FinTech and Its Disruption to Financial Institutions

FinTech and Its Disruption to Financial Institutions

Chen Liu (Trinity Western University, Canada)
DOI: 10.4018/978-1-5225-7074-5.ch006

Abstract

This chapter studies how FinTech is transforming traditional financial institutions (FIs). This chapter achieves the four related goals. First, it discusses the current stage of FinTech development in different areas such as crowdfunding, payment, blockchain, and cryptocurrency. Second, it examines how each FinTech development affects traditional FIs, in both positive and negative ways. Third, it explores how FIs are currently managing FinTech innovations. It also suggests ways through which these institutions could best utilize FinTech to better serve their customers and eventually optimize the overall financial system. Finally, following the book's focus on man's role at the center of technology advancement, this chapter discusses whether FIs' customers' needs are still placed at the center of FIs' incentives to adapt new technology, and if not, how can we focus back to the people that the financial system ultimately serves.
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Introduction

Financial Technology (FinTech) is defined as “a new financial industry that applies technology to improve financial activities” (Schueffel, 2016). This chapter studies how FinTech is transforming traditional financial institutions (FIs), including banks and investment companies such as mutual fund, hedge fund, venture capital firms (VCs) and private equity firms (PEs). This chapter achieves the four related goals. First, it discusses the current stage of FinTech development in various areas such as crowdfunding, payment, blockchain and cryptocurrency. Second, it examines how each FinTech development affects traditional FIs, in both positive and negative ways. Third, it explores how FIs are currently managing FinTech innovations. It also suggests ways through which these institutions could best utilize FinTech to serve their customers and eventually optimize the overall financial system. Finally, following the book’s focus on man’s role at the center of technology advancement, this chapter discusses whether customers’ needs are still placed at the center of FIs’ incentives to adopt new technology, and if not, how can we focus back to the people that the financial system ultimately serve.

This chapter makes the following contributions. First, this chapter is one of the first studies to provide an overview of all three major areas—crowdfunding, payment, and blockchain—of FinTech development and their impacts on FIs. Second, it inspires critical thinking on the effects of technology on traditional industries and how traditional industries use technology to optimize their businesses. The discussion also focus on the effect of such transformation on man, discussing both economic and social impacts.

Key Terms in this Chapter

Cryptocurrencies: Digital assets that use cryptography to secure transactions, to control the creation of additional units, and to verity the transfer of assets.

Crowdfunding: An umbrella term that refers to the practice of funding a project or business by raising many small amounts of money from a large number of people, typically through the internet.

Blockchain: Database of information that offers permanent and unchangeable public ledger for transactions in general and is secure and resistant to modification by design.

Supply Chain Finance: The financing activities that allow supplier to borrow from a bank or FinTech platform with the interest rates tied to a buyer’s credit rating.

Smart Contract: Computer programs that execute automatically based on conditions defined beforehand such as the facilitation, verification, or enforcement of the performance of a contract.

Fintech: Financial technology, the use of technology in financial service.

Initial Coin Offering (ICO): Sales of tokens or coins offered by blockchain companies looking to raise funds.

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