itself, but a digital technology-enabled entrepreneurial initiative
that oers services to clients that would traditionally be considered within the
domain of banks; or that are an innovative service in the natural business
domain of banks; or that help banks develop their back-oce processes.
So, returning to the research question—Why did FinTech emerge as an
industrial sector, independent of banking?—and to focus the mind we will
address it by responding to four subquestions:
11 The FinTech Industry: Crowdfunding in Context
250
• What caused banks to lose leadership in the development of corporate
ICT systems?
• What enabled the FinTech sector to emerge with such vitality in a
business dominated by behemoths?
• What encouraged entrepreneurs to move into the service domain tra-
ditionally served by banks?
• How is the FinTech industry organized and where does crowdfund-
ing t in?
Arner etal. (2017) divide the co-evolution of nance and technology
into three stages, namely:
(a) e analogous age prior to the late twentieth century,
(b) the digitalization era that goes from the late twentieth century
until 2008, and
(c) the diverging era with the advent of new nancial providers based on
advanced technologies.
As is mostly the case, there is not a single cause for the advent of the
tipping point that moved the evolution of nance and technology into
the diverging era. is research identies three unrelated causes that hap-
pened in the 2007–2008 point in time; it is quite probable that none of
these causes alone would have caused such a disruption, but their coinci-
dence in time enabled them to feed into each other and cause havoc in
the banking industry. e rst is the global nancial crisis known as the
Great Recession that is generally accepted as having been caused by the
banking system and its greed in the mortgage segment. e second is
several nearly simultaneous major breakthroughs in the technology sector
that led to a drastic drop in entry barriers to the banking services sector.
And nally, signicant social changes with the coming of age of the mil-
lennial generation and their growing role in the business world and in
relationship to banking. e rest of this section will esh out these
three causes.
P. Griffiths
251
The Effect oftheGreat Recession
e 2007–2008 recession put banks in the US, the UK, and several
countries on the European continent at the brink of collapse leading to
systemic failure which, in turn, led banking authorities in those markets
to bail them out with public funds. Subsequent investigation into the
events detected that banks accelerated their growth by taking on excessive
risk that they partially transferred to other organizations through nan-
cial engineering devises concocted by their investment banking arms. In
conjunction with this, the population became extremely critical of banks
and there was general distrust in these institutions. ese three factors led
national authorities to react, and in many cases over-react, with the result
of far more stringent banking regulations that caused great regulatory
challenges to the banks (European Central Bank 2016; Haddad and
Hornuf 2019; Kotarba 2016). ese more stringent regulations worked
in two directions (see Fig.11.1).
e rst was in the sense of demanding banks to signicantly increase
their regulatory capital so that never again would they need to be rescued
with public money. Because as a result of the crisis capital was costly to
acquire by banks, they reacted by reducing the denominator of the capital
adequacy ratio, that is by reducing their exposure to risk. ey did this by
pruning those clients of higher-risk prole, and by letting go the less
2007/8 Crisis
Bail outs w/public money
Distrust in Banks
Emerged that banks
accelerated growth @
expense of risk
More stringent
regulations
Increase Capital
Adequacy
Cost reduction
/pruning of clients
Let go least
profitable operations
Client data
Client data security
Data available to
third party providers
Regulatory challenge
Fig. 11.1 The effect of the 2007–2008 crisis
11 The FinTech Industry: Crowdfunding in Context
252
protable operations (e.g., certain products and geographic markets).
e resulting reduction in scale in turn led them to embark on cost
reduction initiatives (European Central Bank 2016; Kotarba 2016).
e other way in which more stringent regulations worked was related
to client data. On the one hand the authorities put emphasis on client
data security, and on the other hand bank regulators demanded that cli-
ent data be made available to third-party providers in order to break the
oligopoly of incumbent banks and increase competition in banking ser-
vice (European Commission 2014, 2015; Tammas-Hastings 2017).
The Effect ofMajor Technological Breakthroughs
At the time the banks focused all their senses inside to cope with the regu-
latory changes that came because of the crisis, three key technology phe-
nomena were happening. e rst is incremental and refers to the
continuing of Moore’s law that translated into lower prices and thus giv-
ing more and more people access to devices (Lundstrom 2003;
Waldrop 2016).
e second was the swift coming of age of Cloud computing with a
change in mind-frame in the business community in the sense that mov-
ing from on-premise applications to cloud ones did not bring extra risks
in terms of data security, and that adopting an on-demand model for
technology appropriation had signicant operational and balance sheet
advantages (Ambrust etal. 2010; Rimal etal. 2009).
e third phenomenon was surely disruptive and is the advent of the
rst i-Phone and from there all the forms of smartphones that came after
it. Moreover, the smartphone had the eect of enabling the development
of social networks and, thus, the side eect of the advent of the data tsu-
nami usually understated as Big Data (Barkhuus and Polichar 2011; Lee
and Shin 2018; Smolan and Erwitt 2012).
ese three phenomena had eect on what was to be the emerging
FinTech sector, and on incumbent banks. e eects on these two groups
initially developed quite independently of each other, but as will be seen
opportunities for cross-fertilization emerged in later stages (EY 2018,
p.28; Gai etal. 2018; Lee and Shin 2018).
P. Griffiths
253
Looking at the FinTech sector rst, it is found that the conjunction of
the three technological phenomena had the eect of both lowering entry
barriers for small new players to oer components of nancial services
and giving many more people access to devices and thus become poten-
tial clients for these new entrants to the nancial services market oering.
As opposed to entrepreneurial technology-based start-ups in other sec-
tors, in general these new players in the FinTech sector did not have cash
to burn at outrageous rates, so they developed two characteristics. On the
one hand they are limited in the scope of their service, and on the other
they take incremental opportunities in relatively mature markets that
oer them quick cash-ow. ese two characteristics translate into them
focusing on niche but protable parts of the incumbent banks’ business,
causing strong reaction from the banks who denounce them as avoiding
regulations to take the icing of their cake (Lacasse etal. 2016).
e conjunction of taking the more protable pieces of the banks’
business and being able to serve many more people who were then pos-
sessing digital devices, converted into great opportunities for the emerg-
ing FinTechs. But their increasing visibility and the protests of the
incumbent bankers led banking regulators to observe this new sector and
extend at least part of the regulations to them.
From the perspective of incumbent banks, these three technological
phenomena and their derivations (i.e., social networks and Big Data) had
a signicant impact on their own operations. Bank clients were demand-
ing new channels such as mobile and generating massive data ows that
oered signicant potential if properly exploited. However, they also
posed unsurmountable challenges in terms of cybersecurity, of data ana-
lytics issues and of data visualization complexities to incumbent banks
that were constrained by their legacy systems as described above. is led
the banks to start seeing FinTechs as potential enablers for their own
processes in this new era of nancial services (EY 2018; Gai etal. 2018).
Particularly on continental Europe where FinTechs were being funded
more by banks than venture capital (Lee and Shin 2018), risk manage-
ment challenges emerged quickly and were addressed by regulators which
erected barriers for FinTechs to operate as independent client-facing ser-
vice providers, but opened opportunities in the banks that were funding
them. So, in general, the antagonistic atmosphere between incumbent
11 The FinTech Industry: Crowdfunding in Context
254
banks and FinTechs that prevailed in the early post-2008 years gave way
to a more collaborative spirit between both sectors. is eect of the
technological breakthroughs is depicted graphically in Fig.11.2.
The Effect ofSocial Changes
At the time of the nancial crisis and the advent of the technological
phenomena described above, the business world was going through major
social transformations in terms of power as depicted by Naim (2013), of
the changes in mindset that came with Generation Y taking a growing
role in the workforce and of the advent of social entrepreneurs and
entrepreneurship.
e Generation Y are avid adopters of mobile banking as long as it is
easy to use and it poses no excessive risks in terms of data security. Both
these conditions were hard to meet for incumbent bankers due to their
legacy platforms, but straight forward for the FinTechs. On the other
hand, due to the capital constraints mentioned above banks put eort
into developing CRM processes and solutions that enabled them to
Cloud
Moore’s law ->
more devices
Technology
breakthrough
Falling entry
barriers
Digital -
multichannel Omni-channel
Strengthen relationship w/
valued clients
Access to more
people
Taking
more
profitable
pieces
Regulation
extending to
FinTech
Incremental
Focused scope
Quick cash flow
Low investment
Regulation
challenges
Risk management
challenges
Market
opportunities
More stringent
regulations
Fin. business
processes enabled
by mobile
w/massive data
flows
Cybersecurity issues
Data analytic issues
Data visualisation
complexity
Fintech
applications
play facilitator
role
FinTechs
Banks
i-Phone
More finance by
banks than VC
(Continent)
Fig. 11.2 The effect of major technological breakthroughs on FinTech and banks
P. Griffiths
255
strengthen their relationship with their ‘valued’ (i.e., the older more au-
ent) customers, and let go their less protable and higher risk ones, as the
Generation Y were seen to be. is opened a segment of great potential
to the FinTechs (Boonsiritomachai and Pitchayadejanant 2017; Lee and
Shin 2018).
In parallel with the above and especially in the Anglo-Saxon world,
there emerged a new breed of what were to be called social entrepreneurs
whose projects did not pursue a predominantly nancial objective and
thus were unt to be assessed in terms of the banks’ traditional credit
scoring criteria. is new breed of entrepreneurs resort to alternative
nance sources such as crowdfunding so became another market oppor-
tunity for FinTechs (Kotarba 2016).
On continental Europe it was found that while people do not trust
banks much more than in the Anglo-Saxon world, they have less incen-
tive to leave their banks and trust FinTechs even less than banks. So that
becomes a barrier for FinTechs on the continent.
e eects of social changes are depicted and summarized in Fig.11.3.
As a result of these three external forces (i.e., the Great Recession and
subsequent regulatory changes, the technology breakthroughs, and the
social changes) acting nearly simultaneously, banks lost control of the
Social changes
M, M, M
GEnY become active
Social entrepreneurs
GenY avid mobile banking
consumers as long as:
Ease of use
Lose non-profitable
clients
Security does
not pose
excessive risk
Both are
problematic for
banks
Banks develop CRM
Strengthen relationship w/
valued clients
Omni-channel
Projects w/ social
impact (esp. A-S
world)
Don’t fit bank credit
scoring
Resort to
crowdfunding
People don’t trust
banks (Continent)
Plus no incentive to
leave banks
Trust FinTechs even
less than banks
Fig. 11.3 Effects of social changes on banks and FinTech
11 The FinTech Industry: Crowdfunding in Context
256
evolution of ICT and left the door wide open for technology entrepre-
neurs to set up independently and eat away at the icing of their cake. e
next section gives an overview of the industrial organization of this
new sector.
A New Industrial Sector: TheEmerging
ofFinTech
As mentioned above the FinTech sector is quite dierent from other
technology- driven entrepreneurial or start-up sectors in the sense that it
did not access massive funding and therefore its companies had to be
focused in terms of service scope, and it did not produce great new mar-
kets but rather served extant markets that were until then poorly or
underserved by banks. While, due to the latter, initially the relationship
between traditional banks and FinTechs was notoriously antagonistic,
with the passage of time banks realized that their constraints from legacy
systems would obstruct them entering the digital era, so started to see
FinTechs as possible collaborators to help overcome those barriers. is is
particularly so in the data-oriented, security and privacy, and compliance
spaces (Duan and Da 2012; Gai etal. 2018; Roumani etal. 2016).
Growth of the FinTech sector in terms of investment is literally expo-
nential, going from $1.8 billion in 2010 to $19 billion in 2015 according
to some sources (Citi 2016 cited by Leong etal. 2017) or from $1.5 bil-
lion in 2010 to $22 billion in 2015 according to others (Shuttlewood
etal. 2016) and there are indications of steep growth in 2016 (Lee and
Shin 2018). Within this context, seven banking-service areas emerge as
the domains where FinTechs carry out their oering. ese are: alterna-
tive nance, transactions, investment markets, banking back oce,
nancial inclusion, cryptocurrencies, and business partner integration.
Alternative nance refers to services that supersede the traditional lending
function of banks. ey include personal nance, consumer nance, small
and medium enterprise lending, and prominent in this category is crowd-
funding in its four formats: reward-based, donation-based, equity-based and
loan-based. Examples of reward-based crowdfunding companies include
Kickstarter, Indiegogo, CrowdFunder, and RocketHub; of donation-based
P. Griffiths
257
are GoFundMe, GiveForward, and FirstGiving; of equity-based crowdfund-
ing companies are AngelList, Early Shares, and Crowdcube; nally, of loan-
based crowdfunding companies are Funding Circle and Cumplo (Lee and
Shin 2018; Shneor and Munim 2019 citing Ziegler etal. 2018).
Transactions refers to one of the most active areas of FinTech as are pay-
ments and remittances. ese two areas were traditionally controlled by
banks but are now giving way—in the case of payments by oering layers
of service overlaying those of traditional banks and biting away at parts of
the fees that banks charge in this space. In the case of remittances, it is
about oering channels that circumvent bank services and fees altogether
(Lee and Shin 2018).
Investment markets include services such as equity nancing, retail
investment, institutional investment, fund management and crowdfund-
ing as an opportunity for investing (Lee and Shin 2018; Shneor and
Munim 2019).
Banking back oce is about FinTechs supplying banks agile services
such as banking infrastructure, nancial security services, identity veri-
cation, compliance, business tools, nancial research, and energy e-
ciency in regard to achieving green nance. Prominent amongst these are
RegTech, a avour of FinTech aimed at helping banks comply with the
demands of regulators and assist banking supervisors in keeping track of
the banks under their watch (Gai etal. 2018; Puschmann 2017; Tammas-
Hastings 2017).
Financial inclusion means reaching out to the unbanked and oering
nancial services at an extremely low cost and ll a gap that banks have
never tackled, with well thought through and low-cost service oerings;
micro-nance is prominent amongst this category (Lacasse etal. 2016).
Cryptocurrencies emerged as an initiative to circumvent banks alto-
gether in the payments space but have not materialized as such; up to
now they have served more as investment than payment instruments, and
with doubtful outcomes at that. However, the distributed ledger technol-
ogy that underlies them could be of application in many other areas such
as trading and ‘smart contracts’ (Chen 2018; Hawlitschek etal. 2018).
Business partner integration is about FinTech oering services that
bridge across the traditional oerings of banks and of other sectors with
large business-to-consumer operations, such as telecommunications,
11 The FinTech Industry: Crowdfunding in Context
258
retailers and airlines (Kumar etal. 2006; Rosingh et al. 2001; Schmitt
and Gautam 2016).
To deliver these services FinTechs will apply one or multiple emerging
technologies such as the DANCE acronym (Data, Algorithm, Networks,
Cloud, Exponential) proposed by McAfee and Brynjolfsson (2017) and
others including mobile, distributed ledgers, bioinformatics and behav-
ioural biometrics, robots, all-in-one smartcards, and others.
It is helpful to understand the industry to present this in the form of a
double entry table and map the FinTech companies onto the cells of this
matrix (see Table11.1).
e rest of the chapters in this book will develop the contents that will
t into the columns under alternative nance and investment markets of
this framework. ose are the two service domains in the FinTech I/O
framework where crowdfunding plays a key role. In the rst case in its
funding role, and in the second in its investment opportunities role. Just
as an example of how this works, Table11.2 reproduces the contents of
one cell in this framework: e cell corresponding to Alternative Finance
as a service domain, and data analytics and the exploiting of Big Data as
a predominant enabling technology for those services.
It should be noted that in the Table11.2 there are the four kinds of
crowdfunding companies described above, but there are also other com-
panies such as Touch Bank, which is a retail bank, or Retail Capital,
which lends through partnership with banks, and do not conform to the
crowdfunding principles but nevertheless are FinTechs in the alternative
nance space.
With all this information in mind, the next section will extract some
insights into how the FinTech sector emerged and evolved, and it will
address the research question.
Discussion
Many interesting insights emerge from this analysis of the FinTech sector,
of which four will be mentioned in this section. e rst is that techno-
logical breakthroughs are all important but are only a necessary but not a
sucient condition for the advent of FinTech. Cultural-based inuences
P. Griffiths
Table 11.1 The FinTech I/O framework
Alternative
Finance:
Profitable
Finance;
Consumer
banking;
SME
lending;
Crowd-
funding
Transactions:
Payments;
Remittances
Investment
Markets:
Equity
financing;
Retail
investment
Institutes.
Investment;
Crowd-
funding
Back Office:
Banking
Infrastructure:
Fin. Security;
Business tools;
Financial
research;
Regtech
Financial
Inclusion:
Reaching
out: Fees
and
Profitability;
Micro-
finance
Cryptocur-
rencies:
Payment or
investment
instrument?
ICO.
Business
Partner
integration:
Telcos,
Retail,
Airlines
Data: Exploiting ‘Big
Data’
Algorithms: AI and
Cognitive Computing
Networks: 5G, faster
data accumulation
Cloud: Lower entry
barriers; local vs central
computation
Exponential
improvement in digital
h/w; Moore’s law effect
Mobile
Robotics
Bioinformatics &
behavioural biometrics
Distributed Ledgers
All-in-One smartcards
VR, interactive & AR
260
Table 11.2 Sample from the repository of FinTechs
Company’s
name Country Activity Notes Website
Lendingkart India Business loan
for small
business
Co-lending with
banks
www.lendingkart.
com
KredX India Business loan
for small- and
medium-sized
businesses
Investors/applied
for an
Non-Banking
Financial
Company (NBFC)
licence
www.kredx.com
Wefinance USA Lending to
particular by
funding from
particulars
www.wefinance.
com
Upstart USA Bring together
high-potential
borrowers and
investors
Calculate credit
score based on
borrower’s
background
www.upstart.com
SoFi USA P2P lending for
students
www.sofi.com
Rocket
Mortgage
USA Loans and
mortgages
Focus on
millennials
www.
rocketmortgage.
com
C2fo UK Short-term
loans
C2fo.com
Zopa UK P2P lending Founded in 2005,
one of the first
sites directly
bringing
together
borrowers and
savers, cutting
out financial
institutions from
the lending
process (NYT)
www.zopa.com
Touch bank Russia Retail banking Online credits,
loans, card,
account
management
without
paperwork,
saving
management
www.touchbank.
com
(continued)
P. Griffiths
261
have also been essential and probably the most important was the
Millennium generation taking their place in the labour and consumer
markets. e incumbent bankers disregarded them to focus on more
auent baby-boomers, particularly in asset management services. What
the banks did not anticipate is that Millennials are not individually au-
ent yet but that they are on the way to being the largest demographic
group and as a group they hold over $1 trillion in wealth (Pitchbook).2
is group is not interested in investing in active management funds and
having costly nancial advisors; they want passive management funds
that can be monitored through their mobile phone. What is even of more
impact is that the older generations learn to trust technologies that are
embraced by the Millennials, so disregarding this generation exposes
them to losing their senior relations.
A second insight is that according to some sources of the seven service
categories of FinTechs, the most highly funded (Venture Scanner 2019)
are lending to consumers and to businesses, (meaning small- and
medium-sized enterprises, SMEs). Most of this is based on the peer-to-
peer business model thus constructing links between borrowers and
investors. Some of the FinTechs in this space are co-lending with banks
and loan criteria vary across companies, but most want to avoid the clas-
sic credit scoring criterion in favour of seeking the highest potential bor-
rowers and the most interesting personal projects. Based on keeping a low
operating cost, these FinTechs can oer lower rates to borrowers and
higher returns to lenders or investors. is insight is saying that crowd-
funding is in a highly relevant position within FinTechs.
Table 11.2 (continued)
Company’s
name Country Activity Notes Website
Smart asset USA Advices
throughout
database (find
best credit,
loan solution
among all
propositions
in the market
Tax, retirement,
bank, account
comparison tool
Smartasset.com
Simple
finance
Russia Micro lending Asset-based loans,
unsecure loans
www.ewdn.com
11 The FinTech Industry: Crowdfunding in Context
262
e third insight, as anticipated, is that banks have departed from their
original antagonistic view of FinTechs to start nding potential in them
as start-up venture opportunities and, more importantly, as resources for
internal projects to make their operation more responsive, secure, com-
pliant and ecient (EY 2018; Lee and Shin 2018). Typically, they look at
FinTechs to help them reduce operational costs, provide more personal-
ized services through data, and respond to customer behaviour changes.
As a result of this, FinTechs have extended their role from retail customer
facing to the back oce or middle oce of banks. Although it is men-
tioned above that alternative lending is the most funded domain, this can
be contested based on the massive resources that are increasingly going
into security and privacy initiatives (Gai etal. (2018), citing Gartner, says
that the cybersecurity market reached $75 billion in 2015 and is pro-
jected to reach $170 billion by 2020; a signicant share of this will go to
nancial services).
Finally, it has been said that in the UK, following the 2007–2008
nancial crisis and the tarnished image with which established banks
came out of it, the regulators proactively promoted FinTechs in the hope
that challenger banks would emerge from them. And in eect this did
happen as several challenger banks have emerged (e.g., Monzo, Metro)
but their real impact on the market concentration has been marginal with
the ve big banks still rmly in control. What is even more disappointing
is that some of these challenger banks have had to have their business
models closely scrutinized by the banking supervisors under suspicion of
adopting aggressive lending practices and even manipulating of balance
sheets to avoid increased demand for fresh regulatory capital (FT 2019).
It is hoped that the implementation of open banking supported by regu-
lations such as Payment Services Directive 2 (PSD2) will enable FinTechs
and the most agile and forward-looking mainstream banks to oer more
API-enabled services and thus change the oligopolistic structure of the
banking business. Traditional banks will not go away but they will most
likely become a component of a more fragmented industry in the form of
a network of hyperspecialists (Malone etal. 2011).
is evolution of the evolving relationship of banks and FinTechs is
summarized in Fig.11.4.
P. Griffiths
263
So, returning to the research question, Why did FinTechs emerge as an
industrial sector, independent of banking? A combination of factors hap-
pening nearly simultaneously led banks to get distracted from the trans-
formations that were happening around them. Just as the banks were
looking inside their own organization to deal with the severe regulatory
changes being imposed upon them as a result of the Great Recession,
bankers did not perceive the importance that new technologies such as
the smartphone were having, nor did they understand the cultural
changes that were starting to happen with the coming of age of Gen-Y.
e eect of the smartphone and thus accessibility to devices of a mass
market of relatively low income individuals, combined with the lowering
of barriers to entry into the banking business of agile entrepreneurs that
came with the maturing of cloud computing, enabled FinTech compa-
nies to roar into activity.
What encouraged entrepreneurs to move into the multiple banking
services domains was the fact that they could detect a great number of
underserved banking customers, with a young mindset, to whom they
could approach with a narrow service oering driven by technology. at
the oering was narrow meant that investment in developing application
was relatively low; and the fact that the market was already there meant
that cash ow would start coming in quickly. e combination of these
Technological
Breakthrough
Financial Crisis
& Stringent
Regulations
Generation Y
and Social
Changes
Advent of
Open Banking
Crippled in
Legacy
Systems
Can’t Change
the World
Alone
2008
-
2009
2013
-
2019
FinTechs Emerge
Banks Lose Sight of
Technology
Banking and
Financial
Technology
Banks
FinTechs
Fig. 11.4 Evolution of the relationship between banks and FinTechs
11 The FinTech Industry: Crowdfunding in Context
264
two factors meant that the amount of working capital required was rela-
tively low.
e fact that the FinTech companies developed relatively focused ser-
vice oerings within a far reaching service industry as is banking, and
that their services are enabled by a large spectrum of technologies that
either emerged or matured in the second half of the last decade when
this sector was emerging, has led the FinTech sector to encompass a
large number of companies with quite dierent congurations. e
framework presented in Table11.1 as a double-entry table, with seven
service-oering domains in one dimension, and over ten technology cat-
egories in the other, helps to understand how the sector is organized and
where each company plays.
Conclusions
In summary this research has found that, distracted by the 2007–2008
crisis and its immediate regulatory changes, the banking industry lost
sight of the technological breakthroughs and social changes that were
happening around it. As a result, after decades of having been a driver
and leader for technological change, the industry left windows wide open
for nimble companies based on ground-breaking technologies to emerge
and ‘eat its lunch’.
It is extraordinary that in such a closely regulated industry as banking,
these FinTech entrepreneurs could have found gaps in regulations to eat
away at some of the most protable icing on the banking industry’s cake.
It is also extraordinary that in such a short period of time FinTechs could
open into so many dierent business domains, enabled by the emerging of
such an unprecedented number of dierent game-changing technologies.
e FinTechs managed this feat with little capital in comparison with
the deep pockets of the institutions they were outpacing. ey achieved
this precisely by focusing on niches where the market was already there
and waiting for a solution. So, in a way, it was more a pull by social
changes than a push by the FinTechs (this is quite dierent from other
areas of technology-based entrepreneurship where the pioneers created a
P. Griffiths
265
market). However, FinTechs should not become complacent as regula-
tion is creeping in. Approximately one-third of the FinTech business in
the Eurozone is not regulated, but going forward, FinTechs should count
on the fact that banking regulations will move further into their space.
Crowdfunding and other forms of alternative nance occupy a posi-
tion of relevance within the FinTech sector and together have the greatest
fraction of investment as compared to the other six business domains
included in the FinTech industrial organization framework. Clearly
banks have great diculty in nancing the SME segment, where its tra-
ditional credit scoring techniques are not appropriate. ere is, thus, a
promising opportunity for crowdfunding to grow in this space.
Banks have found it hard to keep up as selecting a new technology that
will drive its processes is no minor decision for a bank and in times when
so many technologies are emerging, it is hard to predict which will be the
winning ones. is is not a level eld: Clearly banks as incumbents have
far more to lose than FinTechs so the question we need to ask ourselves is
this: Do extant strategy-technology alignment models apply to banks in
times of so much disruption? Banks need to address this issue.
is review of the FinTech sector as a framework to give context to the
theme of crowdfunding that is the focus of the rest of this book, is neces-
sarily generic and bridges across the dierent markets. But clearly the
process of emerging of the FinTech sector and the evolution of its rela-
tionship to banks, as synthesized in the process described in Fig.11.4,
will change from market to market. As a result of the stage of economic
development, the regulatory environment, the quality of the technologi-
cal infrastructure, the dierent attitudes towards the nancial sector, and
many others, the FinTech sector has evolved dierently in each market.
ere is scope to do comparative analyses of this evolution between mar-
kets and thus arrive at a more granular knowledge on its evolution.
Finally, another question for future research is why, despite the advent
of the FinTech sector with all its diverse set of players, has the market
structure in terms of market control by a small number of traditional
players, remained essentially unchanged. Will open banking be the
answer to this problem?
11 The FinTech Industry: Crowdfunding in Context
266
Notes
1. OECD (2003, pp.65–66) nds that nancial intermediation organiza-
tions ‘are intensive users of information and thus have the greatest scope to
benet from ICT’.
2. https://pitchbook.com/news/articles/blend-becomes-latest-fintech-
startup-to-bank-a-mega-round-in-2019
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the permitted use, you will need to obtain permission directly from the copy-
right holder.
P. Griffiths
