Chapter One Financial Technology and Digital Economy Overview.pdf

Chapter One: Introduction to Fintech& Digital Economy
This Photo by Unknown Author is licensed under CC BY-ND
Prepared By Dr. Jamileh Ali Mustafa 1

What’s Digital
Economy &what is
Fintech?
The history of
FinTech
Areas of Fintech
Why is Fintech
Important?
Why has Fintech
Become Populr
Now?
Main Fintech Hubs
The Fintech
Unicorns

1.Introduction to Digital Economy
• The digital economy is growing at much faster pace than the overall economy.
• The digital economy is based on data.
• Data transformed into digital numbers like 0 and 1.
• Data is the crude oil of the digital economy. The volume of data generated is growing
exponentially.
• The digital economy is built upon the foundation of technologies developed in the last six
decades – the technology of ICT (Information &Communication Technology). The
advance of ICT allows the industry to move into 5G communication, cloud and edge
computing, Big Data and artificial intelligence, blockchain technology, Industry 4.0, financial
technology (Fintech), digital currency, and many others. These new technologies are altering
the landscape of the financial, business, and trade systems today.
• Digital transformation is closely related to the digital economy, as they are interdependent
and often go hand in hand. The digital economy encompasses all economic activities and
transactions that involve digital technologies and the internet. This includes e-commerce,
online services, digital advertising, software development, and more.
This Photo by Unknown Author is licensed
under CC BY

This Photo by Unknown Author is licensed under CC BY-SA

1.Definition of Digital Economy & Digital Economy
• Technological Integration: Implementing and integrating digital technologies like cloud computing, data analytics,
artificial intelligence, the Internet of Things (IoT), and automation into various aspects of an organization.
• Technological Integration: Implementing and integrating digital technologies like cloud computing, data analytics,
artificial intelligence, the Internet of Things (IoT), and automation into various aspects of an organization.
Digital transformation refers to the process of using digital technologies to fundamentally change or
enhance various aspects of an organization's operations, business models, and activities. It is a strategic
approach that aims to leverage the power of digital technologies to create new value for customers, optimize
internal processes, and drive innovation.
Digital Transformation is based on Technological Integration: Implementing and
integrating digital technologies like cloud computing, data analytics, artificial
intelligence, the Internet of Things (IoT), and automation into various aspects of
an organization.

The digital economy, often referred to as the "internet economy" or "online economy," is an
economic system that is primarily based on digital technologies and the internet. It encompasses all
economic activities that use digital technologies, networks, and data as fundamental components for
conducting business.
The relationship between digital transformation and the digital economy can be understood as follows:
1. Enabler of the Digital Economy: Digital transformation initiatives are a fundamental driver of the digital economy. They
enable businesses to operate more efficiently, reach a broader customer base, and develop new digital products and services.
1. Global Reach: The digital economy allows businesses to reach a global audience, opening up new markets and
opportunities for growth, which digital transformation can facilitate.

2.Fintech & the Digital Economy
• Financial technology (Fintech )and the digital economy are closely intertwined and have a symbiotic relationship. They both
play a significant role in shaping the modern financial landscape and have a substantial impact on various industries and
individuals
Fintech : is a subset of the digital economy. It represents
the use of technology to innovate and improve financial
products & services. Fintech companies leverage digital
technology to create more efficient, accessible, and user-
friendly financial solutions. This includes services such as
mobile banking, payment processing, lending, insurance,
and investment management.

3. What is Fintech?
• If you ever paid for something by your phone, transferred money by app,
or check your bank statement online, then you’re already part of Multi-
billion dollars industry ;
• it’s called Fintech and it’s changing economy around the
world.
• Fintech is short for Financial
Technology .
• Seems simple right ?
• While the term Fintech includes a huge range of products , technology,
and business models; that are changing the financial services industry.
• It refers to everything from cashless payments to crowdfunding platforms
to Robo-advisors to virtual currencies.
Dr.Jamileh Ali Mustafa Jamileh.izzat@yahoo.com 8

Finance + Technology = FinTech

Dr.Jamileh
Ali
Mustafa
Jamileh.izzat@yahoo.com
• FinTech tends to rely on several main technologies; these include:•
Artificial Intelligence (AI): Including big data , advanced data analytics
and machine learning
• Alternative Data: including social media activity and web browsing
data
• Distributed ledger technology: includes open banking, the block chain,
and the foundation of crypto assets
• Peer-to-peer platforms and crowdfunding: type of financing include
large group of people offering to fund a particular project or venture.
10

WHO USES FINTECH??
• Broadly, FinTech describes any Individual or entity using
the internet, mobile devices, and software technology or cloud
services to perform or connect with financial services.
• Many FinTech products and services are designed to
connect consumer finances with technology for ease of use.

FINTECH USERS
1. Business- to -Business (B2B)
2. Business- to- Customer ( B2C)
3.Customer-to – Customer(C2C)
4. Customer-to- Business

Dr.Jamileh Ali Mustafa Jamileh.izzat@yahoo.com
A FinTech firm is one that specializes in offering Digital financial
services (DFS) to consumers or enables other providers to offer DFS.
While many of these companies are relatively new to the financial sector,
others are by now well-established public companies. Examples of
FinTechs include digital payment providers (e.g., PayPal), financial
infrastructure/connectivity providers (e.g., Plaid), digital insurers (e.g.,
BIMA, Policy Bazaar), peer-to-peer lending platforms (e.g., Funding
Circle, Investree).
13

BigTech Firm is a large firm whose primary activity is digital services, like on line
search engines, social media platforms,
e-commerce platforms, ride-hailing platforms, and mobile network operators. Numerous
big techs have started to offer DFS, leveraging their large customer bases and the data they
have on transactions and activities that give rise to payments or a need for credit, insurance or
other financial services (BIS paper no117,2021).

So “Fintech” briefly refers to
-The interaction of financial services &
products with new technology.
- It offers consumers and businesses new ways
of doing financial services, and involves
introducing entirely new ideas and approaches,
such as cryptocurrencies.

Fintech TIMELINE

❖ FinTech history can be viewed in three distinct
time periods:
❑ Fintech 1.0 (1886 – 1967)
Also known“Signs to the Digital Age of Financial Services”
❑ Fintech 2.0 (1967 – 2008)
Also known as “Digital Age of Financial Services”
❑ Fintech 3.0 (2008 – Current)
Also known as “New Age of Financial Services”

The history of FinTech
❑ Fintech 1.0 (1886 – 1967)
Also known“Signs to the Digital Age of Financial Services”
✓1950s — Credit Cards
In 1958, Bank of America launched the BankAmerican card in California, which would
become the first successful recognizably modern credit card.
➢ 1960s — The invention of ATMs
The first withdrawal was made in Enfield, North London in 1967

❑ Fintech 2.0 (1967 – 2008)
Also known as “Digital Age of Financial Services”
✓ 1971 — The Nasdaq
The National Association of Securities Dealers Automated Quotations — was
established in New York, but in its original form, it operated as an electronic bulletin
board, rather than an exchange.
✓ 1972 — SWIFT
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provided
a network that enables financial institutions worldwide to send and receive information
about financial transactions in a secure, standardized and reliable environment.

Continue…
✓ 1990 — Cashback is introduced
Tesco introduced customer cashback on debit card transactions. 7 million
cashback transactions are made in the first year.
✓ Late 1990s — Internet and e-commerce business models emerge
E-Pay and Amazon (launched 1994) were among the first to establish
prominent e-commerce brands. Finally in 2003, almost 10 years after
launching the company, Amazon.com realized its first annual profit.
✓ 2007 — Contactless Payments
The first contactless card transactions occurred in the UK. This technology
offers a quick and convenient alternative to cash for low-value transactions.

❑ Fintech 3.0 (2008 – Current)
Also known as “New Age of Financial Services”
Post-financial crisis of 2008, lack of trust in banks aligned with regulatory change, is opening
the market to new service providers, and allowed the FinTech industry to bloom into a hyper-
growth market.
✓ Bitcoin is born in 2009 followed by other cryptocurrencies using blockchain technology.
✓ Crowdfunding sites that have opened new channels for funding entrepreneurs.
✓ Mobile devices become the primary means by which people access the web and other
financial services.
✓ Open Banking, a new technologies have opened-up to make it easier to create digital
banking products that allows third-party companies access to financial data.

So, What’s Fintech?
• Finance + Technology
• “New financial industry that applies technology to
improve and automate the use of financial services”.
• The financial technology, or fintech, industry, refers
to the group of companies that are introducing
innovation into financial services through the use of
modern technologies. Some fintech firms compete
directly with banks, whilst others have partnered
with them or supply them with good or services.

Areas of Fintech

Examples…
• Blockchain
It is the technology behind Bitcoin and other cryptocurrencies, but it can be used for many more
applications.
• Online Payments and Digital Banking Services
Customers can open an account through an app on their smartphone instead of making the trip to a
physical branch or filling out endless paperwork in paper format.
• Robo-advisors (an example of Artificial Intelligence)
These online platforms can manage investments and suggest a
personalised portfolio best suited to individual interests.
Other examples of AI in finance include chatbots used by banks to provide
basic customer service queries.
• Machine Learning (ML)
is a subcategory of AI used to learn and evolve from data in order to solve complex problems. Examples
of machine learning in finance include fraud detection, compliance analysis and algorithmic trading.

4. Why Fintech Important?
The Fintech industry makes traditional
financial services more accessible, including
investments, loans, bills, automated payments,
savings, etc. It can also be the channel for
innovative financial processes outside
traditional banking, such as buying and selling
cryptocurrency or online crowdfunding.

Why is Fintech Important?
• Fintech could manage point-to-point payments, eliminating the
requirement of a third-party intermediary, significantly reducing bank
transaction costs, and enhancing service quality.
• There have been numerous industry reports (e.g., Deloitte) predicting
that fintech supported business-to-business and person-to-person
payments systems would create reductions in transaction costs of
between 40% to 80% and require just 4-6 seconds to complete, as
opposed to the current transfer process average of 2-3 days

5.Why has
Fintech Become
Popular Now?
Prepared
By
Dr.
Jamileh
Ali
Mustafa
• Several factors have contributed to the fact that fintech is
flourishing now. One of these is that fintech promises healthy
returns on investments and growth opportunities, even though
the business models are not yet fully understood.
• Fintech has become popular recently due to:
1.Technological Advancements: Innovations in AI, blockchain,
and mobile technology have made financial services faster,
more efficient, and accessible.
2.Changing Consumer Expectations: Consumers now demand
convenient, digital-first financial solutions like mobile banking
and digital payments.
3.Supportive Regulations: Governments and regulators are
fostering fintech growth with policies like open banking and
innovation sandboxes.
4.Increased Digital Trust: Greater trust in online transactions,
accelerated by the pandemic, has made digital financial services
more widely accepted.
28

6.Main Fintech Hubs
• Fintech hubs are cities or regions that have become centers for innovation, investment, and development in the financial technology
sector. These hubs typically have a strong ecosystem that includes a mix of startups, financial institutions, investors, academic
institutions, and supportive regulatory environments. Here are some of the main fintech hubs around the world:In terms of categories,
lending and payments unicorns dominate the space, taking up 75% of the aggregate valuation of these firms.
• The main global fintech hubs:
1. San Francisco/Silicon Valley, USA: Focused on digital payments and blockchain, with major players like PayPal and Coinbase. Known
for strong venture capital and tech ecosystem.
2. New York City, USA: A blend of traditional finance and fintech, specializing in insurtech and capital markets. Home to Wall Street and
key fintech firms like Betterment.
3. London, UK: A leader in open banking and digital payments, with notable companies like Revolut and Monzo. Strong regulatory support
from the FCA.
4. Singapore: Focused on payments, digital banking, and blockchain. Supported by the Monetary Authority of Singapore and strategically
positioned in Southeast Asia.
5. Hong Kong: Specializes in virtual banking and cross-border payments, serving as a gateway to China’s financial markets.
6. Shanghai & Beijing, China: Key players in digital payments and blockchain, with giants like Ant Group and Tencent’s WeChat Pay.
7. Dubai, UAE: Focused on digital banking and Islamic fintech, leveraging its location as a link between Asia, Africa, and Europe.
8. Sydney, Australia: Known for regtech and digital banking, with a strong financial sector and proximity to Asia-Pacific.
9. Toronto, Canada: Specializes in AI for fintech and digital banking, supported by a strong AI research community.

Cont. Main Fintech Hubs
• Some regions are more open to fintech innovation than others. The factors that contribute to fintech
growth include government support, a developed culture of innovation, proximity to customers,
specialised talent, and flexible regulations. Considering these factors, the cities that have the best
environment for fintech are London, Singapore, New York, Silicon Valley and Hong Kong. These
centers have seen many years of either financial or technological (in the case of Silicon Valley)
development. They also understand that it is important to collaborate with an ecosystem of firms to
achieve greater results.
• Quite several Fintech firms have reached a valuation of at least $1 billion in net worth, and the term
‘Unicorn’ has been coined to describe these promising companies, which have reached a significant
size but remain private.
• In terms of categories, lending and payments unicorns dominate the space, taking up 75% of the
aggregate valuation of these firms.

FinTech Companies…

Technologies in Finance
1. ARTIFICIAL
INTELLIGENECE
2. MACHINE
LEARNING
3. DATA SCIENCE 4. BIG DATA

the Traditional Financial System

5. FinTech Impact on the Financial System
Prepared
By
Dr.
Jamileh
Ali
Mustafa
36
FOSTER COMPETITION
AND INNOVATION.
FINANCIAL
STABILITY.
BETTER
WEALTH
DISTRIBUTION.
CHANGE
CONSUMER
HABITS.
IMPROVE
FINANCIAL
INCLUSION.
CHANGE THE
DEMANDED
KNOWLEDGE
AND SKILLS IN
THE MARKET.

Innovations in DIGITAL ECONOMY
BLOCK CHAIN
• Blockchain- based smart contracts and distributed apps open up a wide
frontier for transaction applications, in addition to the immutable digital
identity, which provides a chain of custody and proof of asset ownership.
• Another important innovation in the digital economy is AI. Artificial
intelligence, machine learning, and Big Data are different aspects of the
same thing. Artificial intelligence promises to augment human intelligence
and to help humans to accelerate innovations. Applications of AI in health
care, governance, legal systems, smart cities, factory automation, etc., can
greatly improve efficiency.

Digital currency
• Digital currency is possible because of its underlying technology Blockchain.
• Blockchain can transform the Internet of information as we know it today, into the Internet
of value. It is “money over IP”. Money can be transferred online, just like data, without the
worry that it can be stolen or duplicated. Suddenly, the Internet finds itself capable of
performing many financial functions with the security and speed unmatched by the
traditional financial systems.

Digital currencies
Prepared
By
Dr.
Jamileh
Ali
Mustafa
39
The digital economy is
more than just the
Internet. Digital
currency is also a
disruptive revolution.
One of the most well-
known digital
currencies is Bitcoin.
Bitcoin, the first
cryptocurrency, is
probably the most
explosive asset in
human history.
In 12 years, from 2009
to 2021, its market
capitalization has
grown from zero to
almost $1 trillion. Since
Bitcoin appeared, there
are many other
cryptocurrencies
springing to life. At the
current count, there are
over 6,000 different
cryptocurrencies.
The top 5
cryptocurrencies have a
combined market
capitalization of over
$1.5 trillion.

6. FinTech Domains

1. PayTech
The most popular FinTech Category

2. RegTech
Subset that focuses on technology that may facilitate the delivery of
regulatory requirements more efficiently and affectively than available
facilities.

3. LendTech
Subdomain of FinTech that focuses on providing loans, and other
forms of credit to people securely online via banks and other lending
institutions applications or platforms.

4.BankTech
Banks digital branches, that make banking become “something we do”
rather than “somewhere we go”

5. InsurTech
Uses by companies that are using technology to innovate
and disrupt the insurance industry.

7.Fintech Risk
Fintech, has revolutionized the financial industry by providing
innovative solutions that enhance the efficiency, accessibility,
and convenience of
financial services. While Fintech offers numerous benefits, it
also comes with its own set of risks and challenges.
FinTech Risk is the uncertainty or potential for loss that arises
from the adoption, implementation, and use of financial
technologies. It encompasses the challenges and vulnerabilities
that can affect the stability and integrity of fintech solutions,
such as disruptions in digital services, algorithmic errors, or
reliance on emerging technologies.
Here are some key risks associated with fintech:
1. Regulatory Compliance: Fintech companies often
operate in a complex regulatory environment. They
must navigate various legal and compliance
requirements, which can vary significantly from one
jurisdiction to another. Failure to comply with these
regulations can result in legal consequences and
reputational damage.
2. Cybersecurity:Fintech companies handle sensitive
financial information, making them attractive targets
for cyberattacks. Data breaches and security
vulnerabilities can lead to financial losses, damage to
customer trust, and regulatory penalties.
3. Operational Risk: Fintech companies rely heavily on
technology, and any disruption to their systems or
infrastructure can lead to significant operational risks.
System outages, technical glitches, and downtime can
result in financial losses and customer dissatisfaction.

4.Data Privacy and Ethics: Handling sensitive customer data requires strict adherence to
data privacy laws and ethical considerations. Mishandling customer data can lead to legal
consequences and loss of trust.
5. Fraud: Fintech companies may face various types of fraud, including account takeovers,
identity theft, and fraudulent transactions. Preventing and mitigating fraud is essential to
protect both the company and its customers.
6. Third-Party Risk: Many fintech companies rely on third-party vendors and partners for
various services, such as payment processing and data storage. These dependencies can
introduce risks if the third parties fail to meet expectations or suffer security breaches.
6. Operational Scaling: As fintech companies grow, they must efficiently scale their
operations to meet increased demand. Poorly managed growth can lead to inefficiencies,
increased costs, and decreased service quality.

Prepared
By
Dr.
Jamileh
Ali
Mustafa
• Managing risk in the fintech industry is crucial due to the sensitive nature of
financial transactions and the fast-paced, innovative nature of the sector. The
future of fintech is likely to be shaped by various trends and advancements.
• The future of Fintech holds great promise, but it also presents significant
challenges. Fintech companies that can effectively manage risk, stay ahead of
regulatory changes, and innovate to meet evolving customer needs are likely to
thrive in this dynamic industry.
The End of Chapter One
Best of Luck ☺
48

Chapter One Financial Technology and Digital Economy Overview.pdf

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