03 Payments, Banking, and Investing Flashcards
(35 cards)
What are payment systems?
General
Payment systems provide an alternative to cash for settling transaction and transferring funds
–>While cash is settled on the spot, in a payment system a transaction sets in motion a process with multiple steps
There are substantial network effects in any payment system (meaning the more people using the payment systems the better)
- these network effectds are barriers to entry for new players
- thus, many FinTech startups cooperate with established payment networks (e.g. credit card companies)
Why interest in Payment Systems?
- Success of alternative payment systems, especially in emerging markets
* widespread adoption in Africa, has triggered the interest of established financial institutions all over the world (risk to loose market share, and revenue streams) - Value in payments data
* Data on transactions and payments contains a lot of information about the spending behavior of an individual
–>Data protection laws aside, such data allows for targeted marekting or price discrimination
–>Payment data can be a valuable ingredient in big data applications
Payment systems typology
Based on users and transaction sizes
-
Wholesale payment systems
* are used for relativeley few but very large value transfers
* There are only a few participants (mostly commercial and central banks)
* Innovation has happend in waves in the past decades
2. Retail payment systems
* retail transaction are relatively low in value but large in numbers
* Many different user, e.g. Debit/credit cards, PayPal
Distinguish Payment Systems Typology
Based on Netting
Deferred net settlement (DNS)
* accumulate payment over some time period and only settle net amounts
* net payments tend to be much smaller, lowering liquidity requirements
* usually achieved through a central counterparty
Real time gross settlement (RTGS)
* process and transfer payments immediately for every transaction
* no settlement credit risk as payments are settled immediately
* Higher liquidity requirements because transactions are not offset at the same time
–>alos hybrid versions available
Important payment issues
Overview
- Financial Exclusion
- Cross-border payments
Important payment issues
Cross-border payments
International payment are particularly complicated: different currencies, times zones, regulation, risk management
–>as a result international payments can be very slow, opaque and costly, especially for retail transactions
–>Most international retail payments use the correspondent banking model:
The correspondent bank holds funds owned by another bank (the respondent)
–>it uses these funds to provide payment services
–>Some FinTechs facilitate fast cross-border payments: e.g. Wise
Important Payment issues
Financial Exclusion
about 1.7 bn adults do not have payment means other than cash
* studies suggest that access to a bank account can reduce poverty
* cost of sending remittances in many developoing regions is between 6-9%
Remittance payment are important: Flows to low and middle income countries
–>Costs have declined, especially due to digital payments
Front-end payment innovations
Overview: Front
Front-end innovations in payments:
* change how the user interacts with the system, e.g., how to initiate payments
(provide another layer between back-end and the user, in the background still rely on existing payment systems like credit card)
Back-end payments innovation
Back-end
Back-end innovations payment concern the underlying infrastruture to settle transactions or provide a completely new infrastructure
* usually entails a new front-end design
* often these systems are closed-lool, and operate similar to other payment service providers
–>Blockchain and cryptocurrencies also provide an alternative back-end
Banking and importance of the banking sector
Lending basics and
At the core, FI are intermediaries between depositors and borrowers
–>They lend money and provide credit lines to businesses and households
–>The banking secor is crucial for economic growth, poverty reduction, and reduced inequality
Lending inefficiency of current financial system
1.7bn people are substantially underbanked and do not have access to credit markets, especially in the developing world
–>Even if they have access to the financial system, interest rate and fees can reach extreme levels for poor borrowers
–>But also in rich countries, established financial services providers tend to be expensive, especially for households and small businesses, and there seems to be an overall loss in customer trust
Decomposition of Net Margins
–>Net interest rate margins are substantially higher in low-income countries
* There is likely a selection bias in that relativeley poor households and small business do not get any loans in low-icome countries
* Profit-margins are higher in low-income countries, so it is not just driven by risk
FinTech disruptions in lending overview 6 areas
- Sourcing Capital: Tokenized bond (Crypto), Debt platform
- Origination/customer acquisition: Mobile and online applications, Payment gateways
- Credit assessment: alternative data (Facebook, phone), Phone based KYC
- Disbursement: Digital wallets, Virtual currencies, Machine to machine leasing
- Monitoring and servicing: Business monitoring apps, Cloud accounting
- Collection: Pay-as-you-go, automatic deductions
Neo Banks
Short description
sometimes described as banks that do not (yet) have a formal banking licence but partner with established banks to offer banking services
Neo Banks
Business model focus General, type of loans, customers
Challenger and neo banks:
–> have a narrower focus than big commercial banks:
* most cater to households and small to medium size businesses and
* often focus on fixed-term personal loans insted of revolving credit card loans
* most do not have a branch network, but are online-only and usually mobilce centric
–>some specialize in certain loans, e.g. student loasn (like Earnest)
–>Traditionally first emergered in Europe, but can now be find througout the world
—>To compete traditional banks are also starting to launch FinTech like brankds
Marketing and Customer acquistiton
How do CHallenger and Neo Banks compete
- Often target younger people
-
Digital natives and millenials grew up with the technology used
—often prefer digital channels to communicate
—do not have strong ties with established FI - Others target the un(der)banked ->why are not catered to by traditoonal banks
— not just the developing world, surveys indicate that 25% of the US househoulds fall into this category - using challenge or neo banks is sometimes a way to repair bad credit
- setting up account is easier and much faster
–>the ease of onboarding makes it more likely that potential customers try out a new bank before making a final decision
Fees and costs
How do challenger and Neo Banks compete
Advantages and how do they make money
Advantages over established banks:
* offer (some) services for free
* or others are offered at substainially cheaper price
Making money from:
* Interchange fees: Merchants have t pay a fee when accepting card payments
* ATM fees: fees for withdrawing cash
* Interest: typically charge different interest rate for saving and borrowing
* “Freemium” business model: offer a free basic package, and then more expensive premium packages
* keeping cost low, by e.g. not having legacy tech
How do Neo banks and challenger banks provide thier service?
User experiences and Interface
–> they focus on providing their services through intuitive and easy-to-use mobile applications
* apps or web interfaces allow a convenient manamgent of personal finances with more features than why is typically offered (detailed spending statistics, virtual sub-accounts, automatic saving plans and other tools)
* integration of third-party services increases the convenicence of accessing a broad range of financial services
(e.g., internation transer, buy and sell cryptocurrencies)
What is the advantage of providing services with easy-to-use mobile applications?
User experiences and Interface Neo Banks
- apps or web interfaces allow a convenient manamgent of personal finances with more features than why is typically offered (detailed spending statistics, virtual sub-accounts, automatic saving plans and other tools)
-
integration of third-party services increases the convenicence of accessing a broad range of financial services
(e.g., internation transer, buy and sell cryptocurrencies)
Risk management —> Why is credit scoring important?
How doe challenger and Neo Banks comepte?
–>Credit risk is an essential part of any lending activity
* understanding and managing credit risk is crucial to prevent unexpected losses
* more accurate credit risk measurement allows for more precise pricing
–>traditional banks reley on third-party credit scoring services
Risk management —> credit scoring, what are the advantages of FinTechs and BigTech and what are the concerns?
How doe challenger and Neo Banks comepte?
–>traditional banks reley on third-party credit scoring services
–>FinTech have access to alternative data that may be valueable to access credit risk (app usage, social media, browsing history, geolocation, education)
- especially in partnerships with BigTech
–>However, (unintentional) discrimination and privacy regulation may be a concern
Neo Brokers - Characteristics and additional features
–>Provide clients with a way to trade on financial markets
* focus on retail clients, especially younger and tech-savy investors
* fees are overall very low, and minimum investment amounts
* setting up account is easy, fast and convenient
* service provided via intuitive and easy-to-use mobile applications
–>Additional featues:
* trading cryptos
* Build-in robo advsing
Reasons why a large fraction of households don´t invest in the stock market
–>there is a large fraction of underbanked, but also underinvested or “unerbrokeraged” people with no significant wealth management
Multiple reasons:
* high costs in form of fees, commisions, especially for smaller trades
* Minimum investment amounts that are too large for poor households
* Insufficient knowledge to navigate complext process of investing
Two ways how FInTech address the each of “Underbrokeraged” people?
- Brokerage via neo brokers
- Portfolio management by robo advisors
