Master class Fintech

Abril-Juliol 2021
Títol sessió:
“Digital Transformation in
Financial Services”
Professor:
Gerard Albà Soler
Master Class Finance

PETD Sessió 1 Pág. 2
Programa Executiu en Transformació Digital- Edició Municipis
1. Introduction
1.1 Introduction: Innovation, Technological change and Competition. GovTech case studies
1.2 Business model: Strategy and business Transformation
1.3 Fintech
1.4 Large technology companies, Bigtechs
1.5 DeFi and the sharing economy
2. Regulation
2.1 Introduction: Financial stability, AML/CFT, Consumer
2.2 Rules on Access to data. PSD2
3. Operations: People, Processes and Data
3.1 Introduction: unbundle of the Value Chain and processes
3.2 Target Operating Model
Digital Transformation in Financial Services

The primary functions of a financial system in the economy:
i. Payments system with a medium of exchange
ii. Credit: the transfer of resources from savers to borrowers
iii. Savings and Investments: the gathering of savings for pure time transformation
iv. Insurance: the reduction of risk through insurance and diversification
The importance of finance for economic growth naturally raises the importance of financial innovations
The recent emergence of fintech (technological change in Finance) has greatly expanded interest in
financial innovation as new products and services (ex: payments, cryptos), production processes (ex:
machine learning, blockchain), and organizational forms (ex: marketplaces, neobanks) are being created
and deployed
Digital Transformation in Financial Services

Payments, featuring in a majority of the basic services availed by
citizens, form the core of every economic flow in a city, including
salaries, consumer spending, business procurement and tax
collection
• GovTech Singapore: the E-Payments initiative is driven by the
Monetary Authority and by the Smart Nation and Digital
Government Office
Singapore is also developing its payments regulatory framework
Case study: GovTech Payments in Smart Cities
• PayNow
PayNow allows citizens to do peer-to-peer (P2P) digital transfers
with the use of either the NRIC or mobile numbers
• PayNow (Corporate)
PayNow (Corporate) allows business-to-business and consumer-
to-business digital transactions. Businesses can link their
corporate bank accounts to their Unique Entity Numbers (UENs)
and can easily make and receive payments using UENs
• Singapore Quick Response (SGQR) Code
With the SGQR code, merchants only need a single QR code to
receive mobile payments from customers

• Visa commissioned Roubini ThoughtLab to make a
comprehensive review of the current state of
digital payments in key urban areas around the
world to quantify the net benefits to consumers,
businesses, and governments
• The analysis used the NiGeM model, an econo-
metric model used by prominent central banks
around the world such as the Bank of England, the
European Central Bank and others, to estimate the
“catalytic” impacts (economic growth, productivity,
employment and wages) that a move toward
digital payments would have on each of the 100
cities analyzed
https://usa.visa.com/dam/VCOM/global/visa-
everywhere/documents/visa-cashless-cities-report.pdf
GovTech Payments in Smart Cities

Copenhagen Fintech supported Danish fintech start-ups to help SME's in regards of the COVID-19 crisis, with
liquidity and more
• Shortly after relief packages were accepted at the government-level, CrediWire launched a solution, where an
SME can go and grant them access to their Cloud Accounting data in order to see if they are eligible for funding.
CrediWire can also assess how much money the company is eligible to apply for and generate the necessary
documentation for the company and the accountants.
Case study: Denmark’s response to covid-19 crisis
Collaboration between government and FinTech startups
• On local communities, a nationwide platform was
developed to connect struggling businesses with people
who may have some spare cash to spend upfront, on
prepaid services, for example. This idea has been
consolidated into a platform called YourLocal with many
local businesses registered

Urban innovation initiatives supported by incumbent payment networks like Mastercard
• New York City uses actionable data-driven insights to guide Covid-19 crisis response. Utilizing anonymized and
aggregated transaction data, Mastercard provided near real-time actionable insights to New York City leaders to
help them analyze and estimate tax revenue to inform budget planning, and to put in place and manage
recovery policies and measures
• London transit solutions like contactless and mobile ticketing. Mastercard worked with TfL to complement
London’s existing closed-loop smart card system, Oyster, with open-loop EMV payment acceptance in order to
enable the city’s residents and visitors to use the usual payment card or enabled device to pay for public transit.
London’s contactless ticketing deployment was a world first and set a new standard for transit ticketing
innovation
• The City of Los Angeles, Mastercard and a fintech partner collaborated to launch the “Angeleno Campaign” in
only eight days, including a donation platform, promotion campaign, and disbursement solution. It enabled
inclusive access for all residents to city benefits with a platform for engagement
https://usa.visa.com/content/dam/VCOM/global/visa-everywhere/documents/government-e-payment-adoption-ranking-study-2018.pdf
Case study: Mastercard City possible

• Spanish regulatory sandbox: testing
grounds for new business
models that are not protected by
current regulation, or supervised by
regulatory institutions. The purpose
of the sandbox is to adapt
compliance with strict financial
regulations to the growth and pace of
the most innovative companies, in a
way that doesn’t smother the fintech
sector with rules, but also doesn’t
diminish consumer protection
• Pensumo got Public funding through
the UE Social lnnovation Program
H2020-SME
Case study: Sandbox Spain – Pensumo Retirement plans

The financial industry has at all times been based on the processing of information. Storage and transfer of
information is a core element of financial sector operations: clients liabilities, payments, transactions, credit data
analysis, trading of securities, among others.
But behind the most recent wave of digital transformation and changes there are three main technological
advances, plus an additional one to also take into account well into the future:
i. Broadband networks, and smart mobile devices and IoT
ii. Cloud computing services and SaaS
iii. Big datasets and the use of artificial intelligence
iv. Blockchain and DLT
Technological change and Competition

A number of emerging innovation technologies are also becoming transformative:

i. Broadband networks and smart mobile devices
Banking front end vs Traditional physical branches
This has led to new –digital- distribution and service channels, mainly ebanking (online banking) and mobile apps,
without the need of a network of physical branches.
From a competition perspective:
• Opportunity to new providers of financial services
• Improve comparability of products and services
• Reducing cost in switching from one bank to another
This results in an increase of competitive pressure for traditional financial players

Financial Inclusion
• The growth of mobile money—one of the early
fintech solutions for payments—has been most
prevalent in emerging economies. In most countries,
fintech for financial inclusion started with “spend”
and is fast moving also into “lend”
• There is ample evidence of the benefits of digital
financial services, including greater financial inclusion
and stronger GDP growth. In Low-middle-income
Countries, mobile money is far more accessible than
any other type of digital financial service, particularly
outside urban centres

Financial inclusion in Low-middle-income Countries
https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2021/03/GSMA_State-of-the-Industry-Report-
on-Mobile-Money-2021_Full-report.pdf

ii. Cloud computing services
Replacement of intensive capital investment with operating expenses, lowering barriers of entry.
• Efficiency. Increased and cheaper computing power
• Flexibility and Scalability: can consume on-demand computing and software capacity
It can be deployed in different models: Infrastructure as a service (IaaS), Platform as a service (PaaS) and SaaS
Regulatory aspects of the sector in each country must be also taken into account (ex: outsourcing policies)
In the area of banking and payments, where services
are more standardised, the use of a standardised core
system in the cloud can be attractive
• Developing and maintaining own core applications
can be inefficient
• Data protection requirements have to be taken into
account (GDPR)
• Challenge lies in the migration process (databases
and business applications)
• Regulatory implications for all the previous points
• Change in the Operating Model (Organization)

Explosion in the amount of data available and new predictive/analysis tools
Some uses cases in Finance: New sources of data in the analysis of credit risk; Control of suspicious transactions in
AML or fraud; Personalisation of commercial offers and financial advice; Investment management new techniques

New AI techniques in investment management (ex BlackRock funds)

New AI techniques in investment management (ex BlackRock)

Technological change and Competition: Blockchain

iv. Blockchain and DLT
• The fact that the design of bitcoin was focused on the use of the scheme as a peer-to-peer payment
network without intermediaries led to the idea that the underlying technology could be used as for
digital payments without the need of the bitcoin token
• Example: JPMorgan’s Quorum global institutional payments system based on a permissioned Ethereum
distributed ledger and a smart contract platform

Digital transformation doesn’t lie in the new technologies individually. It stems from how companies
integrate them to transform their business and how they work
In the Finance sector –highly regulated-, supervisory process performed by regulators is built around risk
assessments, but it also includes business model analysis as a key part:
The European common supervisory SREP framework comprises the following major components:
• Business model analysis
• Assessment of internal governance and institution-wide control arrangements
• Assessment of risks to capital and adequacy of capital to cover these risks
• Assessment of risks to liquidity and adequacy of liquidity resources to cover these risks
Main drivers for adapting business models to these financial and technological innovations include:
profitability concerns (low rates), customer expectations and behaviour, competition, and regulatory
changes
Business model: Strategy and business Transformation

Case study: Wealth management business model
Business model: Strategy and business Transformation
https://finadium.com/ft-blackrocks-aladdin-under-scrutiny-for-
crowding-risk-as-assets-pass-20tr/

• New companies and startups who have taken the
opportunity of the digital transformation to break
into the financial sector
• These emerging companies tend to specialise in a
specific financial product or service, sometimes
also targeting a particular customer segment
• In general, they operate in those areas of the
financial sector which are not subject to a heavy
regulatory burden and which are not capital-
intensive: such as payments and transfers, along
with credit-related services that are not based on
deposit taking (such as crowdfunding platforms) or
applications that help customers to manage their
personal finances (such as account aggregators
and automated financial advice)
Fintech

These emerging Fintechs provide the following
services:
1) Banking –deposits and lending-
2) Payments, transfers and forex
3) Wealth and asset management
4) Personal finance
5) Insurtech
6) Digital currencies
7) Enabling technologies and infrastructures
Fintech

1) Banking
• The business model related to deposits tend to replicate those used offline, while usually operating as an aggregator of
financial services that seek to empower customers with a customer-centric approach
• The most innovative business models are related to lending services: P2P lending or Marketplace lending. Ley 5/2015
(CNMV) regulates the Plataformas de Financiación Participativas (PFP) in Spain, for example.
• P2P lending are based in multi-sided platforms (borrowers and investors) and crowd-sourcing (individuals and funds)
• The equity crowdfunding model provides funding in Exchange of shares in the Company
Fintech
Case Study: Auxmoney business model
• Enables retail and institutional investors to directly invest
into loans
• Lending platfgorms can also generate loans and keep them
in their own balance
• Uses PSD2 to access banks’ accounts of the borrower for
risk and credit scoring

6) Digital currencies (cryptocurrencies)
Examples of –private- digital currencies are Bitcoin, Ethereum, Cardano, Ripple, Libra, CDBCs, among others
The main difference between electronic money and a digital currency is that the traditional e-money is based on the
conventional bilateral settlement with a trusted central party (central bank), while digital currencies are based on the
underlying peer-to-peer (network) structure operated without any central party
Authenticity and prevention of double spending (ensuring that any unit transferred from one user to another is not spent
again by the old holder) of digital currencies is preserved by cryptographic techniques
Fintech
Case Study: The People’s Bank of China has been developing
the digital yuan, a so-called central bank digital currency that
aims to replace some of the cash in circulation
• China has already started real-world trials for the digital
currency in a number of cities including Shenzhen, Chengdu
and Suzhou
• The digital yuan could increase competition in China’s
mobile payments market which is dominated by Ant
Group’s Alipay and Tencent’s WeChat Pay
CBDC
• A CBDC is an instrument issued by a Central Bank, using
cryptography and DLT, to offer an electronic variant of
central bank money. It is a liability of the central bank,
which may emulate cash (if held by the eneral public) or
central bank reserves (if held only by Banks and entities
that have access to the wholesale payments system)

• Several large technology companies have begun to incorporate
financial products within their digital ecosystems. Examples of these
are Amazon, Facebook, Google, and Apple in the US and Europe and
Alibaba and Tencent in China
• This expansion represents a considerable disruption to the financial
sector due to the size of these companies and their consolidated
digital ecosystems. Like the fintechs, these companies also offer
specific financial products and services, unbundled from the banks'
value chain but nevertheless incorporated within their own value
proposition
• The final extent of this expansion is also dependent on the future
regulatory and competition policy framework developmenteas,
such as the collection of deposits
• They may potentially alter the structure of the financial sector, due
to:
(i) they develop network effects
(ii) they have a position of gatekeepers or entry points to
related markets
(iii) they generate and exploit massive amounts of data
Bigtech companies

Goldman Sachs (IB) partnership with Apple to launch a new consumer credit card
Bigtech companies

Amazon lending business to merchants and shoppers
• Big digital companies can also leverage their market power (for example, rebates to buy products)
and customers’ data (for example, more accurate credit scorings) to enter the Marketplace lending
services
Bigtech companies

The Financial sector is a highly regulated sector due to the important role it plays in the economy
Public policies interventions seek thus to ensure financial stability, including deposit insurance, last-
resort lending and prudential regulation
• Deposit insurance seek to assure the power of bank-account payments to clear debts
• Last-resort lending provides emergency liquidity to solvent yet illiquid institutions
• Prudential regulation seeks to limit risk of loss for the previously-mentioned safety nets by ensuring
sufficient levels of capital, provisions and liabilities with sufficient capacity to absorb losses, as well
as appropriate risk control systems
• In addition to these, regulation includes other rules concerning anti-money laundering and
combating the financing of terrorism (AML/CFT). They are not related to financial stability. But the
authorities exploit the banks' the key role in the economy's payment flows
But Banks and Financial institutions are also subject to other regulations which pursue competition
and consumer protection goals
Regulation

A third line of regulations pursues competition and consumer protection goals
A good example of this is the new European Payment Services Directive (PSD2), which obliges banks to open
up their systems to other players, who, with the authorisation of their customers, can access bank accounts in
order to offer payment initiation services and account information services
Regulation
• The Payment initiation services have a direct impact on the
retail payment market. The ability of third-parties to make
bank transfers on behalf of customers means that new
payment instruments, based on the direct movement of
funds from between accounts, may compete with debit and
credit cards in retail payments, especially online
• While the movement of funds continues to take place
within the banking infrastructure, banks lose the direct
relationship that they have with the customer at the
moment of payment and become mere providers of the
underlying infrastructure
• On the other hand, account information services which aggregate data
from the customer's transactions with various entities increase the
comparability between payment account services and reduce the cost
for the consumer of switching from one provider to another
• They serve thus as interfaces or intermediaries between the customers
and financial institutions, reducing the direct relationship between the
two
• Account information services have also access to customer financial
transaction data, whose value goes beyond the accounts and payment
services market. This data provides companies with information on a
customer's consumer habits and patterns, allowing them to ascertain
their credit and savings needs and analyse their risk profile. As PSD2
facilitates access to this data by other banks and new players,
competition for a range of financial products and services may increase

Open Banking

Blockchain, or DLT (distributed ledger technlogy) is used as a decentralised payment mechanism that register any payments
between parties. It is based on a peer-to-peer network of nodes collaborating to maintain the ledger of currency transactions
• A blockchain platform can be Open (or permission-less), vs Private (permissioned)
• Mining is the activity of updating or changing the state of the blockchain. This consists of adding a new block with the last
transaction held, after calculating its hash code (cryptographic mathematical function aimed at verifying the integrity and
security of a transaction)
• The transactions appended to the block come from a wallet. Ther wallet is the final user application used to securely
manage and use their coins
• Smart contracts allow the parties to implement any contract payment covenants to be self-executed when the event
occurs (for example, a monthly payment of a house rental)
Blockchain and DeFi

DeFi and the Sharing economy
1.The settlement layer consists of the blockchain and its native protocol
asset (e.g., Bitcoin BTC on the Bitcoin blockchain and ETH on the Ethereum
blockchain). It allows the network to store ownership information securely
and ensures that any state changes adhere to its ruleset
2.The asset layer consists of all assets that are issued on top of the
settlement layer: Tokens
3.The protocol layer provides standards for specific use cases such as
decentralized exchanges, debt markets, derivatives, and on-chain asset
management. These standards are usually implemented as a set of smart
contracts and can be accessed by any user (or DeFi application)
4.The application layer creates user-oriented applications that connect to
individual protocols. The smart contract interaction is usually abstracted by a
web browser-based front end
5.The aggregation layer is an extension of the application layer. Aggregators
create user-centric platforms that connect to several applications and
protocols. They usually provide tools to compare and rate services, combine
relevant information in a clear and concise manner, etc

DeFi equivalent for every financial instrument and function
https://pages.consensys.net/intro-to-defi-webinar
DeFi and the Sharing economy

The advances in technlogy make easier to unbundle the value chain
For example, the distinction between manufacturing ad distribution has accelerated
Quite often in the Financial sector, much effort and resouces still go into operating legacy processes,
systems, and dealing with regulatory requirements
• Distribution-focused banks tend to offer a full product suite, tailored to particular customer segments.
They outsource many products and processes such as credit cards, asset management or insurance.
And they focus on cutomer relationships, analytics, channels and economies of scope
• Manufacturing banks build world-class solutions for specific product needs and client segments,
including institutions (B2B). They focus large-scale product leadership (economies of scale) ands
technological expertise (efficiency)
Rather than models based on generic (usually traditional end-to-end processes) industry benchmarks,
institutions have to rethink the role, structure and processes of many functions (IT, risk, compliance,
front, back, etc)
Operations: People, Processes and Data

The operating model is the blueprint for how resources are organized and operated to get work done:
• Structure/matrix of geographies, segments and products
• Governance and accountabilities
• Culture of working
• People and talent
Operations: People, Processes and Data

IT and Operating Model of a Bank

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