Disrupting Finance FinTech and Strategy in the 21st Century

This second volume in Palgrave Studies in Digital Business & Enabling
Technologies further contributes to multidisciplinary research on digital
business and enabling technologies in Europe by exploring the evolving
domain of the next generation of financial technologies or “FinTech”.
The concept of evolution is important in this context as FinTech is not
a new concept. Since the 1950s, each decade has witnessed a new tech
nology that has transformed how financial services operate and how
we interact with them. Credit card processing, ATMs, electronic stock
trading, e-commerce are just some of the myriad of technologies that
we take for granted. Today, we are seeing the advent of a new genera
tion of FinTech built on near-ubiquitous access to the Internet through
mobile and cloud computing, machine learning, artificial intelligence
and blockchain. These technologies are resulting in significant disruptive
changes to the financial services sector, not least opening up the sector to
increased competition and empowering customers in ways unthinkable
just a decade ago.
While practice might view FinTech as a co-evolution and convergence
of finance and technology, one could be mistaken in thinking that for
finance researchers it is business as usual. Finance research is concerned
with risk and return framed by established theories such as asset pricing
theory, modern portfolio theory and the efficient market hypothesis,
albeit with emerging challenges from the set of theories underpinning
behavioural finance. Yet, it is clear that FinTech is changing, as Drucker
(1994) might put it, the ‘theory of the business’ or ‘mental models’

upon which the financial sector is based. In the same way that established
financial services firms, banks, and insurance companies are being forced
to rethink their role and activities in the market, finance researchers
need to reflect on the impact of FinTech innovation on finance research.
What are the implications of FinTech innovation for finance literatures?
As FinTech represents greater convergence of finance and technology,
is greater collaboration between the finance and technology research
domains required to ensure greater relevance and market impact? Does
FinTech represent a new discipline in itself? While this book does not
seek to address these questions, it has value to university educators and
researchers, industry practitioners, and policymakers as an entrée into the
wider FinTech ecosystem and some of the extant, although early stage,
research being undertaken in this space.
Addressing the call for inter-disciplinarity, contributors have been
drawn from an international group of scholars in finance, law, computer
science and management. “Disrupting Finance” presents a variety of per
spectives on how technologies are making us rethink lending, regulation
and compliance, risk management, insurance, stock trading, payments,
and money in the fourth industrial age. FinTech is changing how individ
uals, projects and businesses access finance and from whom. Chapters 1
and 2 discuss crowdfunding and online peer-to-peer (P2P) lending, a
form of crowdfunding that bypasses conventional intermediaries, pro
cesses and requirements to connect borrowers and lenders. Information
asymmetry is a key issue in lending that can result in moral hazard or
adverse selection. Chapter 2 explores this issue specifically discussing
some of the mechanisms being used by online P2P lending platforms to
reduce this risk. The theme of risk management is continued in Chapter 3
where the role of machine learning and artificial intelligence is discussed
in the context of the assessment and management of credit risk, market
risk, operational risk, and compliance.
Chapter 4 presents a thematic analysis of extant literature on the
somewhat controversial area of high-frequency trading and discusses key
themes in extant literature including the impact of high frequency trad
ing (HFT) on market liquidity, trading strategies and speed, implications
for market structure changes, and the relationship between the “script
ability” of corporate disclosure and short-term information advantage.
Asymmetric information and the use of new data science techniques is
a common theme in many of the chapters. Chapter 5 deals with emerg
ing uses cases in InsurTech and specifically how large and continuous

datasets are transforming general insurance markets and their business
processes, modifying policyholder behaviour, and streamlining claims
management. The authors illustrate how machine learning, artificial
intelligence and blockchain are creating and helping to capture new
value in the insurance market.
A common theme in each segment of financial service sector are the
barriers to entry created by regulation. Indeed, the lending, insurance,
and stock markets are all characterised by regulatory requirements that
are complex to understand and costly to implement for incumbents and
new entrants alike. With over US$100 billion spent by banks on regu
latory compliance in 2016 alone, RegTech solutions represents a sig
nificant market opportunity in itself by (a) identifying the impacts of
regulatory provisions on business models, products and services, func
tional activities, policies, operational procedures and controls; (b) ena
bling compliant business systems and data; (c) helping control and
manage regulatory, financial and non-financial risks; and (d) perform
ing regulatory compliance reporting. Chapter 6 explores the drivers of
RegTech adoption and the risks and challenges inherent in this adoption.
It presents a timely focus on the lack of standardisation and interopera
bility in RegTech data and systems and the need for open standards and
semantic technologies in order to avoid a digital Tower of Babel in the
inancial sector.
Chapters 7 and 8 focus on the future of payment and money. The
European Union required its member states to implement the new
Payment Service Directive (PSDII) in January 2018. This directive has
the potential to drastically reimagine the relationships between con
sumers and their banks and the structure of the banking and payments
sector. Driven by the Internet and mobile banking and the need for
more efficient and effective support for cross-border payment services,
PSDII seeks to level the competitive playing field by reducing the var
ious exemptions from payment services regulation and to permit two
new innovative arrangements: “account information service providers”
and “payment initiation service providers”. Chapter 7 presents the back
ground and detail of PSDII and the implications for banks, credit card
issuers, merchant acquirers and new FinTech operations, not least tech
nology firms such as Apple, Google, PayPal etc. While Chapter 7 reima
gines the role of banks in the payment sector, Chapter 8 discusses the
reconceptualisation of money in the digital age. This chapter explores
the characteristics of money and the affordances of digital money which
viii
PREFACE
make it something very different—frictionless, anonymous, transparent,
non-denominated and dataful. Furthermore, the authors discuss the con
cept of money as opportunities for social encounters in transactions with
very real social impacts.
The final two chapters focus on the related topic of cryptocurrencies
and blockchain. Following on from this discussion on the future of pay
ment and money, Chapter 9 focuses on cryptocurrencies as two distinct

lavours of digital token—native coins and crypto tokens. While native
coins are well known as a new form of digital money such as bitcoin,
crypto tokens are less well known. They represent a form of “digital
vouchers” that allow the token holders to get access to almost any type
of service and assets from monetary rewards, or commodities to loyalty
points to even other cryptocurrencies. As well as discussing the differ
ences between these token based models, Chapter 8 explores the emer
gent start-up token funding model of Initial Coin Offerings (ICOs),
which allows entrepreneurs to bypass the traditional capital market by
issuing crypto tokens out of thin air. Blockchain, or distributed ledger
technology, is one of the most hyped technologies in recent years and
no FinTech book would be complete without a wider discussion on it.
Chapter 10 discusses the current challenges and opportunities that
blockchain poses for financial services firms and its potential impact on
four main financial activities: (1) payments and remittance, (2) credit and
lending, (3) trading and settlement, and (4) compliance.
The ten chapters in “Disrupting Finance” are by no means exhaustive
nor were they intended to be. Rather the collection of topics in this book
were collated to be a primer and signpost for FinTech. The financial ser
vices sector is a dataful one—it comprises data and generates data. It is
unsurprising therefore that technologies that enable the exchange, vali
dation, and analysis of this data faster and in more complex ways domi
nate the FinTech discourse today. Blockchain, deep learning and artificial
intelligence are not only challenging how we conceive financial services
but introduce new avenues for research not just in finance and computer
science but in ethics, sociology and law, to name but a few.
Dublin, Ireland
Malibu, USA
Dublin, Ireland
Dublin, Ireland
Theo Lynn
John G. Mooney
Pierangelo Rosati
Mark Cummins