Fiche Fintech

Session 1 : Introduction, basic questions about fintech

The financial system is a network of institutions etc designed to facilitate efficient allocation and
management of financial resources and risks across the economy.

Financial institutions : banks, insurance companies, pension funds, mutual and hedge funds, broker.
Financial markets : Stock markets, bond markets, forex, commodity markets, derivatives markets.

Fintech is an industry composed of companies that use new tech and innovation with available
resources in order to compete in the marketplace of traditional financial institutions and intermediaries
in the delivery of financial services.
Affect payments, lending, advisory, capital markets, crypto, …

The Swift network : Belgian cooperative company created by 239 banks to replace the outdated tax
service and counter the growing influence of Citibank of NY for global transactions.
Has created the BIC and IBAN.

It’s complicated for startup to challenges banks and the industry. End game for most startups is
failure. In many industries, startups with a high potential will fail.
Nevertheless, it is the ones that survive that become a problem for the industry.

For the moment, banks are safe. In fact, even if there is more and more users in digital banks, the most
part of those clients have also an account in a traditional bank.
Banks have all the customers, expertise, scale, lobbying power, etc, but they face challenges such as
the lack of flexibility, the risk averse attitude, the illiteracy amongst some decision makers.

Banks can : do nothing, convert current IT and strategy to adopt Fintech service, acquire FinTech
firms, Partner with FinTech companies to cover the services.
Banks and financial institutions have taken advantage of their position and purchasing power to buy
out the best contenders in their specific markets.

Financial crisis in 2008, tech maturity (AI, smartphone, blockchain, …) and GAFA + 1 have
contributed to the FinTech boom.
FinTech industry defined the rhythm and direction of innovation in the financial sector, challenged the
status quo and forced incumbents to adapt or at least react and create value.
In 2020, there was 67 unicorns valued at 252,6 billion dollars $.

Why fintech emerged ?

cost of capital, slowdown in global economic activity. Payments, insurtech dominate activity FinTech.
Session 2 : Payment systems and technologies

4 types of payment cards : loop = lieu peut utilizer

- Gift cards : closed loop
- Prepaid card : open loop with a pan or other
- Debit card : open loop with a pan
- Credit card : open loop with a pan. It is a line of credit with interest

Payment : process exchanges something of value to obtain good and services.

Money : medium of exchange + unit of account + store of value

Cardholder : customer that is the legal bearer, user of the card.

Merchant : that will accept the payment via the card
Issuer : bank that issues or provides the card linked to its clients account can also be a creit
card company
Acquirer : The merchant bank that will acquire all card transactions and credit the relevant
accounts.
E-commerce accepts payments by using Fintech software companies called Payment Service
Providers (PSP). (passerelle de paiement)
The payment gateway of a PSP :
- Collects the payment data of the client
- Securely sends it to the PSP’s servers
- The PSP checks with the bank or the entity that has the clients’ funds and responds
to the gateway
- The gateway informs the merchant and consumer of success or failure.

Embedded finance is the practice of integrating any financial services or products into an
originally non-financial environment. Ex : ride-sharing application that integrates financial
functionalities such as processing payments directly within its interface.
 Application programming interface : way for two or more computer programs or
components to communicate with each other.
Electronic money directive 1  Created the concept of digital money
Payment service directive 1  Created payments institutions (PIs)
2015 : PSD2  Creation of open banking and banking as a service.
The E-wallet :are software programs which securely store data. This data is needed to enable
the wallet owner to conduct payments online at points of sale. And they do so by use of
specific device. They rely heavily on PSPs and smartphone.
Acceleration of digital payments and decline in the use of cash.
Acceleration of e-commerce and e-trading. Enhanced digital experiences Reduce poverty
and inequality, economic growth and development, promotes small businesses and
entrepreneurship, increased innovation and productivity, increased stability and resilience.

Sustainability  Financial inclusion is a subset of sustainability. From growth to sustainable

growth. It is the main driver of growth and wealth in a stagnating global economy.
Remote working /
Distance learning

12 new tendencies
for payments :

USA : Powerful
banks and powerful
card schemes.
Healthy fintech sector.
China : Powerful banks controlled by the government but powerless in payment, mobile first
country where the Qr code is king. Big tech dominates payments.
Europe : Us card scheme oligolopoly. Innovation friendly regulatory framework. Neo and
digital banks are marginally growing.
India : Cash first society, hypercentralized payment ecosystem, digital payment are
exploding.
African continent : cash first society, telecom companies are the largest fintechs.
Many small banks, mobile payments are dominant aside cash and DCB. E-commerce works
with cash.

Session 3 : Big Data, AI and Robo-advisors

Big data

Data is a collection of discrete or continuous values that convey information, describing the
quantity, quality, fact, statistics, other basic units of meaning, that may be further interpreted
formally.

External / secondary data : info outside organization : Web (public), geo (GPS), files, 3 rd part
Internal / Primary data : generate and collect in intern : User’s data, internal doc, IoT devices
(internet of object), Logs (journals).

Big data primarily refers complex, large info.

In history we store data with Floppy disk > Compact disk > USB drive > cloud computing
90 % of the world’s data was generated in the last 2 years and doubles every 2 years

The 4 pillars of big data : Volume, variety, velocity, veracity.

How to setup a big data system ?
Identify the business problem, data sources, store, process, secure, monitor , analyze, Train

AI is the intelligence of machines or software, as opposed to the intelligence of living beings,

primarily of humans.

Machine Learning is a field of study in artificial intelligence concerned with the development
and study of statistical algorithms that can learn from data and generalize to unseen data and
thus perform tasks without explicit instruction.

Artificial neural networks (deep learning)

Computational models inspired by the neuronal organization found in the biological neural
networks in animal brains. Comprised of nodes and edges.

Several layers of neurons : Input layer, hidder layer, output layer.

Each layer is connected by channels to the previous layer.

3 main types of machine learning : Supervised (using existing data with correct labels to train
the model), unsupervised (lets the machine automatically recognize patterns in the data),
reinforcement (Uses a system of reward/penalty, the machine learns using trial and error).

Garbage In Garbage Out : Importance of high quality date at entry if you want good
performance of the algorithm.

AI uses in Finance : Algorithm trading, automation, credit scoring, data analysis, fraud
detection, loan processing, personal finances, portfolio management, predictive analytics,
risk.

Upstart : seek to promote financial inclusion via enhanced access to credit using AI
Because for example only 45% of American have access to bank quality credit and the rest is
vulnerable to low quality loans.
Lending process steps : customer acquisition, underwriting, servicing.
Information about the borrower are not known and uncertainty hamper some borrowers
access to credit. In a frictionless world you would be immediately
Alternative data help to mitigate information frictions

Session 4 : Blockchain, distributed ledgers and tokenization

In Europe, Target 2 merges all the compensation platforms of all central banks in the
eurozone. Acts like a centralization platform for all central banks. Permit to trade payment
abroad between central banks and transaction with efficacity and centralization.

Bitcoin : By Satoshi Nakamoto

Crypto-currency works with decentralized network based on blockchain technology.
Not pass by intermediary for transactions.

How work ?

A wants to pay B in bitcoin => transation coded within a block. Each block contains a link to
the previous block. All node (users) of the network receives the transaction request message,
updates its own copy of the ledger and passes on the message to the nearby nodes. = node
validate transaction and assure security of the system. To add a block to the blockchain, node
must solve cryptographic issue = minage = reward is new bitcoin.

The network checks whether a wallet has enough funds for the transaction by checking
previous incoming transactions and their amount. The consensus method validates both the
transactions and the order of transactions. To secure the transactions, computers need to find
the solution attached to the current block which is based on the information in the block.
Nodes are rewarded by the network for solving problem, this is how new bitcoins are
mined/created.
new block is added to the network every 10 minutes meaning it takes 10 minutes to validate
transactions. Then A make his transaction with B.

Traditional approach : central authority control and manage transaction, users’ needs to trust
this authority to record and manage data and transactions. Lack of transparency, more cost.
Decentralization = data distributed across a network of computers (nodes). Plural center of
control or failure. More transparency, no intermediary, automate contracts and security
because of cryptographic techniques to secure transactions and data = more resist to fraud.

Three requirements for money ? Store of value, unit of account, medium of exchange.
Question potentielles : Est-ce que le Bitcoin est une monnaie ? Si non, expliquer pourquoi.
Virtual so facilitate transaction = medium of exchange.
But : unit of account ? no really because extremely volatile. No intrinsic value.

Tokenization = process of substituting an item by a taken.

Web3.0 is a term used to describe the next iteration of the internet, one that is built on
blockchain technology and is communally controlled by its users.
APP ≠ dApps : Regular apps work on a single device or a centralized cloud. DApps don’t
rely on a centralized server, but multiple. Even bypassing the need for servers is possible by
using user’s devices as cloud for storing and computing.

Session 5 : Cryptocurrencies, decentralized finance and CBDCS

The shadow banking system = non-bank financial institutions that legally provide services
similar to traditional commercial banks but outside normal banking regulations.

DeFi : usually decentralized apps that connect to the blockchain to perform financial
transactions and give the users an interface to facilitate usage.

Layer-2 networks : secondary frameworks built atop the main blockchain (layer-1) to
enhance its scalability and transaction speed. These networks handle transactions off the main
chain, reducing the load and increasing efficiency.
Blockchain trilemma : Decentralization, scalability, security.

Stablecoins are crypto whose value is pegged or tied to that of another currency, commodity
or financial instrument.
The main price drivers in crypto market are number of users, computing power and price of
electricity.
The crypto market cannot be influenced by one single entity. It is the purest form of market
since there is no regulation from government or central authority.

The main market manipulation methods :

- Pump and Dump / Rampling : Inflating and deflating a cryptocurrency, often using
social media and influencers as a tool to coordinate buying and selling, thus affecting
the price
- Spoofing : Placing large orders for cryptos with no intentions of fulfilling them, in
order to manipulate the price
- Front running : Because orders are public on the blockchain before being validated,
traders can infer prices before the transactions occur and make a sort of arbitrage
- Quote stuffing : Placing and cancelling large amounts of orders, to overwhelm other
traders with data. Traders take advantage of the information lag others experience
trying to distinguish real from fake
- Pinging : Placing orders at regular intervals in order to test the market, thus revealing
large undisclosed orders waiting to be fulfilled and market liquidity
 - Wash trading : Traders buying and selling simultaneously in order to drive up the
traded volume to stimulate interest in a given cryptocurrency

Main attack methods:

- Wallet Hacking : Hacking the device that stores the private key of a wallet. Usually
done via phishing, but can be done physically (aka stealing the hard drive containing
the key)
- 51% attacks : Taking control of more than 50% of the network’s computing power
to introduce fraudulent transactions on the ledger and validate them. In a far future,
quantum computing could potentially be a threat due to the computing power.
- Reetrancy / Double spending : Withdrawing the funds multiple times in a wallet or a
contract before the chain has the time to update the balance, allowing multiple
withdrawing or double spending
- Flash loans attacks : Some platforms allow for very short term loans without
collateral. Those can be used to manipulate the price of some crypto assets on other
chains at the expense of users or the platform.
- Sybil attack : One entity creates a large number of validator accounts on the
blockchain, so that they can get increased influence. This does not work on proof of
work.
- Eclipse attack : Surrounding a node with a network of cooperating malicious nodes,
in order to feed it wrong information and hide the true transactions of a blockchain

Governments are slowly adapting

EU Cryptocurrencies are legal in the EU, but different policies. Taxation varies from 0% to
48% depending on states. Algorithmic stablecoins are banned and asset backed stable coins
require a 1:1 liquid reserve or more.
USA The role of crypto-asset regulation in the US falls onto the Securities and Exchange
Commission (SEC) as well as the Commodities Future Trading Commission (CFTC). In
2022 more regulation power were given to those government.
January 2024 : the first Bitcoin Spot ETF being traded in. Easier access for investor to
cryptocurrency. ETF Bitcoin enable investor to buy and sell part of the funds which
own bitcoin physically.

Other: China: Banned crypto enterprises in 2021. Then also banned mining. In the end,
banned all cryptocurrencies outright the same year.

Central Bank Digital Currencies, CBDCs

Digital fiat currency issued by a central bank rather than a commercial bank.
3 types : Retail (CB issues the currency directly to consumers for everyday payments),
Intermediated (retail CBDCs but financial institutions issue it on behalf of the central bank),
Wholesale (Similar to CB reserves, issued to financial institutions).
= modernisation of payment system, more efficacity, less cost of data treatment, respond to
demand of customers. BUT question of protection private data, security and impact on
traditional system.

ICO = mechanism to raise funds use by project based on blockchain in order to collect duns
by emission of “jeton” via public offer.
Investors buy numerical tokens that are emitted in a blockchain and have a participation on
the project. They buy tokens and receive cryptocurrency.
3 challenges for ICOs
1. Increased regulation from authorities who now consider it a security
2. Because of lack of regulation, lots of scams and fraud. Low standards = high risk
3. ICOs are subject to the volatility of underlying crypto.

If ICOs worked as intended : advantage compared to traditional IPO :

- Lower Costs IPOs are expensive : regulatory fees, administrative
- Speed and efficiency IPOs can take month or even years to complete.
- Global Reach IPOs are limited to the exchange / ICO Mondial because internet.
- Greater accessibility IPOs often have investment minimum requirements or are
exclusive to institutions ICOs generally don’t have a minimum open to more I.
- Less regulation
- More than just equity IPOs are only offering shares and voting rights ICOs can have a
wide variety of perks, like shares, usage rights, other social perks.

What are the factors that will likely drive the adoption of FinTech services in
the future?

Context : more tech progress in artificial intelligence, blockchain, IoT(internet of object).

So Fintech respond to need and are attractive for customers and suppliers in the market.
Customers reach more easier, quick and transparent solutions.
Financial inclusion : Fintech good for equality, sustainability : more solutions for large
people, accessibility etc. Decentralization : less cost and frictions.
Legal aspect : adoption by countries bitcoin etc
Education
Competition : more diversification, innovation etc.

2) FinTech companies are fast growing and attract a large investment each year
in their development. At the same time, traditional financial institutions feel
threatened on their part, because with the increasing number of FinTech
companies, competition in the financial services market is growing too. May
we consider the current banks’ business models at risk?

Traditional banks invest in technology to enhance their digital capabilities and improve
customer experience : banking apps, IA etc. Many traditional banks are forming partnerships
and collaborations with Fintech companies. Role of advisory, human contact still important.
Most of customers have account in Fintech still have account in bank. The regulatory
framework of traditional banks = barrier of entry for Fintech startups ensuring trust for
customers.

The regulatory landscape will significantly influence the future trajectory of FinTech
companies. By adopting supportive policies, governments can foster a conducive
environment for innovation, promote competition, protect consumers, and drive
inclusive growth in the FinTech ecosystem. Collaboration between regulators,
industry stakeholders, and policymakers is essential to strike the right balance
between innovation and regulation in the evolving FinTech landscape.