Impact of FinTechs on the Banking Sector. Competitor or Partner for Traditional Banks?

Bachelor Thesis , 2018 , 84 Pages , Grade: 1,0

Business economics - Banking, Stock Exchanges, Insurance, Accounting

This paper will analyse, if traditional banks deal with the continuous digitization and new technology-based competitors, especially FinTechs, as a threat or rather as a chance for their own business model. Is it more likely that banks and FinTechs will link up as partners to benefit from mutual competitive advantages, or will it degenerate into a battle for power and market share? Furthermore, why is it that small start-ups can present such a threat to established banks that have been operating for years?

Innovative start-ups revolutionized several business sectors. There was Napster for the music industry, Uber for the taxi industry, and there are FinTechs for the financial sector. FinTech is an abbreviation for Financial Technology. The designation itself already gives an idea of what their business idea looks like. Intelligent technologies and the continuously expanding digitization across all business sectors expands the customers' needs and demands towards banks.

They want to take care of banking business as easily and convenient as they order goods via Amazon, ask Google for the way or stream music and movies online via Spotify or Netflix. FinTech has recognized that change in customer behaviour and started to build their business models based on these findings. Those new innovative market entrants are present in every part of the value chain of a traditional bank, offering alternative financial products and services on a purely online basis. Traditional banks are, therefore, facing significant challenges and risks that are endangering their competitiveness.

II Contents

Index of tables and figures

List of abbreviations

1. Introduction

2. Digital Revolution
2.1 Drivers of digitization
2.2 How digitization impacts the financial sector
2.2.1 Classical bank model
2.2.2 Innovations in the bank model

3. Overview ofFinTechs variety
3.1 Types ofFinTechs
3.1.1 Credit
3.1.2 Payment technologies
3.1.3 Wealthmanagement
3.1.4 Service provider
3.2 Practical example N26

4. Impacts ofFinTechs on the banking sector
4.1 Risks and challenges concerning traditional banks
4.2 How banks master the challenge
4.2.1 Own technologies and brands
4.2.2 Cooperation and partnerships
4.2.3 Investments and acquisitions
4.3 Recommendations for both sides

5. Conclusion

6. Bibliography

Appendix

III Index of tables and figures

Index of tables

Table 1: 10 drivers of Information technologies

Table 2: Categories of FinTech Companies

Table 3: Overview of financial products offered by N26

Index of figures

Figure 1: Bank model by Alt and Puschmann

Figure 2: Future strategies ofbanks and FinTechs

Figure 3: Global investment activity (VC, PE and M&A) in FinTech Companies

Figure 4: Global VC activity in FinTech

Figure 5: Number of FinTech deals

IV List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

Innovative Startups revolutionized several business sectors. There was Napster for the music industry, Uber for the taxi industry, and there are FinTechs for the financial sector. FinTech is an abbreviation for Financial Technology. The designation itself already gives an idea of what their business idea looks like. “It’s about a segment that overlaps the financial Service and the technology sector. Technology-focused start-ups and new mar­ket entrants innovate the products and Services currently provided by the financial indus­try.”¹ Intelligent technologies and the continuously expanding digitization across all busi­ness sectors expands the customers’ needs and demands towards banks. They want to take care of their banking business as easily and convenient as they order goods via Amazon, ask Google for the way or stream music or movies online via Spotify or Netflix. FinTech’s recognized that change in customer behavior and started to build their business models based on these fmdings. Those new innovative market entrants are present in every part of the value chain of a traditional bank, offering alternative financial products and Ser­vices on a purely online basis. Traditional banks are therefore facing significant chal- lenges and risks that are endangering their competitiveness. Questionable is, how estab- lished banks are going to deal with this development towards an increasing digital world. Will they see digitization and new technology-based competitors as a threat or rather as a chance for their own business model? Consequently, is it more likely that banks and FinTechs will link up as partners to benefit from mutual competitive advantages, or will it degenerate into a battle for power and market share? Furthermore, why is it that small startup Companies that have been founded only a few years ago are able to present such a threat to established banks that have been operating in the market for decades?

To answer questions like these, the main part of this paper is divided in three chapters. To start, the first part explains the drivers of digitization. In order to understand how these drivers affect the financial sector and why banks are at risk the following section takes a closer look at the classical structure of a bank’s value chain and introduces the innovations in the respective areas of the banking model. Since the FinTech sector shows a wide ränge, the second chapter identifies the individual fields of activities and explains them more detailed based on sampled Companies. An example for a digital universal bank pro- vides the analysis of the Company N26. The last chapter deals with the direct influence of these FinTechs on the banking sector. It describes the challenges that traditional banks are facing and gives insights to the tools and methods they use in order to counteract these risks. Subsequently, recommendations are made for banks as well as for Fintechs. These recommendations will include how banks can improve their current weaknesses in order to minimize risks, as well as how to develop a sustainable digital strategy to compete in the digital environment in order to create a good foundation for partnerships with tech- nology-based Startups. With regards to FinTechs the paper recommends what FinTechs should note when they decide to form partnerships with traditional banks. This paper also includes Information from two expert interviews with A., CEO of a comparison platform, and P., researcher at Frauenhof Institute, to consider further aspects and guiding questions of this paper and form the basis for various arguments.

2. Digital revolution

Due to a steady development in new technologies, several business sectors are facing a rapid change in how processes, products and Services might look like in the future. How­ever, it is not just the future that concerns established Companies. Businesses in almost all sectors are already confronted with competitors that offer the same Services or prod­ucts on a purely online basis. The sectors that are endangered the most are the ones that trade in intangible Information and goods or offer goods and Services that are easy to standardize.² Some sectors, like the music industry, media- or the Publishing industry already experienced digital change and the threats and risks it entails for established mar­ket participants.³

Clearly, digitization has impact on the life of all of us. A., for example, says that he can’t even imagine what it is like to live with a landline phone, or without applications like Amazon’s Alexa, a Smart-TV or Netflix.⁴ Also, P. Claims that digitization has made his daily and Professional life easier and more conven-ient.⁵ He says that almost every part of life can be changed by digitization.⁶ With the Smartphone acting as a central instrument, it is possible to book train tickets, make pay-ments, book vacations, etc. instantly, which makes life easier, more flexible, faster, and easier to organize.⁷

The following chapter focuses on the influence of digital transformation on the financial sector. The use of internet-based Services has made its way in our daily routines. The internet became an aid that bundles knowledge and Information and makes it available to a continuously expanding share of the population at any time and at any location.⁸ There-fore, it has become self-evident that it is possible for customers to check their bank bal-ance, compare offers or make transactions whenever they want and with no regard to where they are. This opinion is also shared by A.. He says that the op- portunities of checking his bank balance at any time on his apps and not having to go to a branch has made his personal banking more convenient.⁹ However, in addition to the changes in demand and consumption pattems and higher expectations of customers to- wards their banks, there are many more factors that influence the challenges that the fi­nancial sector is facing. For example, the penetration of web-based devices, familiarity with the internet as well as the potential for automation and Standardization.¹⁰ Those forces are benefiting FinTech’ s that build their business model on processes that use those factors for their success. On the other side, they are threatening established banks that built their processes decades ago on structures that cannot be transformed in one day.

2.1 Drivers of digitization

Digitization happens when something analogue is transformed into digital data.¹¹ In this context the term analogue can be applied to intangible things like signals, as well as to tangible goods like forms, books, contracts, CD’s, DVD’s, basically everything that con- tains Information with in hardware. The digitization thus creates a purely digital good.¹² Which means that this good has no exclusive owner anymore. Thus, the user can use or consume this good while sharing it with others at the same time.¹³ This procedure might be described best with online Streaming. No matter if it’s movies or music, millions of people can nowadays listen to the same song at the same time without blocking each other, whereas in the analogue area the possession of a CD automatically excluded a sec- ond’s person ownership of this CD. The drivers of digitization can be derived from an economic point of view as well as from the needs and wants of customers and the Situation of a Company. A study from Deutsche Bank research in the year 2014 claimed that the drivers of digitization and its impact can be grouped in three major forces:¹⁴

- Digitization effect: increasing storage and usage of intangible digital Infor­mation goods
- Network effect: exponential growth of data in virtual networks
- Penetration effect: Expanding reach of the world wide web

Those three drivers refer to the economical point of view. However, according to a case research that MIT conducted in 2003, there are 10 drivers that can be separated in to three categories.¹⁵ Those ten drivers represent the needs and wants of Customers, as well as the current state of a Company. The background of this research was to discover the effects of new Information technologies in different and transforming industries.¹⁶

Table 1: 10 drivers of Information technologies

Type of Driver Driver

Abbildung in dieser Leseprobe nicht enthalten

Source: Andal-Ancion, Angela, Cartwright, Phillip A., Yip, George S., The 10 Drivers of New Information Technologies (NIT), 2003

The first category entails the drivers that represent the characteristics of products or Ser­vices. The product characteristic drivers refer to the content of Information that a product or Service contains (Information intensity), the tailored offerings for individual Customers (customizability), the components of a product that can be delivered electronically or still need physical interaction (electronic deliverability), as well as the ability to aggregate and combine products from different industries and distribute them in a bundled Service pack­age (aggregation effects).¹⁷

The drivers regarding the interaction between a Company and its customers are summa- rized in the second group. They are defined in search costs, real-time interface and con- tracting risk. This category is about the reduced research costs for finding exact the prod­uct or Service the customers wants (e.g. by comparing prices, products and features eas- ily), the ability to transfer data or money in real-time (e.g. online stock-trading or trans­ferring money at night), as well as the risks that customers face if they’re conducting a contract online (e.g. risks in quality, prices and a lack of opportunity for refunds).¹⁸

In the third and last group, are drivers regarding the interaction between the Company and its partners and competitors is defined. They are described by network effects, the benefits of Standardization, and missing competencies. More detailed, this group is about networks that Companies build with each other in order to conduct business more efficiently (e.g. products and Services that are used by an increasing amount of people usually show a higher utility).¹⁹ The perceived benefits of standardized and synchronized processes show better efficiency in B2B transactions (e.g. the Standardization of automated teller ma- chines through networks entail a huge benefit for customers since they can withdraw money while travelling).²⁰ As well as the scenario where partners take advantage of each other to fill the absence of missing competencies within a Company (mostly through Stra­tegie Company alliances).²¹

Professor Dr. Remigiusz Smolinski (head of Business Development & Innovation Man­agement at Comdirect Bank) and Moritz Gerdes (Business Development & Innovation Manager at Comdirect Bank) see the drivers of digitization in five key developments:²²

- Increasing availability and exponential improvement of Computing power and storage space
- Decreasing costs of computing power and storage space
- Changes in customer behavior and communication due to new products, Services, technologies and social media
- Easy and affordable access to the internet
- Increasing usage of mobile devices like Smartphones

Another Classification of drivers of digitization was made by Christophe Châlons and Nichole Dufft, her Independent Vice President Digital Enterprise and he Chief Analyst at PAC-group Germany, a Company for consultation, choice, and optimization for Software solutions. They say that it’s not necessarily the technological developments like mobile technologies, social media, Analytics and Big Data, or Cloud-Computing-Technologies themselves that encourage digitization.²³ It’s rather the resulting economical change that arises through the interaction of those technologies.²⁴ The usage of digital technologies enables Customers to gather Information about quality, functionality, prices, recommen- dations, reviews, as well as alternative offers, which leads to an increasing transparency of the market.²⁵ Furthermore, Companies have to be able to react to changing expectations or demands of Customers, preferably in real-time and with predictability, since they ex- pect tailored offers based on their preferences, which are continuously changing.²⁶ Alt- hough all these identifications are derived from different sources and involve different points of views, their common basis are technological progress and the resulting change in customer behavior that drives digitization forward and makes it such an essential issue for established Companies; no matter which industry an enterprise is operating.

2.2 How digitization impacts the financial sector

Generally it is considered that, digitization describes a change that is triggered by digital transformation.²⁷ The term digital transformation is defined differently depending on the perspective. Computer scientist emphasize more on the technical components, whereas users of digital media rather emphasize on the experience of the Customers.²⁸ Business economists, on the other hand, focus on the transformation of business models, value chains, business processes, as well as IT- and Analytic-Systems.²⁹ The MIT Center for Digital Business and Capgemini Consulting defined - in a global study with 157 execu­tives from 50 large traditional Companies - three main pillars of digital transformation: Customer Experience, operational processes, and business models.³⁰ This defmition in- volves the point of view of the digital media users (customer experience), as well as that of business economists (operational processes and business models). In another study, the MIT defined digital transformation as “the usage of new digital technologies (social me­dia, mobile, analytics or embedded devices) to enable major business improvements (such as enhancing customer experience, streamlining operations or creating new business models).”³¹ In this defmition, customer experience and new business models are defined as objectives that should be achieved due to digital transformation, whereas analytics is mentioned as a tool to accomplish these goals. Nevertheless, both definitions emphasize on the change of interaction with customers, business models and internal processes. The fact that digital transformation is perceived differently from different perspectives whereas the basic defmition includes all those perspectives suggests, that digital transfor­mation is by no means a pure IT issue. Rather, the Strategie and business-critical treatment of this transformation plays an important role.³² Next to a Segmentation of the perception, digital transformation can also be clustered in periods. According to Rainer Alt and Thomans Puschmann, the use of IT in the banking sector can be grouped in five phases:³³

- Phase 1: until 1940s
- Phase2:1950s- 1970s
- Phase3:1980s-2010s
- Phase4:2010s-2020s
- Phase 5: From 2020, onwards

According to this Classification, the digitization in the banking sector is currently in the fourth phase out of five.³⁴ This phase refers to the concept of a service-oriented architec- ture and the result that banks can now detach single functional areas and hand them over to Service providers.³⁵ It is also marked by the so-called Fintech-Evolution, in which banks and Startups take initiatives to develop innovative solutions with the objective to realize improved interaction with Customers.³⁶ The upcoming fifth phase is mainly char- acterized by the perspective of the customer. Platforms like comparison portals or crowdsourcing-platforms replace traditional bilateral relationships between banks and their Customers.³⁷ It is then possible for Customers to carry out transactions and exchange banking relevant Information through multiple channels.³⁸ According to A., the influence of digital transformation on the financial sector should be separated in two things.³⁹ On the one hand, what are banks capable of doing, also regarding legal developments, e.g. video identification and digital signing, as well as the opportunity of digital account checks.⁴⁰ Those developments enable banks to offer credits on a purely online basis, which is, on the other hand, an estrangement from classical usage behavior.⁴¹ Customers now expect to request a credit today and see the money on their account the next day. Which makes digital transformation, according to A., the most serious change for banks since the introduction of online banking.⁴² P. says that this digital change is causing problems for traditional banks that count on cus-tomer proximity.⁴³ It doesn’t matter anymore if Customers make a transaction from bank A or bank B as long as it is works easy, which makes banks become replaceable.⁴⁴ On the other hand, P. says that customer behavior has hardly changed.⁴⁵ A per-sonal and individual address, like indications of opportunities is still very important.⁴⁶ The offers of FinTechs do not differ from those of a traditional bank, they are still classical financial products.⁴⁷ The only difference is an easy usage with and a nice surface.⁴⁸ How-ever, FinTechs defmitely played a key role to the increasing technology adaption at tra-ditional banks.⁴⁹ Nevertheless, digital transformation is a huge challenge that banks need to implement in their processes and structures. Especially because digital transformation is notjust a challenge, but also a chance for profit. A study from Boston Consulting group proves this Statement. They claim that retail banks can create a 30 % increase in net profit by 2020 due to accelerating digital transformation.⁵⁰

2.2.1 Classical bank model

To get an idea of how the previously mentioned drivers of digitization and the digital transformation can have such an impact on the financial sector, it is necessary to under- stand how banks are structured. The value chain of a Service orientated bank can be illus- trated as in the bank model by Rainer Alt and Thomas Puschmann. The Organization of a bank is divided in three main columns: processes, value chain, and customer processes. Where the components of the value chain are clustered in different groups of internal processes. Additionally, differences are made in the customer processes between pay­ments, Investments, and fmancing.

Figure 1: Bank model by Alt and Puschmann

Abbildung in dieser Leseprobe nicht enthalten

Source: Alt, R., Puschmann, T., Bankmodel erweitert, 2016, p. 91.

This model divides the value chain on the one hand in primary activities (performance processes), which includes sales-, execution/completion-, transaction-related-, and cross- transaction-related-processes.⁵¹ On the other hand in leadership- and supporting-pro- cesses. While the leadership-processes guarantee planning, steering and control, the sup- porting-processes provide the necessary resources that are required for the performance processes to operate successfully (human resources, accounting, marketing, IT, etc.).⁵² Innovations in the financial sector affect the needs and wants of customers and therefore the associated processes, which focus on at least one task of the areas sales and consulta- tion, payments, Investments, and fmancing.⁵³

2.2.2 Innovations in the bank model

Before FinTech’s started to conquer the financial industry, technological innovations in the banking sector have been very rare. Teller machines, online banking, mobile payment methods, or the opportunity to pay cashless by debit- or credit-card have been the only innovations the industry created.⁵⁴ Since a few years, more and more FinTech Startups started to build their business models based on the already mentioned drivers of digitiza- tion and digital transformation. With innovative solutions and not even a banking license, they are now a serious competitor and embody a threat to traditional banks in their whole value chain.⁵⁵ Therefore, the value chain of a Service orientated bank as seen in chapter 2.2.1 is now vulnerable in several areas. This section should give a short overview of how digital transformation is threatening traditional banks in different parts of their value chain. A detailed examination of the different types and fields of activities in which FinTechs are operating follows in the next chapters.

In the sales and consultation area traditional banks are now confronted with innovations like digital Consulting assistants (robo-advice), online-chats that are used to gather expert advice, the consultation of customers by social media, as wells as the opportunity for customers to advice themselves by comparing providers and products on comparison plat­forms.⁵⁶ These innovations have the effect of eliminating the need for traditional advice p a g e | 12 | in a branch. Customers are now able to inform themselves easily about products from alternative providers and compare prices and Services. If Customers now go into the sales talk with their bank, they have already gathered most of the Information about a product in advance and are now able to negotiate on a favorable basis.

In the area of payments, it can be seen that Customers are increasingly using mobile pay­ment methods, as well as social networks, to conduct their payments.⁵⁷ Those Services include for example the photogravure of bills with smartphones as well as making trans- actions via Social Media Payment (offered for example by the Facebook App).⁵⁸ This sort ofFinTech Company has the advantage that they are often able to offer payment Services much cheaper than traditional banks. For example, a British provider of peer-to-peer transactions offers international payments 90% cheaper than traditional banks.⁵⁹

When it comes to Investments, mobile brokerage enables Customers to trigger and manage transactions on a bond account on their mobile phones.⁶⁰ More transparency in Invest­ments is provided by the so called Covesting, in which investors make their portfolios visible for others.⁶¹ The resulting advantage compared to a traditional bank would be, for example, a shortened response time, which is an important factor in the fast-paced world of financial Investments in e.g. shares.

The area of the value chain that deals with financing gets the influence of disintermedia­tion feit as Customers increasingly avoid existing Service providers and rather use offers for consumer credits or real estate Ioans provided by private lending over crowd-plat- forms.⁶² However, most Customers in that area still use the Services and products provided by traditional banks. Innovations like comparison platforms provide significant ad­vantages for this group of Customers, since they make the different conditions in the mar­ket more transparent. Before this time, Customers had to go from bank to bank to get an overview of different conditions in the market. Nowadays, Customers can view and com­pare conditions of different providers online with a simple mouse click, which not only saves time but also money.

Other innovations can not necessarily be attributed to a particular process within the value chain. For example, universal solutions that provide Customers an overview of all their financial Services (payments, Investments and credits) are affecting every area of cus­tomer processes in the banking model.⁶³ Fürther applications are evolving in financial education and the determination of trends in bonds, indices and currencies from com- ments, social media and financial news.⁶⁴ Those innovations are also affecting every cus­tomer process of the value chain and can thus no only be assigned tojust one.

In summary one can say that banking innovations are affecting specific needs and wants of customers and the associated processes in the first place. Secondly, those innovations are mainly coming from so called non-banks not from traditional financial Service pro­viders, at least that’s the current state of things.⁶⁵ Furthermore, a lot of innovations are not only focusing on the interaction between customer and bank (B2C), but also on this between customers (C2C).⁶⁶ A. sees in principle the retail sector, e.g. asset management or the area of installment credits, as the most vulnerable parts of a bank’s value chain.⁶⁷ P., on the other hand, says that it is not necessarily single areas of the value chain that arejeopardized.⁶⁸ Rather, banks will face a real prob-lem as soon as customers are able to put together individual modules, from different pro-viders, to form a personalized Service portfolio via a single platform.69 Which would put the whole bank at risk and notjust a single part of its business.

3. Overview ofFinTechsvariety

The impact of digitization and digital transformation on the value chain of a bank was examined in the previous chapter. On this basis, individual FinTech Companies are not threatening the bank as a whole but rather the individual areas of the value chain. Those FinTech start-ups realized the desire of customers to obtain their financial Services, espe- cially banking and payment Services, as well as consultation with very low effort, from a single source and available 24 hours a day, 7 days a week. Concentrating on only indi­vidual Services, FinTechs often only offer one Service. Thus, some FinTech Companies concentrate on Ioans and others on current accounts or payment Services. Their objective is to offer various financial Services, based on new technologies and business models, in a more efficient and easier way, and accessible for an increasing share of the population. Modern technologies are replacing analogue processes and personal experience with Soft­ware solutions, modern data analysis and intelligent algorithms.⁶⁹ The entrance of those new players is putting traditional business models at risk. The following sections deal with the different types of FinTechs and the fields of activities in which they are operat- ing.

3.1 Types ofFinTechs

FinTechs operate in different areas of the banking sector. Therefore, it is possible to cat- egorize them based on their field of activity. To clarify the diversity of the FinTech sector, the business models ofFinTechs are grouped in sub-categories. In the following sections, the primary categories and the associated sub-categories are introduced based on sampled Companies. The table below summarizes these segmentations and the associated Compa­nies in order to visualize the diversity of the FinTech sector.

Table 2: Categories of FinTech Companies

Abbildung in dieser Leseprobe nicht enthalten

Source: In Dorfleitner, G., Hornuf, L., FinTech-Markt in Deutschland, 2016, p. 11; Tiberius, V., Rasche, C., Geschäftsmodelle von FinTechs, 2017, p. 2-3.

3.1.1 Credit

One sub-category of the Segment credit is the so-called crowdfunding or crowdlending. This innovation is also known as Peer-to-Peer lending or funding. The term Peer-to-Peer indicates that not the FinTech Company itself gives the credit, it is rather an intermediary between the borrower and the lender. The Startup Company provides a market place on its website where several private, commercial or institutional investors provide money to grant a Ioan to another private person or a Company. The reference to the term crowdlend­ing / crowdfunding becomes clear if the private financial backers are described as the crowd. The difference between crowdlending and crowdfunding lies, on the one hand, with the borrower and, secondly, with the purpose of use. Crowdlending provides regulär credits to private persons or businesses, whereas crowdfunding is mainly used to finance and invest in projects, Startups and SME Companies.⁷⁰ Many self-employed persons or startup Companies are not able to show sufficient collateral.⁷¹ Therefore, due to uncer- tainty and a lack of liability, risk-averse traditional investors often hold back to grant Ioans to self-employed persons.⁷²

The goal of this innovation is to Support good ideas and projects so they don’t fail because of a lack of assets. Auxmoney is the leading platform for crowdfunding and crowdlending in Germany. Depending on the credit score - which is determined based on over 300 factors from auxmoney itself - different yields for investors and different interest rates for borrowers are used.⁷³ For example, in the score-class “AA” the expected average yield for investors is 3,0 %.⁷⁴ In the same dass the expected nominal interest rate for borrowers is starting at 3,95 %.⁷⁵

Crowdfunding or crowdlending are therefore benefiting borrowers with relatively cheap interest rates and less regulations (credits are mostly unsecured) and investors with attrac- tive yields and the ability to spread the assets in several projects. Peer-to-Peer platforms are therefore a threat to traditional banks in the customer processes Investments and fi- nancing. The influence on the value chain is especially feit in performance processes like sales, transaction related and cross-transaction related. Analysts are assuming that P2P- platforms will hold a 25 to 50 % share of the gross Ioan volume in the UK and US con­sumer and UK SME market by 2024.⁷⁶ It is estimated that the volume of Ioans issued by P2P platforms could increase from $5.5 billion in 2014 to $150 billion or higher by 2025, solely in the US market.⁷⁷ In Germany the business of smaller banks is strongly dependent on interests. Due to the current phase of low interest rates, the profitability of these banks is burdened by lower margins in the deposit business, as well as with the replacement of a stock with a high interest portfolio by low-interest new business.⁷⁸ This could lead to higher regulations and to an increase in equity requirements, which means that these banks would have to create a more restrictive lending process.⁷⁹ Therefore, it is most likely that these smaller banks will lose their customers to P2P-platforms.

Another innovation in fmancing are credit platforms. The term platform is extensible and can be used for various types of business models. Auxmoney for example is a platform that solely mediates peer-to-peer transactions. S. on the other hand can be described as an online comparison platform that cooperates with various traditional banks and me­diates credits between banks and private customers, as well as peer-to-peer lending’s. The Company was founded with the mission to offer customers a more comprehensive market overview and transparent, fair and favorable credits.⁸⁰ S. started with only mediating peer-to-peer credits. Later, they began to also mediate credits from traditional banks, which is their main business today. On the one hand, the move towards traditional banks was based on more favorable refmancing costs, on the other hand, it was notjust a matter of covering a niche but of covering the entire credit market and making it more transpar-ent and favorable for the customer.⁸¹

However, next to a Cooperation with banks, they also cooperate with other startups like auxmoney.83 A., CEO of S., says that in the first place, it doesn’t matter whether it’s a bank or a FinTech, what matters is that they do what’s in the Cus­tomers interest and make him happy.⁸² They advertise to offer a wide selection of person- alized offers with the most favorable conditions, thus the customer does not only save a lot of money but also time.⁸³ These are also the clear advantages that S. sees in its business model compared to traditional banks, a comprehensive overview of the market and the guarantee for the customer to get the best offer.⁸⁴

Another example would be the American start-up OnDeck, which focuses to provide cap­ital in form of short and long-term Ioans, as well as lines of credit, to small businesses.⁸⁵ Since its establishment in 2007, the start-up has issued over $7 billion in Ioans for over 50.000 small businesses in more than 700 industries.⁸⁶ It is to stay that all platforms, no matter what kind of credit they are mediating, all advertise with a quicker response to Ioan applications than traditional banks. However, the real issue for traditional banks is that the acquisition of the customer gets harder since they should be more competitive than alternative providers. Also, comparison platforms generate a lot of revenue since they deliver a lot of credit applications. However, banks’ margins are under pressure since the mediated interest rates usually are very low and comparatively high commissions are paid to the intermediary. Therefore, platforms are mainly threatening established banks in the customer process of fmancing as well as in the sales processes of the value chain, which are defined in marketing and product Information, contacting the customer, finan­cial consultation, and the creation of an offer.

Factoring is also a form of lending. It is not a credit in the classical sense, but the sale of Claims. The buyer of the claim, so called factor (mostly a Factoring Corporation) provides the amount due immediately to the seller of the claim. The customer then pays the amount back to the factor. Thus, the seller of the claim receives its money quicker and eliminates the risk of a payment default, since the factor takes that risk (the fmancing effect). FinTechs are also operating in this area of financial Services. The probably most known FinTech in this sector would be the Swedish Company Klarna. It offers Customers the opportunity to pay the open amount immediately, by invoice within 14 to 30 days or by installments (whereby the payment by installments is quite expensive with an interest rate of 11.95 %).⁸⁷ Klama advertises for Companies that want to use factoring as a means of fmancing with an increase of the efficiency of marketing measures, reduced cost in ac- quisition of new Customers, personalized offers for Customers and checking creditworthi- ness in real time.⁸⁸ This type of Startup is especially threatening traditional banks in the process of fmancing (private fmancing as well as corporate fmancing). Especially since banks decide if a Company is creditworthy based on historical data, e.g. historical income or already gained prosperity (collateral).⁸⁹ This approach doesn’t consider current and prospective developments and impedes entrepreneurs to develop their potential because of a lack of capital.⁹⁰ However, a distinction must be made between business Customers and private Customers.

3.1.2 Payment Technologies

Goods and Services are increasingly purchased on the internet, which strengthens the us- age of cashless payment methods.⁹¹ The transaction volume in the Subsegment of pay­ment methods was €17 billion in 2015, of which €15 million accounted for payments done while shopping online.⁹² Also, regarding the current discussion to abolish cash grad- ually or limit its usage, alternative payment methods are gaining more and more im- portance and attention. From 2007 till 2015, 79 FinTech Companies that specialize in this segment have been founded, offering various types of alternative payment methods.⁹³ However, the probably best-known FinTech in that segment is the online payment Service PayPal. The US-based FinTech Company offers various payment Services for consumers and business Customers. For example, once consumers open an account and submit their banking or credit card Information, they are able to pay in countless online shops only with their e-mail address and a password.⁹⁴ Furthermore, it is possible to send money to friends and relatives, as well as to request money by only using an e-mail address, pro- vided the recipient is also registered at PayPal.⁹⁵ For business Customers, PayPal öfters a business account that allows merchants to offer their Customers various payment options. With PayPal PLUS Customers can choose between the four most populär payment meth- ods (PayPal, debit, credit, or invoice), even if they don’t have a PayPal account.^{96 97} PayPal express integrates the PayPal button in the payment process on the merchant’s website, which makes the payment process even faster and reduces possible cancelled sales." Additionally, if merchants decide to integrate PayPal for their payment processes, pay­ment websites are automatically optimized for mobile devices.⁹⁸ However, even though Germans prefer to pay in cash, they are still increasingly shopping on the internet. The dilemma here is that online purchases are not paid in cash, but are processed through online payment Services like PayPal. The Startup Company barzahlen discovered that niche and offers the Service to pay online bills in cash by using a barcode. They cooperate with various drugstores, supermarkets, and retail merchants that act as payment points.⁹⁹ Next to a Cooperation with online merchants, barzahlen is also active in the sectors energy supply, insurance and telecommunications, as well as in the gaming business, travel busi­ness, and receivables management.¹⁰⁰ They also provided a solution to deposit and dis­burse money on the current account.¹⁰¹ Their long-term vision is to replace the branch of a bank and become the place where people manage their banking business like bill pay­ments and cash supply.¹⁰² This type of Service is different than the majority of alternative payment methods. While most of alternative payment methods are based on deviating from cash and offering payments on a pure online basis, barzahlen goes the other way and focuses on cash payments. This makes sense especially because even though many people are still skeptical of online payment methods and reluctant to disclose banking Information on the internet, they still increasingly use the convenience of online shopping.

However, the category of payment technologies might contain the most FinTech Startups of all categories, all offering different types of payment methods. Mainly because the process of payments is easy to standardize and digitize. Nevertheless, due to a large num­ber of Startups, certainly not every single one of them will be successful in the long- or medium-term. However, it is to say that the more automated and convenient the purchas- ing process of a platform is, the less consumers will switch to a bank for the process of payment transaction.¹⁰³ Therefore, new and alternative payment methods are especially affecting the value chain of a bank in payments (e.g. payment Orders and direct debiting) since Customers are increasingly moving away from traditional methods like transfers. Though, none of the current technologies have been able to enter the mass market, which is partly attributable to the preference for traditional payment methods (cash is still the most populär payment method in Germany).¹⁰⁴ Nevertheless, the planned collaboration of Apple Pay with various credit card providers could change this in the medium term.¹⁰⁵

Payments are always made in a specific currency. A new type of currency is the electronic currency, also called crypto currency. It is based on algorithms that realize a distributed, decentralized, and safe payment System.¹⁰⁶ Bitcoin is just one of many other variants of digital currencies. It was developed to conduct payments in the internet independent of other currencies like Dollar or Euro.¹⁰⁷ The technology Bitcoin is based on Blockchain technology and enables payments in real time, which means that the money is available within seconds.¹⁰⁸ The blockchain technology works like a cash book in which every sin­gle transaction is recorded.¹⁰⁹ The difference to the cash book of a traditional bank is that it is not located in a central location, but everyone that uses Bitcoin has a copy of this cashbook on its own Computer.¹¹⁰ This makes every transaction transparent and trackable. However, the persons that are behind these transactions are anonymous, which makes Bitcoin a populär currency for illegal businesses and is therefore deeply criticized.

[...]

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¹ Davies, S. et al., Blurred lines: How FinTech is shaping Financial Services, 2016,p. 3.

² Compare Dapp, T., Fintech - The digital (r)evolution in the financial sector, 2014, p. 7.

³ Compare Omau, F., Digitale Transformation, 2017, p. 50.

⁴ Compare A., Interview, Appendix 1, 2017.

⁵ Compare P., Interview, Appendix 2, 2017.

⁶ Compare Ibid.

⁷ Compare Ibid.

⁸ Compare Dapp, T., Fintech - The digital (r)evolution in the financial sector, 2014, p. 3.

⁹ Compare A., Interview, Appendix 1, 2017.

¹⁰ Compare Dapp, T., Fintech - The digital (r)evolution in the financial sector, 2014, p. 10.

¹¹ Compare Ibid, p. 6.

¹² Compare Ibid, p. 6.

¹³ Compare Ibid, p. 6.

¹⁴ Compare Ibid, p. 7.

¹⁵ Compare http://sloanreview.mit.edu/article/the-digital-transformation-of-traditional-business/, accessed on 06-08-2017.

¹⁶ Compare Ibid.

¹⁷ Compare Ibid.

¹⁸ Compare http://sloanreview.mit.edu/article/the-digital-transformation-of-traditional-business/, accessed on 06-08-2017.

¹⁹ Compare Ibid.

²⁰ Compare Ibid.

²¹ Compare Ibid.

²² Compare Smolinski, R., Gerdes, M., Innovationsmanagement in der Finanzbrache, 2017, p. 40, 41.

²³ Compare Châlons C., Dufft, N., Die Rolle der IT als Enabler für Digitalisierung, 2016, p. 28.

²⁴ Compare Ibid, p. 29.

²⁵ Compare Ibid, p. 29.

²⁶ Compare Ibid, p. 29.

²⁷ Compare Omau, F., Digitale Transformation, 2017, p. 50.

²⁸ Compare Zumstein, D., Kunischweski, D., Design und Umsetzung eines Big Data Service im Zuge der digitalen Transformation eines Versicherungsuntemehmens, 2016, p. 321.

²⁹ Compare Ibid, p. 321.

³⁰ Compare Westerman, G. et al., Digital Transformation, 2011, p. 17.

³¹ http://sloanreview.mit.edu/projects/embracing-digital-technology/, accessed on 21-09-2017.

³² Compare Höttges, T., Digitalisierung ist Chefsache, 2016, p. 6.

³³ Compare Alt, R., Puschmann, T., Digitalisierung der Finanzindustrie, 2016, p. 36 - 40.

³⁴ Compare Ibid, p. 36 - 40.

³⁵ Compare Ibid, p. 36 - 40.

³⁶ Compare Alt, R., Puschmann, T., Digitalisierung der Finanzindustrie, 2016, p. 36 - 40.

³⁷ Compare Ibid, p. 36 - 40.

³⁸ Compare Ibid, p. 36 - 40.

³⁹ Compare A., Interview, Appendix 1, 2017.

⁴⁰ Compare Ibid.

⁴¹ Compare Ibid.

⁴² Compare Ibid.

⁴³ Compare P., Interview, Appendix 2, 2017.

⁴⁴ Compare Ibid.

⁴⁵ Compare Ibid.

⁴⁶ Compare Ibid.

⁴⁷ Compare Ibid.

⁴⁸ Compare Ibid.

⁴⁹ Compare Ibid.

⁵⁰ Compare Dupas, M. et al., Global Retail Banking 2017, 2017, p. 3.

⁵¹ Compare Ornau, F., Digitale Transformation, 2017, p. 51.

⁵² Compare Ibid, p. 51.

⁵³ Compare Ibid, p. 52.

⁵⁴ Compare Alt, R., Puschmann, T., Digitalisierung der Finanzindustrie, 2016, p. 94.

⁵⁵ Compare Ibid, p. 94.

⁵⁶ Compare Ibid, p. 95.

⁵⁷ Compare Alt, R., Puschmann, T., Digitalisierung derFinanzindustrie, 2016, p. 95.

⁵⁸ Compare Ibid, p. 95.

⁵⁹ Compare Drummer, D. et al., Fintech - Herausforderung und Chance, 2016, p. 2-4.

⁶⁰ Compare Alt, R., Puschmann, T., Digitalisierung der Finanzindustrie, 2016, p. 95.

⁶¹ Compare Ibid, p. 95.

⁶² Compare Ibid, p. 95.

⁶³ Compare Alt, R., Puschmann, T., Digitalisierung der Finanzindustrie, 2016, p. 95.

⁶⁴ Compare Ibid, p. 95.

⁶⁵ Compare Ibid, p. 99.

⁶⁶ Compare Ibid, p. 99.

⁶⁷ Compare A., Interview, Appendix 1, 2017.

⁶⁸ Compare P., Interview, Appendix 2, 2017.

⁶⁹ Compare Ibid.

⁷⁰ Compare Alt, R., Puschmann, T., Digitalisierung der Finanzindustrie, 2016, p. 11.

⁷¹ Compare Wardrop, R. et al., Moving Mainstream, 2015, p. 18.

⁷² Compare Dapp, T., Fintech - The digital (r)evolution in the financial sector, 2014, p. 23.

⁷³ Compare Ibid, p. 23.

⁷⁴ Compare https://www.auxmoney.com/kredit/darlehen-crowdfunding.html, accessed on 08-10-2017.

⁷⁵ Compare https://www.auxmoney.com/infos/rendite-und-gebuehren, accessed on 10-10-2017.

⁷⁶ Compare https://www.auxmoney.com/infos/faire-gebuehren, accessed on 10-10-2017.

⁷⁷ Compare Leech, C. et al., P2P Lending, 2014, p. 20.

⁷⁸ Compare Hernandez, R. et al., Peer pressure, 2015, p. 1.

⁷⁹ Compare Steinkühler, D., Peer-to-Peer Kredite, 2017, p. 144.

⁸⁰ Compare Ibid, p. 144.

⁸¹ Compare A., Interview, Appendix 1, 2017.

⁸² Compare Ibid.

⁸³ Compare Ibid.

⁸⁴ Compare A., Interview, Appendix 1, 2017.

⁸⁵ Compare https://www.smava..de/brokerage/ueber-uns.html, accessed on 10-10-2017.

⁸⁶ Compare A., Interview, Appendix 1, 2017.

⁸⁷ Comparehttps://www.ondeck.com/company, accessed on 10-10-2017.

⁸⁸ Compare Ibid.

⁸⁹ Compare https://www.klama.com/de/verkaeufer/, accessed on 13-10-2017.

⁹⁰ Compare Ibid.

⁹¹ Compare Bommer, M., Kempf, S., Factoring für Freiberufler und Selbstständige, 2017, p. 160-161.

⁹² Compare Ibid, p. 160-161.

⁹³ Compare Allegrani, S. et al., Zahlungsverhalten in Deutschland 2014, 2015, p. 10.

⁹⁴ Compare Dorfleitner, G., Homuf, L., FinTech-Markt in Deutschland, 2016, p. 46.

⁹⁵ Compare Ibid, p. 46.

⁹⁶ Compare https://www.paypal.com/de/webapps/mpp/personal, accessed on 24-11-2017.

⁹⁷ Compare https://www.paypal.com/de/webapps/mpp/personal, accessed on 24-11-2017.

⁹⁸ Compare Ibid.

⁹⁹ Compare Ibid.

¹⁰⁰ Compare Ibid.

¹⁰¹ Compare https://www.barzahlen.de/de/ueber-uns, accessed on 24-11-2017.

¹⁰² Compare Ibid.

¹⁰³ Compare Ibid.

¹⁰⁴ Compare Ibid.

¹⁰⁵ Compare Dapp, T., Fintech - The digital (r)evolution in the financial sector, 2014, p. 20.

¹⁰⁶ Compare Ibid, p. 20.

¹⁰⁷ Compare Ibid, p. 20.

¹⁰⁸ Compare Jung, G., Aufbewahrung und Handel von Kryptowährungen, 2017, p. 105.

¹⁰⁹ Compare https://www.welt.de/debatte/kommentare/articlel67558828/Bitcoin-werden-scheitem-und- die-Welt-veraendem.html, accessed on 18-10-2017.

¹¹⁰ Compare Ibid.

• College: University of Applied Sciences Essen
• Grade: 1,0
• Author: Alice Hofmann (Author)
• Publication Year: 2018
• Pages: 84
• Catalog Number: V1014867
• ISBN (eBook): 9783346429919
• Language: English
• Tags: FinTechs, Finanzindustrie, Digitalisierung, Banken