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Open Banking, the Business Model for the bank of the future: Illimity bank case study

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Università degli Studi di Modena e Reggio Emilia

Dipartimento di Studi Linguistici e Culturali

Corso di Laurea Magistrale in

Languages for communication in international enterprises and organizations (LACOM)

Open Banking, the Business Model for the bank of the future: Illimity bank case study

Prova finale di:

Matilde Fioravanti Relatore:

Alessia Pedrazzoli

Correlatore

Bernardo Balboni

Anno Accademico 2018-2019

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ABSTRACT

In meno di 30 anni, la digitalizzazione ha pervaso il mondo che ci circonda modificando radicalmente i ritmi di vita. La comparsa delle fintech, ovvero dell’unione di finanza e tecnologia, sul mercato finanziario sta mettendo in subbuglio il settore bancario proponendo ai clienti delle soluzioni finanziarie vantaggiose in termini di costi. La maggior parte dei servizi sono stati resi automatizzati grazie al supporto dell’intelligenza artificiale che permette di far risparmiare importanti risorse agli istituti finanziari. L’utilizzo degli strumenti digitali all’interno del settore bancario è un processo in corso da diversi decenni ma la regolamentazione a favore della condivisione dei dati (PSD2) e la pressione dei nuovi entranti, hanno velocizzato il suo sviluppo. L’obiettivo di questo elaborato consiste nella spiegazione delle principali cause che hanno portato ad una rivoluzione del modello bancario e in che modo una maggiore digitalizzazione potrà portare ad una situazione vantaggiosa per i clienti e gli istituti finanziari. I primi ne vedranno solo gli effetti ma è importante capire le cause dei fenomeni per avere piena consapevolezza del mondo in cui viviamo. Verranno esposti i principali servizi finanziari proposti dalle fintech e le previsioni sul modo in cui la piazza finanziaria italiana e globale sarà influenzata dalle sfide future. L’approccio metodologico è fondato su tre criteri di ricerca differenti: il primo è l’analisi delle fonti sia italiane che internazionali di tipo giornalistico, scientifico e divulgativo; il secondo consiste in un case study relativo al nuovo modello di banca specializzata interamente digitale, nonché orgoglio italiano, ovvero illimity; il terzo riguarda l’analisi di due interviste condotte presso istituti di pertinenza, quali illimity e Accenture. Secondo molti esperti, questo processo di disintermediazione bancaria sta mettendo alla prova i modelli di business delle banche e il concetto di “banca universale” potrebbe cadere per via della crescente concorrenza che porterà il settore verso la ricerca di una maggiore specializzazione. Infatti, i risultati della mia tesi suggeriscono un ribaltamento della prospettiva e della struttura stessa della banca tradizionale, che si troverà a competere con i big tech in un mercato dei servizi finanziari saturo di nuove fintech con le quali sarà costretta a collaborare per evitare il fallimento.

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In less than 30 years, the digitalization has pervaded the world around us, radically modifying today’s lifestyle. The advent of fintech, that is the union between finance and technology, on the financial market is threatening the banking sector, providing to its customer very cost-saving financial solutions. Most services have been automatized through the support of Artificial Intelligence, which enables financial institution to save huge resources. The use of digital tools within the banking sector has been an ongoing process for several decades, but data-sharing regulations (PSD2) and pressure from new entrants have accelerated its development. The aim of this thesis is to explain the main causes that have led to a revolution in the banking model and to which extent a greater digitization can lead to a win-win situation for customers and financial institutions. Users will only see the effects of this phenomenon but it is important to understand also the causes of it, in order to have full awareness of the world in which we live. In the paper, the main financial services proposed by fintech and the forecasts on how the Italian and global financial system will be influenced by future challenges will be analyzed. The methodological approach is based on three different research criteria: the first is the analysis of both Italian and international journalistic, scientific and popular sources; the second consists of a case study on the new model of a totally digital specialized Italian bank named illimity; the third concerns the analysis of two interviews with relevant institutes, such as illimity and Accenture. According to many experts, this process of banking disintermediation is putting to the test the business models of the banks. Moreover, the concept of "universal bank" could fall due to the increasing competition that will lead the sector towards the specialization. In fact, the results of my research suggest a reversal of the perspective, as well as the structure, of traditional banks, which will find themselves competing with big techs, in a financial services market full of new fintech. It will be necessary for banks to cooperate with the latter, in order to avoid disruption.

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In weniger als 30 Jahren hat die Digitalisierung die Welt um uns herum durchdrungen und den heutigen Lebensstil radikal verändert. Das Aufkommen der Fintech, (die Union zwischen Finanzen und Technologie), auf dem Finanzmarkt bedroht den Bankensektor, indem sie den Kunden kostengünstige finanzielle Lösungen anbietet. Die meisten Dienstleistungen wurden durch die Unterstützung der Künstlichen Intelligenz automatisiert, wodurch den Finanzinstituten erhebliche Ressourcen eingespart werden können. Die Nutzung digitaler Instrumente im Bankensektor ist ein Prozess, der seit mehreren Jahrzehnten passiert, aber die Regelung für die gemeinsame Nutzung von Daten (PSD2) und der Druck neuer Marktteilnehmer haben die Entwicklung beschleunigt. Ziel dieses Berichts ist es, die wichtigsten Ursachen für eine Revolution des Bankenmodells zu erklären und zu klären, wie eine verstärkte Digitalisierung zu einer „Win-Win-Situation“ für Kunden und Finanzinstitute führen kann. Die ersten werden nur die Auswirkungen sehen, aber es ist wichtig, die Ursachen dieser Phänomene zu verstehen, um sich der Welt, in der wir leben, voll bewusst zu werden.

Die wichtigsten Finanzdienstleistungen, die von Fintech angeboten werden, werden vorgestellt, genauso wie die Prognosen über wie der italienische und der globale Finanzplatz von den künftigen Herausforderungen beeinflusst werden wird. Der methodische Ansatz beruht auf drei verschiedenen Forschungskriterien: erstens die Analyse sowohl von italienischen als auch von internationalen journalistischen, wissenschaftlichen und verbrecherischen Quellen; das zweite Kriterium besteht aus einer Fallstudie für das neue rein digitale Modell der Bank, (sowie aus italienischem Stolz), heißt illimity; und das dritte betrifft die Analyse von zwei Interviews, die in Banken wie illimity und Accenture geführt werden. Viele Experten sind der Ansicht, dass dieser Prozess der Bankenauflösung die Geschäftsmodelle der Banken auf die Probe stellt. Darüber hinaus könnte das Konzept der

"Universalbank" aufgrund des zunehmenden Wettbewerbs fallen, weil den Sektor zur Spezialisierung führen wird. Tatsächlich deuten die Ergebnisse meiner These darauf hin, dass die Perspektive und die Struktur der traditionellen Bank wechseln werden, die sich in einem Finanzdienstleistungsmarkt voller neuer Fintech und Big Tech. Die Banken sollten mit den Fintech zusammenarbeiten, um ein Scheitern zu vermeiden.

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TABLE OF CONTENTS

INTRODUCTION ... 1

CHAPTER I ... 3

THE FINTECH ... 3

1.1 INTRODUCTION TO FINTECH ... 3

1.2 THE PRE-FINTECH ERA ... 6

1.2.1 Pre-fintech transition: from pre-fintech to fintech ... 7

1.3 THE FINTECH ECOSYSTEM ... 8

1.3.1 Elements of the fintech ecosystem ... 9

1.4 THE FINTECH BUSINESS MODEL... 12

1.4.1 Payment business model ... 13

1.4.2 Wealth management business model ... 13

1.4.3 Crowdfunding business model ... 14

1.4.4 Lending business model ... 14

1.4.5 Capital market business model ... 15

1.4.6 Insurance services business model ... 15

1.5 WHAT FAVORED THE EMERGENCE OF FINTECH ... 16

1.5.1 Fintech contributing elements ... 17

1.5.2 Fintech areas of application ... 17

1.6 MAIN FINTECH FEATURES... 18

1.6.1 Mobile Banking... 19

1.6.2 Blockchain ... 20

1.6.3 Internet of Things (IoT) ... 22

1.6.4 Big Data ... 23

1.6.5 Artificial Intelligence (AI) ... 24

1.6.6 Regulatory Technology (RegTech) ... 25

1.6.7 Biometrics ... 26

1.6.8 Open Banking Application Program Interfaces (APIs) ... 27

1.7 CHALLENGES FACING THE FINTECH SECTOR ... 29

CHAPTER 2 ... 31

THE OPEN BANKING ... 31

2.1 INTRODUCTION TO OPEN BANKING ... 31

2.2 THE DIGITAL ERA CLAIMS THE DIGITAL BANK ... 33

2.2.1 Changing the banking culture ... 34

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2.2.2 The customer experience ... 35

2.2.3 The omnichannel experience ... 36

2.2.4 Uncertain future for the bank’s branch ... 37

2.2.5 Social banking ... 37

2.3 OPEN API ... 38

2.4 PSD2 ... 39

2.4.1 PSD2 in the clients’ perception ... 42

2.4.2 New digital payments: Mobile wallet ... 43

2.4.3 The impact of PSD2 on financial institutions ... 46

2.5 THE ISSUE OF CYBERSECURITY ... 47

2.6 OPEN BANKING ... 48

2.6.1 The paradigm of open banking in the PSD2 framework ... 49

2.6.2 How banks can drive maximum value and benefits from Open banking ... 50

2.7 THE ITALIAN SCENARIO ... 52

2.7.1 The evolution of the Italian banking system ... 53

2.7.2 Light banking and Mobile banking in Italy ... 55

2.7.3 Foreign banks fill the Italian domestic gap ... 58

CHAPTER 3 ... 61

NEOBANKING: THE ILLIMITY BANK CASE STUDY ... 61

3.1 NEOBANKING & CHALLENGER BANKING ... 61

3.1.1 The backlash ... 65

3.1.2 Becoming the norm ... 66

3.2 ILLIMITY BANK CASE STUDY ... 67

3.2.1 SMEs (Small- and Medium-sized Enterprises) ... 70

3.2.2 Distressed credits ... 71

3.2.3 Online banking ... 72

3.2.1 Illimity timeline... 75

3.2.2 The first year of illimity ... 77

3.3 INTERVIEWS ... 79

3.3.1 Interview at illimity ... 79

3.3.2 Interview at Accenture ... 81

3.3.3 Key concepts ... 84

CHAPTER 4 ... 85

THE FUTURE OF BANKING ... 85

4.1 INTRODUCTION TO THE FUTURE OF BANKING ... 85

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4.2 THE COMPONENTS OF THE FUTURE BANKING SYSTEM ... 85

4.2.1 Platforms will be dominated by big techs and fintech ... 86

4.2.1.1 Fintegration ... 87

4.2.1.2 Fintech predictions ... 88

4.2.1.3 Platformification ... 89

4.2.2 Control over the product ... 90

4.2.3 New utility wave in the process sector ... 90

4.3 FOUR PILLARS OF THE FUTURE DIGITAL-FIRST BANK ... 91

4.4 FUTURE CUSTOMER EXPERIENCE... 92

4.4.1 The Invisible Bank ... 92

4.4.2 Conversational Commerce ... 93

4.4.3 Share of moment ... 95

4.5 THE REGULATORY CONTEXT ... 95

4.6 THE FUTURE BANKING ECOSYSTEM ... 96

4.6.1 The traditional banking model will disappear ... 97

4.6.2 The future bank is specialized, data-driven and accelerated by fintech ... 98

4.6.3 The fear of big techs ... 98

4.6.4 The extent to which big techs will prevail ... 99

4.6.5 The impact on skills and formation ... 99

4.7 OPPORTUNITIES AND THREATS FOR THE BANKING SYSTEM ... 100

CONCLUSIONS ... 103

REFERENCES... 106

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LIST OF FIGURES

Figure 1. The five elements of the fintech ecosystem Figure 2. Fintech financial services

Figure 3. How does a blockchain work Figure 4. Biometrics safeguard

Figure 5. The relationship between the bank and other players after the opening of API Figure 6. Before and After PSD2

Figure 7, The five Open banking elements of success

Figure 8. The neo- and challenger bank market huge potential growth worldwide Figure 9. Unique retail bank

Figure 10. Open banking by design: more partnerships on the cards Figure 11. From scratch to a fully digital bank in just 12 months

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INTRODUCTION

Our age is characterized by the magnitude and speed of the changes that have occurred. Digital banking is the definition under which we classify all the technologies, evolutionary processes, contemporary cause and effects of the technological evolution applied to the banking sector. The fintech phenomenon, which is the union of finance and technology, has revolutionized and innovated the banking and financial sector, changing the intermediary role played by banks and institutions, introducing new products, new services and new players on the market and calling into question the whole structure of the banking system. In particular, I wanted to understand the main aspects of this innovation, the most important initiatives taken in the financial and banking sectors (such as payments, investments and credit) and the possible future scenarios involving banks and financial institutions. This thesis will analyze the economic aspects of this transformation, especially the enabling technologies and the impact they had on banks and customers. The technologic progress has imposed a review of the old credit systems, unable to face an always riskier, volatile and competitive market. Add to the entrance of new players, such as fintech and big techs (GAFA – Google, Amazon, Facebook and Apple), an increasingly stringent regulation of credit policies, together with the evolution of demand behavior, has completely turned the tables. The European directive PSD2 has opened customers’ financial data to the new players, enabling a ruthless competition among financial services’ providers and banks, creating the open banking model. At the base of this progressive and constant process of transformation there is a more evolved and attentive customer, educated and able to influence the dynamics of the market. Therefore, the bank will have to adapt to the needs of the customers through new business models, alternative channels and more specific policies for determined targets. Traditional banks will find themselves competing against big international companies specialized in digital services, and small fintech startups, delivering innovative financial services. The aim of my research is to define the business model of the bank operating in the future scenario contended by a plenty of new digital players. Moreover, I have analyzed the impacts that digital transformation, the entry of new players in technology and the continuous technological innovations in the financial sector are having and will continue to have on traditional banks, as well as on specific fields, such as payments (shifting from physical to digital payments), financial advisory (supplied by robo-advisors), bank branches (from physical place to remote service).

The thesis is divided into four chapters and a conclusive semi-chapter in which I point out my opinion on the business model for the bank of the future, in light of the study that I have conducted.

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In the first chapter I tried to give a definition of fintech, starting from the historical steps that have brought to the spread of these technologies, understanding the current ecosystem and pointing out the eight fintech features. I continued with a list of fintech business models in order to have a clear idea of the new players’ functioning.

In the second chapter there is a detailed analysis of the open banking phenomenon. The chapter opens with a clear picture of how the digitalization has changed the banking culture. However, open banking is an effect of the bigger change in customers’ lifestyle and demand: the banking sector has to support the global digitalization in order to allow online international transactions, as quickly as possible. The European Payment Service Directive 2 (PSD2) is another key factor of the digitalization process, since it regulates the sharing of the customers’ financial data held by the banks, to the other providers of financial services. Finally, few Italian and foreign examples of open banking working systems will be analyzed.

The third chapter will focus on the case study. I have analyzed a new paradigm bank called illimity, which is one the best Italian examples of success in a time where many incumbents and players are failing. I believe that this totally digital bank is a clear example of the business model of the future and I have explicated it through an accurate description of its structure and functioning, enhanced by the opinion of experts working in the financial sector that I have interviewed personally.

The fourth and last chapter is concerned with the future perspectives of the banking system. I try to provide the reader with a complete vision of the whole phenomenon, attempting to identify and describe the possible scenarios that will occur in the future. A too accurate forecasting is difficult to make, as current times lead to disruptive changes that make considerations for the future uncertain.

With regard to the methodology of the analysis, three different research methods were employed. The former is the analysis of reports, academic papers, newspaper articles, publications of financial institutions and statements of national and international organizations, having the means and tools to carry out studies and research on companies operating in the banking and financial sector, understanding their movements and hypothesizing their possible future reactions. The second method consists of the evaluation of a case study on the business model of the new totally digital specialized bank: illimity. The final method involves two interviews that I carried out personally with four managers working both for illimity and Accenture, in order to discuss their experiences and testimonies about the effects of open banking as well as the future scenario that the financial services sector is going through.

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CHAPTER I

THE FINTECH

1.1 INTRODUCTION TO FINTECH

In less than 30 years, the digitalization has pervaded the world around us: from the fast diffusion of the mobile phone and the invention of the Internet, to the recent advent of social media, big data, data analytics, and so on. The digital revolution, after the diffusion on large scale of the digital technologies, has radically modified the paradigms of communication, changing the ways of interaction among people, companies and clients. Some of the most game-changing technological innovations that have transformed the way we live, have become part of our everyday life: think about the I-Phone, Air B&B, Uber, WhatsApp, WeChat, just to name a few. When we talk about fintech, we refer to the innovative use of technology in the design and delivery of financial services. It is a new industry, integrating finance with technology, rather than finance versus technology. According to Leong and Sung (2018) fintech can also be considered as “any innovative idea that improves financial service processes by proposing technology solutions according to different business situations, while the ideas could also lead to new business models or even new businesses". Fintechs are financial intermediaries that offer a wide variety of services, in terms of financial resources (such as equity-based financing, crowdfunding, etc.), investments (like trading, financial management and advisory, etc.), transfers and payments, insurances, and so on. The most commonly used fintech services are: mobile payments, Peer-to-Peer money transfers, services for the management of the family budget, crowdfunding, social lending and card-less withdrawals, but we can also find crypto- currencies, blockchain technology (to store data without a central register on a public network), smart contracts, insurtech (fintech applied to the insurance sector), regtech (regulatory technology), etc. As a matter of fact, the number of investments in the fintech industry have amazingly increased over the last 10 years, stepping from almost 2 billion dollars in 2010 to 35 billion dollars in 2018, as stated by Montagnani and Cavallo (2019).

It is important to consider this first distinction between fintech and techfin:

- Fintech businesses are primarily startups which deliver a different set of financial services from the traditional bank, (meaning they are not working for the banks, but rather with or against them), and are defined by the FSI (Financial Stability board, 2017) as:

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“technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services”;

- Techfin businesses “start with technology, data and access to customers. Then they move into the world of finance by leveraging their access to data and customers and seek to out- compete incumbent financial firms or Fintech startups. By selling the data to financial services providers or by leveraging its customer relationship by serving as a conduit through which its customers can access financial services provided by a separate institution, they could develop later a different strategy by providing financial services directly itself”, according to the EBI (European Banking Institute, 2017). They are the Tech giants like Google, Amazon, Apple, Alibaba, etc.

This fintech revolution is bringing many positive developments by reducing costs, increasing the speed and the quality of communications, widening the range of the consumer’s choice, including financially billions of individuals completely unbanked before (people that have no access to bank account, no way to borrow money for college and for whom the only way to save money is to literally stash it under their mattress), [Arslanian (2016)]. With technology, it has been possible to reach part of the world historically unreachable, bringing school education, providing financial wellness to create mental wellness, helping old people from criminals. Banks wasn’t used to do this because it wasn’t profitable. In fact, financial inclusion is one of the biggest growing areas in fintech. But unfortunately, it is also causing few damages to the traditional model of financial institutions raising the bar of competition in the field of service delivery. Therefore, this may create a new banking model of the future, where traditional banks are backing, becoming utility providers to this technology firms and fintech’s startups which control the fronting and the customer experience.

The internet revolution of the 1990s changed the financial market, lowering costs of transactions and leading to electronic finance, which refers to all forms of financial services performed by electronic means (www) [Lee and Shin (2017)]. A gap was created between what banks were offering clients and what customers came to expect, especially from a user experience and a convenience perspective. That gap is what the fintech industry is tackling right now, and it was so big that even non-traditional banking players, (mainly technology firms), decided to jump in and catch this opportunity. The revolution started to allow individuals to access services and products without being physically present.

As far as banks are concerned, it led to the invention of the “Open Banking system”, cutting physical locations and offices. Thanks to the PSD2 (Payment Services Directive 2) European

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regulation, the banking sector is now open: banks are able to provide access and communicate, authorize third parties, customer and payment account information, and set up open interfaces to ensure their full compliance. Behind this progressive and constant process of transformation there is the client, which is always more evolved, careful, educated and capable of influencing the market dynamics. It is thus necessary to redefine the ways of interaction between the bank and its clients, concentrating on the new communication systems, always faster and trustful. So, the bank ought to adapt to the needs of its customers using different channels and new policies, according to the target, in order to better evaluate risks and protect the investors. Moreover, banks were built around paper (checks, cash, etc.) for the industrial revolution, namely for the last century. They need to completely change their business to be digital, because dealing with a business model focused on the physical distribution of paper and a localized network of buildings and humans, doesn’t work in a world of digital distribution of data and a globalized network based on software and services, as claimed by Skinner (2019). The digital spread of Internet and mobile technologies has changed habits, needs and consumptions of people, challenging the whole capitalist system which has never seen such disruptive changes. In order to stay competitive every financial firm will have to invest in fintech: traditional financial institutions invest in both external fintech startups (in the form of collaborative fintech risks) and internal fintech projects (in order to gain a competitive advantage), [Lee and Shin (2017)]. Young people, able to code, are even creating new organizations and new ideas around financial services to change the system as it is with technology. For instance, John and Patrick Collison started a business called Stripe in 2010 (when they were 21 and 19 years old), which is now one of the biggest fintech unicorns in the world, (a unicorn company is a startup with a valuation over 1 billion dollars), valued at 9.2 billion dollars in October 2016 with 400 employees, and 20 billion dollars in October 2018 with 1 thousand employees. In such a context, a traditional bank like JPMorgan Chase, valued 245 billion pounds with 235 thousand employees in October 2016, and valued 365 billion dollars with 165 thousand employees in October 2018; so, Stripe generated more than twenty two times more value per person than JPMorgan Chase, with only 400 people working in 2016. Jamie Dimon (Chairman and CEO of JPMorgan) reorganized the whole of the bank to more like a technology company, investing in fintech startups, building their own fintech campus, automating everything that can be automated. And this led to a cut of 1/3 of the employees in two years, and an increase in the company value of 50%. JP Morgan invests 11 billion dollars per year in, spending 30% of the revenues in innovation (3 billion dollars per year), which will probably increate to 50% in the next few years. They have more developers than Facebook and Twitter together [Skinner (2019)]. It is now a technology company that does banking, by changing its model and structure to be digital. A 220-years old bank does not want to be disrupted by the fintech community; they want to be the

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disruptor, and this is a big mind-set change. It is to bear in mind that JPMorgan is being competitive just because it has an incredible amount of credit to invest in innovation, but all the other banks that do not reach the same numbers, will be deemed by the competition. The only chance they will have to survive, is to partner with fintechs and cooperate with them, serving as platform to share customers.

1.2 THE PRE-FINTECH ERA

During the mid-1990s started the so-called “pre-fintech” era [Ferrari (2016)], in which the fast internet introduction in the banking sector led to direct (Online banking development) and indirect (e-commerce growth) effects, and consequent need for instruments to manage transactions in a fast, simple and safe way. The company that better met such requirements was PayPal, (1998), allowing privates and businesses to transfer money through the internet. This encouraged the worldwide development of online shopping, making it the most important “pre-fintech” so far. PayPal represents the precursor of the banking services supply by non-banking companies, which is an incredibly growing trend (from the Annual Report, 2015).

Brett King (2015), co-founder of the mobile banking startup Moven, asserts that we have to consider the psychological impact of technology in order to understand the urge of the digital revolution, because now users consider traditional channels a waste of time. Since technology is a faster and more efficient tool, it makes people feel that they are investing their time in a better way and this has a positive impact on their self-esteem. Moreover, the sense of control arising from the possibility of carrying out a transaction without a third-party assistance, contributes to the abovementioned positive psychological impact. Another important aspect of the incumbent digitalization process is the tendency of technology to become faster and faster, meaning that people are always more confident in the use of technology and they need less time than companies need to adopt innovations. This implies that if less time is needed to introduce innovation in the customer experience than in the public, it is very likely to lose clients to the advantage of faster companies.

This is a fundamental concept for banks, which so far have been proving to be rather slow in transactions and have being widening the gap with their customers, pushing them to adopt services by non-banking players (like PayPal).

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1.2.1 Pre-fintech transition: from pre-fintech to fintech

In view of the above, King (2015) divides the transition, from the pre-fintech to the fintech era, in 4 phases:

I. The first one begins with the advent of the internet, including its impact in the way consumers access banking services for example, with “online banking”, amplified by the psychological effect of technology. At the end of this phase, we face the advent of social media which completely change the balance of power in the bank-customer relationship. As far as banks are concerned, clients can now resort to social media to evaluate the bank that better meet their needs, by relying on the always stronger public opinion. As a consequence, banks are forced to radically modify their way of interfacing with their customers, in order to protect the brand.

II. The second phase is dominated by the diffusion of mobile devices and apps, which are supporting the introduction of the “mobile banking” in the banking sector, and the consequent possibility of using the phone for any transaction other than to withdraw or deposit money.

III. The third phase is the one of “mobile payments”, which is the convergence between the smartphone and the credit card in a mobile wallet. This step will contribute to a great decrease of physical payments, but mostly to the progressive elimination of the physical interaction between financial institutions and clients.

IV. In the last phase, financial services will be provided everywhere, in every place and time the consumer will need to.

In the opinion of Ferrari (2016), this process is preparatory to the profound mutation that occurred afterwards with the “fintech revolution”, characterized by the use of digitalization as a mean of accessibility to the service, self-service, real-time and mobile.

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1.3 THE FINTECH ECOSYSTEM

There are many definitions of fintech, however there is one by the Financial Times taken from a JP Morgan summit, that better describes the revolutionary essence of these new players. He affirms that:

“Fintech are like small piranhas, ready to take over every segment of the banking value chain.”

[Financial Times (2015)]

These new realities, according to a study carried out by McKinsey (2016), are characterized by:

- Technology and innovation as the source of competitive advantage.

- “agile” and “simple” business model.

- Communication with the user through innovative channels (such as mobile channels and the internet, eliminating bank’s branches).

- Customer orientation (the customer experience is central to the services’ supply).

The new players generally specialize in a specific segment of the banking value chain, in order to provide services, priorly offered only by the banks, and to pursue a disintermediation in the customer- bank relationship. So, fintech can be seen also as a sector made by societies using technology to allow a more efficient financial system. This phenomenon progressed at the same pace as the adoption of electronic devices in the financial system. It is possible to attribute the beginning of the fintech era in 2009, following the 2008 banking crises and consequent loss of trust by the consumers in the financial sector. It is therefore due to the emergence of a new model in the financial field. A transition occurred form the world of software to that of finance, in a way that digitalization let internet evolving, making it usable thanks to “mobile banking” and the “open source” software. Moreover, at least in the early days of fintech, the speeding-up internet banking and the inability to renew the traditional bank’s Information Technology systems, made the latter even more vulnerable, facing huge cost and efficiency issues. Thus, fintech also represents a stage of digitalization in the sector: the same physical channels do not necessarily disappear, but instead they transform by digitizing themselves according to a simpler user experience. Having said that, we are still far from a bank-less future; what is important to underline is rather how we have been witnessing the deep transformation of the bank so far, as claimed by Paracampo (2017). In fact, banks themselves have already headed down the path creating specific activities. All the big players have by now started to invest in fintech. This behavior

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has not only a monetary value, but also a competitive one. In spite of the recent nature of fintech, it is already constantly evolving. It is evident the fintech companies’ evolution, whose clients are the banks themselves, are transforming their own systems to foster digitalization in their business model.

For the small and medium sized financial enterprises, fintech will be the promoter of an attempt to expand their business towards new segments. Anyway, fintech will have to face psychological aspects of consumers, implementing actions to conquer their trust and leading to the abandonment of the classic financial system. The initial approach of a fintech startup is starting by being extremely specialized in one area; then to aim at interacting with all of the system’s actors, in order to reduce resistance in the spread of its innovative services. fintech is now a synonym of emerging financial services, subject to further expansions in the next future.

1.3.1 Elements of the fintech ecosystem

It is important to analyze the fintech ecosystem if we are trying to comprehend its competitive and collaborative dynamics in innovation. As a matter of fact, these new players generally specialize in a specific segment of the “value chain” in the business of financial institutions, in order to provide services so far supplied by the banks. They also create a “disruption” in the client-bank relationship.

In the fintech ecosystem, Diemers et al. (2015) identify three major participants:

1. Entrepreneurs, 2. Government,

3. Financial institutions,

and five main elements, (as shown in Figure 1). These elements symbiotically contribute to the innovation, stimulate economy, facilitate collaboration and competition in the financial industry, and ultimately benefit consumers, so say Lee and Shin (2017):

1. Fintech startups:

These entrepreneurial companies have driven innovations in the areas of payment, wealth management, lending, crowdfunding, capital market, and insurances by lowering the costs of operations, targeting more niche markets, and providing more personalized services than traditional financial firms. They are driving the phenomenon of unbuilding financial services, which is highly disruptive for banks [Walchek (2015)]. And this ability of unbundling services

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is one of the major drivers of growth in the fintech sector, since traditional banks are disadvantaged in this situation. Consumers are beginning to pick and choose services they mostly like from a variety of fintech companies, rather than relying on a single financial institution. Venture capitalists and private equities are leading to the creation of fintech startups and the level of investments increased significantly as well. They are at the center of the fintech ecosystem.

2. Technology developers:

They provide digital platforms for social media, big data analytics, cloud computing, artificial intelligence, smart phones, and mobile services. Technology developers create a beneficial environment for fintech startups to rapidly launch innovative services. Big data analytics can be used to provide unique personalized services to customers; algorithmic trading strategies may set the basis for robo-advisor wealth management services at much lower fees than the traditional; social media helps the growth of communities especially useful in the crowdfunding and the person-to-person lending services; mobile network operators are providing low cost infrastructure for fintech companies’ service development, (such as mobile payment and mobile banking), and in turn, the fintech industry is generating revenue for these technology developers.

3. Government:

Since 2008 governments have been providing a favorable regulatory environment for fintech [Holland Fintech (2015)]. Depending on the economic development plans and policies of each nation, different governments provide different levels of regulation for fintech startups to stimulate fintech innovation and global financial competitiveness. For instance, Singapore is changing online payment regulations to make the regulation friendlier to payment service providers and stimulate technology growth [Reuters (2016)]. On the other hand, since 2008, traditional financial institutions have been subject to more rigorous regulation. The looser regulatory requirements imposed on fintech startups allow them to provide more customized and easy-to-access financial services to customers than traditional institutions. Anyhow, even though some regulations are favorable to fintech startups, they still have to understand how regulations may affect their service provision.

4. Financial customer:

They are the source of revenue generation for fintech companies. Large organizations are also important sources of revenue, but the main revenue sources for fintech companies are:

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individual customers and small and medium-sized enterprises (SMEs). A survey by Holland Fintech found that the use of fintech services is greatest among younger, wealthier customers.

Early fintech adopters are generally tech-savvy, younger, urban, and higher-income individuals. Currently in most countries, millennials (people between the age of 18 and 34) account for a substantive portion of fintech consumption. The future demographic is positive for fintech companies because in the next few decades, the tech-savvy millennials will constitute the largest part of the population driving the growth of fintech services [Lee and Shin (2017)].

5. Traditional financial institutions:

They are a fintech driving force as well. After becoming aware of the disruptive power of fintech and the fact that there is nothing to do to soften its impact on the market, traditional financial institutions have been revaluating their existing business models and developing strategies to embrace fintech innovations. Traditional financial institutions initially treated these fast-growing fintech realities as threats, but now they shifted their focus to collaborating with fintech startups with various funding provisions. In turn for funding providing, they are able to draw on the insights of these startup companies in order to stay on the forefront of the technology [Yang (2015)].

Figure 1. The five elements of the fintech ecosystem

Source: https://www.sciencedirect.com/science/article/pii/S0007681317301246

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1.4 THE FINTECH BUSINESS MODEL

The term “business model” was first used by Drucker in his The Practice of Management (1954) where he recognized the importance of the external environment on the proactive managerial activity of choosing the way a company should be designed [Al-Rfouh (2019)]. Itami and Nishino (2010) affirmed that a business model has two main elements: the business system and the profit model. Even though people generally focus on the profit model, (since it looks more important due to the fact that it is more visible and directly related with money), the business system is actually the key element, designed with the aim of defining how goals should be achieved. The business model itself can be a competitive advantage if it is coupled appropriately with business strategy, able to convey value propositions. Moreover, a business model cannot be competitive in the long run if it is easy for externals to copy it. Therefore, an isolating mechanism should be contemplated, like the hard-to-replicate systems, the general opacity of the model, etc.

From a banking perspective on business model analysis, it is mostly taken into consideration the issues for a bank to be stable and resilient to market shocks. This involves putting more attention on the degree and kind of diversification a bank develops, like entering different businesses, such as retail banking, corporate banking and investment banking [Al-Rfouh (2019)]. The European Central Bank’s study on business models (2016) is an empirical analysis on Banking Business Models (BBMs). The most important studies on BBMs are those redacted by Ayadi et al. (2011, 2012, 2014, 2015) with the aim of identifying the exact number and composition of different Banking Business Models in the European environment, spotting them based on the nature and scope of banks’ funding strategies. The BBMs have been classified into five groups of banks by differentiating from one to the other for their activities being more or less market-oriented and their funding structure:

- Three of the clusters refer to banks performing retail-oriented activities: deposit-taking and lending activities, customer deposit taking and trading activities, and trading and debt liabilities.

- The remaining two clusters are the wholesale banks (bank-intermediation activities) and investment bank (trading and investment-oriented activities).

With all that been said, Omarini (2014) asserts that the perspective has a little approach on a pure bank strategy market positioning.

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Fintech redefined the ways in which people store, save, borrow, invest, spend and protect their money [Accenture (2016)]. In the research conducted by Lee and Shin (2017), they identify six main fintech business models, explained in the next paragraphs.

1.4.1 Payment business model

Since payments are relatively simple financial services, fintech companies focused on payments acquire customers more rapidly at a lower cost. They are one of the fastest moving companies in terms of innovation and adoption of new payment ways. The payment ones are among the mostly used fintech on a daily basis, even though it’s one of the worst regulated financial services’

field. The two possible markets for the payment’s fintech are:

I. Consumer and retail payments: mobile wallet (Google Wallet, etc.), mobile payments (phone bill, barcode, credit card on websites, direct mobile payments), foreign exchange, real-time payments, Peer-to-Peer/P2P (users can reimburse each other for free with PayPal, etc.) , and so on. These tools improve the experience of customers whose payments are faster and have multi-channel accessibility [BNY Mellon (2015)].

II. Wholesale and corporate payments.

Mobile payments services can be convenient and secure; therefore, they are a popular business model [Lee and Shin (2017)].

1.4.2 Wealth management business model

It provides financial advices for a fraction of the price of real-life advisors, called robo- advisors. They use algorithms to suggest a variety of investments driven by customers’ preferences [Lee and Shin (2017)]. They benefit from consumer behaviors that favor automated and passive investment strategies, and a simple fee structure [Holland Fintech (2015)].

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1.4.3 Crowdfunding business model

This kind of fintech empowers networks of people to control the creation of new products (but also media and ideas), raising funds for charity or venture capital [ITA (2016)]. Crowdfunding is a three-parties model, made by:

I. The initiator (entrepreneur) who needs founding.

II. The contributor who supports the project.

III. The moderating organization which gives to contributors the access to the information on initiatives and opportunities.

There are three most popular crowdfunding business models [Lee and Shin (2017)]:

A. Rewards-based crowdfunding: an attractive fundraising option for small business and creative projects. In case of interests to be charged on the crowdfunding, the borrower sets the interest rate that they are comfortable with and can guarantee a refund within the time period. In return to the received support, the business gives some type of rewards [Mollick (2014)].

B. Donation-based crowdfunding: is a source money for charity projects, by asking donators to contribute money to it. The donators receive only non-monetary recognitions.

C. Equity-based crowdfunding: it allows entrepreneurs to reach investors interested in acquiring equity in their startup or other small businesses. It is very appealing for SMEs (small and mid- sized enterprises) because traditional banks are usually reluctant to lend them money. The essential difference between equity-based and the other forms of crowdfunding is that in the first kind fund-seeking entrepreneurs give up a portion of the ownership in exchange for the funds.

1.4.4 Lending business model

The Peer-to-Peer (P2P) business and consumer lending fintech allow businesses and individuals to lend and borrow money between each other. They offer low interest rates and improve lending processes. Technically, fintech is not involved in lending itself (form the banking point of view) since they are just matching lenders and collecting fees off users. For this reason, while fintech

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is not obligated to meet the capital requirements to enable lending, banks have become more and more limited in the lending they are engaged in [Williams-Grut (2016)]. The manifestation of fintech in lending is the use of alternative credit models, online data sources, data analytics, lower operating costs, etc. The success or failure of this model is dependent on the behavior of the interest rates (something that firms do not have control over), as stated by Zhu et al. (2012). Crowdfunding and P2P lending differ in the purpose, since the first one collects funds for projects, while P2P lending affects debt consolidation and card refinancing.

1.4.5 Capital market business model

It takes hold across a series of capital market areas such as investment, foreign exchange, trading, risk management, research. There are two main areas of promising capital market fintech:

- Trading Fintech: connects investors and traders to discuss and share knowledge, buy and sell commodities and stocks, monitor risks in real time.

- Foreign currency transactions: are dominated by financial institutions. Fintech lowers barriers and costs engaging in foreign currency transactions. Users see live pricing and funds in various currencies via their mobile phone.

1.4.6 Insurance services business model

Here the fintech enables a more direct relationship between the insurer and the customer, through the use of data analytics, useful to calculate and match risk and offer products for the customers. They also streamline healthcare billing processes. Technology allows insurer to expand their data collection to supplement their traditional models and improve their risk analysis.

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1.5 WHAT FAVORED THE EMERGENCE OF FINTECH

As it has already been mentioned, the financial markets worldwide were deeply affected by the internet revolution in the early 1990s, leading to the development of electronic finance, which refers to all kinds of financial services (like banking, insurance, stock trading, etc.) through electronic means, and so allowing individuals and businesses to access accounts, do transactions, and obtain information without being in physical contact with financial firms. Consequently, a substantial reduction of number in physical locations for banks occurred. The internet technology has been of great impact especially in the financial field which led to an overall digitalization of the everyday life.

In fact, as far as the banking industry is concerned, every component of the business’ value chain benefitted from the innovative use of web technologies, including lower operational costs, shorter turnaround time, real-time managerial information, smoother communication within the organization, more convenient interaction with existing as well as prospective customers, and the provision of value-added services such as access to professional knowledge in financial management [Nielsen (2002)]. Another example of e-finance is online stock trading: by processing every stock transaction online, it minimizes its operating costs. By providing differentiated services at the lowest feasible transaction fees, it achieves competitive advantage.

In the mid-2000s the advent of the smartphone facilitated the growth of mobile finance, (an extension of e-finance), such as mobile payment and mobile banking. Financial institutions allow their customers, not only to access bank account information, but also to make transactions via their mobile phone (such as paying bills and remitting money).

After the worldwide financial crisis in 2008, fintech innovations emerged by combining the e-finance, internet technologies, social networking services, social media, artificial intelligence, and big data analytics. Fintech startups differentiated themselves from traditional financial firms with personalized niche services, data-driven solutions, fast solutions and so on. Even though fintech was initially seen as a threat to traditional financial firms, it is now spreading the collaboration between fintech and financial institutions, joining the forces in terms of competitive advantage over competitors [Lee and Shin (2017)].

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1.5.1 Fintech contributing elements

De Galahau (2016) summed up the elements that have contributed to the entrance of fintech in the world of financial services:

- Digital transformation: the diffusion of technological tools that can be used to improve the supply of financial services. Recent IT innovations have introduced original solutions, both in terms of internal processes, and the digital channel of communication with the client.

- Loss of trust in the banking system: after the crisis, it has been suddenly clear that many consumers, especially the young ones, had lost their trust in the traditional banking system. What has emerged was the intention of the new generations to “turn their back” on traditional players, while opening up to the new realities, who did not contribute to the financial crises and, at the same time, can offer an innovative approach to the financial services’ supply.

- Regulation of the sector: the financial crises began in 2008 showed to the regulators that the activity of the big operators in the banking field creates a systemic risk. This brought to the implementation of risk quantitative measures [Darolles (2016)], and the reshaping of the bank’s activities.

1.5.2 Fintech areas of application

In the past years, we have seen a series of startups and banking, as well as non-banking, service providers entering the payment’s field, using new technologies, new market conditions and alternative business models, in order to disrupt or integrate traditional payment procedures. The global investments’ growth in the technological sector fostered this phenomenon, starting from the private equity. Moreover, innovation is rising also in financial activities, with a special focus on developing solutions for the operators of the small and medium-sized market (from loans, payments and big data, to text messages and security. Fintech has a strong strategic power on the financial services’ companies, according to Meta (2017). There are three main areas of application of fintech in the sector of financial services, in terms of development, in the last decades:

1. Internal digitalization: the first area of use of the IT is concentrated on the internal process (like payments operations or portfolio management). In the first stages of IT development, banks and insurance companies, concentrated on the process automation of financial services in order to gain efficiency and profits. Companies, instead, offered a couple of following

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channels, (like offices, consulting, insurance agents, ATMs), and were more concentrated on support and back-office services (like management of electronic accidents or bank accounts).

2. Supplier-oriented digitalization: in this phase, the suppliers of financial services focused on the integration of clients. For this reason, they had to standardize processes and functions of the application. The outsourcing of company processes occurred, beginning with supporting areas (like IT) and subsequently reaching back-office areas (like payments, investments and credit elaboration), with the aim of reducing the internal production.

3. Client-oriented digitalization: this area of fintech application is based on clients, redefining the current logic of processes. New hybrid and added forms, based on clients’ interaction, are the center of the products’ and financial services’ planning. A first example could be the electronic portfolios, which include not only the payment but also the option to collect, store and spend fidelity points and other personal data. These new services include the Peer-to-Peer business model development and the evolution of external non-financial services’ providers.

1.6 MAIN FINTECH FEATURES

Riding the wave of innovation brought by digital transformation, several fintech startups have started to establish themselves on the market that, little by little, have gained important positions.

2017 has proven to be a fantastic year to be a fintech entrepreneur with more than 30 fintech unicorns globally. Through a large-scale analysis of 14.000 fintech startups made by StartUs Insights, they identified the rising innovation areas in the industry early on. The biggest driver continues to be the payments sector: paying for online shopping, cross-border remittances, using cryptocurrency and so on. Then, we find the insurance and investments sector: crowdfunding platforms, robo-advisors, Peer- to-Peer investment platforms etc. Finally, fintech enabled lending platforms and financial planning tools round up the list. These include web-based financial planning and budgeting tools, P2P lending platforms and so on.

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Source: Fintech Innovation Map (c) StartUs Insight

1.6.1 Mobile Banking

Mobile banking is a service provided by a bank, or another financial institution, that allows its customers to conduct financial transactions remotely using a mobile device such as the smartphone or the tablet. Transactions through mobile banking depend on the features of the mobile banking app provided, and typically includes obtaining account balances and lists of latest transactions, electronic bill payments, remote check deposits, P2P payments, and funds transfers between a customer’s and someone else’s accounts. Some apps also enable copies of statements to be downloaded. Using a mobile banking app increases simplicity of use, speed, flexibility and also improves security because it integrates with the user built-in mobile device security mechanisms [BBVA (2012)].

Mobile banking differs from mobile payments, which involves the use of a mobile device to pay for goods or services either remotely or at the point of sale[KPMG (2011)], just like using a debit or credit card. Mobile banking before 2010 was most often performed via SMS or the mobile

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web. Apple's initial success with iPhone and the rapid growth of phones based on Google's Android (operating system) have led to increasing use of special mobile apps, downloaded to the mobile device. Nowadays, Mobile banking is more and more used, with about 17.3 million users and about 10.7 million current accounts online, according to the 7° report The multichannel of banks by Consorzio Bancomat –Abi (2010). Moreover, Mobile banking is at the disposal of disabled people or people with mobility difficulties, who find it more challenging to go to the bank counter. Mobile banking services include:

- Account information (monitoring of term deposits, access to loans and card statements, etc.) - Transactions (funds transfer, paying third parties, bill payments, etc.)

- Investments (portfolio management services, etc.)

- Support (check book and card request, ATM location, etc.) - Content services (general info, location-based services, etc.)

Not only does mobile banking reduce location dependency of financial services and operation costs, but it also provides an end-user interface for the expansion of Banking-as-a-Platform (BaaP).

The payments sector leads the field of the fintech value pyramid. People use more payment apps than any other fintech service, since they have reduced the time and cost to make online payments. In addition, thanks to mobile banking, people have more control over their savings, preventing customers from getting in debt.

1.6.2 Blockchain

Blockchain is defined by Crosby et al. (2016) as “a distributed database of records (or public ledger), of all transactions or digital events that have been executed and shared among participating parties. Each transaction in the public ledger is verified by consensus of a majority of the participants in the system”. In order to reach the consensus, the community has to verify the new piece of information and keep the blockchain copies in sync between all the participants to the network in such a way that everybody agrees which is the chain of block to follow. When a client executes a transaction, it broadcasts the transaction to all the network, so that all users in the system receive a notification of the transaction in a few seconds. Now the transaction is “unconfirmed” because it has not been validated by the community yet. Once the users manage to verify the transactions with a

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process called “mining”, a new block is added to the chain. The miner (the user that participates to the verification process), which has verified the transaction receives a reward under the form of virtual coins called cryptocurrency (such as Bitcoin, Ether, Stellar Lumens, etc.). Cryptography protects the security of transactions and thus ensures the possession of cryptocurrencies. Virtual coins can be then used on the blockchain platform to transfer value. Due to a complex mechanism, the transactions between users, once verified in the network and added to the chain, are both unmodifiable and true.

The technology could also be easily applied to form legally binding contracts among individuals. The digitalized asset takes the name of “token”: it can be a digitalized share of a company, as well as a real estate property or a car. Through the introduction of “smart contracts”, (digitalized contracts), the blockchain technology allows users to freely trade digital tokens without the need of a central authority to certify the transaction [Crosby et al. (2016)]. I found this description of Blockchain by Fontana et al. (2019) very explicative and detailed. The implementation of this technology in the financial markets could provide investors and entrepreneurs with new tools to successfully exchange capitals. This is the reason why many believe that blockchains would become a potential mainstream financial technology for the future. In fact, empowered by the technological innovation, many new players in the entrepreneurial finance landscape emerged like crowdfunding, accelerators, Peer-to- Peer business lending, etc.

Figure 3. How does a blockchain work

Source: https://101blockchains.com/ultimate-blockchain-technology-guide/

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One of the key characteristics of the blockchain is the possibility to connect stakeholders without the approval of a third party (such as the bank) in an open, transparent and secure way. It can bring companies a real competitive advantage, strengthening transaction security and reducing their costs as well as the processing time. Technology makes it extremely efficient in transferring value between users, solving the problem of trust and eliminating the need of a central authority to approve and certify transactions. It allows easier participation of nonprofessional investors, provide greater liquidity, reducing monitoring costs; for instance, thanks to the Peer-to-Peer lending, two billion people in developing countries with no access to formal financial services, would be able to have basic financial services previously reserved to individuals with certified financial records. Intuitively blockchain also presents some downsides, such as leading to higher risks, related to lower level of control, and the immutability of the data reported on the register, which does not allow the correction of errors.

In the near future blockchain technology potential will be used by people without really knowing how the technology behind it works (in the same way they now use browsers like Chrome).

The world of business will split in two: those companies that will integrate blockchain technologies in their operation and financial activities, expanding their products and services globally, who will survive, and all the other companies that won’t keep up with technological innovation and won’t be competitive on the market. Banks will be impacted in their core business. They could use the blockchain to create a more efficient interbank network and reduce administrative costs, as well as redefine the mission of the middle and back office to focus on front office operations [ Fontana et al.

(2019)].

1.6.3 Internet of Things (IoT)

Internet of Things (IoT) is a technology that allows to maximize data collection and usage capabilities from a multitude of sources (industrial products, factory systems, vehicles, etc.). It benefits digitalization and process automation, as well as the ability to exploit machine learning and artificial intelligence to create new businesses and value services for customers and consumers. The concept represents a possible evolution of the use of the Internet: objects become recognizable and acquire intelligence thanks to the fact of being able to communicate data about themselves and access aggregate information by others [Magrassi (2002)]. Alarms ring earlier in case of traffic, sneakers transmit times, speed and distance to compete in real time with people on the other side of the globe,

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medicine jars warn family members if they forget to take the drug. All objects can play an active role by connecting to the network, [Casaleggio Associati (2011)].

1.6.4 Big Data

The term "big data" refers to computer data so large, fast and complex, that are impossible to process using traditional methods. But it is not the amount of data that is important: what really matters is how the company uses those data. Big data must be analyzed while searching for valuable information, that leads to more profitable and strategic business decisions. Access and storage of large amounts of information for analysis have been available for a long time; but the concept of big data gained momentum only in the early 2000s, when market analyst Doug Laney (2001) articulated the current definition of big data as “the three Vs”:

- Volume: organizations collect data from various sources, including commercial transactions, smart devices (IoT), industrial equipment, videos, social media and more. In the past, storage costs would have been an obstacle, but today it is much more accessible, thanks to platforms (such as data lakes and Hadoop).

- Velocity: with the growth of the IoT, data flows towards businesses must be managed incredibly fast and at an unprecedented rate. Sensors and smart meters have led to the need of managing these streams of data in near real time.

- Variety: data are available in all types of formats, from structured and numerical data in traditional databases to unstructured text documents, e-mails, videos, audio, stock data and financial transactions.

According to SAS (2019), it is worth to consider other “two Vs”:

- Variability: data flows are unpredictable, so they often change and vary continuously. They are the real challenge for all those companies that need to know when something is trending on social media and how to handle daily data peaks, seasonal data or events-based data.

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- Veracity: it refers to data quality, because data comes from so many different sources that it is difficult to connect, match, clean and transform data between systems. Companies need to link and correlate relationships, hierarchies and links between data, otherwise they could quickly get out of control.

We are constantly producing a lot of data, for example via social media, public transport and GPS.

But it goes way beyond that. For example, video streaming website Netflix analyses big data of their viewers like popular shows. This way they produce the successful series with the perfect combination of actors, directors and storyline. Right now, the big data of traffic is being analyzed to develop a car that can drive completely accident free all by itself and in the future, we can even use the big data of DNA to determine the perfect treatment. This way curing genetic diseases like cancer would become much easier.

1.6.5 Artificial Intelligence (AI)

Artificial intelligence is a discipline debated between scientists and philosophers because it manifests ethical as well as theoretical and practical aspects [Keplan and Haenlein (2018)]. Stephen Hawking warned about the dangers of artificial intelligence in 2014 as a threat to humanity’s survival. He told the BBC:

"The development of full artificial intelligence could spell the end of the human race".

[Cellan-jones (2014)]

On August the 2nd of the same year Elon Musk also tweeted:

“We have to be super careful with artificial intelligence. Potentially more dangerous than nuclear”

[Twitter (2014)]

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Artificial intelligence is a computer technology that revolutionizes the way in which man interacts with the machine, and the machines between them. It provides a robot with computing qualities that allows it to perform complex operations and "reasoning”, learn from mistakes, and perform functions until now exclusive to human intelligence. A more recent AI trend is to use its cognitive abilities to go through a large amount of unstructured text and data: cognitive AI is making deep inroads into business decision making. There are tools which are so good at making sense of mountains of data that they are already providing valuable business insight that’s going right to a company’s bottom line. Cognitive AI systems go a step beyond normal data crunching and can see and analyze patterns, as well as accelerate and optimize decision making.

1.6.6 Regulatory Technology (RegTech)

Regtech (from “regulation” and “technology”), is the use by companies of technological tools to support the procedures of adaptation, compliance, compliance with standards, regulations, laws, reports. It has been identified, for the first time, by the English regulator FCA (Financial Conduct Authority) as: “a subset of fintech that focuses on technologies that can facilitate the delivery of regulatory requirements more efficiently and effectively than is already the case”. But its coronation took place thanks to Deloitte, in the 2015 report entitled RegTech is the new fintech [Dalton et al.

(2015)]. The regtech Council estimated in 2018 that, on average, banks spend 4% of their income on compliance-related activities, and by 2022 this share will increase to 10%. In this sector, switching to advanced and digital compliance management could save banks a lot of money.

Regtech therefore responds both to the need of banking institutions to produce, as quickly as possible, reports for regulatory requests, and to the definition of a new reference system for regulators and financial institutions, driven by mutual collaboration and effectiveness. It is then clear that it is becoming the tool to achieve greater sharing of information between the parties, reducing the time spent on producing and verifying data through joint analysis. It can therefore be a great help to companies and organizations, not only to be always in compliance with the different regulations, but also to better understand how regulations can be used to improve the performance of the organization itself. Actually, true innovation is what transforms an obligation, (often considered a limit), into opportunity and competitive leverage.

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