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4. The development of new technologies applied to the financial sector

this chapter aims to present the definition of some cornerstone concepts for this thesis such as FinTech, E-payment, m-payment systems, and Peer-to-Peer lending.

Published onDec 17, 2018
4. The development of new technologies applied to the financial sector

4. The development of new technologies applied to the financial sector

Aspiring to understand better the digital environment that is emerging in China and in Brazil and changing these economies, it is necessary to define some essential concepts first.

Only after this, it is possible to go deeper in the analysis of the economic impact associated with the emergence and establishment of FinTech companies in these countries.

In this context, this chapter aims to present the definition of some cornerstone concepts for this thesis such as FinTech, E-payment, m-payment systems, and Peerto- Peer lending. Additionally, it also brings insights about the usage of these technologies and some of the economic advantages and risks associated with it.

4.1 The emergence of FinTechs

The spread of smartphones and cell phones, the advances in Internet, and the growth of wireless connection services around the world have created the perfect scenario for the emergence of mobile financial services.1 Companies like Google, Apple, Tencent (腾讯控股有限公司), Alibaba Group Holding Limited (阿里巴巴集 团控股有限公司)2, UOL3, and Mercado Livre, for instance, have invested in the development of digital services and development of new technologies that allow their customers to simplify their daily financial transactions and banking related activities. 4 Paying bills, buying groceries, transferring money to other people, managing wealth and investment funds, among other activities, became more practical, easier, faster, more convenient and less expensive due to the expansion of new technologies applied to the financial arena.

But what does Digital Finance mean and what are the new technologies impacting the financial field? According to Gomber, Koch and Siering (2017), Digital Finance refers to the digitalization of the financial industry. In other words, it refers to the introduction of electronic products and services in the financial sector, such as mobile payments systems, electronic currencies and other financial and banking apps.5

In this context, the term “FinTechs” is coined. FinTechs are companies – both start-ups and already established companies – whose business models are innovative and whose products/services are mainly focused on the financial and economic areas. This term can also be defined as “companies that apply technological innovations to increase efficiency and/or expand access to the finance industry.”6

The birth of FinTechs is deeply connected with the 2008 financial Crisis. Indeed, this period created the perfect scenario for start-ups and other companies to propose new digital solutions for financial problems.7 In a moment of uncertainty and pessimism, FinTechs brought new ideas that presented themselves as an alternative way to provide more trust, transparency, convenience, accessibility, and inclusiveness to the economy.8

FinTechs, thus, could be summed up in one sentence: “Economic Power to the People”. By that, it is argued that FinTechs have been successful in providing more autonomy to individuals to control over their own money without relying in a banking system that had failed in prevent and contain the recession emerged in 2008. Moreover, FinTechs companies have also presented a non-banking way to deal with investments and wealth management. They widened the access to investments opportunities, desintermediated the access to credit, allowed Peer-to-Peer lending, reduced transaction costs and middlemen fees, and provided easy-to-use financial services.9

Furthermore, some would claim that FinTechs are also providing greater inclusion of million of people in the real economy by creating a whole new financial infrastructure. This infrastructure would be placing digital financial services in the hands of consumers who previously could not be reached by the traditional banking system. However, with the consolidation of new financial technologies, it is expected that trillions of US dollars will be generated by the inclusion of million of new customers into the formal economy – previously either unbanked or under-banked individuals.

4.2 Online Payment Systems and Peer-to-Peer online lending platforms

Some of the most impactful technologies applied by FinTechs so far are related to cashless payments methods – E-payment and M-payment systems. These cashless payment methods could be defined as an electronic “specialized subset of commercial transactions (…) [that] promote commerce by transferring value quickly and effectively and by imposing a minimum of additional costs or risks on the transacting parties.” 10 As any other payment system, these new platforms might be

“(…) efficient, pervasive, and trustworthy in order to minimize the costs that the payment function adds. Any new electronic payment system technologies must not only offer innovative features, they must continue to meet these basic requirements.”11

Within this cashless payment context, there are two popular payment technologies that developed during the last decade: Electronic Payment Systems and Mobile payment system (MPS).12

Electronic Payment System, or just E-payment, is a way of purchasing any goods or services electronically with using neither cash nor check. In other words, is a system that allows its users to buy and sell products by digital means instead of doing it either personally or by mailing money. Electronic Payments can also be described as a process that covers “the transfer of a certain amount of money from the payer to the payee through location-independent payment mechanism”. 13 The demand for these kind of payment has emerged and has been catalyzed mainly by the rise of online shops and e-commerce’s expansion.

In addition to that, there is a sub-category of e-Payment that is revolutionizing the way people purchase goods and manage their savings and bank accounts in countries like Kenya, China and India. The Mobile-Payment Systems (MPS) is a way of paying or transferring money performed from or via the use of portable electronic devices like cell phones or smartphones. According to Guo and Bouwman (2016), “M-payment can be defined as [a way of] paying for goods, services and invoices using a mobile device via wireless or other communication technologies.”14

Another technological innovation that is transforming the financial sector is Online Peer-to-Peer (P2P) lending systems. Event though “Offline” Peer-to-Peer lending itself is not new15, its online form is advancing in the the investment’s world by providing non-traditional credit origination channels, creating big data about borrowers’ creditworthiness, and improving the efficiency of loans.16

Less than one decade ago, the Online P2P lending platforms emerged as relatively simple systems whose aim was to facilitate loans between individuals and between individual lenders and Small and Medium-Sized Enterprises (SMEs) through online platforms. Putting another way: online P2P lending brought the possibility of cutting out banks17 from the traditional lending process by offering alternative sources of loans by connecting potential lenders with potential borrowers and reducing the intermediaries in the lending process.18

Indeed, online P2P lending platforms are not only reducing the number of intermediaries involved in the lending process, but are also speeding the whole process up, lowering transaction costs, and raising the liquidity of assets in the financial system. As consequence, these P2P technologies are expanding the access to capital to million of consumers and SMEs’ owners who have been historically excluded from the formal lending process embedded in the traditional banking system. These platforms allow that individuals take out small loans and “the risk of default is theoretically spread out and decentralized” in the process of lending.19

Go to next: 5. The emergence of FinTechs in China

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