TableofContents

Title

TableofContents

Prologue

Chapter1:Introduction

WhatistheFintechIndustry?AreasofFintechShortHistoryofFintechWhyisFintechImportant?WhyhasFintechBecomePopularNow?GlobalFintechInvestmentMainFintechHubsTheFintechUnicornsNoteworthyExitsLet’sgetstarted

Chapter2:NewEntrantstoBanking

NewBankingEntrantsinaFlashTheTraditionalBankingLandscapeNewOperatingModelsforBankingBankingasaServiceandOpenAPIsNeo-banks,ChallengerBanks,andIbanksKeyPlayersTheFutureinaFlash

Chapter3:RethinkingPaymentsandRemittances

PaymentsandRemittancesinaFlashTraditionalRemittancesSizeoftheRemittancesMarketUpcomingTrendsinRemittancesInnovativeWaysofSendingMoneyKeyPlayers

SocialMedia-basedRemittancesKeyPlayers

NanopaymentsTheFutureinaFlash

Chapter4:DigitalLendingInnovation

DigitalLendingInnovationinaFlashShortHistoryofLendingPeer-to-PeerLendingP2PMarketplaceLendingBusinessModelKeyPlayersConsumerLendingKeyPlayersDigitalLendingforStudentsKeyPlayersDigitalLendingforSMEsKeyPlayersDigitalMortgagesKeyPlayersTheFutureinaFlash

Chapter5:CommercialBankingTransformation

CommercialBankingTransformationinaFlashHowCommercialBankingWorksSMEMarketSizeTheImpactofFintechonBusinessBankingTheImpactofFintechonCorporateBankingKeySMEBankstoWatchOnlineAccountingforSMEsandIntegrationwithBusinessBankingToolsforSMEsKeySMEToolPlayersTheFutureinaFlash

Chapter6:NextGenerationCommerce

NextGenerationCommerceinaFlashChangesinCustomerShoppingBehaviour

PointofSales(POS)EvolutionmPOSBusinessModelKeyPlayersTablet-basedCashRegistersKeyPlayersOnlineAcquiringKeyPlayers

Chapter7:CrowdfundingandCrowdinvesting

CrowdfundingandCrowdinvestinginaFlashHowBusinessesTraditionallyFundThemselvesCrowdfundingBusinessModelMarketSizeKeyCrowdfundingPlatformsTopCrowdfundingCampaignsCrowdinvestingKeyCrowdinvestingPlatformsTheFutureinaFlash

Chapter8:InnovativeWealthManagement

InnovativeWealthManagementinaFlashHowWealthManagementWorksChangesinCustomerExpectationsChangesinAdvisorsChangesinDataAnalyticsChangesinAccesstoProductsSocialInvestingSomeNovelInvestmentIdeasKeyPlayersServingIndividualInvestorsKeyPlayersServingInvestmentManagersPersonalFinanceManagementTheFutureinaFlash

Chapter9:ThePowerofBigData

ThePowerofBigDatainaFlashHistoryofData

HowBigDataWorksHowtoUseBigDataInnovativelyBigDataintheFinancialServicesIndustryKeyPlayersinBigDataAnalyticsTheFutureinaFlash

Chapter10:TheInternetofThings

TheInternetofThingsinaFlashWhatDrivestheGrowthofIoT?TheImpactofIoTonBusinessesTheIoTinCategoriesCombiningIoTandBlockchainTheIoTinFinancialServicesO2OandIoTinFinTechChallengesFacedbytheIoTSuccessfulIoTUseCasesintheFinancialSectorTheFutureinaFlash

Chapter11:BlockchainandDistributedLedgers

BlockchainandDistributedLedgersinaFlashAboutDistributedLedgersWhatisBlockchain?TheComponentsofBlockchainTopCryptocurrenciesCryptocurrencyWalletsHowBlockchainwillimpactFinancialServicesInvestmentinBlockchainUseCasesforBlockchainTheFutureinaFlash

Chapter12:TheRiseofInsurTech

TheRiseofInsurtechinaFlashHowInsuranceWorksMarketSizeDriversofDisruptionPeer-to-PeerInsurance

BlockchainedInsuranceandMachineLearningWearablesinInsuranceWhatTraditionalInsuranceFirmsCanDoInterestingInsurTechIdeasKeyPlayersinInsurtechTheFutureinaFlash

Chapter13:Identification,Cybersecurity,andRegtech

Identification,Cybersecurity,andRegtechinaFlashTraditionalWaysofUsingIdentificationUniqueIdentificationSysteminIndiaIdentificationfortheUnbankedUsingBiometricsasIdentificationTheFIDOAllianceOpenIDConnectUsingaDistributedLedgerforIdentificationTheUNIdentityAspirationCybercrimeandItsHistoryTheCybersecuritySectorTypesofCybercrimeCybersecurityCategoriesandPlayersRegulationTechnology(Regtech)TheFutureinaFlash

Endnotes

Acknowledgements

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FINTECHINAFLASHFinancialtechnologymadeeasy

Copyright©2017SimtacLtd.

Allrightsreserved.

www.fintechflash.co.ukLondon,UnitedKingdom

Nopartsofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformorby any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior writtenpermissionofthecopyrightowner.

Thisbookissoldsubjecttotheconditionthatitshallnot,bywayoftradeorotherwise,belent,resold,hiredout,orotherwisecirculatedwithoutthepublisher’spriorconsentinanyformofbindingorcoverotherthanthatinwhichitispublishedandwithoutasimilarconditionincludingthisconditionbeingimposedonthesubsequentpurchaser.Undernocircumstancesmayanypartofthisbookbephotocopiedforresale.

CoverPhotographyfromDepositphotos.com

YourFreeGift

As a way of saying thanks for yourpurchase, I’m offering a free report that’sexclusivetomyreaders.

Fintech is becoming more and morestrategic,anditisagreatplacetofocusyourcareerandinvestments.

If you’re interested in building your ownFintechempire,IrecommendyoudownloadmyHowtoGet intoFintechInfographic,which contains an introduction to themainplaceswhereyoucanstartyourjourneyintoFintech

www.fintechflash.co.uk/freebie

AbouttheAuthor

Financial savant, author, and advocate,AgustínRubinihasmany interests and is devoted to excelling in these fields.With many years of experience as a financial industrystrategist, Agustín is passionate about the world of financeand the future of financial services.He spendsmuch of histime speaking and writing about fintech and advisingbusinessesoninnovationanddigitaltransformation.

He has a strong background in developing digital strategy,driving innovation in the financial services industry, and iswell versed in the disruptive effect of technology on the

financial services industry. As a means of helping others understand thecomplexities of the financial services industry, Agustín wrote and publishedFintechinaFlash,acomprehensiveguidetofinancialtechnology.Asaresidentof London, Agustín’s love of the UK led to the release of his first book, atouristicnovelaboutayoungLatinAmerican’sfirsttriptoLondon.Anadvocateof child welfare, arts and culture, and a proponent of education, Agustín

combines his love of science and technology, knowledge, and compassion toeffectpositivechangeandofferabetterunderstandingofourcomplexworld.

TomysonLucaLu,whofillsmewithlaughtereveryday.

AndtomywifeElena,whokeptmegoingthroughthisprocess.

CONTENTSATAGLANCE

TableofContentsPrologueChapter1:IntroductionChapter2:NewEntrantstoBankingChapter3:RethinkingPaymentsandRemittancesChapter4:DigitalLendingInnovationChapter5:CommercialBankingTransformationChapter6:NextGenerationCommerceChapter7:CrowdfundingandCrowdinvestingChapter8:InnovativeWealthManagementChapter9:ThePowerofBigDataChapter10:TheInternetofThingsChapter11:BlockchainandDistributedLedgersChapter12:TheRiseofInsurTechChapter13:Identification,Cybersecurity,andRegtechAcknowledgementsJoinourNewsletter

PROLOGUE

When I startedworking in financial services, just starting out inmanagementconsulting,Iwouldhaveneverdreamedofwritingabookonthetopic.Myfirstimpressionoftheindustrywasthatitwashighlyregulated,static,boring...

Boy,howwrongwasI!IwasrightwhenIsaiditwashighlyregulated.Butstaticandboring?Notatall.

Financialserviceisoneofthemostimportantindustries,astheexpressionusedinCabaretgoes–“moneymakestheworldgoround”.

SinceIstartedinbanking,I’veseenalotofchanges.However,overthepastfewyears, the change rate has been exponential.Whilst going digital used to be anice thing to do, it is now a necessity for any serious financial servicesinstitution.

The application of new technologies to financial services creates loads ofopportunitiesfordisruption,aswellasmanyjobopportunitiesforthepeoplethathave the right skill set.However, gettingup to speed in this sector is not thateasy.Thequantityofnewsandanalysis that’sgeneratedonadailybasis is sohugethatkeepinguptodatefeelslikeclimbingamountain.

Mymotivationforcreatingthisbook,andtheonlineblogthatcomplements it,wastoprovideanentrypointtothisexcitingindustry.FintechinaFlashaimstoprovide an overview of the whole sector, and readers that start off with noknowledge of the industry will come out the other side with an intermediateunderstanding.Thiscanhelpseasonedfinancialservicesprofessionalsaswellasnewentrantsintotheindustry.

Ihopethatbyreadingthisbookandfollowingtheblog,youdevelopknowledgeofandloveforthisindustry.

CHAPTER1

INTRODUCTION

WhatistheFintechIndustry?

Thefinancialtechnology,orfintech,industry,referstothegroupofcompaniesthatareintroducinginnovationintofinancialservicesthroughtheuseofmoderntechnologies. Some fintech firms compete directly with banks, whilst othershavepartneredwiththemorsupplythemwithgoodorservices.Whatisclearisthat fintech companies are improving the financial services world throughintroducing innovative ideas, allowing for speedy delivery and increasingcompetition.

Financialtechnologyintegratesvarioustypesoffinancialserviceintothedaytodaylivesofcustomers.Millennials,aswellasthegenerationscomingupbehindthem, areused to technology andwant tomanage theirmoney in an easy andquickmanner, insteadofwalking tophysical branches toperform transactionsandotheroperations.

Fintechisredefiningfinancialservicesinthe21stcentury.Originally, thetermapplied to technology used in the back-end of established trade and consumerfinancial institutions. It has expanded to include various innovations intechnology, including cryptocurrencies, machine learning, roboadvice and theInternetofThings.

AreasofFintech

Inthissection,weprovideasneakpreviewofwhatwillbecoveredinthebook.Feelfreetoskiptoanychapterthatinterestsyou,orreadthechaptersinorder.

InourNewEntrantstoBankingchapter,welookatthenewbusinessmodelsthat are being introduced to challenge traditional banking, such as aggregatorsandinfrastructureproviders.WealsoreflectonhowopenbankingandAPIswillchangetheindustry.

In our Payments and Remittances chapter, we will explore how fintech is

pavingthewayforinnovatingthewayinwhichpeoplesendandreceivemoney.Welookatpeer-to-peerpayments,mobileapps,cryptocurrencytransfers,socialpayments, and nanopayments. Innovations in remittances are particularlybeneficial to migrant workers, who need to send money to their families athome.

InourDigitalLendingchapter,welookatpeer-to-peerlendingmarketplaces,aswellasotherformsoflendingandformsofcreditscoring,whichallowmorepeople to access themarket.We analyse different niches, including consumerlending,studentlending,businesslending,andmortgages.

InourCommercialBankingTransformation chapter,we examinehow thissector isbeing transformed,whichare thenewbanks to lookout for,andhowthevalue-added services space for small andmediumenterprises is starting tomergewithtraditionalbankingservices.

InourNextGenerationCommercechapter,welookathowfintechinfluencesretailshopping.Weanalysethedifferenttechnologies,suchasmobilepoint-of-sale terminalsand tablet-basedpointofsales.Additionally,weexamineonlinecommerce and the companies that are disrupting the space,making commerceeasierandcheaperforallparties.Wealsolookathowmobilewalletsareslowlyreplacingcashandplasticcards.

InourCrowdfundingandCrowdinvestingchapter,weappraisethisnewwayofobtainingfunds forall sortsofdifferentpurposes, includingsocialpurposesand investing in firms. We also consider crowdinvesting, which allowsindividualsandcompaniestoinvesttheirmoneyinsmallbusinessesinexchangeforstocks.

InourWealthManagementchapter,we findouthowfintechcanbeused todemocratiseinvestmentsbyusingtechnologiessuchasroboadvisors,whichcanofferlow-costinvestmentadvice,artificialintelligence,andadvancedanalytics.

InourBigDatachapter,weexaminehowtheincreaseinthepowerofanalyticscanhelpprovidebetterinsightsintocustomersandtheirbehaviours.Welookatthe use cases that are being developed specifically for the financial servicesindustry.

In our Internet ofThings chapter,we explore how connected devices in thecloudcancommunicatewitheachotherandevenperformpaymentssmartly.We

considerusecasesusingBlockchain,ininsurance,realestate,andlending.

In our Blockchain and Distributed Ledger chapter, we explain distributedledgers in a way that is simple to understand. We cover the maincryptocurrencies that have emerged and the areas that are most likely to bedisruptedbythisnewwayofstoringdata.

In our Insurtech chapter, we look at how new business models couldpotentiallychangethefintechindustry,byintroducingapeer-to-peerframework.We also find out howBlockchain, smart contracts, and the Internet ofThingsimpactthisarea.

In our Identification, Cybersecurity, andRegtech chapter, we look at howthesekeyenablershaveevolvedandprovide thefoundationsforfuturegrowthallacrossthedifferentfintechthemes.

ShortHistoryofFintech

Itishardtopinpointwhenfinancialtechnologybegan,butthe1950sareagoodreferencepoint.Technologyisakeycomponentofthefinancialservicessectorinvariousways.

The1950ssawtheintroductionofcreditcards.Insteadofcarryingcash,peopleusedthesecardstopayfortheirpurchases.ATMswereintroducedinthe1960s,meaning that people no longer had to visit bank branches for certaintransactions.

In the 1970s, firms began to trade stocks electronically. In the 1980s, banksstartedusingmainframecomputersandotherstate-of-the-artrecordkeepinganddatasystems.Inthe1990s,ecommercebusinessmodelsandtheInternetthrived.Becauseofthis,retailinvestorscouldexperimentwithonlinestocktrading.

During the 50 years of fintech developments, innovators have createdsophisticated treasurymanagement, riskmanagement, data analysis tools, andtradeprocessingforfinancialservicesfirmsandinstitutionalbanks.

Currently, fintech is digitising retail financial services through crowdfundingplatforms, roboadvisors for retirement and wealth planning, payment apps,mobilewallets, and the like.Fintechprovidesaccess to alternativeandprivate

investmentopportunities,aswellasonlinelendingplatforms.

However,despitethefactthatfintechisflourishing,bankshavenotbeengreatlyaffected. Themain reason for this is that fintech and banks complement eachother.Bankshaverealisedthattechnologyisastrategicassetandthatitneedstobetakenseriously.

WhyisFintechImportant?

Moneymakes theworld go round, and financial services regulate how fast itspins.Disruption caused by fintech drives the financial industry to be smarterandmoreagileandallowsittodealwithimportantproblemsintheworld.

Forexample,automatedinvestingpavesthewayforallsocialclassestoinvestandseereturnsontheirmoney.Italsoallowspeopleindevelopingcountriestotransact,eveniftheydon’thaveabankaccount.Yet,thefintechindustryhasalotofroomforgrowthandimprovement,andfinancialinfrastructuresshouldberevisedforthebenefitofconsumers.

Fintech disruptors can also help develop better methodologies for riskassessment. For instance, OnDeck andKabbage use information to assess theperformance of small businesses using more than 1500 data points. Avantunderwrites consumers using machine learning. Kickstarter taps into people’swisdom to funds startups. This means that more customers can get access tolendingservices.

Since the financial crisis in 2008, regulators have enforced strict compliancewithbankregulationstomakefinancesafer.Fintechcanhelpregulatorssecurefinancial transactions and serve customers better by introducing regulationtechnologiesandsophisticatedcrimedetectionalgorithms.

WhyhasFintechBecomePopularNow?

The fintech sector received a huge influx of funds in 2014. The startups thatreceived funding are hungry and ambitious and want to disrupt the bankingsector.Thereareseveralfactorsthathavecontributedtothefact thatfintechisflourishingnow.

Oneoftheseisthatfintechpromiseshealthyreturnsoninvestmentsandgrowth

opportunities,eventhoughthebusinessmodelsarenotyetfullyunderstood.Forexample,nobodyknowswhetherpeer-to-peer financing isamodel thatcanbesustainedinthelongterm.

Additionally,newtechnologieshavebeenemerginginseveralindustriesthatcanalso be applied to financial services. These include blockchain technology,advanced machine learning software, micro-sized card readers and chips, andpowerful servers capable of performing intelligent analytics. Social networksandmicromarketinghavealsobrokendownthebarrierstoenteringtheindustry,as some fintechs canachievevery lowacquisitioncosts, as little as1%of thecostsofnationalandcommunitybanks.

Customerexpectationsalsodrivethisincreasedinterestintheindustry.Previousgenerations failed to experience a respect-based, personalised, and one-to-onerelationship with their bank. However, millennials demand it. With advancedpersonalisation and Internet technologies, they can access the kind of bankingrelationships that they have come to expect. The use of data provides thepotential for financial services companies to know and treat their customersbetter.

Finally,regulationchangeshavealsohelpedfintech.Generally,regulationscanhinderinfluxofcapitalandgrowth.Theycanslowthingsdownbecausetheyarethere to protect and control the public. However, many regulators haverecognisedthevalueoftechnologyandhaveprovidedinnovationsandboxesorflexed the rules for small players. The lack of regulation for some segments,suchaspeer-to-peerlending,hashelpednewcompaniesgrowatafastpace.

GlobalFintechInvestment

Fintechhas experienced substantial growthdue toheavy investments andnewtrends in the financial industry. It has produced different financial servicesproductsthatcandisruptthewayinwhichcustomerstransactwiththeirbanks.

InareportbyLondonFintechWeekonJuly18,2016,itwasstatedthatfintechinvestmenthadincreasedto$8.8billioninChina,betweenJuly2015andJune2016. This figure represented a 252% increase since 2010.Globally, the totalinvestmentinfintechsince2010is$80billion.

Globalinvestmentscontinuetopourintofintechstartups.In2015,investorsput

$19billion into these companies.Bymid-August of 2016, fintech funding forthatyearhadalreadyhit$15billion.Venturecapitalistsusedtodominatefintechfunding,yet,inthefirsthalfof2016,privateandcorporateinvestorswerealsorampinguptheirinvestments.

IntheUnitedKingdom,fintechgenerated$7.2billionininvestments.However,investmentgrewataslowerpacethaninthepreviousyear.FromJuly2015toJune2016, peer-to-peer lending andpayments, aswell as direct lending,werethefintechcategoriesthatreceivedthehighestfunding,with$5.3billionapiece.

MainFintechHubs

Someregionsaremoreopentofintechinnovationthanothers.Thefactorsthatcontributetofintechgrowthincludegovernmentsupport,adevelopedcultureofinnovation,proximitytocustomers,specialisedtalent,andflexibleregulations.

Considering these factors, the cities thathave thebest environment for fintechare London, Singapore, New York, Silicon Valley and Hong Kong. Thesecentreshaveseenmanyyearsofeitherfinancialortechnological(inthecaseofSilicon Valley) development. They also understand that it is important tocollaboratewithanecosystemoffirmstoachievegreaterresults.

In Europe, London combines booming technology with the world’s largestfinancial services sector. Some of the companies based in London are AtomBank, Funding Circle, Monzo, Worldpay, and Zopa. The success stories ofWorldpayandTransferwiseshowthatLondoncanstandindependentlyandscaleupcompanies.Londonisstronginretailbanking,neobanking,foreignexchangeandwealthmanagement.

MovingontotheUS,NewYorkishometoWallStreet,thelargestcapitalbaseintheworld.Thereisconsiderablehumantalentandhugeinvestors.OndeckandBetterment are two big fintechs based here. Silicon Valley is linked withtechnology in general, and much of that has been directed towards finance.Venturecapitalsarehugeinthisarea,andthereissubstantialexpertiseinscalingupcompanies.PayPal,Square,LendingClubandSofiarebasedhere.

InAsia,HongKongisanimportantpointofreference,asitisthelargestAsianfinancialcentre.TheyareespeciallystronginB2Bsolutions,asHongKongisinvolved in so much trade. The proximity to China is also a strategic asset.

Welend,alendingplatform,isthebiggestsuccessstorythathascomeoutofthiscity. Singapore has also created a top financial centre. The government isinvestingheavilytosupportthesector,andevenaRegulatorySandboxhasbeencreated for innovating safely. Finally, Shanghai can’t be ignored.China is thebiggestfintechmarketbasedontheamountinvestedandthetotalusage.Shangaiis strong in asset management, liquidity management, and blockchain.‘Unicorns’suchasAntFinancial,Lufax,andZhongAnarebasedhere.

TheFintechUnicorns

Fintechisdisruptingthewaythatpeoplecarryoutfinancialtransactions.Quiteanumber of fintech firms have reached a valuation of at least $1 billion in networth, and the term ‘Unicorn’ has been coined to describe these promisingcompanies, which have reached a significant size but remain private. In thissection,we examine this club. Investors see these companies as the ones thatwill have the biggest impact in the world of finance. In terms of categories,lending and payments unicorns dominate the space, taking up 75% of theaggregatevaluationofthesefirms.

TheAmericanUnicorns

AmericaisthecontinentwiththehighestnumberofUnicorns,eventhoughthetotalvaluationofthesecompaniesisfarbehindAsia.

ThereareseveralUnicornsinthelendingspace.Valuedat$9billion,LendingClubisAmerica’sbiggestconsumerpeer-to-peerloansplatform.Establishedin2007 inSanFrancisco, ithasprovided loansworthat least$11.1billion sinceconception.Next,worthatleast$4billion,SoFiisaSanFrancisco-basedpeer-to-peerloansprovider.Itprovidesmortgages,studentloanrefinancing,andotherpersonal loans. It recently acquiredZenbax,whichwill allowSoFi to performthe basic functions of a bank. Established in 2011, it has provided about $3billionworthofloanssinceitstarted.

Another interesting lender isProsper, a peer-to-peer lending marketplace forindividuals.Worthabout$1.9billion,ithasprovidedatleast$5billioninloanssinceitstartedin2005.IthasitsheadquartersinSanFrancisco.

Another Unicorn in lending is Chicago-basedAvant. Valued at $2 billion, ituses machine-learning protocols, algorithms, standard consumer data, and

analyticaltoolstodeterminetheloantermsitofferstoitsborrowers.InOctober2013,itcommencedoperationsintheUnitedKingdomandCanada.

Georgia-basedGreenSky,valuedat$2billion,offerstechnologytomerchantsand banks to provide loans to customers for healthcare, solar, homeimprovement,andotherpurposes.Lastly,alsobasedinGeorgia,Kabbageoffersloanstoconsumersandsmallbusinessesthroughitsautomatedlendingplatform.Itisworth$1billion.

In the insurance sector,OscarHealth isworth about$2.7billion.Founded in2013 inNewYork, itoffersdigitalhealth insurance,which includesunlimitedtelemedicineconsultationsandfreegenericmedicationforitsmembers.

In the value-added services sector, US-based FinancialForce.com providescloud-based financial service apps such as billing, supply chain management,revenuerecognitionandaccounting.EstablishedinSanFranciscoin2009,it isworth$1.5billion.AnotherUnicorninthisspaceisZuora.Foundedin2007,inSanFrancisco,Zuoraofferssoftwareforbusinessesthattakesubscriptions.Itisworth$1billion.

Credit Karma is a company offering online credit reports free of charge byallowingtargetedadvertisingoffinancialproducts.EstablishedinSanFranciscoin2007,ithasatleast35millionusers.CreditKarmaiscurrentlyworthatleast$3.5billion.Next,Zenefitsprovidesaplatformforsmallbusinesses.Establishedin 2013 in San Francisco, it provides software like payroll, health insurance,humanresource,andcompliancemanagement.Itgeneratesincomefrombrokerfeesitearnsfromhealthinsurers.Itisworthatleast$2billion.AnotherUnicorn,California-basedCoupausesitscloudarchitecturetoprovidespend optimisation software focusing on expense management, accountspayable,andprocurement.Itisworthatleast$1billion.Lastly,Gustoprovidescloud-based software for employees’ and contractors’ payroll, benefits, andworkers’compensation.Itisworth$1billion.

In the payments sector, San Francisco-based Stripe provides online paymentprocessing for companies. Established in 2010, it boasts Fitbit, Twitter, Lyft,Kickstarter,Pinterest,Salesforce.com,TheGuardian,andRedditassomeofitsclients.Stripe’seaseofimplementationiswhatmadethecompanysosuccessful.It is worth at least $5 billion. Another Unicorn,Mozido, offers white-labelshopping, mobile payments, and marketing products for small businesses. It

targets emerging markets like Africa, Southeast Asia, and Mexico, whereconsumersprefer tousemobilemoney.Founded in2005withheadquarters inNewYork,itsvalueisabout$1billion.

TheAsianUnicorns

Asiaisthekingofhigh-valuefintechs,withChinabeingthemainhub.TherearetenUnicornstobetakenintoaccount.Themainreasonforthehighvaluationslies in theamountofpeople living there.Whenyou lookatChinaalone, thereareover500millionsmartphoneusers,andthemobilepaymentsmarketiswork$235billion.

Onthelendingarena,LufaxisaShangai-basedpeer-to-peerfinancingandloansplatform with at least 20,000 loans approved since it began its operations in2011.Itisvaluedat$18.5billion.Inthesamespace,Jimuboxisanonlinepeer-to-peer lendingplatform for individuals and small businesses.Worth about $1billion, it is popular in China and currently experiencing significant growth.Foundedin2013,itsheadquartersareinBeijing.

ChinaRapidFinance is another innovatorofferingonline,offline, andmulti-channel lendingplatforms inChina,connecting investorsandborrowers.Sincecommencing,ithasprovidedatleast$2billioninloansandiscurrentlyworth$1billion. Finally, JD Finance is a consumer finance subsidiary of China’sJD.com, an ecommerce company. It offers various online financial services toChina’scompanies,startups,andconsumers.Valuationisat$7billion.

In the payments area,Qufengi is an online electronics retailer that allows itscustomerstopayinmonthlyinstalments.Worthatleast$1.3billion,itcanraisefundingwithoutdisclosingmuchinformationbecauseinvestorsseethepotentialoftappingChina’saspirationalclasses.Foundedin2014,itsheadquartersareinBeijing.BorninIndia,One97isthecompanybehindPaytm,anonlineplatformfor online shopping and bills payment. Founded in 2000 inNewDelhi, India,Paytm transacts 800,000 orders daily with 50 million registered wallets. Anaffiliate ofChina’sAlibabaGroup,AntFinancial operates theSesameCreditratingsystemandtheAlipaypaymentplatform.Itiscurrentlyworth$60billion,makingitthebiggestfintechcompanyglobally.

Intheinsurtechspace,ZhongAnistheonlyChineselicensedinternetinsurancecompany.Itisreshapingthecountry’sconventionalinsurancebyusinganonline

model to lower distribution and operating costs. Its current valuation is at $2billion.

Inthevalue-addedspace,Housing.comisanonlinerealestateplatforminIndiathatalsooffersmortgages.Worthabout$1.3billionandfoundedin2012,ithasits headquarters in Mumbai. Beijing-based Rong360 provides financialinformationtoconsumersandsmallbusinessbyofferingaplatformforfinancialproductsearches.Itprovides themostextensivefinancial informationinChinaandisworth$1billion.

UnicornsofTheRestoftheWorld

Thereareafurthereightunicornsintherestoftheworld,withEuropebeingthemainbase.

In the payments space, valued at $1 billion, is TransferWise. It providesinternational money transfers online at reduced fees. Founded in 2010, withheadquarters inLondon, ithas transferredat least$4.7billionsince its launch.At present, it is transferring around $783millionmonthly. Another paymentsUnicorn is Amsterdam-based Adyen, which provides a payment platformacceptingdifferentmethodsandformsoftransaction.Foundedin2006,itboastsFacebook,Uber,Netflix,Airbnb, andSoundCloudas customers. It isworth atleast$1.5billion.Klarnaisyetanother,auser-friendlypaymentsystemforwebandmobile. Established in Stockholm in 2005, it isworth about $2.25 billionandhasprocessedatleast$9billionworthoftransactionsinthespaceofayear.

In the lending arena,FundingCircle isworth$1billion since its founding in2009. It provides business loans through a peer-to-peer marketplace. SincelaunchinginLondon,ithasfunded$1.2billionworthofloans.Atpresent,itisexpanding in theUS. Inaddition to thisunicorn,PowaTechnologiesprovidesmobilepaymenttechnologiesforpurchasesmadeonlineandin-person.London-based and founded in 2007, it is worth $2.7 billion. Finally, iZettle is aStockholm-basedfirmestablishedin2010andworthabout$1.4billion.Knownas thesocialpaymentscompany, it facilitatesperson topersonandbusiness toconsumercommerce.ItisanMPOSmanufacturer,whichofferslowchargesontransactionsandevennanopayments.

In the value-added services space, New Zealand-basedXero provides cloud-based accounting software for small businesses.Worth at least $1.3 billion, it

started in 2006 in Wellington, New Zealand. Another Unicorn to watch isMarkit. Valued at $5.1 billion and established in 2003 in London, Markitprovides financial data and information. It began as a platform for creditderivativepricing.

NoteworthyExits

Everyentrepreneur’sdreamistohaveagloriousexittocashinallthehardworkthat they have put into the business. Themain exit strategies applicable are acompanyacquisitionoranInitialPublicOffering.Inthissection,welookatkeydeals.

Square is a fintech startup offering sellers tools to start, run, and growbusinesses. On November 18, 2015, Square announced a $9 per share for its27,000,000ClassAcommonstockinitsinitialpublicoffering.Thisvaluedthecompanyat$2.9billion.

Worldpayisapioneerinmulticurrencyprocessing,cardpayments,andcontactlessandonlinepayments.

When itwent public inOctober 2015,Worldpay priced its share at £2.40 pershare,thusgeneratingamarketvaluationof£4.8billion.ItsIPOwasthebiggestintheUnitedKingdomforthatyear.

PayPalwentpublicforthesecondtimeinJuly2015,afteritsspinofffromeBay.Established in 1998, its first IPO was in February 2002. Yet, eBay boughtPayPalback for$1.5billion inOctober2002. In its second IPO,PayPalhadamarketvalueof$46.6billion.Itssharesjumpedashighas$42.55or11%duringthemorningtrading.However,eBaysharesdippedto$26.50or2%.

First Data is a leader in commerce-enabling solutions and technologywith atleast4,000financial institutions.OnOctober1,2015,FirstDataannounceditsIPOofClassA common stock consisting of 160,000,000 shares, at a price of

between$18and$20pershare.

Lending Club is a peer-to-peer lending firm in San Francisco, California. OnDecember 31, 2015, Lending Club originated $15.98 billion worth of loans.Lending Club announced the price of its IPO onDecember 10, 2014. As theworld’slargestmarketplace, itoffered58,000,000commonstocksharesat$15pershare.ThepriceplummetedafterascandalwhichmadeitsCEOresign,andthepricepersharewentdownto$3.5.Sincethenthestockhasbeenrecovering,andcurrentvaluationforLendingClubisaround$2billion.

OnDeck is an online lending platform for small businesses.OnDecember 16,2014, it announced its IPOprice at $20per share for the10,000,000commonstockshares.ThesharestradedontheNYSEonDecember17,2014.Thevalueofthestockhasgonedown,andinFebruary2017,itwastradingataround$5.

Yodlee is a US-based software company providing an account aggregationservice so users can view their bank, email, credit card, investment, travelrewards,andthelikeonjustonescreen.YodleeannouncedonOctober2,2014,the$12persharepriceofits6,250,000commonstocksharesinitsIPOontheNASDAQGlobalSelectMarket.

Let’sgetstarted

Inthenextchapter,wewilllookathowdigitalbanksarestronglymovingintothe financial services arena and analyse whether it is likely that they haveenoughstrengthtochangetheindustrydynamics.

CHAPTER2

NEWENTRANTSTOBANKING

NewBankingEntrantsinaFlash

Traditionalbankinghasremainedunchangedforalongtime,withmostclientsusing big, stable banks. This has generated a high level of complacencyamongst these banks. However, technology advances, combined with therelaxationofregulationshasledtotheemergenceofnewplayerswhoarenowthreateningthestatusquo.Incumbentsarebeginningtounderstandthatiftheydon’tchange,theymightnotsurvive.

Newoperatingmodelsareemerging.Someplayersarebetting,providingbankswithinfrastructure.Othersarelookingtoprovidecustomerswithmoreoptionsby aggregating products, and some are trying to provide an open bankinginterfacewhilststillmaintainingawiderangeofproducts.

The usage of APIs is seen as a key enabler in improving the quality of theproductsoffered,aswellasincreasingcompetitioninbanking.Newcategoriesof bank are being created, such asNeobanks, Challenger banks, and Ibanks.These are mostly concentrating on being purely digital and specialising inspecificniches.Whilst nooutcomecanbepredicted, it is clear that agreaterdegreeofcompetitionwillemerge.

TheTraditionalBankingLandscape

Forbothconsumersandbusinesses,bankinghasn’tchangedmuchoverthelastfew decades.We consume products in a similar way to previous generations.Current accounts, saving accounts, credit cards, and mortgages are all, inessence, still the same. Traditional banks have two types of customers:depositors and borrowers. The bank acts as an intermediary, using moneyentrusted to them by depositors to lend to borrowers at a higher interest rate.Bankshavetwomainrevenuestreams,onebeingincomefrominterestandthe

otherthefeestheycharge.Ontopofthis,theycanearnadditionalrevenuefromcross-sellingotherproductssuchasinsurance.

Traditional banking has thrived for years because customers trust the system.Thestrengthofthesebanksliesintheirlargedatasetsandcustomerbases.Theycan generate a large amount of capital from customer deposits at a low costbecause customers accept low interest rates on their savings accounts.Traditionalbanksprofitbecauseofthelargevolumeoffundsthattheymanage,and the spread that they make on the interest rates between borrowing andlending.So far, it has been difficult for new entrants to compete with thembecauseoftheirsizeandcapital.

TheEffectofDigitalTechnology

Digital technology challenges banks in two ways. Firstly, it is transformingtraditionalbusinesses.Anexampleofthisisthenumberoffinancialtransactionsthat have shifted from traditional channels to mobile and web applications,thereby providing customers with more choice. Another is how financialprocessingisbeingspedup,andtransactioncostsarebeingreduced.

Technology is reinventing businesses, and new business models are beingintroduced. Most disruption in the future is likely to come from outside thebankingworld.Traditionalbanksarestrugglingtofusetheirphysicalanddigitalassetstogethertotransformtheirpresentbusinesses.Newentrantsmightbeabletoreachcustomersmoreeffectivelyastheyarestartingwithacleanslate.

Itisimportantforretailbankingtoridethewaveofdigitaltechnologybecausenew, innovative financial servicestartupsarepoppingupeveryday, supportedby accelerator hubs and incubators in various major cities worldwide.Traditional banks have to defend their positions against these startups to staycurrentandprofitable.

Retailbankingwillfacebigchallengesinthenearfuture.Somepeoplebelieveitmayevensoondisappear,asdigitaltechnologyisslowlyeatinguprevenues.Anestimated30%ofbankingrevenuesfromItaly,France,andGermanyarebeinglostdue todigital technology[1].Somestartupsarenowearning largerevenuesfromtheiroperations,andmorecompanieswillsoonbeoperatingwithaprofitmargin. These companies earn by charging low fees for a large number oftransactions,insteadoftheusualbusinessmodelwhichinvolveshightransaction

fees.

Inthepast,banksjustcopiedtheircompetitors’innovations.However,theyarenowfindingitdifficulttoimitatetheseinnovationsbecausetheircompetitorsareentrepreneurs or technologists, not bankers, and the rate of change hasaccelerateddramatically.

TheCaseforChange

Thenumberofstartupsisgrowingandestablishedretailbanksmustbeabletoimplementtheirowndigitalreinventioniftheywanttothriveinfuture.

Retail banks must be able to transform their business models. Digitaltransformationprogrammesneedtobesetupthatcanreactasquicklyasstartupsdo.Changesneedtobemadetothebankingculture,whichhasuntilnowbeencharacterisedby fearofprogress.Stakeholdershave tounderstand that changeneedstohappenfast,andtheyneedtobeadaptable.

Retail banksmust also reinvent bymaking changes from the outside in. Thismeansthattheymustcatertotheircustomers’prioritiesandneeds,innovatinginaway thatmay cannibalise their present business.Their culture andprocessesoften do not support reinvention because banking institutions are, by nature,slowandriskaverse.Assuch,reinventionmustbehandledseparatelyandhavesupportingfunding.

Manybanksstruggleregardinginnovationbecausetheiraimsareunclear.Theylosemarketsharetonewentrantsorfaster-movingincumbentsbecausetheydonot have discretionary funds and become paralysed by choice. Some of themimplement unconnected initiatives that yield small returns, squandering theirinvestments.

Some bank executives do not know how or where to start when it comes toinnovation. The main obstacles that they face are talent management,governance,andfunding.

Regardingtalent,banksneedtoappointanexecutivewhomonitorsthecreationof innovative ideas until these ideas are ready for scaling. Also, they mustappoint people with skills in deal structuring, due diligence, and businessevaluation and relationship management. Banking institutions must develop amindsetofinnovationanddisruption.

Concerning funding, bank executives need to be able to experiment butmustavoidfollowingtheherd,focusingontheneedsoftheirbankandimplementingacarefullyplanned,long-termprogrammeofchange.

NewOperatingModelsforBanking

Banks can choose to continue operating their current full-service model byproviding corporations and individuals with various products and services.However,bankswillfinditdifficulttocompetewithsomeprovidersbecauseoftheir legacy software.Theymaynotbeable toofferproducts at a lowerpricewithbettercustomerserviceandsimplerprocesses.

Becauseof the emergenceof new technologies and regulations, it hasbecomenecessary for the banking industry to develop new business models. Manybusinessesandconsumersknowtherehasbeenlittlechangeinbankingfor thepast fewdecades.On theotherhand, therehavebeen radical changes inotherindustries.Forexample,itisnownormalforpeopletouseAirbnborUber.

In terms of business models, some banks choose to become infrastructureproviders to fintech companies or other financial institutions. Solaris andBancorp are using this businessmodel, and their clients see the benefit of nothavingtocarryoutcertainactivitiesthatarecomplexandheavilyregulated.

Big banks will find this model profitable, especially if they can spreadcompliance costs across a large number of customers.However, theywill notearnlargeprofitsfromit,as this isaservice that is likelytobecommoditised.Additionally, they can only cater to local customers because regulators makecross-countryoperationsveryexpensive.

Otherbankschoose tobecomeaggregatorsordistributorsof financial servicesproducts.Theydonot create theproducts and services but procure them fromvariouspartners.Theydonotincurmanufacturingandcompliancecostsbutcanoffercustomersaccesstodifferentproductsandservices.

With this model, banks use customer data to help their clients make betteroperationalandfinancialdecisions.Theyoffertherightadviceand/orservicetoa customer, through the right channel at the right time.These banks receive asmallfeeforeveryproductorservicethataconsumerbuys.

Theproblemwiththismodelistheuseofcustomers’transactionaldata.Bankswill find it difficult to offer advice without access to this data. The PaymentServicesDirective2 (PSD2) [2] inEuropewill soonallow3rd-parties toaccessthetransactionaldataofEuropeanbanks,helpingaggregators.ThroughInternetplatforms, customers can gain relevant and timely advice by using contextualdata. There are also sites offering price comparisons allowing customers tosearchforthebestdealsthattheyareeligiblefor.

Theaggregatormodelallowsbankstooffercustomersaddedvaluebyworkingwiththemandunderstandingtheirfinances, thusprovidingoptionsfor themtomake a decision. It can be very profitable for banks, especially if they haveeconomies of scale that can service millions of customers with just oneapplicationplatform.

Perhaps the idealbusinessmodel forbankswouldbeahybridone.Banks thatare vertically integrated have the advantage of being able to provide superiorcustomer fulfilment and have better execution capabilities.However, they canonly offer a limited number of self-produced products and services. Theseproductsandservicesmustbeopensothat3rd-partyproviderscanprovidethemforotherbanks’use.Usingthis typeofmodelcanmeanofferingproductsandserviceswithsimplerprocessesandfasterdelivery.

Some of the competitive advantages that banks have include large customerbases, trust, strong execution capabilities, large data sets, large amounts ofcapital,andaccesstocheapfundingthroughdeposits.Banksthatdecidetoshifttotheaggregationmodelmaylosealltheseadvantages.Thus,thebestcourseofactionmaybeforthemtoassumeanopenyetverticallyintegratedmodel[3].

BankingasaServiceandOpenAPIs

BankingasaserviceandAPIshavebeenhottopicsrecently;everybodyseemstobetalkingaboutthem,andforgoodreason,astheyaretransformational.Wewill cover these topics in simple terms. An API (Application ProgrammingInterface) is a collection of functions that developers can use to createapplications. Insteadofdeveloping interfaces fromscratchwhenworkingwiththirdparties,developerscantakeadvantageoftheseAPIs.Theyrequesttheuseofthesecodesthroughasyntaxmadeavailableinthepartner’sdocumentation.Oncetheyhaveaccess,theycaninteractwiththepartner’splatformthroughthe

API[4].

Inthepast,bankstookalongtimetobuildsystems.Theyspentmillionscodingthem, and integrating them with third parties was a very laborious task.Currently, the approach is changing, thanks to APIs. New financial servicestartupswanttobuildsolutionsquicklyandatalowcostbycollaboratingwithotherfirms.

TheycreateAPIs,symbolicallysaying,“Herearethekeystomyservice,pleasehelpyourself,and togetherwecancreatesomethingbigger”.Forexample, if Isell ecommerce platforms and I want to offer a cheap payment system usingmultiple currencies, I could decide to use an API from a provider such asStripe.Thiswouldsavemea lotofhasslewithcodingandhaving toestablishpartnershipswithseveralmerchantsindifferentgeographicallocations.Byusingtheir API, I could offer full multicurrency payments by following Stripe’sreferenceguidetohelpmeusetheiraccountbalances,charges,customerdetails,transfers,andrefundsfunctions.IcouldevenskipreadingthereferenceguideifIdecidedtouseanoff-the-shelfconnectorfromafirmsuchasMulesoft,whichmakes theprocesseveneasier.Byusing theAPI, Iwouldstillbeable to fullycontrolthewaythatmycustomersseemywebpageandmobileapp,butIwouldnotneedtocreatecomplexcodeoreveninvolvethedevelopersinmyproject.

BenefitsofOfferingAPIsforFintechProviders

Fintechs offeringAPIs demonstrate that they are open to collaboration.Whendifferent services are connected, larger products can be created. Never-beforeimagined ideas can be brought to life. This is partly why the App Stores ofAppleandAndroidhavebecomesopopular,astheyfreelyallowpeopletobuildappsonthem.

Let’ssupposeyouareasmallcompany(suchasNymi)offeringabraceletthathas Bluetooth connectivity and a heart monitor. You could work for monthscoding to incorporatea fewcreditcardproviders so thatyoucanpaywith thebracelet.Thiswill takebothtimeandmoney.However, ifyoucreatedanAPI,allowing everybody to connect to your bracelet, then anything could emerge.The bracelet could be used to pay fares on theUnderground, replace securitypassesatyouroffice,andevenauthenticateyourselfwhenyoucallyourbank.

Challengerbankswanting todevelop their services fast canuseAPIs.Agreat

producthasbeencreatedbyFidorcalledFidorOs,asolutionthatdoesnotcarrytheirbrandingbasedonAPIservices.Customerscaneitherchoosetouse theirown Core Banking system or use Fidor’s Core Banking Module to set up abankfromscratch.TherearealsoAPIsthatdealwithawiderangeofactivities,such as Analytics, Scoring, Identity Service, Loyalty, Community, and ThirdPartyManagement.

HowTraditionalBankscanuseAPIs

APIs can be used by both banks and their fintech partners. For example, if abankwants to connectwithPayPalon thebank’smobile app, thePayPalAPIwould allow customers to see the funds they have available in PayPal, anddetails of recent transactions. This would be useful for enriching a statement,whichnormallyjustreadsPayPalonthetransactionline.OnthePayPalapp,anAPIcreatedbythebankwouldallowPayPaluserstoseetheiravailablebalance.Sobeforemakingapayment,thecustomerwouldknowwhichaccountorcardtouse, based on their available balances. To take this a step further, anothercompany such as Supercard, a company that offers a card which can storeseveralcardsfromdifferentbanks,mightdecidetointegrateboththebankandPayPal’sAPIs,sothatcustomerscanestablishasetofruleswhichdictatehowatransactionispaidforwhentheyusetheirSupercard.

Incumbentbankshaveadoubledilemma.Ononehand,thereisaclearneedtoupgradetheircorebankingsystems.Ontheotherhand,theyneedtodecidehowmuchtheuseofAPIsopensthemuptotherestoftheworld.

Corebankingsystemshavebeenbuiltoverdecades,andarehighlycomplex.Iftheyhadbeencreatednowadays,acompletelydifferentframeworkwouldhavebeen chosen for their development. Upgrades to and maintenance of thesesystemsarecostly,andeverychangetothesystemrequiresalotoftesting,duetothehugeriskofgettingthingswrong.Somebanksconsiderthesesystemstobeacompetitiveadvantage.Theyhaveinvestedmorethanothersandgivenepicnames to their systems, such as Santander’s Partenon system and Lloyd’sGalaxy.The issue is, therearecompanies rightnow that areprepared tobuildbettersystems,whicharefuture-proofedandmoreflexible.AgoodexampleofthisistheoperatingsystemcalledVaultOS,builtbyex-googlers,whichkeepsaledger of transactions using blockchain technology, a system that records alltransactionsonapermanentonlinedatabase.

Bankshavebeenreluctanttoopenup,andonlystartedtodosobecauseofnewregulations being introduced. The main fear they have is that banking maybecomecommoditised.Athirdpartythatconnectsallbankscouldcheckthebestinterest rates and fees and propose the best current accounts, savings, andlendingdeals.The thirdpartycouldcreateanappwithagreatuserexperienceand remove the need for customers to even contact traditional banks. Bankswould, therefore, be losing their relationship with the customer, whichwouldtranslateintoalossofprofits.

Even though it will take a lot of courage, sooner or later banks will need toupgrade their corebanking systemsandopenup to thirdparties.The future islookingbrighterforcustomersasthingsbecomemoretransparent.

Neobanks,ChallengerBanks,andIbanks

DifferenttermsareusedintheFintechcommunitytodescribenewbanks.Thereis no official definition of what each bank does, but I have laid out somecategories below, which will help you to understand how different banksoperate.

WhatareNeobanks?

A neobank is a company that provides an upgraded and updated version of atraditionalbank,without reallyholdingabanking license. Ituseswebsitesandmobileapplicationsratherthanphysicalbranchestoprovideitscustomerswithbankingservices.

A neobank offers traditional banking services like accounts and transactions,assetmanagement,credits,deposits,investments,etc.Someneobanksalsooffercrowdfunding,P2Plending,cryptocurrencies,androboticfinancialconsultants.Neobanksminimise costs and aim to speedup services.Thekey factor is thattheydon’tpossessabankinglicense,sotheyneedtoworkwithapartnerbanktoprovide services. This is comparable to a Mobile Virtual Network Operator(MVNO) in the mobile industry. They are using one of the big provider’snetworks,whilstofferingthecustomeradifferentexperience.

Withtheincreaseofglobalinvestmentinfinancialtechnology,neobanksshowalot of promise in theUnitedStates ofAmerica andEurope. Popular neobanksinclude Moven, Simple, and GoBank. Moven offers direct-to-consumer

products, in collaboration with CBWBank. It offers a bundle with an app, adebit card, and contactless payment sticker. Simple, on the other hand, offerssurcharge-freeATMSTARnetworkaccessandcurrentaccounts,whileGoBankoffersacurrentaccounttocustomerswhowanttopaylowfees.

Theneobankingmodel is facing someproblems,mostlydue to its relianceonanotherbank’sinfrastructureandlicense.Infact,GoBankintheUnitedStatesofAmericaannouncedthat itwouldstopallowingaccounts tobeopenedthroughmobile devices. Customers would have to buy a kit from a store to open anaccountinstead.Anotherneobank,Simple,hadissueswithpaymentschedulingandservicedelays.Moven,on theotherhand,had toexpandinternationally toattractmorecustomers.

Recently, large banks are taking an interest in neobanks. Spain’s BBVAacquiredSimple.IthasalsoinvestedinAtom,achallengerbankwhichwillbeconsideredbelow.TheseacquisitionshaveallowedBBVAtofosteracultureofinnovation, align internal resources, and establish a customer base in differentgeographicalareas.

WhatareChallengerBanksandiBanks?

Lately, a new breed of banks has emerged, and some have called this theevolutionof theneobank.Thesecanbecompared tono-frillsairlines,offeringbankingatalowercost.Itisquestionablewhethertheywillbeassuccessfulaslow-costairlines.

A challenger bank is a new bank that competes with large national ones forbusiness.Ithasthepotentialtoofferbetterdealsandsuperiorservice.Insteadofhavingphysicalbranches,itoffersonlineandmobilebanking;althoughtherearechallenger banks that collaborate with other banks to accept money over-the-counter. It relies on customer deposits and lends money to individuals withlowerinterests.

Achallengerbankdoesnothavetodealwithlegacyissuesasithasacleanslate.Many customers may have reservations about them because these banks arerelatively unknown, and people are often loyal to their traditional bank. Achallengerbankmaynotbeasbigasatraditionalbank,butittypicallyneedstocomplywiththesamerulesandregulations.

After the financial crisis in 2009, the Bank of England encouraged the

establishmentofnewbanksbyloweringthecapitalrequirements.

Aside from being mobile-only, challenger banks also have other commoncharacteristics. Their apps reflect changes in customer behaviour. Aside frompeerreviewsandpeerreferrals,consumersalsorelyonsocialinteractionstotestthefunctionalityofchallengerbanks,whichofferadifferentvisualexperience.

Challenger banks offer everyday banking experiences by becoming morerelevantintheconsumers’lives.Theydon’tonlyprovidemonetarytransfersandtransactions.Theyprovideameaningful contextbyofferingaconcierge-basedapproachthattraditionalbankingcannotoffer.Challengerbanksarefocusedontheir API layer, thereby giving them agility and flexibility to expand theirproductsandservicesthroughstrategiccollaborations.

Challenger banks have various specialisations. For example, Aldermore andShawbrook Bank cater to small or medium-sized enterprises and individuals,whileClydesdaleandMetroBankoffercreditcards,currentaccounts,andothertraditionalbankingservicesandspecialisemoregeographically.

Most of these banks have private equity backing. For example, JCFlowers, aprivate equity firm, providedOneSavings Bankwith capital in 2011.AnaCapFinancial Partners backed Aldermore, and Pollen Street Capital backedShawbrook Bank. Some challenger banks are very profitable. In 2014,ShawbrookBankreported£18.6million[5]pre-taxprofitduringthefirsthalfoftheyear,whilstAldermorereported£50.3millionprofit[6].

However,challengerbankscanfacepotentialproblems.First,challengerbanksmust prepare for the effects of increases in interest rates and the tighteningofmonetarypolicy.Sincetheybegan,after thefinancialcrisis in2008, theyhaveexperienced supportive monetary policies and steady growth. They remainuntestedinamorehostileenvironment.

Some people quote iBanks as another emerging bank category. They look atmonetisingbanking inadifferentway. Insteadofmakingaprofit throughfeesandinterest,theytrytogainrevenuesfrommonetisingdata.Anexampleofthisisthenichebank,Loot,whichfocusesonstudents.Theyaimtoprofitfromnon-traditional revenue streams, such as advertising and cross-selling. AnotherexampleisSeccoBank.TheirsubsidiarySeccoAuraislookingforanalternativewayofmonetisingpersonaldata,anditallowsmemberstoearntokensthrough

referrals done through social networkswhen people buy items that have beenlikedbySeccoAura’smembers.

KeyPlayers

In this section, we look at interesting companies that are making importantprogressinthiscategory.Fintechisaveryvolatileindustry,sobythetimeyoureadthis,thesecompaniesmayhavechangedsubstantially.

In2009,thedigitalbankFidorstartedoperatinginGermany.Itsfocusistore-establishtheconfidenceofcustomersinbankingbyallowingthemtoparticipateactively in the bank’s decision-making.At present, their portfolio of productsincludes business and retail banking, covering current and savings accounts,lending,andbonds.Ithasmorethan100,000customersand300,000communitymembers[7].

As one of the pioneers in innovative banking, Fidor received variousinternationalawardsforbeingtransparentanddisruptiveinitsapproach.Itsuseof socialmedia is innovative. Itprovidesa space for individuals to share theirknowledgeandexperiencewithfinance.Itdoesnotusefinancialadvisorstosellitsproducts.Itsdigitalframeworkisinteractive,fun,connected,andtransparent,andtheirmottoisthatmoneymanagementshouldbeenjoyable.

Ithasabankinglicensesimilartothatofatraditionalbank,butitdoesnotactlikeone.Toencouragecustomerstosignupandlivenuptheusercommunity,itoffered €50 to customers who created a video with the theme of “user-help-user”.Itraiseditsinterestratesonsavingsandlowereditslendingrateby1%ifits Facebook account could generate 2,000 likes. Fidor Bank’s customers canalso transact foreign currencies online and use itsCurrencyCloud.Customerscanapplyforaloaninjustamatterofseconds.Theycanalsointeractwithothercustomersonlinetoseekadviceandgiveopinions.

Rocketbank is an iBank from Russia. Because of the style of their customerservice and viral marketing app, it has been dubbed a “bank for hipsters”.AlexeyKolesnikov co-founded Rocketbankwith three of his friends in 2012.

They wanted to let young Russians manage their finances through an app. Itbecamefamousforrecommendingitsownuserstomovetheirmoneyawayjusthours before Interkommerz, its servicing bank, went under. Despite thisRocketbank survived, thanks to a Russian bailout, and in December 2015,RocketbanksignedadealwithOtkritie,thefourthlargestRussianbankintermsofassets[8].

Number26 is a Berlin-based startup, which is trying to reinvent banking. ItcollaborateswithWirecard,andoperatesasafullbank,withalicensetooperatearoundEurope. It hasmore than 2.000.000 users. Launched inGermany, it isnowavailableinsixcountries[9].

Number26 can offer products in real time and supports an aggregator model.Expensesharingisoneofitsinterestingfeaturesthatallowsitscustomerstosplitbills with friends. This is similar to Uber’s fare splitting. Number26 is alsocollaboratingwithotherfintechstobuilditsownproductssinceitalreadyhasalicensetobecomeafull-fledgedbank.

Loot Bank, a money management startup for students launched by youngentrepreneurOlliePurdue, linkstoaprepaidcard.It letsstudentsmonitorhowmuchmoneytheycanspend,basedonprojectedspending,outgoings,andtotalbalance.

Purdue developed the idea with London’s Fast Forward, a pre-acceleratorprogramme. He showed a prototype to Charles Tyrwhitt’s founder, NickWheeler, hoping he would invest in the project. Wheeler and seven otherinvestors invested £200,000 each in Loot Bank, which earns revenue fromMastercardtransactionfees[10]andplanstofocusonmonetisingtheirdata.

MonzoisanothermobilebankingappfromtheUK,whichachievedarecordforfastestcrowdinvesting,gettingonemillionpoundsinjust96secondsfrommorethan 1800 investors. It provides purchase tracking in real-time, geolocationtransactionviewing,purchaseviewingbycategory,andagraphical timelineof

overallexpenditure.Theirapphasreceivedimpressiveinitialfeedback.IthasanAPI toconnect toexternalcompaniesandhasbeenbuiltbyanentirelyBritishteam. Recently, UK regulators granted Mondo a restricted banking license.Mondocannowswitch itsbeta testers toacurrentaccountand ispreparing tobecomeafullbankin2017[11].

Founded in Durham, Atom Bank is one of the digital-only banks offeringfinancialproducts.Userscanperformtransactionsthroughtheapp.Itsproductsincludeafixedsaveraccount,whichoffersa2%interestrateforoneyear,andanotheraccount,whichoffers2.2%interest for twoyears.Recently,Atomhasalso launched their mortgages business. According to the chairman, AnthonyThomson,Atomwilllaunchfurtherproductssoon.ItwillalsosoonbeavailableforAndroidusers[12].

Tandem is a British challenger bank. It received its operating license inNovember2015.Itallowscustomerstoaddbankaccountsfromotherprovidersandmonitor their spending. The bank’s goal is to engage customers and helpthemmanagetheirhabitsandbehaviours.Itstartedrollingoutitsapptoitsfirstcustomers at the end of 2016. Tandemwill offer current accounts, loans, andcreditcardsin2017.Currently,itprovidessavingsaccounts[13].

The Financial Conduct Authority and the Bank of England granted StarlingBank,amobile-onlybusiness,itsbankinglicense.ThebankhopestolaunchbyJanuary2017andhasplanstoofferacurrentaccount.Itsfocusisonmakingthemostofbigdata,anditwillallowcustomerstoanalysetheirspendinghabitsandkeepaclearviewofthestateoftheirfinances.FormerAlliedIrishBankChiefOperatingOfficerAnneBodenheadsStarlingBank[14].

Monesecaterstoexpatsandimmigrants,whomayhaveadifficulttimeopeningabankaccountinanothercountry.IttakesaboutthreeminutestoopenaMonese

currentaccount.ItalsooffersaVisadebitcardandlow-costinternationalmoneytransfers, and it’s also possible to deposit andwithdraw cash, aswell as storevarious currencies in the account.Monese earns by charging a fixedmonthlyservicefeeperaccount[15].

TheFutureinaFlash

Inmostregions,thereisspaceformorecompetition,anditislikelythatsomeofthenewentrantswillendupbeingprofitableinthelongrun.Also,itisverylikelythatsomeofthetraditionalbankswon'tmanagetoadaptwellenoughtothe new environment, which requires constant modernisation and change.Hence, some of these might disappear, or have to change their modelsradically.

The concept of bankingwill change and integrate a lotmorewith our dailylives;however,thesamebigbrandsthatweareusedtoseeingwillretainaleadinthisspace,thankstotheirexperienceandtheirstrongpositions.

CHAPTER3

RETHINKINGPAYMENTSANDREMITTANCES

PaymentsandRemittancesinaFlash

Fintech hasmade a strong entrance into the payments arena.Consumers canmake themost of innovativemethods of sending and receivingmoney usingmobileapps,peer-to-peerpayments,andcryptocurrencytransfers.

Wewill look intohowmigrantworkerssendmoney to their families throughfundtransfersorremittances.In2011,theamounttransferredwasatleast$483billion[16], and this figure is steadily increasing, which represents a greatopportunity.

Mobilemoney transfers are popular in developing countries because citizensoften find it easier to send text messages instead of physically going to aparticular money transfer operator or branch. Peer-to-peer money transfersallowuserstosendandreceivemoneythroughanetworknotcontrolledbyanycentralauthority.Eachtransactionoccurs inanonlinemarketplacewhereonepersonsellsacurrencyandanotheronebuysit.Cryptocurrencyisalsoanotherinnovative way of sending and receiving remittances. It is inexpensive, andsendersandrecipientsmaintaintheiranonymity.However,usershavetohaveadigitalwalletbeforetheycaninitiatetransactions.

Other interesting payment trends are socialmedia and nanopayments. Socialmedia allows users to send and receive money through peer-to-peerconnections, although this is currentlyonlyavailable fordomesticpayments.Nanopaymentsareusedformonetisingonlinecontent throughchargingsmallfees.

TraditionalRemittances

It is useful to understand how remittances traditionally work to identify the

inefficiencies. A typical transaction is done in three steps. First, the customersendsthemoneythroughasendingagentviatheInternet,phone,oremail.Thissending agent instructs its operations team to send the remittance to therecipient’scountry,andtherecipientreceives thefundsfromthepayingagent.Ingeneral, settlementsbetween the sendingandpayingagents arenotdone inreal-time. The agents settle the transactions periodically and through acommercialbank.

The sendingagent charges a fee for the remittance transaction, and the senderalsopaysforthecurrency-conversionfeesothatthepaymentoftheremittancecan bemade in the recipient’s local currency. Smallmoney transfer operatorsalso require the recipient to pay a fee to receive the remittance to coverunexpected movements in the foreign exchange rate. Remittance agents alsoearn from interest because they invest the funds overnight before they deliverthemtotherecipient.

TraditionalDeliveryMethods

There are three traditional ways to send remittances: through money orders,cheques,anddrafts,throughwiretransfers,andthroughACHtransfers.

Thesafestandmostcommonwayofsendingremittancesinternationallyisusingmoney orders, cheques, and drafts. International money orders are the mostsecureandconvenientmode.Recipientscangotovariouslocationstocashthemordepositthemdirectlyintotheirbankaccounts.

Wire transfers involve financial institutions who agree to process the moneythrough the Society for Worldwide Interbank Financial Telecommunication(SWIFT) messages. The remittance transaction takes place between twofinancialinstitutions,soboththesenderandtherecipientcanexpecttopayfees.

Money moves from one bank account to another through money transferoperators(MTOs).TheMTOgatherstheinformationfromthesender,andthentriggers thewire transfermessage to the receivingfinancial institution.For thewire transfer process to be successful, the sendermust provide the recipient’sname,address,accountnumber,andbankinformation.

Asidefrombank-to-banktransactions,wiretransferscanalsobethroughacashwiretransfer,aserviceusuallyofferedbyMoneyGramorWesternUnion.Usingthismethod,themoneytransfercompanyusesitsownfundsforthewiretransfer

process. An individual goes to one of the company’s branches to give thecompanyrepresentativethecashthathewantstosendtoanotherperson.

Wire transfer fees vary depending on themoney transfer service. For a fasterservice,themoneytransfercompanytypicallychargesahigherfee.

Anotherway of transferringmoney is through theAutomatedClearingHouse(ACH),anelectronicnetwork forbatchprocessingof transactionsby financialinstitutions. This is an intermediary who receives the payment, clears it, andinformsthefinancialinstitution.

Banks offer ACH Transfer to their clients, who want to transfer moneyanywhereintheworld.Unlikethewiretransfer,theACHtransfergoesthroughits own network, which is a financial hub composed of various financialinstitutions. The National Automated Clearing House Association (NACHA)manages ACH transfers for all financial institutions in the United States ofAmerica.TheSingleEuroPaymentsArea (SEPA) isNACHA’scounterpart inEurope.

InACHtransfers,thesendersendsadirectpaymentthroughthenetwork.Theirbanksendstheirtransaction,togetherwithothers,atregularintervalsthroughoutthe banking day. Then, the ACH operator sorts the batch and sends thetransaction to the receiving financial institution. The recipient’s bank receivesthe funds transferred by the sender. ACH transfers take more time than wiretransfersandarelessexpensive.

InitiatingOnlineTransfers

An online money transfer is any fund transfer that is performed through theInternet and does not require the sender to visit amoney transfer operator orbank.Currently,mostmoney transferoperatorsandbanksallowonlinemoneytransferservices.

This type of fund transfer is safe, convenient, and fast.Many bank customershaveonlineaccess to theirbankaccounts so theycaneasily transfermoney toanyonearoundtheworld,aslongasthatrecipienthasabankaccount.Theback-endprocessforthemoneytransfercanbeeitherACHtransferorawiretransfer.

Independent companies, on the other hand, havewebsites onwhich users cancreatetheirownaccount.Theseusershavetoprovideadebitcard,acreditcard,

orabankaccounttoinitiateafundtransfer.Theyalsoneedtoprovidethebankaccount details of the intended recipient. These companies, such as Xoom,collectthefeefromtheusers’bankaccounts.

PayPal revolutionised the remittance process by using an email address as aunique identity. A PayPal user can transfermoney by paying into his PayPalaccountfromtheircreditcardorbankaccount.OncethemoneyisinthePayPalnetwork, transactions occur instantly between PayPal users. However, therecipientneedstowithdrawthemoneyfromtheirPayPalaccounttotheirbankaccountortoaPayPalcreditcard.

SizeoftheRemittancesMarket

In 2015, remittances amounted to $646 billion. For 2016, the World Bankestimatedthisamounttobeatleast$700billion.Itfurtherstatedthatremittancesare about 300% higher than the official development assistance given todeveloping countries. Additionally, remittances are worth more than portfolioequityandprivatedebtflowstothesenations.Inabout14developingcountries,theyexceededtheforeignexchangereserves.Remittancesarealsoatleastequalto50%ofthereservesinatleast26developingcountries[17].

Due to consumer demand, startups are emerging around the world. Thedisruptionofthebankingindustrycouldmeanitwillfacetoughtimesasthereisahugeopportunityforthesestartupstoabsorbthemarketshareoncebelongingto the top banks and money transfer specialists. Peer-to-peer payments haveenabled individuals to sendmoney to their intended recipients in justminutesusingcloudtechnology.According toForresterResearch, this typeofpaymentschemecouldgenerateatleast$17billionintransactionvolumesby2019.

With advances in technology, the global community expects the process ofsendingandreceivingremittancestobecomemoreefficient,safer,andgenerateapositiveimpact.

Theaveragecostofsendingremittancesgloballywentdownto7.9%from10%in2009.Thissavedmigrantworkers$54billion.Digitalpaymentproductscancost as little as 3.4%, and technological innovations in the paymentinfrastructure and payment instruments improve the safety and efficiency ofremittances.

UpcomingTrendsinRemittances

The first notable trend relates to infrastructure expansion.AutomatedClearingHouses and card payment schemes have established procedures, policies, andstandards,soitmakessensetoinvestinthem.Theyareoftenreliableandwidelyused.

The second trend involves combining payment instruments and currentinfrastructure.Mostcountrieshavepre-existingpaymentsystemssetup.Usingthis infrastructure with innovative products and services can prove to be lessexpensivethancompletelyrethinkingtheprocess.Somefinancialinstitutionsinbothsendingandreceivingcountrieshavecreatedcard-basedproductsthatallowthe familiesofmigrantworkers towithdrawremittancesatATMsoruse themfor payments. The use of the card infrastructure is cheaper, safer, and moreefficientthancash.However,someregulatorsdonotallowdual-purposecards.

A third trend entails combining domestic and international paymentmechanisms. In some countries, citizens increasingly prefer to use electronicpaymentsinsteadofcash.Someevenusethistypeofpaymenttotransferfundstoanotherpersonlocally.Nonbanksandbanksissueelectronicmoneybasedonarrangements with the country’s regulators. Payment service providers andinternational money transfer operators use the existing electronic paymentsstructuretosendthefundstoaparticularreceiverinthatcountry.

A fourth trend is around new players that aremaking themost of the currentpayment infrastructure. New companies have started to operate within theremittancemarketandenhancedthepotentialoftheexistingnetwork,aswellascreating international links. Some of these companies provide cross-borderservices that also enable financial institutions to maintain ownership of theconsumer base. They offer efficient and transparent cross-border paymentproducts. There are also companies, often banks, which allow interoperabilitybetween Automated Clearing Houses, mobile money, and the Internet. Theyhave created a hub that allows for both domestic and international remittancetransfers.Online remittance providers likePayPal allow senders to try variousoptions. Senders can pay using their bank accounts, credit card, or debit card,andtheycanchoosehowtheywantthemoneydeliveredtotherecipient.

A fifth trend is aroundnon-remittance companiesoffering remittance services.Retail stores and import businesses can become remittance companies. Some

onlinecompaniesareevenoffering remittance services to their clients throughcurrentpaymentinfrastructures.Forexample,abusinessofferingonlineforeignexchange information can offer remittance services. A customer can provideonline instructions for their bank account to be debited and the money to becreditedtotherecipient’sbankaccount.

InnovativeWaysofSendingMoney

MobileMoneyTransfers

Companiesnowoffermoneytransfersusingthemobilephone.Theintroductionof smartphones allowsusers to usedifferent online services and apps, even inrural areas. In several countries, it is now possible to send money via textmessages.Largebanksandmoneytransferoperatorsoffermobileappstotheirclientstomakeiteasierforthemtosendmoney.

Mobile apps are a convenient, secure, and fast way to remit moneyinternationally.In2015,internationalremittancesusingmobiletechnologygrewby as much as 52% compared to the previous year. In that same year, USmigrantworkerssentabout$600billiontotheirfamiliesoverseas.

Cryptocurrencytransactions

Asdigitalcurrencies,Cryptocurrencytransactions,suchasBitcoin,donotneedto pass through banks. They incur no hefty fees and parties to the transactionalsoremainanonymous.Digitalwalletsactasstorageforthesecurrencies.Theycanresideontheuser’scomputerorinacloud.Oneproblemwiththismethodcould be the risk of fluctuations in the exchange rate, as well as the lack ofbankingprotectioninthecaseofproblemssuchashackingorfraud.However,asthecurrenciesmature,insuranceagainsttheseproblemsisemerging.

Themainmodels for these remittancesare thepurecryptocurrencymodel, thecryptocurrencytofiatmodel,andfiat tofiatmodel.Inthepurecryptocurrencymodel, the currency is transferred directly from person to person. Incryptocurrency to fiat, a cryptocurrency operator is used to convert into thetarget currency. This assumes that the originating country has easy access tocryptocurrency.Thisistypicallythecaseofdevelopedcountries,andthisisthemodel likely to have the highest degree of success. In the third model, bothsenderandreceiveruseaphysicalcurrency,but theremittanceoperatorusesa

cryptocurrencyforthetransfer.

Peer-to-PeerPayments

In traditional foreign exchange trade, a company can sell or buy a particularcurrency from another person online and earn money from it. In a P2Ptransaction,apersontradescurrencieswithotherpersonsinamarketplace.Theplatform offering the service earns a small amount of money from eachtransaction[18].

Apeer-to-peermoneytransfercompanyoffersalmostcompletetransparency.Acustomer understands the fees they have to pay for each transaction, and,comparedtoatraditionalforeignexchangecompany,theybenefitfromalowerexchangerateandasmallfixedfee.Registeringwithaplatformiseasy,andauser can send any amount ofmoney.Online platforms are secure and easy touse.

However, P2Pmoney transfers also have their disadvantages. Firstly, they arerelativelyrecent,whichmightmakecustomersfeeluneasy.Secondly,someP2Pcurrency exchange companies allowprices to fluctuate unless a user locks therate.Traditionalmoneyexchangeslockthepriceattheagreementdate.Thirdly,someP2Pcompaniesalsochargefeesonmoneytransfers.

KeyPlayers

In this section, we look at interesting companies that are making importantprogressinthiscategory.Fintechisaveryvolatileindustry,sobythetimeyoureadthis,thesecompaniesmayhavechangedsubstantially.

Founded in January 2011 by Taavet Hinrikus and Kristo Kaarmann,TransferWiseisapeer-to-peermoneytransferoperatorwithitsheadquartersinLondon.ItcurrentlyhasofficesinEstonia,Singapore,Sydney,andNewYork,amongothers.Withatleastonemillionclientsandatleast£800millionworthoftransferseachmonth,itsupportsatleast645currencies[19].

TransferWise does away with costly cross-border transfers and currencyconversionbyreroutingpayments.Itdoesnotsendthemoneydirectlyfromthe

sender to the recipient but redirects the funds to another recipient of an equaltransferintheoppositedirection.Theoriginalrecipientreceivesthemoneyfromanothersenderwhoinitiatedatransferofthesameamount.TransferWiseeithercharges0.5%or€2,ortheequivalent,dependingonwhichisthelargeramount,asafee.

Estoniadeservesaspecialmention.ItbecametheSiliconValleyof theBalticsbecause,duringtheColdWar, theKremlinhaltedtheindependencemovementin Estonian universities by restricting the teaching of social sciences andphilosophy.Students focusedon information technologyandcomputers.Thesepeople becameEstonian software developers,whoplayed a central role in theKGBspyingeffortsandtheSovietspaceprogram.

EstoniabecameindependenttwoyearsafterthefalloftheBerlinWallin1989.NetscapeintroducedtheInternetbrowserafterthreeyears,andEstoniabecamean entrepreneurial e-republic. Most of Estonia is decentralised and digital.EstoniansrarelyvisitagovernmentofficeandhaveaccesstobroadbandWi-Fi.Theyhave been usingmobile phones as identification and voting online since2007.EstoniawasresponsiblefordevelopingSkypeandtheP2PmusicserviceKazaa.

TransferWise’sHinrikusandKaarmannstillliveinTallinn,Estonia.Kaarmanndeveloped the Scandinavian and Baltic version of Yahoo Finance. He had aconsulting deal with Deloitte in London, where he met Hinrikus, a fellowEstonian.Sendingmoneyto their familiesbackhome,KaarmannandHinrikusrealisedthattransactionfeeswerecostingthemalotofmoney.

Beingsoftwareengineers,HinrikusandKaarmann thoughtofasolution.FromHinrikus’s Estonian bank account, he would transfer euros to Kaarmann’sEstonianbankaccount.Then,fromKaarmann’sBritishbankaccount,hewouldtransfer pounds to Hinrikus’s Lloyds bank account, saving on internationaltransfer fees. They invited other Estonians to transfer money through theirmethod.

In2001,KaarmannandHinrikusresignedfromtheirjobstobuildTransferWiseusing about $1.3million of their ownmoney. The company now transacts atleast $750 million monthly with about one million users in 60 countries.Monthly,itearnsroughly$5millionintransactionfees[20].

Currently, itscompetitorsarecompanies likeMoneyGramandWesternUnion.Inthelongterm,itwillhavetodealwithotherthreats.

Paypalaimstoremainattheforefrontofinternationalmoneytransfers,soithasfollowed a policy of acquiring the best companies it can find which offerpotentialandsynergieswithitsbusinessmodel.

Popular amongmillennials, Venmo is a peer-to-peer payment technology thathasvarioususes.Userscanpayforitemsquicklythroughitsapp.Theycanposttheir transactions in the Venmo app for their friends to see. This feature isprimarily social advertising,whichmeansmerchants are very excited about it.Venmocharges2.9%pertransaction,andthereisa30chargeformerchants.Inthe2ndquarterof2015,itprocessed$1.6billion,processing$2.1billioninthefollowingquarter[21].

Xoom, acquired in July 2015 for $890 million, is a leading internationalremittances provider. Xoom enables its customers in the United States ofAmericatosendmoneytoanyonearoundtheworld.Itpridesitselfonbeingabletoperformpaymentsat lightningspeedandallowscustomers to reloadphonesandpaybills inacost-effective,quick, and securemanner throughcomputers,tablets,andmobilephones.

UK-basedWorldRemit is continuously building its business on a global scale.Founded in 2010, it is, at present, worth around $500 million. It has set upheadquarters in the USA, particularly in Denver, to capture the US market,where10%ofallworldwideremittancesoriginate.

WorldRemit charges a lower commission thanWesternUnion.Users from50countries can use their mobile phones or computers to transfer money toindividualsin117countries.Theycansendmoneytomobilewallets,cashpick-uppoints,orbankaccounts.WorldRemitisleadingitscompetitorsintheareaofmoney transfers tomobilewallets,with100,000 transferseachmonth,25%ofthecompany’stotaltransactions.

Based inLondon,Azimo isamobilemoney transfercompanywithmore thanhalf amillion customers. It is expanding its operation inEurope and targetingmigrantworkers,whoearnlessthantheaverageincome.Foundedin2012,itcantransactin80currenciesandcovers200countries.ItstargetregionsareAfrica,Latin America, Asia and Eastern Europe. Azimo is integrated with FacebookMessengerandwillsoonbeintegratedwithViber.

Based in the UK, Currency Cloud offers cross-border money transfers and isusedbypaymentandmoney transferbusinesses. ItsPaymentEngine,acloud-based platform, connected to an API, is used by companies like Xe.com,TransferWise,andAzimo.CurrencyCloudboastsatleast500,000endusersandis used by no less than 150 companies like WorldRemit, WeSwap, andMANGOPAY.

Currency Cloud’s main competitors are banks, but the platform charges lessmoney for the same money transfer service. On average, Currency Cloudprocesses$10billionworthofpaymentstransactionsyearlyin40currenciesin212nations.Itexpects tosoonexpandinto theUSmarketandplans toopenaheadquartersinNewYork.

Seattle-basedRemitly isamobile remittanceapp thatallows individuals in theUSAtosendmoneytothePhilippinesandIndia.IthasacquiredTalio,apicture-messaging app, and plans to incorporate its features into the Remitly app.Remitly processes an average of $1 billion in money transfers each year.Focusing on its customers, its mobile-first service continues to disrupt theremittancemarketwithitslowfees.

Foundedin2012,RippleisaUSbasedcompanythatoffersanInternetprotocoltoconnectthedisparatefinancialsystemsindifferentcountries,offeringsecurefund transfers. It has received more than $90m in funding and supports twosolutions,oneforretailremittancesandoneforcorporatedisbursals.

Ripple’s distributed financial technology enables banks to send real-timeinternationalpaymentsacrossnetworks,withnosettlementrisk,andeliminatingtheneedtohaveseparateaccountsindifferentcountries.

Rippleenablesbankstoopennewrevenueopportunities,lowerprocessingcosts,and deliver better overall customer experiences. 15 of the top 50 banksworkwithRipple,inninecountries.

One of the early shockers of 2017was the announcement that Ant Financial,Alibaba’s financial servicesarm,dubbedas thePayPalofChina,hadacquiredMoneygram. Moneygram is the second largest money transfer operator, justbehindWesternUnion. ThismeansAnt Financial can offer services tomorethan200countries.Itprovesthathavingarobustagentnetworkisstillseenasimportant.Manypeoplestillliketodealincash,andAntFinancialcancapitaliseon the network to offer other products through the AliPay brand, such aspersonalconsumerloansandsmallbusinessfinance.

SocialMedia-basedRemittances

Socialmediaisagreatwaytoconnectwithfriendsandsharestoriesandpictureswith them.With the advent of financial technology, it is alsopossible to sendmoneythroughthemtoanyoneintheworld.

A remittance fintech company can take advantage of social media to makemoneytransferscheaperandfasterglobally.Usually,ithasanappwhichuserscan use to send remittances through social networking sites like WeChat,Twitter,andFacebook.Atpresent,Facebookdoesnotchargeafeeforpeer-to-peer payments through its Messenger app. On the other hand, WeChat, thepopular Chinese socialmedia site, charges 0.1% for transfers. Both FacebookandWeChatallowpaymentsbetweenuserswithinthesamecountry,though,inFebruary 2017, Transferwise introduced a chatbot to Facebook that allowscustomerstodointernationalpayments.[22]

Inmostcases, thefintechcompanywillalsochargeafeefortheprocessingofthetransaction.Therecipientcancollectthemoneyfromcashpick-uppoints,oritcanbesenttotheirbankaccount.

KeyPlayers

WhatsApp

WhatsApp is a cross-platform, proprietary, and encrypted instant messagingsystemforsmartphones.BasedinCalifornia,FacebookacquiredthecompanyinFebruary2014forabout$19.3billion.WhatsApphadatleastonebillionusersbyFebruary2016,makingitthetopmessagingapplicationatthattime[23].

WhatsApp has huge potential for integrating payments. Axis Bank, incollaborationwithWhatsApp,allowsuserstorequestandsendmoney,andthetransferisinstant.Thesenderhastoenterasendercodeandamounttobesenttothe intended recipient. After pressing the “Send” button, the recipient willreceive amessage informing them.They have 15 days tomove themoney totheirbankaccount.Iftheyfailtotransferthefunds,themoneywillbereturnedtothesender’saccount[24].

Facebook

InMarch2015,FacebookannouncedthatitwasofferinguserstheoptiontosendmobilepaymentsthroughitsMessengerapp.UserscanuseadebitcardtosendmoneytootherFacebookuserswithoutcharge.Theyneedtocreateamessagetothe recipient then tap the “$” icon. Recipients have to open themessage andentertheirbankdetails.Themoneytransferwillhappenimmediately;however,it may take up to three banking days for the funds to be available in therecipient’sbank[25].

InOctober2016,theCentralBankofIrelandgaveFacebookalicensetooperateP2PpaymentsandcharitabledonationsthroughitsMessengerserviceallacrossEurope.Withitslicense,FacebooknowallowsitsusersinEuropetodonatetoregistered charities in the European Economic Area and carry out P2Ppayments[26].

SnapChat

SnapChatcollaboratedwithSquaretolaunchSnapcash,amoneytransferservicethatallows individuals tosendandreceivemoneythroughtheapp.SquarehasSquareCash, a remittance app that lets people send and receive cash throughemail.Snapcash, on theother hand, allowsSnapchat users to enter an amount

throughthemessagingappandtransfertheamounttoarecipient’spre-registeredaccount.Snapchatdoesnotstoreuser’sfinancialdata,butSquarestoresallbankdetailsanddebitandcreditcardinformation,aswellastransactions[27].

WeChat

Developed by Tencent, WeChat is China’s cross-platform instant messagingplatformreleasedinJanuary2011.AsofMay2016, ithasat least700millionactiveusers. It is available for iPhone,WindowsPhone,Android,BlackBerry,andSymbianphones[28].

WeChat supportsmoney transfer and payment through peer-to-peer electronicbillpaymentandtransfer.UsersmusthavetheirWeChatPaymentaccounttousethis feature.Theycanuseadebitcard toaddmoney to theirWeChataccount.Thoseuserswithcreditcardscanonlyusethemwhenpayingmerchants.

Most retailers in China, including Taiwan, Macau, and Hong Kong, acceptWeChat Payment. In 2014, WeChat Payment introduced the “Electronic RedEnvelope” insteadof the traditionalredenvelopegiven tofriendsandrelativesasaformofgreetingthemonholidays.

Viber

Developed by Israel-based Viber Media, Viber is a voice-over IP and cross-platform instant messaging app that also allows users to exchange audio andvideo messages, and images. In February 2016, it collaborated with WesternUniontoallowuserstosendmoneytootherusersanywhereintheworld[29].

Using theWUConnectplatform,Viber focusesonsendingmoney, integratingsolutions that use foreign exchange conversion, robust technology, datamanagement, and compliance, regulatory, and anti-money launderinginfrastructure.

Nanopayments

Forthefilmandmusicindustries,itwasachallengetomonetisesomethingthatpeoplecangetfreeofcharge.AppscreatedforFacebookandothersocialmediasitesalsohadthesameproblem.Today,therearestrategiesthatcangetpeopletopayasmallamountfortheseservices.

Nanopayments have been in existence in Asia for many years now. In 2007,Tencent inChinabrought in $523million in sales and$224millionoperatingprofits through nanopayments. In this case, almost 60% of the earnings camefromdigitalgoodsandgames,while13%camefromadvertisements[30].

Apple’sAppStorewassuccessfulbecauseofpeoplewhopaysmallamountsofmoney for virtual goods. Users are willing to pay from $0.99 to $4.99 forvarious apps that they can download from the Store. Social networkswant toreplicatethissuccess,sothereisaneedtohaveareliable,stable,andeasy-to-usepaymentsystem.

Most users are young, so they do not have access to credit cards. In China,children can addmoney to their Tencent accounts by purchasing “QQ coins”from physical retailers or charging it to their phone bill. Similarly, Korea’sCyworldandJapan’sMixiusethesamesystem.

Znak’s Greg Golebiewski devised a way for ads and nanopayments to worktogether. Znak Inc. is a Delaware-based company offering server-based andsoftware-as-a-service solutions to monetise and curate premium contentaccurately. According to Golebiewski, users can earn virtual currency bycompleting surveys or clicking on infomercials. They can also buy virtualcurrencyusingrealcash.

XFactorCEOTonyCohenbelievesthatchargingauser£0.05,forexample,towatch anold episode, canhelp increase demand.Users also avoid illegal file-sharing sites if they canwatch old episodes cheaply.According toOneTouchmarketingmanagerEliGurock,90%ofpeopleworldwidedonothaveaccesstocredit cards, and many credit card users do not want to use them online.Nanopayments can bridge that wide gap and address the problems webmerchantshavewithcapturingmorecustomers.

TheFutureinaFlash

In the globalised world we live in, we can expect remittances to growcontinually.Wecanalsoexpectmigrantstobecomemoreawareofcheapwaystosendmoneyhome,andassume that the levelof trust in theseserviceswillincrease. Mobile wallets are also likely to become an important tool forperformingthesetransactions,asmorepeoplegainaccesstosmartphonesinthe

developingworld, especially in Africa andAsia. Finally, we can expect fullintegrationtosocialnetworksby2020.

CHAPTER4

DIGITALLENDINGINNOVATION

DigitalLendingInnovationinaFlash

Bylookingatinnovationsinmoneylending,wecanseehowfarwe’vecome,starting with pawnbrokers, evolving into Internet-only banks offeringimmediateloanapproval.

Theideaofdigitallendinghasbeenaroundformanyyears,butitisonlynowthat innovations that allow for transformation are taking place. Digitalconsumerlending,studentloans,smallbusinessloans,andmortgageshaveallseenunprecedentedgrowthandundergoneradicalchangesinrecentyears.

Thebiggestchangehasprobablybeentheintroductionofpeer-to-peerlending.Asignificantamountoffundshasgoneintothisspaceoverthelastdecade,andeven though the business model of these companies is still fluctuating, itappears that this type of lending is more than simply a trend. The use ofadvancedanalyticstoinformcreditscoringandeligibilityforlendingisanothersignificant innovation. We will examine in detail how these and othertechnologiesarebeingappliedtodifferentrequestsforlending.

ShortHistoryofLending

Pawnbrokerswerethefirstpeopletobeginlendingmoney.Theyaskedforitemsascollateraltominimisetheirlendingrisk.Thiswasthefirsttimetheworldsawsecured lending. In the Middle Ages, Christians were banned from lendingmoneywhilstcharging interest.However,non-JewscouldborrowmoneyfromJews with interest. Moneylenders used to sit on benches, known as “banca”,whichgaverisetotheword“bank”.Whenalenderstoppedlendingmoneyandsmashedhis“banca”,thiswasa“bancarupta”,whichledtothetermbankrupt.

In the18thcentury,MayerAmschelRothschild invented internationalbanking.

HisfivesonsrananetworkofbanksinfiveEuropeancities.Withinthecentury,hisfamilybecamethewealthiestintheworld.Inthelate18thcentury,buildingsocietiesstartedtoemergeintavernsandcoffeehousesintheUnitedKingdom,particularly in Birmingham. In 1775, a property owner founded Ketley’sBuilding Society, where member subscriptions financed the construction ofhousesformembers.Foundedintheearly1800s,thePhiladelphiaSavingsFundSocietyprovidedameansofsavingandaccesstoloansforaverageAmericans.In 1932, the creation of the Federal Home Loan Bank system by the USCongress paved the way for residential mortgage lending by banks and otherfinancialinstitutions.

In 1950, businessman FrankMcNamara invented the credit card and was thefirst person to use aDinersClubCard to pay a restaurant bill. In 1958,BankAmericafollowedsuitby launchingBankAmericard,which laterbecameVisa.BarclaycardwasthefirstcreditcardintheUnitedKingdom,releasedin1966.In1973,Visa reduced transaction times through thecomputerisationof thecreditcard system. Prior to computerization, payment between credit card issuers,banks, and retailers was manual and slow. It usually involved phone callsbecausecheckshadtobemadeagainstcreditbalancesandalistofstolencreditcards.

LendersintheUSstartedusingFICOscorestomakeinformedcreditdecisionsin 1959. The first reversemortgagewas given in 1961whenNellyYoung ofPortland,Maine,lostherhusband.SheneededtokeepherhouseandwashelpedbyDeeringSavings&Loan’sNelsonHayes. In 1970,USCongress charteredthe Federal Home Mortgage Corporation, to create a secondary market fortraditionalmortgages.

Online lending specialists grew up between 1980 and 2000. Quicken Loan, aDetroit-based mortgage lender, launched its online application and reviewprocess in 1985. First Internet Bank started its online-only banking in 1999,offeringbankingservicesandhomemortgageloans.

Peer-to-PeerLending

Peer-to-peer is an interaction between two parties with no intermediary. Thiswasatermoriginallyusedincomputernetworking,butitnowhasvarioususes,frompeer-to-peerfilesharingtopeer-to-peerlending.

In finance, peer-to-peer lending started with the launch of Zopa and Prosper,whichmatch borrowers and lenders in a central marketplace. In a nutshell, aborrowergoes toaP2Pmarketplace toborrowmoney. Ifapproved, theygetariskclassification,whichdetermineshowmuchtheywillneedtopayininterest.Theloanthengetsfundedbyoneormoreprivateinvestors.Thisturnsouttobeagooddealforbothsidesastheygetbetterinterestratesthanbanksoffer.Tobesuccessful, credit scoring and fund diversification processes need to be wellarchitected.

In2016,Prosperhadatleasttwomillionmembers,andabout$6billionofloansweretakenout.Zopa,ontheotherhand,wasusedtomakeroughly£1.4billionofloansandhadatleast114,000members.

During recentyears,peer-to-peer lendinghasgrownrapidly,andsomebelievethat it will continue to do so. Peer-to-peer lending is more profitable thankeepingmoneyinsavingsaccounts, thoughit isriskier.Peer-to-peerlendingisperceived as having better social value and being more responsible thantraditionalbanking.

P2PMarketplaceLendingBusinessModel

Peer-to-peer platforms take both the depositor and borrower businesses awayfromtraditionalbanks.Theytransferincomeandtheassociatedcreditrisktotheloan investors at thepointoforiginandearnnothing from loansheldon theirbalancesheets.Mostoftheirrevenuecomesfromfeeschargedwhennewloansaretakenout,sotheyneedtobemakingsalescontinually.

Consequently, if there is no appetite for lending and risk in themarket, theirperformanceisheavilyaffected,whichisinturnreflectedintheirrevenuesandcompany valuation. As a result, some believe a purely P2P market isunsustainable.Somecompanies, likeRatesetter,havechanged theirmodel andnow charge fees throughout the life of the loan. This provides a more stablebusinessmodel.

Standardmarketplaceeconomicsindicatethatloansarenormallyoriginatedata5%premium.Assuminga loan lengthof fouryears, thiswouldmeana1.25%transaction fee. Platforms would also charge an annual maintenance fee ofaround0.8%,whichwouldmakethemanaverageofaround2%.Abankwouldmake a lot more than this, as they generally havemargins of around 7% net

interest,afterdeductingcreditlosses.

Sofar,peer-to-peerlendinghasnotbeenveryprofitable.ThetoplendersintheUK, Zopa and Funding Circle, lost £50million in their first decade. They’vebeenonasteeplearningcurveandhavehadtospendsignificantlytoattractnewcustomers. Sales and marketing and origination and servicing expenses havetaken up roughly 50% of the operating revenue of these companies. Referralschemes have been very generous. Ratesetter, for example, rewards referralswith £50 and gives new lenders £100 if they keep an investment of at least£1,000 for one year. FundingCircle customers earn £40 if they recommend afriendwhogoesontoinvestatleast£1,000.Zopacustomersget£50ifafriendlends£1,000withtheplatformand£100ifthefriendlendsatleast£2,000.

There are different approaches to dealing with unpaid loans. Some lendersspreadtheirinvestmentovermanydifferentloanssothattheireggsaren’tallinthesamebasket. In thesecases, interest ratesare indicativeanddependon thenumber of unpaid loans.Other firms setup provision funds,whichmeans thattheyputmoneyasidetocoverpotentialdefaultonloans.

P2Ploansarestilllookingforanoptimalbusinessmodeltosustainprofitability.ApathtostabilitycouldbetohaveP2Plendingasjustonelineofbusinessandoffer other bank services as well. This would allow them to have loans on abalance sheet and earn a profit from them. A hybrid model could help themnavigate thedifficult lending times inabetterway.Theywouldberequired togetabankinglicense,andsomehavealreadystartedtogointhisdirection.

KeyPlayers

In this section, we look at interesting companies that are making importantprogressinthisarea.Fintechisaveryvolatileindustry,sobythetimeyoureadthis,thesecompaniesmayhavechangedsubstantially.

Foundedin2006,LendingClubraised$10.26millionfromCanaanPartnersandNorwestVenturePartners.Itbecameapeer-to-peerlendingcompanyin2007.InDecember2014,afterseveralroundsofinvestment,LendingClubcompleteditsinitialpublicoffering(IPO)at$900million.InJune2015, itcollaboratedwithOpportunityFunandClintonGlobalInitiativetoprovide$10millioninfundstosmallbusinessesinCalifornia.InApril2016,itcollaboratedwithFundingCircle

andProspertobuildtheMarketplaceLendingAssociation.

Lending Club facilitates business and personal loans and finances electivemedicalprocedures.Itisoneoftheworld’slargestonlinecreditmarkets,whereborrowers can obtain loans quickly and easily and at a low-interest rate.Investorsinjectfundssothatthecompanycanprovidetheloans.Inreturn,theyearninterestontheirmoney.LendingCluboperatesonlineandhasnophysicalbranches.

Aborrowercanobtainan instantquotewithoutdamaging theircredit score. Iftheyagreetotheoffer,investorscanstartfundingtheirloan.Alendercancreateaportfolioofloansforqualityborrowers.Theycanopenanaccountquicklyandreceivetheirrepaymentsandinterestmonthly,withtheoptionofreinvestingorwithdrawing them.A person looking formedical financing can apply throughLending Club’s network of providers around the country or online. A bankfacilitates the loans, so lending activities are subject to fair lending practices,consumerprotection,anddisclosurerequirements.

LendingClub’s founder,RenaudLaplanche, ended his tenure asCEO inMay2016.Anofficialauditshowedthecompanyhadknowinglysoldaninvestor$22million of loans that the investor did notwant, falsifying documents.This ledLendingClub’sstockprice to tumble to$3.5fromaninitialhighin itsIPOofalmost $26. Lending Club’s fluctuations show how quickly successfulbusinessesinthisareacanfallfromgrace.

Launchedin2005,ZopaisBritain’sbiggestpeer-to-peerwebsite.Itbrokeevenin2016andhasatleast50,000lenderswith£1.6billionofloans,atanaveragerateof0.8%.Zopa recentlyapplied forabanking license, set to join theever-growinglistofchallengerbanks.

Borrowers pay around 5% interest, depending on the loan term, loan amount,and credit rating. Typical borrowers include homeowners who want toconsolidate their debts,make home improvements, or buy a new car. Lendersearnanaveragereturnof5%onaminimuminvestmentof£10.However,Zoparecommends that new investors invest £500. Lenders can receive repaymentsmonthlyandhavetheoptiontoreinvestthem.

FoundedinSanFrancisco,Prosperisamarketplaceforlendingwithatleast$7billion in loans. Itmatchesborrowers and lenders in a socially and financiallyrewardingmanner.Borrowerscanapplyforaloanofupto$35,000,andlenderspool their funds to lend themoney. Popular investors in the company includeCredit Suisse NEXT Fund, Institutional Venture Partners, Francisco Partners,andSequoiaCapital.

Prosperusespre-setratesdeterminedbyasystemthatconsiderstheborrower’screditrisk.LendershavetheoptiontoinvestornotattheratesetbyProsper’salgorithm. The company profits by charging a fee per transaction, which canrangefrom1%to5%,withanannualservicingfeeof1%chargedtoinvestors.

Established in London in October 2010, RateSetter has at least 33,000 activelenderswhohavelentatleast£1billion.Theirdefaultrate,quotedat0.71%,isextremelylow,andnoneoftheirlendershavelostmoney.Lendersdonotpayafee, but borrowers have to pay a risk-weighted fee that covers costs andmanagement of loans, aswell as contributing to a provision fund against baddebts. Lenders can earn asmuch as 4.56%on aminimum investment of £10.Theycan lendmoney forwhateverperiod they choose. If they choose to lendoveralongerperiod,theyreceiveahigherreturnontheirmoney[31].

Lufax is a Chinese P2P lending marketplace. Its official name is ShanghaiLujiazuiInternationalFinancialAssetExchangeCo.Itwasfoundedin2011andraisedalmost$500millionin2015.Itisowned49%byPingAn,China’slargestinsurer. It’s got anAmericanCEO,GreggGibb. It not only does lending, butalso equities. Its intention is to offer Chinese investors the opportunity todiversifytheirassetsbyinvestingworldwide.LufaxhasalreadygotpartnershipswithSaxoBankandwitheToro,asocialtradingplatform.

InDecember2015,CreditEase floatedYirendaion theNYSEat$10pershareandraised$86millionintheprocess.Yirendaiisapeer-to-peercompanyowned

by CreditEase and is China’s largest P2P Company. Launched in 2006, itbecame a full-service financial company offering wealth management andfinance products and services. It now offers consumer loans, small businessloans,mortgages,rural loans,car loans,andstudent loans.Asidefrompeer-to-peer lending, it also has wealth management products including insurance,alternativeinvestments,credit,realestate,andequities[32].

Established in 2012, Seattle-based LendingRobot is a loan comparison enginethat uses algorithms to help lenders search for themost profitable loans.As acloud-based service,LendingRobot has at least 40various filtering criteria forProsper and LendingClub. It automates and simplifies peer-to-peer lendinginvestments so that lenders can increase their profits whilst saving time. Itaggregates various data and evaluates different loans based on each investor’scriteria. It offers a unique proposition to individual investors due to itsautomationservices[33].

ConsumerLending

Anunsecuredloanisonethatdoesn’thaveanyassetsorsecuritiesagainstitandsoisriskierforlenders.However,itislessriskyfortheborrowerbecausetheyhavenopropertythatservesasaguaranteeiftheyfailtorepaytheloan.Becauseofthis,thelenderchargeshigherinterestratestooffsettherisk.

An unsecured loan can be of many types: signature or personal, credit card,student, or a peer-to-peer loan. A borrower can secure a signature loan fromcreditunionsandbanks.Theycanuseitforanypurposeandusuallypayofftheloanmonthly. If they have good credit standing, they can expect to pay off aloanatalowinterestrate.

A credit card is another type of unsecured loan provided by credit cardcompanies.Acreditcardholderusesittopayforwhatevertheyneed.Normally,theypayahighinterestrateontheircreditcardbalanceiftheyfailtopaytheirbalanceinfullandontime.Acreditcardcompanymayoffera0%interestrateforatimetoencouragepeopletoapplyforitscard.

Digital lending allows customers to get an unsecured loan through onlinelenders. In the United Kingdom, this lending market is worth around £2

billion[34].

Customers avail of digital lending because of convenience, simplicity,transparency, and flexibility and personalisation. They do not have to go to abank branch to apply for a loan. They can use a mobile app anywhere andanytime to gain access to credit. They are only required to provide someinformationandanswerafewquestions.Usually,theysimplyhavetoselecttheloanmaturityandvalue.Thesystem’salgorithmswilltakecareoftherestofthecomplexprocessusingacollectionofpastdata.

Lastly,digitallendingcanprovideborrowerswithincentivesforkeepingagoodloanrepaymentrecordsothattheycangetpreferentialtermsandbetterratesthenexttimetheyapplyforanonlineloan.

InastudybySAPValueManagementCenterandBain&Company,onlyabout7% of traditional banks’ products are compatible with digital transactions,making them vulnerable[35]. Financial technology startups, telecommunicationproviders, and incumbent retailers have recognised this opportunity and aretakingadvantageofit.Thesenewdigitalentrantscanofferloansatabetterpricebecausetheyassumealowerbasecostandarebetterabletotargetspecificriskmarkets.

Banksneedtoinvestindigitallendingiftheydon’twanttolosemarketshares.They have to create better customer experiences, remove avoidable and badinteractions, make the loan application process easier, and create an agileoperatingmodelforacheaper,better,andfasterlendingprocess.

KeyPlayers

In this section, we look at interesting companies that are making importantprogressinconsumerlending.

PayPal’sMaxLevchinhasunveiledanotherstartup,Affirm,anonlinecompanyofferingcreditwithmoretransparencyandlowerfees.Affirmisslowlymakingits way into physical retail stores too, offering loans with low paymentinstalments,verymuchliketraditionalcreditcards.Theloanscanbeagreedatthe cash registers of selectmerchants in collaborationwithFirstData, another

payment-techgiant.Additionally,Affirm loans are also available for over-the-phonepurchase,withtheretailersColemanFurnitureandModloft[36].

AffirmdoesnotchargelatefeesandofferslowAnnualPercentageRates(APR).Ittargetsindividualssuchasmillennialsandimmigrantswithoutcreditcardstouseitsloanfacilities.Thecompanywasabletoraise$275millioninJune2015.Popular investors include Lightspeed Venture Partners, Khosla Ventures,AndreessenHorowitz,Jefferies,andSparkCapitalGrowth.

Affirmoffersanannualslidingmarkupfrom10%to20%tohelpitscustomerspay back their loans. Its algorithm considers the borrower’s name, mobilenumber, social securitynumber, email, birthday, andbehavioural factorswhengrantingaloan.

Avant received more than $325 million in equity funding in 2015, with avaluationofabout$2billion.GeneralAtlantic,BalyasnyAssetManagement,JPMorgan, DFJ Growth, August Capital, Tiger Global Management, and RREVentures led the fresh round of investment. According to Avant’s CEO andFounderAlGoldstein,thecompanywantstobecomealeadingproviderofloanstolowandmiddle-incomecustomers.

Avant tries to be different from its competitors by targeting below-primecustomers and providing its own funds for the loans. This means that it cancollaboratewithnewindustryplayersandnotbeindirectcompetitionwithP2PcompaniessuchasLendingClub.AvantprovidesunsecuredcreditintheUnitedKingdom,Canada,andtheUnitedStatesofAmerica.

Kreditechraised€82.5millionforitsexpansioninSeptember2015.EstablishedinGermany,itbuiltawidearrayofbankingandcreditproductsforindividualswithlittleornocredithistory.PayPal’sPeterThielalsoinvested$44millioninJulywithotherinvestorslikeAmadeusCapitalPartners.Sinceitsinception,thecompanyhasraised€185millionindebtand€70millioninequity.

Currently,Kreditech operates inRussia, theCzechRepublic, Poland,Mexico,and Spain. It is using its platform to reach out to individualswho lack credit

history.Itsalgorithmsconsistof20,000variousdatapointsthatassessasingleloanapplication.Todate,about500,000customershavetakenoutloanswiththecompany.KreditechisplanningtolaunchinBrazilnextyear.InsteadofofferingloansintheUSA,itisfocusingondevelopingeconomies.Allproductswillbesoldunderonebrand,Mondeo.

ZestFinance has built algorithms to provide customers who cannot acquirecreditsfrombankswithloans.Recently,itreceived$150millionfromFortressInvestment Group. Based in Los Angeles, its popular investors includeNorthgate Capital, Peter Thiel, Matrix Venture Partners, Lightspeed VenturePartners, Eastward Capital Partners, and Kensington Capital Holdings. It wasformallyknownasZestCash.

TheFortressinvestmentwillfundZestFinance’sBasixloan,aproductfornear-prime consumers. The technology used by ZestFinance uses non-traditionalfactorstodeterminewhethertolendtoconsumerswhohavenoaccesstocreditsprovided by banks. In a study carried out by credit scoring company CreditKarma,itwasestimatedthatBasixcouldserveatleast42.2millionpeoplewhohaveFICOscoresbetween600and680.Borrowerscanusetheloanfacilitytopaybackalargeloanorconsolidatetheirdebts.

USLendUP is recasting the payday loan business so that high-risk borrowerslearn their lesson and becomemore responsible with their credit. Its app canprocessshort-termloanapplicationsofupto$1,000injustafewminutes,andborrowers cannot roll over these loans automatically. LendUP also providesopportunitiesfortheriskiestborrowerstogetthelowestratesbylearningfromonlineclasses,referringothers,andrepayingloansontime.

DigitalLendingforStudents

Acategorythatstandsonitsowninsideofconsumerlendingisthatfocusedonstudents. Many students need loans to fund their university studies. Somecountries,suchastheUnitedKingdom,haveagoodsupportsystemforstudents,as governments can fund loans at extremely low interest rates. This doesn’tmeanthatstudentloansintheUKearnagoodreturnoninvestment,asstudent

loansareabout£70billion,or16percentofUK’sGDP,andmanyoftheseloansareneverrepaid.[37]However,rulesaredifferentaroundtheworld.Forexample,student loans arebigbusiness in theUSA,with themarketbeingworth about$1.3 trillion.Aftermortgages, student loans are the next largest debts. Takingadvantageof thismarket,manycompaniesandstartupshavestartedlendingtostudentsonline.

Peer-to-peer lendingcompaniesoffer two types loans to students: consolidatedloans after graduation or traditional loans for qualified graduate programmestudents. Each loan is linked to a particular degree, programme, and school,reducingtheriskforcompanies,andbuildingrelationshipsbetweenstudentsandlenders.Ofcourse,differentdegreesimplydifferentlevelsofrisk,andgoingtoacertainuniversitydoesnotguaranteethatpeoplewillendupearningenoughtorepaytheirloan.

Peer-to-peerallowsinvestorstocontributemoney,togetherwithotherinvestors,to fundstudent loans inaqualifyingschool[38].An investorearnsmoneyfromtheinterestpaidbyastudentandassumestheriskifastudentdefaultsontheirloan.However, they are also doing society a great favour by helping studentssecuretheirfuture.

KeyPlayers

In2011,JamesFinnigan,MikeCagney,IanBrady,andDanMacklinestablishedSocial Finance or SoFi. As Stanford Business graduates, they used it to offermore affordable student loan options to fund a student’s education. With $2million initial capital, they funded 100 students, with an average loan of$50,000[39].

Since then, SoFi has raised millions from investors like Baseline Ventures,DiscoveryCapitalManagement,WicklowCapital,PeterThiel,andThirdPointManagement,amongstothers.ItalsoraisedmoneythroughloansfromMorganStanley, Bancorp, and Barclays. SoFi also started offering personal loans andmortgages in 2015. As of October 2016, it has funded at least $12 billion inloansandhelped175,000individuals.

Sofi aims to disrupt the financial services sector by providing borrowerswithmorepersonalisedfinancingoptions,mobileaccess,andbetterservice.Althoughthe loan process is digital, it has hundreds of employees who assist member-borrowers.

Aninnovativedisruptor,SoFi targetshigh-endcustomerswithspecificdegreesfromparticularschools,offeringthemrefinancingstudentloans.SocialFinanceorSoFiinvitesitsborrowerstofreepartiesatcocktaillounges,tryingtobuildacommunity,anditthanksitscustomersbythrowingparties.SoFihasrefinancedmorethan$9.76billioninstudentloans.

Sofihasalsoestablisheditsownhedgefundtopurchaseitsloans.ThereisalsoarumourthatitwillsoonestablishitsownRealEstateInvestmentTrusttobuyitsownmortgages.Toaccelerateitsgrowth,italsoofferspersonalloans,andwillsoonofferinsuranceproducts,wealthmanagementtools,andsomethingsimilartoacheckingaccount.

Established in 2011 by Jessup Shean, Mike Taormina, and David Klein,Commonbondaimstosolvefrustratingproblemsinthestudentloanindustrybyofferingexceptionalcustomerservice,simpleandtech-enabledloanexperiences,andcompetitivepricing[40].

Commonbond focuses on student loans and bringing together investors andstudentborrowers. Ithas technology thatcanspeedupandsimplify thewholeloan process, and its focus is on the customer. It also offers students hosteddinners,careersupport,panels,andnetworkingopportunities. ItsNetPromoterScore[41] system considers customer feedback from various student borrowersandloanapplicantsandhelpsthecompanyfocusonitsproductsandpricing,aswellasover-deliveroncustomerserviceandtechnologytokeepCommonbondgrowing.

CommonBond’s average borrower is 33 years old with an annual income of$159,028and$5,996inmonthlyfreecashflow.Ithasrefinancedmorethan$1billioninloans.

Earnest,alendingcompany,hasatleast80,000datapointstoassessprospectiveborrowers with little or no credit history. Based in San Francisco, it offerspersonal loans to students and refinancing of student loans for indebtedgraduates,withratesof1.92%[42].

AccordingtoEarnest’sCEOandco-founderLouisBeryl,Earnesthasrefinancedmorethan$971millioninstudentloanssinceitsinception.Itrecentlyreceived$17 million funding from Maveron, a venture capital company. Unlike itscompetitors, Earnest considers credit card details and banking history whendecidingwhetherornottoapprovealoan[43].

Student Loan Hero has at least 2,000 borrowers and $63million inmanageddebts. It has a proprietary platform for its algorithms. Expansion VentureCapitalist,SocraticLabs,andStartupChilewereamongstthosewhoinvestedinthe company. Founded by Andrew Josuweit, it first focused on apprecommendations,butthenshiftedtoprovidingstudentloans[44].

Whenhegraduated,Josuweithad$104,000instudentloans.HehadtokeepupwithalltheloansbyusinganExcelspreadsheet.HecreatedStudentLoanHeroin May 2012, and the public beta debuted in October of that same year. Aprospectiveborrower has to enter loan andbanking credentials on thewebsiteandanswersomequestionssothatthealgorithmscandecidetheprogramstheyqualifyfor.StudentLoanHeroalsoprovidesanamortisationscheduleandothergovernmentprogramsthattheborrowercanuse.

MattLenhardandNateMathersonstartedLendEDUtohelpgraduatesrefinancetheirstudentloans.Theydiscoveredthatgraduateswhowantedtorefinancetheirloans had to fill out lengthy application forms and wanted to simplify thisprocess.

A prospective borrower fills out one application and gets access to variousstudentloanrefinancingoptions,withoutdoinganydamagetotheircreditscore.Onaverage,theycansaveabout$12,000throughloanrefinancing[45].

DigitalLendingforSMEs

DigitalLendingforSMEs

Sincethe2008recession,well-knownbankshavebeenawardingfewerloanstosmall andmedium-sized enterprises, andother firmshave started appearing tofill the void. Three interesting business models that are worth exploring areinnovative short-term working capital, peer-to-business lending, and invoicefinancing.

ShortTermWorkingCapital

Forcompanieslookingforshort-termloanswithquickdelivery,Fintechisgoodnews. Up until a few years ago, there were no suitable alternatives to banks.Companieswouldenduphavingtorequestmerchantcashadvances,receivingalump sum in exchange for a share of their daily credit card sales. Effectiveinterestrateswouldbeover100percentilepoints,makingthemveryexpensive.Companies such as Kabbage, OnDeck and PayPal Working Capital haveintroducedlow-costalternatives.

Thesecompaniesrequireacertainnumberofmonthsofcredithistory,acertainturnover,andtheywillalsolookatthepersonalcreditscoreoftheowners.Thegoodthingisthatthereisalmostnopaperwork,andeverythingisdoneonline.PayPal is the easiest company to qualify for and has good rates. However,borrowers need to be selling throughPayPal.Kabbage is the next easiest, andOnDeck is the most restrictive of the three. OnDeck requires personalguarantees,meaning that you are pledgingyour personal finances to paybacktheloan.

Thecompanieswilltapintoapplicants’salesdetailsfromdifferentsourcessuchasShopify,eBay,Amazon,Xeroaccounting,etc., togainaclearviewofyourprofitability.

Traditionalbanksaretakingnoteoftheseinnovations.Forexample,JPMorganChase collaborated with OnDeck to add an online lending platform to itsconventional underwriting process. Kabbage also forged a similar partnershipwithSpain’sINGandtheUK’sSantandertoprovidetheplatformforthebanks’deliveryandunderwritingservices.

Peer-to-BusinessLoans

Becauseofbanks’restrictionstolending,somebusinessesdonothaveaccessto

credit. Peer-to-business offers an alternative to this problem by providing anopportunity for investors to earn money. At the same time, it allows forbusinesses toacquire theirmuch-neededfunding.Businessesget fundsquicklyand at a lower interest rate, whilst lenders receive a higher profit from theirinvestments. Banks cannot offer the same high margin to depositors, as theirstructuresarecostly.

IntheUnitedKingdom,theFinancialConductAuthoritystartedregulatingpeer-to-peerlending,includingbusinesslending,inApril2014,toprotectconsumersand supervise and guide related anti-money launderingmeasures, promotions,and other activities. Peer-to-peer lending firms now have base capitalrequirements that have to be reportedmonthly to the FCA[46]. The FCA alsorequirespeer-to-peerlendingplatformstofollowtheClientMoneyRulesintheFCA Handbook to protect lenders’ money and comply with disclosurerequirements[47].

The auction P2B lending model means a borrower can initiate a loan byspecifying the amount and the date of repayment desired.Then, lenders try tooutbideachother,offeringaninterestratetheyfeelwillmitigatetheirrisks.Attheendoftheauctionperiod,theborrowercandecidewhetherornottoaccepttheloan,dependingontheaverageinterestrate.Theypayfortheloanmonthlywiththeaddedinterest.

If the borrower does not repay the loan on timeor defaults, lenders lose theirmoney.Thus, theyneed to take thenecessaryprecautionsby scrutinisingeachloanandaskingtheborrowerquestions.Theycanalsospreadtheirinvestmentsbyfundingseveralsmallloans.Theycanoptnottolendtheirmoneyiftheyfeelthataborroweristoorisky.

In theUnitedKingdom,Octopus Investments entered the peer-to-peer lendingbusiness inApril 2016with at least £5.5billion in assets. It offers investors adiscretionaryportfolioofasset-backedloansfromOctopusProperty[48].

Established in 2009, Octopus Property (formerly Dragonfly) had about 3,500borrowerswithalossrateof0.1%.Octopus’sloanoriginationisofthehighestquality, and it has a reliable underwriting process.Octopus views the peer-to-peer lending model as having strategic value because of the innovativeinvestmentmodel.

InvoiceFinancing

Invoice financing can consist of invoice factoring, invoice trading, or invoicediscounting.

With factoring, an invoice financier will manage the sales ledger to collectmoneyowedtoacompany.Factoringallowscompaniestogrowbygeneratingfunds to keep the business afloatwhilst waiting for the customers’ payments.Usually, the third party or factor pays between 70% and 90% of totalaccounts[49],andcustomersmaketheirpaymentsto thefactor.Then, thefactorremitsthebalancetothebusinesslessitsservicefee.

Thefactorwillfirstassessthecreditworthinessofthecustomersbeforeitacceptstheaccounts.Itisnotacollectionagency,butcustomersmusthavegoodcreditstanding. It may also consider the yearly revenues and how many years thebusinesshasbeenoperatingforbeforeagreeingtoprovidethefactoringservice.

Thefactorwillrequestpaymentfromthecustomersaftercheckingtheaccountsreceivableforcompletenessandaccuracy.Uponreceivingpayment,itwillmovethebalanceoftheinvoicesbacktothebusinessowner.Otherfactorschargefeesandpaythebusinessowner100%ofthetotalvalueoftheinvoice.Somefactorsallowthebusinesstocollectthepaymentsandreceivetherepaymentsplusfeeswhenthecustomerspay.

Before technologicaldisruption,bankswere theonlyonesproviding factoring.However,theintroductionoftechnologyallowsforadifferentproduct,invoicetrading.Insteadofmanagingthewholesalesbook,companiescanselectwhichinvoices are sold to financiers. By placing these invoices on a platform,individual investors can invest, in a similar fashion to peer-to-peer lending.Players such asMarket Invoice and Platform Black have entered the market,bringing in crowdsourcing platforms to provide invoice factoring, invoicetrading,andinvoicediscountingservices.

Supplier chain finance is another option for fund purchasing. In this type offinancing, a company registers with a platform, provides information aboutinvoices that require payment to suppliers, and issues a promise to pay. Theplatformwill thenlookforfunders topaythe invoice inacompetitivebiddingprocess.Thesupplierswillreceiveimmediatepayment,andthecompanygainsbreathingspace.

KeyPlayers

Foundedin2009byMarcGorlin,RobFrohwein,andKathrynPetralia,Kabbageoffers a technology and data platform for business loans.[50] It can connectdirectly to QuickBooks, PayPal, banks, and even social media to assess thecreditworthinessofaprospectiveborrower.Aborroweronlyhas towaitaboutsixminutestofindoutiftheyqualifyforaloan.However,theconvenienceandspeedofapprovalcomeataprice[51].

Kabbagecanprovideaborrowerwithamaximumof$100,000,payable insixmonths.Onaverage,aborrowermighttakeouteightloansyearlyforatotalof$50,000. Kabbage is one of the top alternative lenders in the US. It attractsinvestors because of its low loan default rate. It offers loans to establishedbusinessesusinganautomatedmodelthatassessescharacter,capacitytorepay,and business stability and consistency. It uses non-traditional metrics like theprospectiveborrower’sonlinereviewsandsocialmediafollowers.

In 2012, Kabbage became part of Red Herring’s Top 100 North Americanprivateenterprises.In2014and2015,ForbesMagazinenameditasoneofTop100MostPromisingCompanies. In 2016,CNBCnameKabbage as oneof itsannualDisruptor 50 for being ambitious and forward thinking, revolutionisingmarketsandindustriesworldwide.

OnDeck went public in the NYSE December 2013, with the aim of offeringonlineloanstosmallbusinesses.WithitsheadquartersinNewYorkCity,ithasprovidedloansto30,000smallbusinessessinceitsinceptionin2007.In2014,itreportedgrossrevenueof$158million,withnetrevenueof$73million[52].Onaverage,anOnDeckloanhasa51.2%APR.

PayPalWorking Capital is for PayPal users whowant a fixed and affordablebusiness loan.A borrower pays the fees and pays back the loan through theirPayPalsales.However,theydonotpayanypenaltyfees,prepaymentfees,latefees,monthlybills,orinterestcharges.

Themaximum amount they can borrow depends on the sales history of theirPayPalaccount.Loanapprovalonlytakesminutes,andthemoneygoestotheirPayPalaccountinstantly.

PayPalensuresthattheborrowerrepaysatleast10%oftheirloan,plusafixedfee,everythreemonthsforthe18monthsoftheloanterm,oruntiltheborrowerhas repaid the loan in full. Only one loan can be taken out at a time. Theborrower needs to pay their loan in full before they can apply for anotherloan[53].

PayPalWorkingCapital started as an invite-onlypilot inSeptember 2013 andlatercollaboratedwithWebBanktoexpandthebusiness.AccordingtoPayPal’sVP forSMBLending,DarrellEsch, the fact that its customers’ saleshistoriesdrivecreditdecisionsinapprovinginstantbusinessloansmakesitunique[54].

SanFrancisco-basedSquareCapitalisafast-growinglendingcompany,foundedby Jack Dorsey, also a co-founder of Twitter. In 2014, it launched a cashadvanceserviceformerchants thatuse thecompany’sPOSsystem.Itused themerchant’scashflowandsalesdatatodetermineifthemerchantqualifiedforaloan. It is now expanding its services to include online loans with fees ofbetween10%and16%ofthetotalloanamount[55].

Collaborating with Upserve, a startup offering software and POS in therestaurantsector,SquarewilluseUpserve’scashflowandanonymoussales toanalysewhich restaurantsqualify fora loan.Eligible restaurantbusinessescantake advantage of a personalised loan through theUpserve software, paying afixedrateoftheireverydaysales.Inthe2ndquarterof2016,Squareprovidedatleast$189millioninloanstoabout34,000businesses.

LeviKing andBrockBlake startedLendio in 2011 as a financial service thatsimplifiestheprocessofobtainingaloanthroughmatching.Insteadofapplyingforabank loan,a smallbusinessownercanuseLendio’splatform to look forlenderswhocanprovide themwithabusiness loan. Insteadofcompetingwithcompanies like OnDeck, Lendio collaborates with lenders so that businessownerscanreceivepre-approvedloans.Well-knowninvestorsinLendioinclude

Highway12Ventures,TribecaVenturePartners,andRunaCapital[56].

Founded in 2014, Fundera is an online loan broker that helps small businessobtain different kinds of loans. Founded by JaredHecht, it’s an alternative toconventionalbankfinancing,whichsmallbusinessesfinddifficulttoaccess[57].

Funderafacilitates loans,rather thanlendingmoney,connectingborrowersandlenders through its online platform. Each borrower can access a personalconsultant who helps themwith their circumstances, and they need to have aconnectionwithatleastonelenderinthenetwork.Funderaearnsfrom1.5%to3%ofthetotalloanamountasafinder’sfeepayablebythelender.

Alibaba, together with at least 25 banks and credit rating bureaus around theworld, announced that it wouldmake cross-border trade financing and a newcredit reporting service available for small and medium-sized enterprises.Buildingon thecreditprofilesofbusinessesof thissize inChina,Alibabacanidentify trustworthy trading partners in China for overseas customers and canalsoprovideinnovativefinancingalternativestoChinesesuppliers.

Alibaba has evolved to become a one-stop shop for different services forinternational suppliers andbuyers, includingbusinessverificationand logisticsservices.Currently,theloanfeatureisonlyavailabletosmallandmedium-sizedChinese enterprises. China Merchants Bank, Bank of China, and MYBankcollaboratetoprovidetheloansforAlibaba’scustomers[58].

DigitalMortgages

MortgageTech has not grown at the rate of other products, mostly becausemortgagesareaverycomplicatedandheavilyregulatedproduct.However,thisarearepresentsoneofthebiggestopportunitiesinfintech,asthemarketisworthmorethan$10trillionifsalesandservicingopportunitiesareconsidered.

Ina2015NationalAssociationofRealtorsHomeBuyerandSellerGenerationalTrendsreport,forthesecondconsecutiveyear,32%ofrecenthomebuyerswere

millennials.However, thesemillennials used the servicesof real estate agents,and45%ofthemhaddifficultieswiththemortgageprocess.

InaUSPrimaryMortgageGrid/NationSatisfactionSurveyin2014,about25%of borrowers felt dissatisfied with the origination procedure. They still valuepersonal guidance but prefer the accessibility offered by online mortgageservices. Market participants may move away from push regulators andproprietary platforms, allowing for innovation and disruption, which canoverturnoldmarketmodelsandbusinesspractices.

Themortgageindustrycouldbenefitfromdisruptorsbecausetheycouldquicklyreplacevendorsand/orplatforms.Regulatorsmustallowmarketplaceinnovationtoofferamoreinteractive,proactive,flexible,andfasterapproachtomortgages.

Some innovators are searching for novelways tomeet consumer demand andincreaseprofitabilityateverystageofthemortgageprocess.Currently,mortgagecompanies tend to view technology as an important requirement for doingbusiness without necessarily prioritising it. This mindset differentiates currentmortgagecompaniesfromemerginginnovators.

Because of the housing crisis, purchasers and lenders of mortgage-backedsecurities have learned that the ability of a borrower to repay a mortgage isunreliable. Emerging innovators correlate and simplify the multistep andmultiparty processes, and validate and compile information sources to have amoreaccuratemeasureofaborrower’screditworthiness.

Theautomationofvalidationandverificationfunctionsreducessubjectivityandcostsandhastensdecision-making.Theuseofvariousdatapointsdeterminesthevalueandqualityofcollateral,borrowingcapacity,andcashflow,andperformsanalysis to identifypossiblemisrepresentationsand fraud.Somenewermodelsuse new technology that considers employmentmarkets, household cash flow,infrastructureinvestment,demographictrends,andpersonalpreferences.

Mortgagesarearichsourceofdataonborroweremployment,income,creditandusage,assets,andproperty,butmanymortgagecompanieslimittheiruseofthisdata.However,newtoolsandtechnologiesinbusinessanalyticsandintelligencecan help mortgage companies with credit-driven data to better identifyprospectiveclients.

Fintechsinthisareacanbedividedintothreegroups.Thefirstoffersplatforms

andITsolutionstooriginators,thesecondsuppliesoraggregatesdatatobeusedbyoriginatorsandservices,andthethirdoffersdisruptiveendtoendorigination.

KeyPlayers

FoundedbyDanielHegarty,HabitoisanonlinemortgagebrokerintheUnitedKingdomofferingbrokering services tohelpcustomers find thebestmortgageand apply for it. The company uses technology that can perform mortgageanalysis acrossmore than100 lenders todetermine thebest deal basedon therequirements and circumstances of the borrower, who can then apply for thatmortgageinlessthan30minutes.

According to Hegarty, Habito has at least 15,000mortgage products and canmake intelligent decisions based on interest rates, eligibility criteria, productfeatures,andaffordability.

Habito raised £1.5 million fromMosaic Ventures as seed funding, and well-knownangel investors includePaulForster,TomStafford,YuriMilner,SamirDesai, and Taavet Hinrikus. Habito does not charge borrowers anything; itprofitsfromcommissiontakenfromthechosenlender.

SoFi, like the othermarketplace lenders, is growing fast, but itwill be a verylong time before it becomes a threat to presentmortgage giants like Bank ofAmerica,JPMorganChase,andWellsFargo.Ina2nd-quarter2015reportbytheMortgageBankersAssociation, it showed thatmortgageoriginationduring theperiodwasat$395billion,andthebiggestlenderswerethesethreebanks[59].

However,accordingtothereportbyInsideMortgageFinance,non-banksclosed37.5%ofUSmortgages in2014.PwCbelieves thatmarketplace lenderscouldgrow at an annual rate of 33%, to $150 billion by 2025. This forecast couldprovetobetruebecauseitiseasierforaprospectivehomebuyertoapplyforanonlinemortgagefromnon-banks.

SoFi entered themortgagemarket with about $50million worth of mortgage

originationsmonthly that it sells toFederalHomeLoanMortgageCorporation(aka Freddie Mac) and the Federal National Mortgage Association (FannieMae). Insteadof usingdebt-to-income ratio todeterminehowmuchmoney tolend,itlooksatthefreecashflowoftheborrower.

Lenda is a startup founded in October 2013 that operates in Washington,California,andOregon.Itmakesonlinemortgagerefinancingavailablequicklyand easily. With at least $1.54 million capital from Structure Capital,Winklevoss Capital, and 500 Startups, it removes mortgage brokers,telemarketers, and loan officers from the mortgage process and offers a lessexpensiveandmorestreamlinedmortgagerefinancingprocedure[60].

Lendacancutthewholerefinancingprocessdowntotwoandahalfweeksforafeeof$2,000.AccordingtoLenda’sCEOJasonvandenBrand,consumersaretiredof telemarketerswhooffer themlowrateseven if theydonotqualify forthem.

Lenda’salgorithmcanfindthemostappropriatemortgageoutofapoolof200productswith10-yearto30-yearfixedrateterms.Itwillpresentamaximumoffour options so the potential borrower can make their choice. The wholeapplication process can be completed in 45 minutes, and Lenda charges thelender.

FoundedbyAnthonyHsiehin2009,LoanDepotisnowtheUSA’sfifthlargestmortgage lender, according to Inside Mortgage Finance. In 2015, it was theseventhlargestintermsofvolume.Sinceitslaunch,ithasgrownby70%onayearlybasis,withabout400%yearlymarketsharegrowth[61].

According to CEOHsieh, the company’s platform delivers high-touch humanandhigh-techdigitalexperiencesthroughitsnetworkoflendingofficersanditswebsite. Its technology digitises themortgage experience by considering howpotential borrowerswant to have access to credit on their own terms. For thefirst three-quarters of 2016, LoanDepot’s funding volume had reached $27billion.Thecompanyhasfundedatleast$90billionmortgagessinceitbeganin2009.

Sindeo,anonlinemortgagebroker,offersanewplatformthatmakesitpossibleto approve mortgages in just five minutes. SindeoOne offers at least 1,000mortgageproductstopotentialborrowers[62].

According to itsCEOandco-founderNickStamos, itcombinesanewservicemodel with technology for a more educated and happier borrower. Customersatisfactionis thricehigherthanindustryaverages.Stamosfurtherclaimedthatthecompany’scustomershadsavedabout$17millionastheyaregettingbettermortgages.

SindeoOneoffersguidesandtipseverystepofthewayandhelpsitsborrowersunderstand theiroptions. Inaddition, itproducesacredit reportandbegins theunderwritingprocessuponverificationofeligibility.Forborrowerswhowantapersonaltouch,Sindeocanprovideamortgageadvisortoguideandanswertheirquestions.

TheFutureinaFlash

Lending isabout temporarilygivingmoneywith theexpectation that itwillberepaid,andthekeyvariableshereareriskandreturn.Technologyallowsriskstobebetterunderstoodandmitigatedandreturnstobeincreased.

Thisisachievedbyopeningupopportunitiestonewplayers:differenttypesoflenders,anddifferent typesofborrowers.Whatwewillendupwith isamoreefficientmarketinwhichtherearefewerlossesduringthelendingprocessandmore satisfaction with the products on themarket. Innovations such as bettercreditscoringdrivenbybigdata,peer-to-peermarketplacesandblockchainwillbetheenablersofthismovetowardsefficiency.

CHAPTER5

COMMERCIALBANKINGTRANSFORMATION

CommercialBankingTransformationinaFlash

Commercial banks have realised that profitability is strongly dependent oninnovation. New entrants are forcing commercial banks to quickly adapt tochangeandofferinnovativesolutionstoSMEsandlargerenterprises.AlthoughitishardtoaccuratelyestimatetheexactmarketsizeofSMEs,itiscertainthatthey are the backbone of most economies across the world. Therefore, new‘sharing economy’ players are developing business banking platforms toinherentlylinkfintechstartups,paymentserviceproviders,andSMEs.

Fintech startups are increasingly acquiring a largermarket share due to theircustomer-centricapproaches.Currently,themainareasofcommercialbankingthat fintechs are helping to improve include the introduction of specialisedplatforms, the improvementofpricingandcustomerselection,cost reduction,and the optimisation of processes.Other services offered by fintechs includepayroll,onlineaccounting,expensesmanagement,andbenefitsmanagement.

Insomecases,partnershipsbetweenbanksandfintechsareaneffectivewayforbanks to gain an insight into the world of digital innovation and positionthemselves at the core of the fintech industry. Nevertheless, banks have thecompetitiveadvantageofbeingmorefamiliarwithregulatoryrequirements.

HowCommercialBankingWorks

The traditional commercial banking model covers business banking, whichcaters to the needs of small and medium enterprises (SMEs), and corporatebanking, which provides corporations with custom banking and financingservices. In both cases, their customers are depositors and borrowers.Commercial banks accept deposits from trusted customers and lend them to

borrowersatahigherinterestrate.Theyalsoofferfundtransfers,creditcreation,andothergeneralservices.

Commercialbanks’profitscomemainlyfromtheirnet interest income, i.e. theinterestincomeonloans,minusinterestexpensesondepositsandotherfundingsources. For example, a loan portfolio of $2 billion which earns 6% interestgenerates an interest income of $120 million. If the expenses of a customerdeposit portfolio of $1.3 billion, earning 2% are $26 million, the net interestincome is$94million.At thesame time,banksdiversify their incomesourcesandensurehigherliquiditythroughnon-interestincome,whichincludesincomefrom areas outside their lending operations, such as deposit fees, transactionfees,annualfees,andsoon.

SMEMarketSize

AlthoughitishardtoputanumberontheexactmarketsizeofSMEs,accordingto McKinsey and the International Finance Corporation (IFC), there areapproximately 365 to 445million SMEs globally, ofwhich between 55 to 70million are formally established as micro-businesses and between 25 to 30millionareformallyestablishedasSMEs.Theremaining285to345millionareinformalenterprises.[63]In2012,SMEsaccountedfor99.8%ofallenterprisesintheEuropeanUnion(EU-27),employedalmost67%ofthetotalworkforce,andcontributed 58% of gross value added (GVA).[64]Additionally, it is estimatedthat of the 5.5million private sector businesses in theUK, 99.9% are SMEs,employing nearly 60% of the private sector workforce.[65] In China, SMEscontributearound80%ofGDPand60%ofnationalemployment.

AreportbyBBVAshowsthat80%ofEuropeanbanksseetheSMEMarketasanimportantgrowtharea,andloanbalancesintheregionareover£120billion.63% of SMEs appear satisfied with the banking service they are getting;however,theywouldwelcomeadecreaseintheirfees.[66]

TheImpactofFintechonBusinessBanking

Fintech startups are increasingly acquiring a larger market share due to theircustomer-centric banking propositions. Overall equity investment in fintechstartupshasgrownfrom$4billionin2013to$12billionin2014[67],$19billionin2015[68],almost$20billionin2016[69].

Five main areas exist where fintechs can provide improvements in businessbanking: introducing specialised platforms, servicing underserved sectors,improving pricing and customer selection, reducing costs, and optimisingprocesses.

IntroductionofSpecialisedPlatforms

Thecreationoffully-fledgedservicebankscanbeabigchallenge,especiallyifabankwants to cater to specialised lending opportunities. However, if fintechsfocusonspecificservices,theycanbesuccessful,offeringbetterportalsthantheonesofferedby incumbents.Advancedofferingssuchas foreignexchangeandsupplychainfinanceareobviousexamples,butmoreday-to-dayservicessuchaspaymentsareredefiningbusinessbanking.

More than 70% of fintech companies are focusing on banks’ most profitableservices,i.e.personalandSMEbankingaccounts,whichaccountfornearly50%of the banking industry’s profits.[70] Focusing on individual services andproductsofferedbytraditionalbanksallowsfintechcompaniestoprovidecost-efficient services with new technologies, such as artificial intelligence, whichcanbetteridentifytheindividualneedsofconsumersandSMEs.

Businesslendingisabigopportunity.Today,almost60%ofincomeforbankscomes from granting loans to retail customers and SMEs. The biggest fintechlenderintheUnitedStates,LendingClub,hasofferednearly$9billioninloanssince 2007, and it accepts higher default rates because it capitalises onefficiencies.[71]Themainareasofbusinesslendingthatarebeinginvestedinaremarketplacelending,merchantandecommercefinance,invoicefinance,supplychainfinanceandtradefinance,andwecovertheseinourlendingchapter.

Apartfromthelendingopportunities,electronicpaymentssolutionscanalsobelucrative.The evolution of fintech has led to the circulation of virtualmoney,which beats the time-consuming processes of traditional business banking andfacilitates the seamless payment of expenses.Although these amountsmay berelativelysmallcomparedtocorporatebanking,peoplearestartingtousetheseservicesenmasse,becausetheyareconvenientandefficient.

OpeningupUnderservedSegments

Established banks commonly exclude a significant amount of the population.

BasedonIFCdata,45-55%ofSMEsgloballydon’thaveanoverdraftbutwouldbenefit from one. While 21-24% have accessed loans, they are still severelylimited.Worldwide,another$2.4trillionindemandforcreditexists,accordingtoIFCdata.IntheUS,44%ofSMEs’requestsforlendingwererejected.IntheUnitedKingdom,thereisafundinggapaslargeas£59billion.Ontopofthis,about30%ofBritishSMEsdidnotmanagetogetthefundingtheyhadtriedtoobtain.

By offering alternative lending services, fintech companies provide innovativeapproaches to segments, such as subprime loans, which are not served bytraditional corporate banking. FundingCircle, Kabbage, Lendio,OnDeck, andSwiftCapitalaresomeoftheplayersthathavecapitalisedonthe20%declineinbank lending to SMEs since 2007. Lending to larger businesses has risen byabout4%duringthesameperiod.[72]

ImprovementsinPricingandCustomerSelection

The data that banks hold is as valuable as gold dust, especially all of thetransactional data. By combining this data source with other external ones,commercialbankscanimprovetheirpricingstrategies,whichcansometimesbeverycomplexinthecorporatespace.

This wealth of information can also be used to decide how to categorisecustomers and what products to make available for each different type ofbusiness.A company that has a good solution in this space is PrimeRevenue.Data processing can also help with underwriting practices. Some of the newfintechsintheUSusemorethan2000differentdatapointsfrommorethan100sourcestomaketheircreditdecisions.

EnablingCostReductions

Fintechcancreate services,platforms,andproductsonabudget.As theystartfromacleanslate, therearenolegacyissues toberesolved.LegacyissuesaremostlytodowiththeITsystemsthatsupportanoperation,butotherthingssuchascultureandworkforcecarrylegacyissuestoo.

Differentinnovationscanbeusedtoreducecostsinbanking.Forexample,intheservicing space, virtual assistants can enhance customer service whilstsimultaneously reducing costs.When looking at back office processes, several

tools are being introduced, including robotic process automation, which canreplace human intervention by using algorithms, electronic identificationsolutions,andopticalcharacterrecognition.

OptimisingProcesses

The use of technology is automating transactions, and customers can makepaymentsusing theirmobilephonesand tablets.Therefore,bankstaffarenowrequiredtoplaymoreofanadvisoryrolethanactivelycarryingouttransactions.AccordingtoCitigroup,numbersofUSbankstaffareexpectedtoshrinkby30%between2015and2025,from2.6millionto1.8millionpeople.InEurope,bankbranch employment is expected to decline by 38% from 2.9 million to 1.8million.[73]

Fintechsprovidedigitalfeaturesthatimproveprocesses.Forexample,advanceddecision-makingenginessuchastheonesdevelopedbyKabbageallowforquickcredit approval. Platforms such as the one developed by Earthport can allowinternational payments to be settled in real time. Finally, a platform such asRipplecanencourageliveinternationalpayments,cuttingcostssignificantly.

HowTraditionalBanksCanCatchUp

The use of ground-breaking technologies that accelerate business bankingtransactionspractically is forcingbusinessbanking toquicklyadapt tochange.Some business banks have already started partneringwith fintech players, butdoingsoofteninvolvesrisk,whichneedstobemanaged.

Another strategiccourseofaction is thatof investing in strategicdevelopmentandgainingabetterunderstandingofwhatfintechstartupsreallydo.Eitherway,traditionalbusinessbankingneedstoreshapeitsmodeltoaccommodatechange.Otherwise,theircustomerportfoliosarelikelytobetakenbycompaniesmakingbetteruseoftechnology.

TheImpactofFintechonCorporateBanking

Sofar,Fintechhasn’tbeenseentobeabigthreattocorporatebanking,perhapsbecause of the more complex needs of these clients. Sophisticated corporateportals have already been built, with advanced functionality such as treasurymanagement, cash pooling, and the ability to check balances and sweep from

differentbankinginstitutions.Theyexistbothlocallyandinternationally,usingtheSWIFTpaymentssystem,avastmessagingnetworkusedbybanksandotherfinancial institutions to quickly, accurately, and securely send and receiveinformation, such as instructions for money transfers. Additionally, largecorporations have gained and still retain sizable economic and customerrelationship advantages. They know their customers and how they like to dobusiness.

This doesn’t mean that corporate banks can rest on their laurels. The biggestthreat for corporate banking comes from other banks already present in thecorporatesector.Fast-moversthathaveintegratedfintechinnovationsintotheirbusinessmodelsmaybecomegamechangers.Specialisedcustomerserviceandefficiencyimprovementscanchangethevaluechainandoffercorporateclientsasuperior customer experience. Also, given that the fintech services remainlargely unregulated, they may deliver sizable revenues along with customerinsights,basedonbigdataanalyticsandrefinedriskmodellingpractices.

A recent study by McKinsey finds that growth in the developed markets ofAustralia&NewZealand,HongKong,andSingapore ismainlydrivenby themobilechannel.Inthesemarkets,increasingly,customersareshiftingtomobilebanking, seeking a seamless and swift banking experience. On the contrary,growthinemergingmarketsisdrivenbothbysecuresiteandmobilebanking.[74]To improve their customer relationships andanticipate the increasing threatoffintechplayers, corporatebankingneeds to accelerate itsdigitisation.Strategicallianceswithfintechcompanieshavealreadytakenplace–BBVAwithHolviBank[75], CIBC with NAB and Leumi[76], and Santander UK with KalixaPayments and Monitise[77] – with the aim of achieving higher profits andimprovedriskmanagement.

In developed markets, banks should improve their digital sales, therebyexpandingtheircustomerbase.Theintegrationofdiversetechnologyplatforms,the use of big data analytics across multiple channels, and the analysis ofcustomer behaviour can help corporate banking identify customer needs andprovide suitable services. In emerging markets, corporate banking shouldcapitalise on the opportunity that arises from high smartphone penetration,especially in Southeast Asia. Fast movers that adopt digital technologies aremorelikelytoincreasetheircustomerbase.However,corporatebankingshouldmaintainpersonalcontactwithcustomers.

KeySMEBankstoWatch

KeySMEBankstoWatch

Cogni, originally known as Bizbaze, is one of the promising players in thefintech field,providingPSD(PaymentServicesDirective)businessbanking toEuropeanSMEs.[78]TheDublin-basedi-bankingplatformtargetsSMEs,micro-businesses and startup entrepreneurs involved in the sharing economy andprovides them with low-cost, customised financial services. The data-drivenbank offers multicurrency business accounts linked to artificial intelligencefinancial toolsandassistsSMEs inautomating their taxandsavings, receivingsalary payments or making money transfers without overdraft fees. Cogni isclassifiedasa“HighPotentialStartup”bytheIrishgovernment.

Holvi is a Helsinki-based online-only business bank for entrepreneursand SMBs.[79] The bank enables entrepreneurs to manage their businessefficientlybyopeningdigitalbusinessaccountsandtransferringmoneybetweenaccounts. Also, the service provides built-in invoicing and paperlessbookkeepingoptions.HolviwasacquiredbyBBVA, themultinationalSpanishbanking group, for approximately $100million onMarch 7, 2016, as part ofBBVA’sdigitaltransformationprocess.

Using Revolut for Business, SMEs in Europe and the UK can manageinternationalpayments,payroll,andcorporatetravel.[80]Seekingtocutbackonbanking fees and normalise interbank exchange rates, Revolut features aninnovative mobile app covering international payments, corporate cards,merchantaccounts,andbusinesstravel.TheFXproviderisduetolaunchitsbetabusiness platform and is accepting pre-registration from a growing number ofretailcustomersandSMEs.

Claiming tobe the“world’s first”mobile-firstbankingserviceforSMEs,Tide

offers automated bookkeeping, integrated invoicing, business banking, andbankingassistanceservices.[81]SMEscanopenabankaccountinlessthanthreeminuteswithno initiation,monthlyorannual feesandcapitaliseona rangeofvalue added services, including money-saving tools, APIs to build apps orintegrate them with Tide, auto-categorisation of transactions, integration withXero and FreeAgent online accounting, 24/7 banking assistance, and securebankingtransactions.

TheRussianbankTochkaoffersanonlinefinancebotforSMEcustomers.Byselectingincomeforbusinessfromthebank’sdashboard,SMEscankeeptheirfundsatthepointoftransactionandruntheirbusinessonlineviaFacebook.[82]The social media network, which has 1.79 billion active users per month,hasopened itsmessenger platform for business, thereby enablingSMEcustomers,bothlegalentitiesandprivatecustomers, topaytheirbills,checktheiraccountbalances,askfinancialquestionsorapplyforamortgageloan.

OnlineAccountingforSMEsandIntegrationwithBusinessBanking

Asmentionedabove,recentstudiesrevealthat63%oftheSMEsintheUKaresatisfiedorrelativelysatisfiedwiththeirbanksregardingqualityofservicesandcost. However, 45% claim that they would be more satisfied if their bankreduced costs. Evidently, the remaining 37% are totally dissatisfied, whichprovidesfintechwithasignificantopportunity.[83]

Fintech canofferSMEs the addedvalue services theyneed and arewilling toadopt.TheuseofcloudaccountingcanhelpSMEssavetimeandmoneythroughautomation and simplified financial reporting.This is anuntappedopportunityfor banks too. By offering a differentiated, digitalised service in a heavilycommoditised market, they can drive more growth and re-establish theircustomerrelationships.

ToolsforSMEs

Payroll

For smallbusinesses,payroll canbean intricate taskas it includeshiringnew

employees, issuing them with contracts, managing their holiday requests andprocessingtheirexpensesclaims.Somebusinessownersdonotliketheideaofoutsourcing these tasks, considering in-house processing to be more cost-effective than outsourcing and because they want to protect the wageinformation.

Infact,outsourcingpayroll taskswith theuseofsuitablesoftwarecansaveanSMEmoneybecauseitdoesnotinvolveemployeetraining,software,hardware,andITsupport.Instead,theCEOortheHRmanagerjustneedstoensurethatallthepaperworkgeneratedby the software iscompliantwith legal requirements.Afterall,outsourcingpayrolltasksallowsSMEstoinvestindevelopinggreatervalue-addedproductsandservicesthatcanofferhigherprofitmargins

OnlineAccounting

Thegrowinginvolvementofthefintechsectorintheprovisionoflowcost,lesstime-consuming, and more customised services puts banks under pressure.Individual customers increasingly seek to manage their finances on the go,whereas SMEs look at mobile-oriented services to manage their businessesefficiently.Hence,fintechstartupsaretakingaspectsoftraditionalbankingandoffercustomersuser-friendlysolutions.

OnlineaccountingisveryimportantforSMEsastheyneedtohandleinvoicing,accounts receivable, accounts payable, and employee expenses. Great cloud-based software has been created for this purpose, such as Freshbooks,Quickbooks,Xero,andWave.TheyofferSMEsthetoolstorecordtheirpayrollentriesandoutsourcetheiraccounting,invoicing,andreceipttasks.

Having realised thegreatpotentialof the fintechsectorandseeking to smoothout the impact on traditional banking, banks form alliances with onlineaccounting providers. For example, NatWest has partnered with Edinburgh-based fintech FreeAgent to offer SMEs an innovative sharing economycapability.[84] With FreeAgent, SMEs can perform accounting tasks online,therebysavingbothtimeandmoney.

Given the fact that online accounting firms have a lot of information on theircustomers,itwouldn’tbesurprisingiftheytriedtotakeovertraditionalbankingin the short term. To do so, they would need to learn how to deal with thesubtleties of banking, such as complex regulatory requirements and risk

management.

ExpenseManagement

Expense management is one of the biggest challenges for SMEs. The use ofdigital and mobile channels offered by fintech provides SMEs with cashless,paperless,andmobilehandlingoftheirexpenses,leadingtobettercostcontrol,increasedproductivity, andagreater chance for success. It is refreshing to seethat expense management is starting to be consolidated in SME bankpropositions,forexampleinHolviandUSBank.

BenefitsManagement

Benefits management is important for SMEs as it facilitates the way theymanage their resources. Fintech offers competitive benefits managementsoftware equipping SMEs with the tools to track their demographic data andanalyseemployeesegmentstooptimisehealthcarecoverage.SMEscantakecareof employeebenefits by collecting all the informationon the composition andsize of their workforce, and then deciding on appropriate group plans andindividual coverage. Consequently, they lower the costs associated withrecruitment, increase employee loyalty, and achieve a higher rate ofproductivity.

KeySMEToolPlayers

Founded in 2009, FinancialForce.com is a San-Francisco-based companyofferingcloudbusinessERPappsforeffectiveresourceandtalentmanagement,benefits management, sales engagement, project management, financialmanagement and accounting. Built on Salesforce architecture,FinancialForce.com enables SMEs to share customer records, reporting tools,and revenue recognition analytics by syncing their transactions across onesystem. FinancialForce.com also has EMEA offices in Harrogate, UK andSydney, Australia as well as in Chicago, IL, Manchester, NH, Burlington,Ontario,andGranada,Spain.

Foundedin2013,ZenefitsisanHRplatform,suitedtotheneedsofstartupsandSMEs. The platform offers broker services, HR advisory, and tech support,whilst its online software automates health insurance, payroll, and other keybusiness perks. [85] Furthermore, the company has expanded from 150employees in2013 tomore than1,600 in2016andhas raised$580million inthreefundraisingrounds.

Gusto,formerlyknownasZenPayroll,offerscloud-basedpayrollandemployeebenefits solutions to SMEs. Founded in 2011, the California-based companyintegrateswithFreshBooks,QuickBooks,andXerotoprovidespecialisedonlineaccounting, including payroll automation, benefits management, and payrolltaxes.[86] InDecember 2015,Gusto raised $50million in fundraising, therebyreachingavaluationof$1billionanddirectlycompetingwithZenefits.[87]Theirpartnership with Capital One Spark Business offers SMEs online bankingsolutionswith no transaction limits,monthly fees orminimumbalances and a1.00%APY(annualpercentageyield)foraSparkBusinessSavingsaccount.

AddressingtheneedsofHRmanagers,CEOs,andaccountants,HibobfeaturesanHR&BenefitsplatformforSMEs.[88]TheIsraeli-Britishstartupwasfoundedin2015,and,inJune2016,itraised$7.5millionfromagroupofVCsandangelinvestors to launch an innovativeHRplatform tomeet theneedsofSMEs.[89]Hibob offers people management, employee benefits, employee engagement,andpensionsauto-enrolmentsolutions.Additionally, itfeaturesaveryefficientHelpCentresection,whereinterestedpartiescanfindlotsofusefulinformationonusingHibobandgettingthebestcustomerexperience.

With more than 17,000 brands in its portfolio, Sprout Social is a promisingfintechintheareaofsocialmediamanagement.Foundedin2010,theChicago-basedcompanyoffersarangeofbusinesssolutionsforSMEs, includingsocialmediamanagement,socialmediamarketing,socialcustomerservice,andsocialmedia analytics. Sprout Social has official partnerships with LinkedIn,

Facebook,Twitter,Instagram,andGoogle+andintegrateswithFeedly,Zendesk,Bitly,GoogleAnalytics,andUserVoice.[90]In2016,thecompanywasvotedthemost innovative socialmedia platform[91] and #2 inCrain’sChicagoBusinessList.[92]

Founded in 2006,Xero iswidely used bymore than 16,000 accounting firmsaroundtheglobewithasubscriberbaseofmorethan862,000people.In2015,thecompanywasranked#1inForbes’MostInnovativeGrowthCompaniesList,[93]andin2016,itgeneratedanoperatingrevenuegrowthof67%andsubscribergrowthof51%.[94]TheNewZealand-basedcloudaccountingsoftwarecompanyleads the New Zealand, Australian, and UK markets by offering onlineaccounting, sales tax, invoicing, bank reconciliation, payroll, and inventoryservicestoSMEs.

TheFutureinaFlash

Businessbankingwill embrace fintechmuchquicker thancorporatebanking,as the barriers to entry into this area are lower. However, looking at themediumterm,allofcommercialbankingwillbeimpactedbytechnology.

Wecanexpecttoseeamassiveimprovementinaccountopeningandaccountservicingprocesses.Openingbankaccounts andmanaging themwill becomeeasy. It will also be easy and relatively cheap to get the right software tomanageallofthemandatoryreportingrequirementsthatsmallbusinesseshave,mainlyaroundtaxandaccountancy.

Only the companies that understand technology properly and invest in itregularlywillsurviveinanewenvironmentwithnewrules.

CHAPTER6

NEXTGENERATIONCOMMERCE

NextGenerationCommerceinaFlash

Technology is changing the way that people shop and raising customers’expectations.Inthischapter,weexaminethedifferentareasofcommerce.

Whenwe visit shops,we generally pay at point of sale terminals. Fintech isintroducingmobile points of sale usable on anymobile device, anytime andanywhere,toprocesscustomers’payments.Thesesystemsarepopularwithfleamarkets, food trucks, tradeshows, sports venues, etc. They can even processmajorcreditcardsifthereisacardreaderattachedtothemobiledevice.

In the same line, tablet-based POS terminals are helping the retail andhospitalitysectorsbecausecustomersneednotqueueuporwaitfor theirbill.With tablet technology, the POS goes to the customer for faster and moreconvenientservice.Tablet-basedPOSsystemsallowretailersandrestaurantstogainnewrevenuestreamsbyhavingremotesaleseventsorarrangingoutdoorseating. Staff can engage customers anywhere and complete the saleimmediately.

Online commerce is being made easier by several companies that makecheckingoutofecommercewebsitesveryeasy,makingitcheapformerchants,andprovidingcustomerswithseveralpaymentoptions.

Technologynotonlyaffectsmerchantsbutcustomerstoo.Theincreasedusageof mobile phones has led to the emergence of mobile wallets. With these,customerscan leave theirplasticandpapermoneyathomeand justuse theirmobilesforpayments.

Finally,weexploresmartcreditcardsandTV-basedcommerce.Let’sstartbylookingatchangesincustomerbehaviour.

ChangesinCustomerShoppingBehaviour

ChangesinCustomerShoppingBehaviour

Theretail industryhasset itssightsonmobility,andinparticular, thegrowingpopularity of mobile devices like tablet computers and smartphones that areInternet-enabledforcomparing,researching,purchasing,andreviewingproductsandservices.

As customers become comfortable with technology, merchants have had toadapt.The Internetwasoriginallyusedmerely todo researchonproducts andprices,andthentheactualtransactionwasdoneinperson.Aspeoplestartedtofeelmorecomfortableaboutsubmittingtheir informationonline, theybegantobuy.Theemergenceofmobilephonesandtabletsmeantpurchasesbegantoshiftto thesedevices.The introductionofnear field technologyonphoneshasalsocreated a new trend of people using devices such as phones, watches, andbraceletstopayinphysicalstores.

AForresterResearchreportstatedthat82%ofUSconsumersbuyfromstores,whilst56%usuallyusemobiledevicestocomparepricesonline.Mobiledevicesareclearlychangingconsumers’shoppingbehaviour[95].

Mobilecommerceconstitutesamajorpartofelectroniccommercetransactions.According toa forecastbyGoldmanSachs,mobilecommercewillaccount foralmosthalfofallelectroniccommercetransactionsby2018.

According to a survey of 5,000 consumers, shoppers using mobile devicesbehavedifferentlytoshoppersusingcomputers.Mobileshoppersaremorelikelyto scan the barcodes in stores then read reviews.As such, retailersmust havedifferentservices,marketing,andsalesstrategiesaimedatthem.Therearealsodifferencesamongstmobileshoppers.Forexample,customerswhoareaged18to 34 use their mobile devices to shop late at night, and most of these arewomen.Men, on the other hand, are 27%more likely to subscribe to retaileralertsneartheirlocation.Mobileshoppersarewillingtoprovideinformationforamorepersonalisedshoppingexperienceandenrolinloyaltyprograms.

PointofSales(POS)Evolution

Inthissection,wediscusstheevolutionofPointofSalesterminals.Weseldomnoticethemwhenpayingforourtransactionsinstore;however,thereisawholeindustrybehindthem.

Previously, a cashier had to enter an item’s pricemanually to operate a cashregister.Thebusinesshadnorecordofthetransactionexceptforacopyofthepaperreceipt.Then,computerizationallowedtheevolutionof thePOSsystem,with the product database being stored in the system, on a server, or on acomputer.

ThePOSsystemevolvedtoincludeabarcodereadertominimisemanualpriceentry. Transactions that pass through the barcode reader were then storedelectronicallywithoutanyhumanintervention.Today,someretailersusecloud-basedpoint-of-salesystemsthatallowfortheonlinestorageofdata.

A modern point-of-sale system has the following components: cash register,cashdrawer,wherereceiptsandvouchersarealsostored,receiptprinter,barcodereader, and cardmachine[96]. The cash register is the POS system linked to acomputerorserver,anditcanevenbea tabletor iPadlinkedtoacloud-basedsystem.

Anyonewhowantstosetuparetailbusinesstodaywillmostprobablychooseamodern point-of-sale system, which is low cost but very functional.They arelikely to choose a cloud-based POS system that allows them to access theimportantaforementionedPOScomponents.

Modern point-of-sale systems can be integrated with other databases andelectronic systems. A POS system can have inventory management andaccountingsystemsfortheautomaticreconciliationofdailytransactions.

UnderstandingmPOS

A mobile point-of-sale or mPOS consists of a portable mobile device thatprocessescustomertransactions.FixedmodernPOSsystemsaremostbeneficialto retail stores and restaurants. Sincemost transactions are now done throughdebit andcredit cards, apoint-of-sale systemmusthavea card swipemachineattached to it.Amobile point-of-sale system performs the same functions butcanworkremotely.

ThemPOSactsasabridgebetweenelectroniccommercebusinessesandpoint-of-salesystems.Aretailercanuseamobiledeviceasanalternatepoint-of-salesystemiftheywanttosaveonupfrontinvestment.mPOSsystemsarealsomoreaffordabletorepair.

mPOS systems can help prevent delays and queues at the checkout. In retailstores, long queues at the checkout sometimes mean customers decide not tomake a purchase. By having employees armedwithmPOS systems, they canserveandchargecustomersmorequickly.

Agenerichandheldmobilepoint-of-salesystemisaportableregisterwithaslotforcardswiping.AnmPOSwithacard reader,on theotherhand, isamobiledevice with a USB port or audio jack for attaching card readers. Themobiledevicecanbeanything,forexample,aniPodTouch,smartphone,ortabletwithaPOSsystemthatcanscananitem’sbarcode,orthetransactioncanbeenteredmanually. It must be able to accept card payments, recognise electronicsignatures,andgenerateareceiptthroughaportableprinter.

mPOSBusinessModel

Large retailers need customisable and robust mPOS platforms. They must beabletointegratetheseplatformswiththeirpresentpaymentsystems.Largestoreowners invest heavily in theirmPOS systems and expect tomake a return ontheirinvestment.Thus,themPOSplatformsmustbeabletogeneratefoottraffictotheirphysicalstoresthatconvertintosales.Therefore,mPOSprovidersfocuson creating personalised solutions to meet the requirements of these largeretailers, like in-store geolocation, consumer data analytics, and omnichannelintegration.

On the other hand, small retailers need simple payment systems that acceptmobile and card payments. Small retailers or even individuals can usemPOSsystems for their business transactions. For example, taxi drivers, local caféowners, and small-scale vendors can use mPOS systems to accept electronicpayments. Traditionally, POS systems require hardware and charge expensivefees.However,mPOSsystemsofferacheaperandconvenientalternative.

mPOSsolutionsforsmallretailerscanalsobecustomisedandsimplified.Theycan integrate various features, depending on the retailer’s budget orrequirements. Retailers can select the kind of data and features theywant fortheirmPOSsystem[97].

Currently, mPOS is popular even outside of the retail industry as it allowsbusinesses to accept non-cash payments anywhere. Courier companies,businesses offering home services, pop-up stores and other similar businesses

commonly use mPOS. mPOS providers enrich the customer experience andchangethewaycustomersinteractwithbusinesses.

Somepeoplemayregardcardpaymentsasoutdatedorobsoletebecauseof thepopularityofsmartphones.However,cardpaymentsarestillthefocusofmPOSsystems, which continue to flourish with the introduction of NFC-enabledmobiledevices.

AccordingtotheBankforInternationalSettlements,in2018roughly273billionmobiletransactionswillbecarriedoutin22countries,worthabout$30trillion.This will be the primary instrument for payments in coming years, somPOSmustbeabletosupportmobilepayments[98].

Developersarefocusingoncreatingnextgenerationpaymentservicesinvolvingmobilephones,whichnowhaveNFCcapabilitytoallowcontactlesstransactionsfromphonesorcards.Thisflexibilityprovidesforthereconfigurationofnewerdevices over time. An important strength ofmPOS terminals is that they canadapttoanomnichannelanddigitalpaymentsenvironment.

When Square introduced the Squaremobile card reader, a little square devicethat attaches to a mobile phone, the payments industry started consideringmobile point-of-sale to give small retailers a chance to accept payments fromcreditanddebitcards.ManycompaniesofferedmPOSapplications,butmostofthemstruggledtofindawaytoprofiteffectivelyfromthem.

BI Intelligence[99] analysed the retailers’mPOS requirements to discover theirconcerns about it. Retailers use the term mPOS to refer to various differenthardware and software. mPOS hardware can include devices like tablets,smartphones,orsmartregisters.mPOSsoftwarecanbepartiallyorfullycloud-basedandusemobileoperatingsystems.

SmallretailerstakeadvantageofmPOSsystems,butbecauseofthelowvolumeof transactions, mPOS providers face the ongoing challenge of how to besustainable.Currently, themPOSbusinessmodel ismoving towards software-basedvalueaddedservices.mPOSsuppliersupselltoexistingcustomersinsteadofacquiringmoremerchants.Forexample,theysellotherbusinessapplicationslikepayrollandmarketing tosmall retailers thatareacceptingcreditanddebitcardpayments.

KeyPlayers

KeyPlayers

In this section,we’ll examine interestingcompanies thataremaking importantprogressinthisarea.Fintechisaveryunpredictableindustry,sobythetimeyoureadthis,thesecompaniesmayhavechangedmarkedly.

BasedinSanFranciscowiththetagline“MakingCommerceEasy”,SquareInc(SC) markets various hardware and software payment products, like SquareReader and Square Register. It also has a programme for financing smallbusinesses known as Square Capital and Square Payroll. Founded in 2009 byJimMcKelveyandJackDorsey,itlauncheditsfirstappin2010andcommencedtradingontheNewYorkStockExchangeinNovember2015.

SquareRegisteracceptsofflinecreditanddebitcardspaymentsonamerchant’sor individual’smobile device. It is available in Australia, Canada, the UnitedStates,andJapan.Theappenablestheusertoentertheircarddetailsmanuallyorswipe their card through theSquareReader,which is connected to themobiledevicethroughtheaudiojack.

Square’smainbusinesscomesfrommobilepoint-of-sale.AccordingtoSquare’sCEO JackDorsey, the $49 chip card and contactless reader that started to bedistributedduring the firstquarterof2016alreadyhascumulativeordersof atleast500,000.Witheverynewreader,aretailerreceivestwomPOSdevices,onefor contactless and chip and pin card transactions, and the other formagneticstripepayments[100].

Square’s chip card and contactless reader are capable of processing EuroPay,MasterCard,andVisatransactions(EMV).InMarch2016,Squarecouldprocess61%ofchipandpincards.With strongnear fieldcommunications (NFC)andEMVsales,Squarecouldchange thingsforsmall retailers,whoarehesitant touse EMV because of the costs associated with terminal upgrades. Many ofSquare’sclientsaremicroandsmallbusinesses.

It is building SquareCapital,whichwasworth at least $400million in 2015.Borrowers use the money to buy equipment or for other long-terminvestments[101].

Square also offers Square Instant Deposit allowing retailers to immediately

transfer funds from their revenues to their bank accounts for a 1% fee. Thisfeature has attracted at least 58,000 users since August 2015, and at least600,000 transactions have been processed. Square also has a digital invoicingplatform,SquareInvoices,attracting100,000usersinoneandahalfyears.ThissoftwarecompeteswithFreshBooks,aninvoicingfirminthemPOSmarket.

Klarnaisapaymentsolutionsprovider,whichissafeandeasytouse.Itallowsbuyerstopossessproductsbeforepayingforthem.Ittakesontheriskoffraudandcredit,restrictingcustomersfrombuyingiftheyaretoorisky.EstablishedinStockholmbyVictorJacobsson,NiklasAdalberth,andSebastianSiemiatkowskiin2005,itisactivein18marketsandhasmorethan1,400employees.PopularinternationalclientsincludeASOS,Wish,Samsung,Disney,andSpotify[102].

In the United States, Klarna decided to offer separate apps for buying andselling.According toKlarnaCEO and co-founder Sebastian Siemiatkowski, auser can purchase an item on a Klarna-powered site bymerely entering theiremail and zip code. They can pay Klarna within a month through a chosenpayment scheme. Klarna has offices in Columbus, Ohio, NewYork, and SanFrancisco[103].

InMay2016,Klarnaunveiledanin-storesolution.AccordingtoSiemiatkowski,theyexpect theirphysicalcommercesolution tooutgrow theironlinebusiness.With this move, Klarna will be competing with big banks, and Android,Samsung,Apple,andPayPal[104].

LifePay is a Russian mPOS company also offering SME-lending and onlineacquiring. By collaborating with FutuBank, it launched its online acquiring,allowing its customers to integrate epayments into theirwebsites. Its loans areinitially only available to legal entities or existing LifePay customers. Theminimumloanaborrowercantakeoutis50,000roubles[105].

EstablishedinAugust2012,SumUp’svisionistobecometheleadingbrandin

global card acceptance. It has customers in 15 countries, including theUnitedStates, Brazil, and Germany. SumUp offers a card terminal with an app thatallows small retailers to accept card payments, using tablets or smartphones,cost-effectivelyandsecurely.

London-based[106] SumUp entered theUSmarket offering small andmedium-sizedenterprisescontactlessandEMVcompatibledevicesthatworkwithtabletsandsmartphones.ItsprimarytargetwasUSAretailers,whowillhavetopaya2.75%feepertransaction,withoutlong-termcontracts.SumUp’sproductswerethefirstEMV-certifiedend-to-endmobilepoint-of-salepaymentssystems.

The strategy of vertical integration is one of themain reasons why SumUp’svaluation has increased. SumUp designed its own hardware, thereby reducingthepriceofaunittenfold.ByMay2015,atleast300,000retailerswereusingitsplatform.

SumUp charges low transaction fees. The UK Financial Conduct Authorityauthorised the mPOS company as a Payment Institution, and PCI-DSS andEuroPay, MasterCard, and Visa have certified it to ensure that paymentsprocessedmeetthehighestsecuritystandards.

Established on August 30, 2014, by Stas Matviyenko and Anna Polishchuk,Settle offers a restaurant app that allows diners to pre-order their lunch. Thisway, app users spend less time waiting for their food and finish eating theirlunch60%fasterthannormal.

SettlestartedinUkraine,chargingrestaurantsa20%fee.However,intheUnitedStates, it plans to launch a free service for both users and restaurants, onlycharging restaurants a small commission for every pre-order during off-peakhours.Forpeakhours,itplanstochargeappusersasmallfee.

SettlehasnowmergedwithAllSet,afirmestablishedinApril2015byUkranianentrepreneurs. It collaborateswith restaurants inPaloAlto,SanFrancisco,andNewYorkso thatbusypeoplecaneatat theserestaurantsduring lunch.UsingtheSettlesoftwaresinceitsinception,itaimstohelpbusyindividualssavetimeandenjoytheirlunch[107].

One97CommunicationsoffersPaytm,India’slargestmobilecommerceplatformwhich aims to provide the best consumer experience. Paytm also providespayment solutions to retailers using a semi-closed wallet approved by RBI.One97providesservicestomobileclientsthroughIndia’scloudplatform[108].

The introduction of Paytm was very successful. In 2010 alone, the companygained 500 million subscribers. Paytm introduced Marketplace andWallet totakeadvantageofitscustomerbase.Walletisapaymentserviceplatform,whileMarketplace is for online commerce. At present, Paytm has 120 millioncustomerswhousetheservicetopayfortheirbillsandpurchases.

Tablet-basedCashRegisters

Theuse of a tablet as a cash register is becomingmore popular, especially inchain stores and coffee shops. It is low cost, and appealing to retailers andrestaurants because of its large display, intuitive interface, and portability. Asmore retailers adopt it, it is opening doors for the use of contactless paymentsystemssuchasGoogleWalletandApplePay.

Thesetabletsareuser-friendlyandcheap.Theappsendssalesinformationtoaback office so that managers can monitor sales, manage inventory, and runreportsinrealtime[109].

Sometablet-basedappsalsoallowcustomerstoaddtipsonthescreenandsignfor credit card transactions. Tablet-based cash registers are also popular infarmer’smarkets, trendy clothing shops, and supermarkets. Big screens allowretailers to view more customer data, and salesclerks can encode customerinformationelectronically.

As with mPOS devices, the operating model is not so much geared towardsmaking big profit margins on the sale of the devices. By offering the mPOSservice,providersgainaccesstobusinessesandinformationabouttheirturnover.This allows for the cross-selling of other services that will have higher profitmargins.

KeyPlayers

Inthissection,welookatcompaniesthataremakingimportantprogressinthisarea.Fintechisanexceedinglyunstableindustry,sowhenyougettoreadthis,thecompaniesmentionedmayhavesignificantlyaltered.

ToastisasoftwarecompanyofferingPOSandrestaurantmanagementsystemsusingtheAndroidoperatingsystem.Itpromisestomakerestaurantsmobileandincrease the number of guests that can be served. Jonathan Grimm, AmanNarang, and Steve Fredette founded the company in Boston in 2012. ThecompanyreceivedSeriesBfundingworth$30millionfromGVandBessemerVenturePartnersin2016[110].Itssoftwareispopularamongstnationwidechains,smallcafes,andrestaurantsintheUnitedStatesofAmerica[111].

Toastrolledoutaninventorymanagementandreportingsolutionforrestaurantoperators so that their businesses could experience more profitability, bettertransparency, and improved operations. The Toast Inventory solution isbeneficial to restaurantbusinessesbecause it saves timeandmoneyaswell asincreasesrevenues[112].

Shopifyismostlyknownasanecommerceplatform,butitoffersatablet-basedpoint-of-salesolution too.Currently, the iPadPOShas thecapability to launchvarious apps that allow retailers to add customised features to their POSsolutions.TheappsareavailablethroughitsAppStoreandallowforupsellingtocustomers, offering wholesale discounts to chosen customers, labels,promotions,marketingtools, invoices,receipts,etc.ThesePOSappsmeanthatretailerscandictatetheirownPOSexperience.Currently,Shopifyhasmorethan165,000users[113].

Established in 2013, Osama Bedier launched Poynt as a startup company,creatingapaymentterminalusingtheAndroidoperatingsystem.Poyntoffersanapp for tablets and smartphones for businesses such aswine shops, ice creamparlours, or restaurants. It collaborateswithbanks that have relationshipswithbusiness owners. Their business model consists of making no profit on theterminalbutgetting20%commissiononsoftwarepurchases.

DinerscanorderandpayfortheirfoodusingthePrestoappbyElaCarteInc.Presto systems include cloud-based software and can be used in casual diningrestaurantsaroundtheUSA.However, therestaurantindustryhasbeenslowtoembracethispaymenttechnology[114].

Diners like the idea of reviewing the menu, ordering, and paying withoutinteractingwithanyof thestaff.Restaurantsexperiencea5.3%increase in theaveragetabandturntablesaroundatleast10minutesfaster.Tipsalsoincreasebyanaverageof16%.

Founded in 2010 by Christopher Ciabarra and Lisa Falzone, Revel Systemsoffers an iPad-based POS system. Revel Systems collaborated with Intuit in2014tocreateQuickBooksPOS.In2015,itcollaboratedwithAppleComputers,andinSeptember2016,thecompanyalsocollaboratedwithShellGlobal[115].

RevelSystemshasanopenAPI thatcan integratewith third-partysuppliers toallow the latter to customise thepoint-of-sale system.With itsheadquarters inSan Francisco, it also has offices in Florida and London. Its POS focuses onsecurity,andinJanuary2013,itbecamethefirstiPad-basedPOStoimplementEuroPay,MasterCard,andVisaprocessingintheUSA.

OnlineAcquiring

Onlineacquiringis the termusedforpaymentsforgoodsandservices throughthe Internet. A customer typically enters the required details on the seller’swebsite, actually instructing their bank / financial services provider to pay thesellerfortheirpurchase[116].

Serviceproviders,engagedbyaprocessingcentreortheacquiringbank,providefor the secure transfer of funds. They use authentication protocols and dataprotection methods to encrypt customer data on the seller’s website. Onlineacquiringcanconnect totheacquiringbankdirectlyoruseintermediariessuchPaymentSystemProvidersandProcessingCentres.

Some of the fintechs that are emerging are improving the payments processflow.Thisis thecasewithStripe,whichremovestheneedtohaveapaymentsgatewayandamerchantaccount.Fintechscanalsoaddmorepaymentmethods,includingcryptocurrencies,andalsomaketransactionscheaper.

KeyPlayers

Founded in 2010 by Irish entrepreneurs Patrick and John Collison, StripeempowersInternetbusinessesusingcodeanddesign.Itoffersdeveloper-friendlyAPIs toallowusers tocreategreatproducts.Famous investors in thecompanyinclude Elon Musk, Max Levchin, Peter Thiel, Andreessen Horowitz, andSequoia Capital. It is helping businesses in 25 countries and has nine globaloffices[117].

Stripe offers software development kits (SDKs) for Android and iOS thatdevelopersandbusinessescanusetocreatetheirownquickandeffectivemobilecommerceexperiences.Thesebusinesses’customerscanpayfortheirpurchaseseasily and securely. Stripe also offers fraud prevention, international support,real-timedataaccess,andmodernaccounting.

FromOctober 2015, Stripe has offeredmarketplace sellers the opportunity toreceive online payments through Stripe Connect, which can accept debit cardpayments.SellerscanuseStripeConnectin25countries.TheyjusthavetoaddtheircustomerstoStripeConnect,andthesystemwillevenautomaticallyupdateexpiredcreditcards.

Stripe charges small retailers a 2.9% flat rate and 30-cent fee per transaction.Retailers find it easy to update their payment systemwith just a few lines ofcode.Paymentsaremadetotheirbankaccountsaftertwobusinessdays[118].InOctober 2016, Stripe introduced various fraud prevention tools that will helpdevelopers and retailers curtail digital theft.Radar, a technologydevelopedbythecompany,usesalgorithmsandmachinelearningtoprocesstransactionsandcanpickupwarningsignsforfraudulenttransactions[119].

ThecompanyhasalreadyreachedtheUnicornclassification,aUnicornbeingastartup valued at $1 billion, with investors like American Express, Visa, andPeterThiel.

StripehasalsointroducedWorkswithStripe,adirectoryofaround300appsthatuserscanusewiththemainapp.Businessescantakeadvantageoftheseservicestoanalysedata.Introducedinthelatterpartof2016,WorkswithStripeincludesSlack,aserviceappprovidingtransactionnotificationsinreal-time;CardFlightcardreadersforusewithAndroidoriOSapps;Xeroforpayrollandaccountingof Stripe transactions; Taxjar for tax computations, Shippo for shipping, andControlforbusinessanalytics[120].

SquarehasbuiltanonlineacquisitionsolutioncalledSquareOnline.AretailercanacceptpaymentsusingSquareOnlineinthreeways:sellontheirownsite,sellonSquare’ssiteorsellwithathird-partysite.Theyreceivetheirdepositsthenextday.Squarecanalsointegrateinventoryandreportswiththeirofflinesalesand accepts major credit cards. Square earns from the processing fee pertransaction[121].

Established in 1998, PayPal is a leading digital payments solution allowingcustomers to manage and transfer their funds more effectively by providingflexibilityandchoiceinhowtheysendorreceivemoney.Itoffersasecureandopenpaymentsplatformthatbusinessescanusebothtotransactwiththeironlinecustomers and in their brick-and-mortar stores. For the year 2015, PayPalreportedthat28%ofits transactionscamefrommobiledeviceusers.Itsglobalpayments platform has more than 192million customers, transacting in morethan100currencies[122].

Established in 2007 in Chicago, Braintree provides commerce tools to userswanting toacceptpayments fromanydevice inalmost everypaymentmethodavailable. Retailers globally can accept, enable, and split payments in at least130 currencies. Braintree also offers innovative concepts, stellar customerservice, and simple processes. PayPal acquired Braintree in 2013 for $800mhavingbeenattractedbythetechnologydevelopersaswellastheinternaltalent,andintegratedthetwopaymentsbusinesses[123].

The merger allowed Braintree to build, scale, and grow faster to help rewirecommerce and improve the connection between retailers and consumers.Braintreeoffersthemobile-firstplatform,whilePayPalhasthereachandpower

ofatwo-sidednetworkofmerchantsandconsumers[124].

As mentioned earlier, Klarna had one goal in mind: to make buying easier.Klarna Payments is an electronic commerce solution using smart data to givecustomersreal-timecreditquicklyandeasily.Retailerscanseamlesslyintegrateit with their solutions. They can increase their customers’ purchasing power,providingthemwiththeoptiontopayininstalments,payafterdelivery,orbuynowandpaylater.Theyalsoimprovearetailer’saverageordervalueandloyaltybyusingKlarnaPayments[125].

IntheUS,KlarnacollaboratedwithOverstock.comtoprovidememberretailerswith the same features as Amazon’s “buywith one click” button. In 2015, itprocessed 30% of Sweden’s online purchases. Worldwide, Klarna processedabout$9billionworthofpaymentsinthesameyear[126].

China’s Ant Financial is the financial investment arm of the Alibaba Group,worthmorethan$60billionatthetimeofwritingandheadingtowardsanIPO.Thismakesitthebiggestfintechintheworld,evenbiggerthanPayPal.

Its payment solution,Alipay, is amobilewallet that started off by processingpaymentsforAlibabawebsitesTaobaoandTmall.It issupportedinmorethan100,000retailstoresandmorethan70countries.Alipayhasacquiredmorethan400millionregisteredusers,almosttriplethesizeofPayPal.Thecompanyalsohasacreditratingservice,amoneymarketfund,andadigitalbankthatlendstoSMEs.

The company has big plans for globalisation, having already acquiredMoneygramandKakaoPay,aSouthKoreanpaymentnetwork.

MobileWallets

Traditionalwallets, typicallymadeof leather,were invented in the1600s as away to carry identification papers and the newly invented paper currency.Modernwallets,whichhaveslotsforcards,quicklyfollowedtheintroductionof

thefirstcreditcardsinthe1950s.Afterthat,debitcards,membershipcards,andloyaltycardsalsofoundtheirwayintothephysicalwallet.

Amobilewalletisawayofcarryingyourdebitcardorcreditcardinformationindigitalformonyourmobiledevice.Amongstotheruses,insteadofusingyourphysical plastic card to make purchases, you can pay with your smartphone,tablet,orsmartwatch.

Physicalwallets have become one of themost targeted items for pickpockets,although lately, much less cash is being carried in wallets as cash is beingreplacedbycardandmobilepayments.

Mobile wallets are also vulnerable to targeting by criminals, in this case,cybercriminals.Establishinggoodsecuritypracticesisessentialforallproviders.Multiple factors of authenticationwill be set up on devices. This can includePINs,passwords,andbiometricinformation.Combinedauthentication,keepingsome information on a mobile device and some on remote servers, isrecommended.

UsesforMobileWallets

Themain use ofm-wallets is to enable payments. They can be used to storecredit,debit, andprepaidcarddetails.Acustomermustdownloadanapp, addtheir card details, and then the wallet can be used to pay in stores usingproximity payment technology, such as Near Field Communication (NFC)technology,requiringtheusertoplacethephoneclosetoareadingterminal.

Theseconduseofm-walletsinvolvescommerce.M-walletscanbeusedtostorecoupons, offers, and discounts, such as loyalty cards for restaurants,supermarkets,andothershops.

The third use for m-wallets is identification. They can store details of accesscontrol cards, authentication, andaperson’s signature.Theycanalso store theuser’sbiometricdetails.Thisfieldwillprobablydevelopthemostinfuture.

Finally,m-walletsareusableforbanking,forexample, tostorecash,paybills,deposit andwithdraw cash frombanks andmerchants,make transfers to bankaccounts and mobile phone numbers, and access banking and investmentaccountsdigitally.

KeyPlayers

KeyPlayers

Alotofattentionhasbeenpaidtomobilewalletsduetothesizeofthemarket.AccordingtoForbes[127],themobilewalletsmarketisworth$4.5TNintheUS.Therearehugenumbersofcompanies involved,but thebignames in thisareaareGoogle,Apple,SamsungandPayPal.Thefactthatthefirstthreethemselvesoffermobiledevicesgivesthemanadvantage.

AndroidPay

GoogleWallet was released in 2011 and became Android Pay in 2015, withGoogle’sacquisitionofSoftcard.UserscanscantheircardsandmakepaymentsusingNFCtechnology.Thedevicereadsafingerprinttoauthenticatepayments.It also allows for storing credit and sending and receiving payments with nocommission. It is only supported by Android devices. It also receives offersfromselectedmerchants.

ApplePay

Apple released passbook in 2012, which then was renamed Apple Wallet. Itallowedboardingpasses,eventtickets,andcouponstobestored.Then,in2014,Apple Paywas released, allowing you to store credit and debit cards on yourphone andmakeonlinepayments andNFCpayments. It is similar toAndroidpayandhasbeencommerciallysuccessfulfromthemomentoflaunching.

SamsungPay

SamsungPaywaslaunchedintheUSAsothattheirsmartphoneshadtheirownsolution.Itallowspaymentsandwillsoonsupportthestorageofgiftandloyaltycards.ThemaindifferencetoitscompetitorsisthatitsupportsMagneticSecureTransmission (MST), meaning that it can work with traditional merchantterminals. Insteadofstoringcardsandpaymentdetails, it storessecure tokens,ensuringthecardscan’tbeclonedorstolen.Italsoallowsauthenticationusinganirisscannerwhichisembeddedintothedevices.

Paypal

PayPalhas thedisadvantageofnot sellinghardware, sopeoplewanting tousethewalletneedtoinstallit.However,theirappcanbeinstalledonbothIOSandAndroid. PayPal has been allowing the storage of funds in email accounts for

severalyears,andtheyrecentlysignedadealwithMastercardallowingPaypalto have increased presence at point of sale.Mastercard benefits by having itsownwallet,Masterpass, as an acceptedpaymentoption forPayPal’sBraintreemerchant network. PayPal also offers awhite label version of theirwallet formerchants.AnotherPayPalsubsidiary,Venmo,isapaymentappwhichisverysuccessfulwithmillennials.

SmartCreditCards

Whilstmobiletechnologiescanbeagreatwaytoreplacecashandplastic,noneofthesewillworkwhenthemobilerunsoutofpower.Fortheseinstances,somecompanies have created intelligent cards, which offer convenience whilstmaintainingsecurity.Curve,foundedinLondon,offersaphysicalcardthatcanlink into allMastercard andVisa cards, selected using amobile app. It saveshavingtocarryseveralcardsatthesametime.Stratos,aUScompany,canstoreuptothreecardsatthesametimeandhasitsownbattery,whichlaststwoyears.OtherpromisingcompaniesarePlastcandSwyp,whichisexpectedtodeliveracardthatcanstoreandmanage20debit,credit,loyaltyandgiftcardsatthesametime. Itwill require chargingonamonthlybasis as itwill havea touchscreenembedded.

WillE-walletsReplaceCash?

Cash is recognised as an expensive, dirty, and not very trustworthy way ofcarrying out transactions. It leaves room for criminal activity and tax evasion.Governments are keen tomove to a better solution.Over time,we have seentransitions from coins to paper money to plastic. Some governments havealready announced theywill no longer produce coins, sowe are already on ajourneytowardsdecreasedusageoflegacyformsofpayment.However,bearinginmindtheworld’ssizeandthenumberofdevelopingcountries,itisdifficulttopictureacashlessworld,at least in thenext fewdecades. It isworthwatchingthe space in India, where the government has ordered demonetization byremoving high denomination bills. It aims to increase online payments andreducetheinformaleconomy.

T-Commerce

Television commerce is the term used to describe buying and selling through

interactivetelevision.Viewerscanreviewdifferentproductsandthenbuythem,and even track their orders. The first attempt at a T-commerce applicationappearedin2013,withSamsungSmartTVs.ThishasevolvedtoSamsung‘PayonTV’,aschemethatallowsforpaymentsusingmajorcreditcards,debitcards,andevenPayPal. It isa simple three-stepprocess that includesenteringaPINcode.Television commerceuses various technologies such asNFC (near fieldcommunications)andARC(audioreturnchannel).

It is convenient for the sale of clothing and decor that feature on televisionprograms.During thebroadcast, customers can create awish list of items thattheywouldliketobuy.

Brands have a new opportunity here, with the relaxation of strict productplacement regulations and growth in sales of smart TVs. They can now takeadvantageofmultiplescreenfunctionality,whereapersoncanshiftbetweenaphone,tablet,orscreen.Theconnectionspeedandscreensizecandeterminetherichnessanddeliveryofcontent.

In May 2013, YouGov research found out that 23% of individuals takeadvantageofsettopboxesastheprimarywayofaccessingtheInternetthroughtheirTVs.Atpresent,GooglehasChromecast,adeviceallowinguserstostreammediafromdifferentdevices[128].

In 2012, American Express collaborated with NBC Universal cable networksandFox,partofNewsCorp,totrytoconvinceTVviewerstopurchaseproductsshownonscreen.Itplannedtoallowviewerstobuyproductsinspiredbycertainprogrammes on NBC Universal from their mobile device. Those with Amexcards can get $35 cash-back if they use their cards, synchronised with theirTwitterorFacebookaccounts[129].

OveratNBCUniversal,thesocial-TVappZeeboxcouldallowuserstospeaktofriendswhoarealsowatchingthesameshowinreal time[130]. Itcouldalsoletusers follow related Facebook and Twitter feeds. Furthermore, it offerspurchasinginformationabouttheitemsonsale.

AmericanExpressandFoxallowedviewerstopurchaseinrealtimeusingtheirnewFoxNowiPadappwhiletheywatched“NewGirl”.Eachepisodefeaturedaproductthatviewerscouldpurchase.AmericanExpresswasbettingonthefutureoftelevisioncommerce.

Moreadvertisersarefindingwaystousecontentintheiradvertisingstrategies,instead of using the usual TV commercials that had nothing to do with theprogrammes. According to NBC Universal’s President for ad sales LindaYaccarino,“contextandimpactmeaneverything”.

TheFutureinaFlash

Commerce is about the facilitation of trading in products or services. In aglobalised world, technology makes commerce easier and cheaper. Theinventionofmachinessuchasmobile terminalsand tabletshelpsbothbuyersandsellers.Specialisedpaymentproviderscanmakepurchasinginternationallyasimplerprocess.Wecanexpecttoseefurtherevolutioninthisarenatomakepayments even simpler.Theworld ismoving towards a state inwhichpapermoneyisusedlessandless,andonedaywemightevenhaveeconomiesthatarefullydigital.

CHAPTER7

CROWDFUNDINGANDCROWDINVESTING

CrowdfundingandCrowdinvestinginaFlash

Gettingfundingforcompanieshasalwaysbeendifficultforentrepreneursandcantakeavastamountofeffortand time.Crowdfundinghelps individualsorentitiesraisemoneyfromotherpeopleorbusinessesfordifferentpurposes.Itisameansofaccessingapoolof funds tofinanceaprojectorendeavour.Withtechnologicalinnovation,itisnowpossibletoreachalargenumberofpossiblefunders,eachofwhomcancontributesmallamountsofmoney.

Individuals or entities can donate money to any cause. Some of thesecrowdfundingprojectsofferrewardslikeaneventticket,acknowledgementsonthe book cover, or gifts, among other things.Usually, donors expect nothingback, content with feeling good about helping other people. Withcrowdinvesting,investorsinvesttheirmoneyinexchangeforequityandshareintheprofitsofthecompany.

HowBusinessesTraditionallyFundThemselves

It is important to understand funding, as when following fintech startups weoften see news about the different rounds of investment that they areexperiencing. Funding typically has six stages: early stage, seed, growth,expansion,bridge,andIPO.

EarlyStageFunding

Initial funding for companies generally comes from savings, and from friendsand family, personal bank loans and, now, crowdfunding.Alternatively, angelinvestorsareagoodfirstpointofcallforacompanyinitsinfancy.Theseinvestinyoungbusinessesorstartupsthattheybelievewillprovidehighreturnsinthe

future.Theysearchforcompanieswithastrongmanagementteam,highgrowthpotential,andasolidbusinessplan,findingotherbusinessassociatesandtrustedfirms to co-invest with them. They choose their ventures based on thetechnologiesor industries that theyaremostfamiliarwith,so theycanprovidementoringandconsultation.

SeedStage

Astartup receivesseed funding togetabusinessoff theground.Thebusinessownerusuallypresents thebusinessplan toapotential investor. If the investoragreestofundtheiridea,theyreceivemoneytocreateaprototypeortocarryoutfurther tests, and in exchange the investor gets shares in the business. Theaverageamountoffundingis$500k.[131]

GrowthStage

This is the first round in which venture capitalists typically get involved andendswithatypeoffundingcalledSeriesA.Typically,seriesAcanraise$2-$4million.ResearchbyJ.E.YoungandJ.C.Ruhnkashowsthatventurecapitalistshavea66.2%chanceoflosingmoneyatthisstage,soitisabitofagamble.Iftheideaisfeasible,theventurecapitalistwillaskforadetailedbusinessplanandwillsitasoneofthecompany’sBoardofDirectors.Thebusinesswillstarttobeprofessionalised to meet the investor’s expectations, and the company willdevelopandtestthesolutionthatwillgotomarket.Itwillshowaprototypetoafewclientsandaskforfeedback.Then,withtheventurecapitalistmonitoringthewholeprocess,itwillarrangeforproduction.

ExpansionStages

Thefollowingroundsoffundinghavesuccessiveletters,SeriesB,C,andD.Thebusiness will be growing steadily, producing and selling products or servicessuccessfully,andvaluationwillgenerallybeabove$30million.Itwillbefacingits competitors and endeavouring to capture a shareof themarket. Itwill alsoaim to break even by findingways to lower costs. The venture capitalistwillmonitor the management team closely to ensure that they make the rightdecisionspromptly.

Theventurecapitalistwillsupportthenextstageifthemanagementteamprovesitcanholditsownagainstthecompetition.However,theymaysuggestthatthe

teamisrestructuredor that thisstageisrepeatedif thecompanywasunabletosatisfy their requirements. They will cease to fund the project if it performsbadlyatoneofthesestages.

BridgeorMezzanineStage

This stage prepares the business for the Initial Public Offering. The venturecapitalistwillleavethebusiness,receivingtheprofitfromtheirinvestment.Thebusiness might merge with another company, eliminate other competitors, orpreventnewplayersfromenteringthemarket.Onlyabout1%oftechfirmsgettoabridgingroundoffunding.

Thebusinessmuststudyitsproduct’smarketposition.Itmayrepositionitselftoattractmorecustomersandincreasemarketshare.Usually,thisisalsothestagewhere thecompanybegins tooffermoreproductsand services toattractmorecustomers.

IPOStage

Reachingthefinalstageiswhatmostentrepreneursdreamof.Beinglistedonastock market allows some of their shares to be cashed in. Private and publicequityhavedifferent typesof investors,andbothhave theirprosandcons.Bygoingpublic,abusinesssellsitssharesthroughanexchange.Insomecases,itsInitialPublicOfferingisoflimitedinteresttothemediaandthepublicbecauseitis still small and unproven. However, there are cases, like Facebook’s IPO,whichbecameahistoricalsuccess.

If itwants togopublic, thecompanymust firsthaveanunderwriter tohelp itwiththesaleofitsshares.Usually,thisunderwriterisaninvestmentbank,andits responsibilities include setting the stock price and selling shares to theinvestors.Theunderwritermustpricethesharelowenoughforinvestorstotakeinterest.

CrowdfundingBusinessModel

Crowdfunding is thepoolingofassetsorcapital through the Internet to fundabusiness or project. Communities and societies support these creative orcommercial projects. Previously, the vehicle used was a consortium, co-ownership, cooperative, ormutual arrangement.There are fourways inwhich

crowdfundingcanraisefunds:throughdonation,reward,lending,orequity.

Aside fromraisingcapital,crowdfundingalsoprovidesstartupbusinesseswithnon-financial benefits, like pre-sales leads, product validation, a definedshareholderstructure,andagaugeofpricinganddemand.Thebusinesscanuseits investors to generate feedback and ideas on new products and services, aswell as encourage collective decision-making. People who fund the businessbecome its ambassadors andhelp topromote andmarket theproducts throughword-of-mouth.

CrowdfundingMotivations

Social motivations have been very popular. Used extensively by non-profitorganizations,donation-basedcrowdfundingfundscommonpurposeorcreativeactivities.Ittargetssmallercampaignsandfocusesoncommunity-basedorlocalprojects.Funders identifywith the cause andgain satisfaction from seeing theproject realised. There are crowdfunding platforms that allow individuals tocreatetheirowncrowdfundingcampaignquicklyandeasily.

Reward-based crowdfunding provides the investor with a product or service.Investorsoftenfundsmallorcreativeprojectsorbusinesses.Usually, this typeof financing serves to test initial demand for theproduct.Entrepreneurs in thetechnology, film and music industries use reward-based crowdfunding togeneratefunds.

MarketSize

In 2015,Massolution estimated the global crowdfunding industry to beworth$35billion.However,thisfigureincluded$25billionfrompeer-to-peerlending.Forequitycrowdfunding,itwouldhavebeenjust$1.2billion.TheWorldBankalsopredictedthatcrowdfundingcouldbeworth$96billionby2020[132].

In the United States of America, investment crowdfunding was worth $1.2billionin2015.However,50%ofthiswasforrealestateandtheother50%wasfor startups.Thevolumeof capital forUSequitycrowdfunding is expected togrowbyatleast75%orabout$3.5billionby2020.

KeyCrowdfundingPlatforms

US-basedKickstarterisaglobalcrowdfundingplatformwithitsheadquartersinBrooklyn,NewYork. It focuses on raising funds for creative pursuits, and itsmissionistomakecreativeideasareality.Withatleast$1.9billioninpledges,ithas funded 257,000 projects, related to a myriad of things including food,technology, video games, journalism, comics, stage shows, music, and films.Thosethatfundprojectsreceiverewardsinexchangefortheirmoney[133].

Established onApril 28, 2009, byCharlesAdler,Yancey Strickler, and PerryChen,Time namedKickstarter one of the “BestWebsites of 2011” and “BestInventions of 2010”. TheNewYork Times called it the “people’sNEA”.OnOctober 31, 2012,Kickstarter started operating in theUnitedKingdom, doingthesameinCanadaonSeptember9,2013.

Project creators do not receive the money if they are unable to raise theminimumfundinggoalby thedeadline.Kickstarterchargesa feeof5%of thetotal funds raised, while an additional 3% to 5% fee goes to the paymentsprocessor. Since there is no guarantee that fund creators will complete thepromisedprojects,itcautionsfunderstouseduediligence.Projectcreatorscanbelegallyliableiftheyfailtodeliverontheirpromises.

Since2009,Kickstarterhashelpedatleast8,800non-profitsandcompaniesandhasfundedabout$3billioninprojects.However,ithasfacedmanychallengessince its inception.Forexample, itwasdifficult tosegregate legitimateprojectcreatorsfromthenot-so-seriousones.Manyprojectsfailedtodeliverresults,andprojectbackersfeltshort-changed.AccordingtoaWhartonstudy,about56%oftheprojectsfailed,andonly25%ofsuccessfulprojectsfinishedontime[134].

From 2012 onwards, Kickstarter has required project creators to list businesschallengesandmajorrisksandrepresentthecreativeprocessmoreclearly.Thisstrategyhasworked,andsincethenonly10%ofprojectshavefailedtodeliver.In 2015, Kickstarter went public, and its board members and stockholdersbecameaccountabletothepublic.In2016,itintroducedCreativeIndependenttosupportartistsinpublishingtheiressays.

US-basedAngelListisforjobseekers,angelinvestors,andstartups.Launchedin

2010,theplatformwantedtodemocratisetheinvestmentprocess.Itbeganasanonline tech-start-upboard that needed seed funding.Since2015, startupshavebeenable to raisemoney fromangel investors freeof charge.BabakNivi andNaval Ravikant founded AngelList. In February 2015, AngelList launched itssyndicatecounterpartintheUnitedKingdom[135].

Atleast$425millionworthofinvestmentshasbeenmadethroughtheAngelListplatform, in at least 1,000 companies. Its use of syndicates has generated aventurecapital-likehybridmodel,inwhichinvestorsreceivecarriedinterestfortheirpartinchoosingthemostpromisinginvestments.Between2013and2015,itsInternalRateofReturnwas45%aftercarriedinterestandfees[136].

Eric Schell, Slava Rubin, and Danae Ringelmann founded Indiegogo in SanFranciscoin2008.Itisopentoindividualswishingtoraisefundsforastartup,charity, or idea. It charges 5%, plus any additional fees charged by paymentprocessorslikePayPalandcreditcardcompanies[137].

Indiegogooffersarewardtocustomers,investors,ordonorswhofundaproductorproject.In2016,itcollaboratedwithMicroVenturestoprovideequity-basedcampaigns. It launched Indiegogo Life in 2014, a free service for individualswho need money for life events like celebrations, medical expenses, andemergencies.Thefollowingyear,IndiegogoLifebecameGenerosity.com[138].

Crowdfunder is amixture of investment and donation-based crowdfunding. Italso encourages collaboration and both offline and online crowdfunding. Itfollowstheall-or-nothingmodel,witha5%chargeontotalfundsraised,plusaminimum 1.9% transaction fee. It emphasizes the long-term growth ofenterprises.However,Crowdfunderisforprofitbusinessesonly[139].

Founded in 2011 in Los Angeles, Crowdfunder connects entrepreneurs withinvestors. Although most companies are tech startups, it can also fund smallbusinessesandsocialenterprises[140].

Withheadquarters inSanDiego,US-basedGoFundMeprovidesaplatformforindividuals to raise funds for life events and challenging circumstances.Although it was established in May 2010 by Andrew Ballester and BradDamphousse, it startedoutas“CreateAFund” in2008.GoFundMebecame thenewnamedue to thevarious revisionsmade to thewebsite’s features. In June2015,theoriginalfounderssoldamajoritystaketoAccelPartners[141].

AusercancreatetheirownGoFundMepagetoencouragedonorstogivemoneytotheircause.Theyneedtodescribewhytheyareraisingfundsandhowmuchmoneytheyhopetoraisefromtheendeavour.Theycanalsouploadvideosandphotostotheirwebsiteandsharethemviatheirsocialmediaaccountsandemail.

Donors can give money through the GoFundMe website using their credit ordebit card. They can alsomonitor the project’s progress through the website.GoFundMechargesa5%feewheneveradonorgivesmoney.Asidefromthe5%per transaction, the payment processor also charges 2.9% and $0.30 pertransaction.

RocketHubisforpeoplewhowanttoraiseawarenessandfundsforendeavoursand projects, and common project creators include musicians, scientists,philanthropists, photographers, writers, entrepreneurs, game developers,filmmakers, theatre directors/producers, fashion designers, etc. VladimirVukicevic, Alon Hillel-Tuch, Jed Cohen, and Brian Meece were the originalfounders[142], establishing the company in 2009 and launching it in January2010.

BasedinNewYorkCity,RocketHubwasoneoftheUSDepartmentofState’s12 top global partners. It operates in at least 190 countries through itscollaborationwiththeUSStateDepartment.

Theprojectcreatorcankeepthefundseveniftheprojectfailstoreachthepre-establishedminimumamount.Itcharges12%processingfeesinsuchscenarios,and8%feesiftheprojectraisestheminimumamount.

London-based GoGetFunding allows fund creators to raise money for anypurpose. It charges 4% of the total funds raised and a 2.9% transaction fee.Anyonecanraisemoneyforanypurpose.GoGetFunding’splatformisalsoeasytouse.However,GoGetFunding isnot for entrepreneurialorbusinessprojectsbecausefewerpeoplefundsuchactivities[143].

Launchedin2011,GoGetFundinghas thesimpleaimofhelpingindividuals inneed raise funds online. Its crowdfunding platform lets you share your page,track visitors and donate easily. You can either create a private or publiccampaign and a timed or ongoing campaign. A project creator can add links,pictures,andvideostogeneratemoreinterestintheircrowdfundingproject[144].

StartSomeGood is fornon-profits and social entrepreneurs. Ituses the ‘tippingpoint’ model, meaning that after a certain amount has been raised investorsreceiverewards.Itcharges5%forcompletedprojectsand3%transactionfees.Itaccepts crowdfunding endeavours worldwide and supports non-profits, for-profits, and individuals who have projects focused on doing good in society.StartSomeGoodhasasmallerreachandisonlyforsocialprojects[145].

Launched in 2011 by Tom Dawkins and Alex Budak, StartSomeGood usescrowdfunding to foster social change by supporting change-makers and theirinitiatives. It provides support, advice, and feedback from its crowdfundingexperts[146].

TopCrowdfundingCampaigns

In this section,we review the campaigns that have raised themost amount offundsforspecificprojects.

PebbleFunding(PebbleTime,Pebble2andPebbleTime2)

Located in Palo Alto, California, the Pebble Company has been the king ofcrowdfunding: they ran three of Kickstarter’s most successful crowdfundingcampaigns.

Between April 11, 2012 and May 19, 2012, its first crowdfunding campaignraised $10,266,845, with 68,929 funders. The funds raised were for the

productionofaninfinitelycustomisablesmartwatchthatcanconnecttoAndroidandiPhonesmartphonesthroughBluetoothtechnology.Thesmartwatchcanalsoalertthewearertoanincomingcall,message,oremail.

The second Kickstarter campaign ran from February 24, 2015, to March 28,2015, and raised $20,338,986 from78,471 funders. The goal of the campaignwastoraisefundsfortheproductionofPebble’ssecond-generationsmartwatchwithaone-weekbatterylife,20%thinner thantheoriginalPebblesmartwatch.This was a crowdfunding campaign that broke records on the Kickstarterplatform.Firstly, itwas the firstproject to raise$1million in just49minutes.After just seven days, it had broken the record for being the most-fundedcampaign ever,with at least $13.3million pledges. It broke the record set byCoolestCoolerwhichiscoveredbelow.

The third campaignwas called Pebble Two. Itwas aKickstarter campaign tofund the production of Pebble’s two new smartwatcheswith a built-in fitnesstracker.Thewatcheshavehealthtools,opticalheartratemonitoring,andactivitytracking. The campaign ran from May 24 2016, to Jun 30 2016, and raised$12,779,843from66,673supporters.

CoolestCooler

CoolestCoolerwasaKickstartercrowdfundingcampaignthatranfromJuly8,2014,toAugust30,2014,andraised$13,285,226from62,642funders.Itsgoalwas to fund the production of a 60-quart cooler with a built-in ice-crushingblender.ThecooleralsohasawaterproofBluetoothspeakerandabuilt-inUSBcharger.

FlowHive

FundedonApril20,2015,FlowHivewasanIndiegogocrowdfundingcampaignthat raised $13,255,247 from 38,473 supporters. The money was for theproductionofahoney-extractionsystemforalltypesofbeekeepers.FlowHivesmakesharvestingpurehoneyfrombeehiveseasier.

Baubax–TravelJacket

Baubax–TravelJacketwasaKickstartercampaignthatranfromJuly7,2015,toSeptember4, 2015, to fund theproductionof a travel jacketwith abuilt-inearphoneholder,eyemask,drinkpocket,gloves,neckpillow,andtechpockets.

Thejacketcomesinfourstylesandallsizes.Thecrowdfundingcampaignraised$9,192,055from44,949funders.

ExplodingKittens

Exploding Kittens was a crowdfunding campaign from January 21, 2015, toFebruary 20, 2015, at Kickstarter. Its goal was to raise funds to manufactureExplodingKittens,agamebasedonRussianroulette.Theplayerwhodrawsanexplodingkittenlosesthegame.Thecampaignraised$8,782,571from219,382backers.

Ouya

Asa crowdfunding campaign that ran from July 10, 2012, toAugust 9, 2012,Ouyaraised$8,596,474from63,416Kickstarterbackers.ThemoneyfundedtheproductionofOuya,anAndroid-poweredgameconsoleforthetelevision.

Crowdinvesting

Crowdinvesting is crowdfunding used by investors who finance a startup inexchange for shares. They usually exit the startup when a large companyacquires the business, profiting from the sale.Because of the economic crisis,entrepreneurs find it difficult to access capital. Therefore, they turn tocrowdinvestingbecauseit’safasterprocess.

Crowdinvesting pools together funds from individual investorswhich are theninvested inan ideaorproject.Likeanybusiness, thereare risks involved, likelossofinvestment,lackofdividends,dilution,andilliquidity.

Investorsmustbecarefulaboutinvestingtheirhard-earnedmoneyinaparticularbusiness startup because theymay not receive any return. In fact, the generalrule is that theymust only investmoney that they can afford to lose.Possibleinvestorsmustalsoconsiderthemarketfluctuationsoftheirinvestment.

Moststartupsdonotdistributedividendsbecausetheyusethemoneytoexpandthebusinessorcreatemoreproductsandservices.Theycanalsoexpectdilutionif the startup raises more capital in the future by issuing new shares. Moststartupsraisingfundshavenooperatinghistory,soinvestorsmayfinditdifficulttoevaluatetheirpossibleperformance.

Investorsmustdiversifytheirportfolio.Theycaninvestsmallamountsofmoneyin different businesses to spread the risks. They also shouldn’t invest all theircapital in just startupsbut investmostof theirmoney in saferor liquidassets.Investorsalsorelyonthecompetenceandexperienceofthestartup’sdirectors,astheycannotmakedecisionsforthebusiness.

Investors must take into account that these startups may not decide to listpublicly in the near future. Therefore, they will find it difficult to get theirmoneyback because there are no buyers for their shares, or theymay receivelessmoneythantheyinitiallyinvestedduetopricefluctuations.Thereisalsonoguaranteeoftaxrelief.IntheUnitedKingdom,theFinancialConductAuthorityallowshigh-net-worthindividualsandsophisticatedinvestorstodabbleincrowdinvesting[147].

With crowdinvesting, a nominee structure may hold the shares for investors,althoughinsomecases,platformsfollowadirectshareholdingmodel.Therearealso instanceswhen investors receivedifferent shareclasses,dependingon theamount they invest. This complexity requires individuals to exercise duediligencebeforedecidingtogetinvolvedwithcrowdinvesting.

KeyCrowdinvestingPlatforms

EquityNetwas the first crowdinvesting site. Established in 2005 in theUS, itfocuses on investments in social enterprises and consumer products. It attractssingle-assisted projects like medical clinics and assisted-living facilities.Companyprofilesareavailabletothepublicbutonlyregistereduserscanviewauditedfinancialstatements,prospectuses,anddisclosures.Registereduserscanalso send messages to companies through the crowdinvesting platform.Transactions occur outside of the platform. EquityNet has no minimuminvestment requirement.However, it is common to find companies asking for$2,000to$5,000investment.

Foundedin2011byLukeLangandDarrenWestlake,CrowdCubeisoneoftheworld’stopinvestmentcrowdfundingplatforms.Minorinvestorsorprofessionalinvestors help businesses grow through debt and equity investment options.

Crowdcube has raised at least £180million for at least 400 companies in theUnitedKingdom.Investorscaninvestaminimumof£10inacompanylistedonCrowdCube,andbusinessesdonotgetanything if theyareunable to raise thepre-established minimum amount. CrowdCube earns from commissions forsuccessfulcampaigns[148].

As an equity crowdfunding platform, SeedRs is for startups and establishedbusinesses inEurope.Userscanchoose to investaminimumof€10or£10 intheir chosen project[149]. The project creators pool the funds in exchange forequity.Likesomeothercrowdfundingplatforms,theydonotgetanythingiftheydo not reach their target. However, if the money exceeds their minimumexpectedfund,theycankeepit.

The FinancialConductAuthority gave SeedRs its regulatory approval inMay2012.AlthoughitsheadquartersareinTechCity,EastLondon,SeedRshousesitsdesignersanddevelopersinLisbon,Portugal.EstablishedbyCarlosSilvaandJeffLynn,TheGuardiannameditasoneof“EastLondon’s20HottestStartups”in July 2012. In August 2012, Wired named it “Startup of the Week”. InNovember2013,SiliconValleyComestotheUKincludedSeedRsintheirTop100UKBusinesses.

SeedRschargesamaximumof7.5%ofthetotalamountsuccessfullyraisedbybusinesses and startups. The amount covers administrative and legal costsincurred by the company. Additionally, SeedRs charges funders or investorsabout 7.5% of the profits they receive from their investments. This amountcovers the costs for ongoing investor protection and day-to-day sharesmanagement.

CircleUpisacrowdinvestingplatformdedicatedtothefitness,technology,andfoodandbeveragesectors. It showscompanyprofiles, including theirbusinessmodel,retailpartners,products,leadership,andrevenue.ThroughitsDealFlowfeature, investors can easily see which companies are actively raising funds.Theycanalsorequestproductsamplesandviewinvestmentprospectuses.Theycan purchase shares from a particular company or join a circle which poolstogether funds from investors andmanages them.Theminimum investment is

usually$1,000[150].

Fundableisbotharewards-basedcrowdfundingandacrowdinvestingplatform.A company that wants crowdinvesting can seek help from Fundable inconstructing their pitch, building their online profile, and developing theirbusinessplan.Itcanhavealowfundraisingtargetof$10,000toattractsmallercustomers. Investors, on the other hand, can invest a minimum of $1,000.TransactionstakeplaceoutsideoftheFundableplatform.

WeFunder has a minimum investment of $100. It focuses on companies andstartups in the fields of packaged food, logistics, insurance, green energy, andbiotech.Companies have to offer detailed salesmetrics, leadership interviews,and summarisedbusiness plans. Investors can also sendquestions to companyexecutives or founders. Currently, all funding transactions take outside of theplatform,butthereareplanstochangethisinfuture.

Localstake connects investors and small businesses within a certain area. Itfocuses on enterprises such as clothing manufacture, food production, orbrewing.Theminimuminvestmentis$250.Investorscaneithertakeadvantageof revenue share loans or crowdinvesting. With revenue share loans, theyprovide loanswith fixed rateyetopen-endedmaturities.They receivemonthlyrepaymentsplusinterestontheloan.

Companisto is a crowdinvesting site located inBerlin and established in June2012byTamoZwingeandDavidRhotert.Theminimuminvestmentis€5,andthemaximum is€500,000, and there isnoupper limit to theamount a startupcan raise. An investor can become a stockholder of the startup and can earnprofitsthroughdividendsoruponexit.Companistohasatleast60,000investorsscatteredaround92countries[151].

TheFutureinaFlash

Crowdfunding and crowdinvesting platforms will grow and will begin toincorporateinnovationsfromotherpartsoffintech,suchasbigdataandmoreefficientpaymentmechanisms.When lookingat thecharitablesector,wecanexpecttoseedonationsbeingrewardedwithsmallproductsandoffers.Socialnetworkswillbeintegratedsothatpeoplecanaccessopportunitieseasily.Wecan’t expect crowdfunding to replace managed investment funds, but it willbecome a good option as a starting point, along with angels and venturecapitalists.

CHAPTER8

INNOVATIVEWEALTHMANAGEMENT

InnovativeWealthManagementinaFlash

Wealthmanagement is changing: customer expectations are increasing as thenewgeneration inheritsandproduceswealth,old-schooladvisorsare retiring,and new technologies are simplifying decision-making and opening upinformationtolargeraudiences.

Roboadvisorsarevirtual robots thatareused toprovideadviceata low-cost.Theyareforecastedtobemanagingmorethan10%ofglobalwealthinthenearfuture, so this is an important space towatch. The use of analytics providesimportant insights for wealth management companies, who are working toprovide investment recommendations appropriate for their customers. Socialinvestmentplatformsallow investors to copy successful investment strategieswithouthavingtopayforthecostofspecialists.

Lastly,weexaminepersonalfinancemanagementtools.Thesetoolsallowforthe creation of an aggregate viewof their different accounts. They are beingfusedwithinvestmentproductsandotherdatasourcestoprovideanend-to-endviewofapersonandtheirfinancialsituation.

HowWealthManagementWorks

Wealthmanagementisamuch-discussedtopic,yet,noteveryoneunderstandsitsfullmeaning.Foranaffluentperson,wealthmanagementisascientificmethodofenhancingtheirfinancialposition.Forafinancialadvisor, it is theability toprovideaffluentindividualswithvariousfinancialproductsandservices.

Wealth management incorporates different financial products and services,investment, portfolio management, and financial planning. Families, small

businessowners,andindividualswithhighnetworthcantakeadvantageoftheservices of wealth managers to coordinate investment management, taxprofessionals,legalresources,estateplanning,andretailbanking.

In theory, a wealth manager can offer any financial product on the market.However,therealityisthatmostofthesemanagersspecialiseincertainproductsand services that they can successfully sell to clients. For quality wealthmanagement, a wealth manager must ensure that they deliver their clientpresentationsinaconsultativemanner.Thismeansthattheymustlettheirclientmaketheirowndecisionswhenchoosingfinancialproductsandservices.Thisisbecauseweliveinanuncertainworld,andnobodycanguaranteeacertainreturnonaninvestmentwith100%confidence.

The aimof a goodwealthmanager is to understand their client’s needs.Theymay involve other experts if a client needs someone with different expertise.Theirfocusmustbeonfindingoutabouttheirclient’sworkingenvironment,lifegoals,andspendingpatterns.

ChangesinCustomerExpectations

ThenewgenerationofinvestorsconsistsofGenerationsXandY,althoughthereare also some baby boomers, influenced by the younger generations. Theyinteract with their financial advisors differently as they want to be treated asuniqueindividualsandreceivetailoredadvice[152].

This new investor is also in charge of their financial life. They understandfinancial advice and make decisions based on their knowledge. They do notpurchase a lot of discretionary services and in general conduct their ownresearch. They are less trusting of authority, ask the opinions of financialadvisors,experts,andcolleagues,andreadvarioussourcesofinformation.Theyuse technology as a key tool for accessing financial advice through differentdevicesandchannels.

Finally,thenewinvestorhasasenseofentitlementwhenitcomestoinvestmentstrategies and products available to affluent individuals and institutionalinvestors. This means that wealth management companies have to seek newwaystoprovideaccesstonewassetclassesandalternativeinvestments.

Withatleasttwobillionsmartphonesinuseandtheexpectationthatthisnumber

will jump to six billion by 2020, mobile apps for wealth management arebecomingpopularwithinvestors,especiallythenewbreed,soofferingamobileappisbecomingessential[153]

ChangesinAdvisors

Technologychangesthenatureoffinancialadviceanditsmethodofdelivery.Aroboadvisor is an electronic service that offers algorithm-based and automatedwealth management advice that does not involve humans. It mainly providesportfolio management advice and is a low-cost service attracting millennialsbecauseitisaccessibleonlineanddoesnotrequireahighbalance.Roboadvisorscanalsousecomplexalgorithms toanalyseclientdata, leading topersonalisedassetallocationsandfinancialplans.Somefinancialtechnologycompanieshavedeveloped methods and tools for providing real-time investment and traderecommendations,cateringtoaninvestor’spreferencesandhistory.

Arobo-retirementisaroboadvisorthatmanagesaperson’sretirementplanwithalgorithms. Insteadof charging1% to2%of the total number of assets in theportfolio, as a traditional financial planner would, it charges a fee as low as0.14%to0.15%ofthetotalassetsundermanagement[154]andhasnominimumasset requirement. However, robo-retirement is available only for assets withquantifiable risk. It cannot deal with unquantifiable risks such as a suddenmarket crash. Clients who need social security and tax guidance might use ahumanfinancialplannerorahybridroboadvisor.

Robotaxlossharvesting,ontheotherhand,isanautomatedserviceforinvestorswho want to pay the lowest possible taxes in non-tax sheltered accounts.Financialtechnologycompaniesprovidefinancialproductsandservices,makingit possible for investors to access them at low cost using smart technology.Roboadvisors can keep track of and rebalance investment portfolios at anaffordablemanagementfee.

InDecember2014,CorporateInsight,aconsultingfirm,releasedtheresultsofitssurvey,discoveringthatelevenleadingroboadvisorshadexperienceda65%increaseintheirtotalassetsperyear.However,thisdatastillonlyaccountedfor0.1% of the total US retail investable assets, worth $33 trillion in total.Furthermore,thelowerfeesthatroboadvisorschargetheirclientsmaynotcreateasustainablereturnforventurecapitalists[155].

Roboadvisors have the potential to disrupt the market. Existing wealthmanagementfirmswithwidedistributioncapabilitiesanddeeppocketsarenowcollaboratingwithfinancialtechnologycompaniestodeveloproboadvisors,andsomearedevelopingthemin-house.

Evenwiththedramaticimprovementofroboadvicecapabilities,manyinvestorsstillpreferpersonalisedservicefromhumans.Reassuringclientsduringdifficulttimes, persuading them to take action, and synthesising various solutions stillrequireshuman interaction.Assuch, theremustbeaunificationof roboadviceand human capabilities for an excellent client-advisor experience, and wealthmanagement companies need to understand how roboadvice enhances andcomplementscustomerrelationships.

Roboadvice can affect wealth management companies’ business models.Investorsmay not bewilling to pay a premium if they know they can obtaineffectivealternativesatalowpriceunlesstheycanunderstandtherealvalueofhuman advice and the difference between the two. Wealth managementcompanies can provide value-added services or perform better in investmentmanagement.

Humanfinancialadvicewillnotbecomeobsolete.AnAccenturesurveyshowedthat 77%of clients still trust financial advisors and prefer toworkwith them.81%insistonface-to-faceinteraction,sohumanadvisorsstillplayanimportantrole in wealth management. Roboadvisors, however, can provide newcapabilities, especially to advisors, so wealthmanagement companies need tointegrateandadoptthem[156].

RoboAdvisorMarketSize

AccordingtoA.T.Kearney,aconsultingfirm,assetsmanagedbyroboadvisorscangrowby68%eachyearandwillbeworth$2.2billionby2020.Becauseofautomation and cost reduction, investors can now take advantage of servicessuch as tax-loss harvesting that was in the past only available to institutionalinvestors.Manyofthesenewinvestorsareyoungandmiddle-agedindividuals,oftenignoredbytraditionalfinancialadvisorswhofocusonBabyBoomers[157].

AnotherreportbyBIIntelligenceforecasts thatroboadvisorswillmanage10%of total assets, equivalent to $8 trillion globally, and it showed that 49% ofconsumersarereceptivetoroboadvising[158].

ChangesinDataAnalytics

In 2012, the estimated amount of consumer data created was 2.8 zettabytes.Expertsbelieveitwillgrowexponentially,reaching40zettabytesby2020[159].Theemergenceofnewtechnologieshashelpedfindauseforsuchdata.Bigdatais revolutionising various industries, and wealth management companies areinvestingincreatingstate-of-the-artdatamanagementandanalyticscapabilities.

At present, many wealth management firms use simple analytics to provideimportantbusinessinsightsintoadvisorbooks,clientsegments,trainingprogrameffectiveness, andproductpenetration.Yet, these samecompaniesarecreatingmorepredictiveanddescriptiveanalytics,combiningexternaland internaldatasources, and both unstructured and structured data for more complete andinsightful customer profiles. In the future,wealthmanagement companieswillalsobeabletodevelopalgorithmicanalyticstosupportinvestmentdecisionsinrealtime.

ChangesinAccesstoProducts

With technology, investors can use online wealth management and apps todecidewhere to place theirmoney,with no need to seek a financial advisor’sadvice. Financial technology companies like Wealthfront, Betterment, andNutmeg, offer an easier and cheaper way for everyone to try their hand atinvesting.

Aside from being accessible to a larger portion of the population, financialtechnology apps are also paving the way for a shift from active investing topassive. Asmost of these apps’ clients aremillennials, it is unsurprising thatthey opt for passive investing as they have already experienced two marketcrashes.

Financialtechnologyappsallowfinancialproductstobegroupedbythemessothatinvestorscanchooseaportfoliobasedontheirpreferencesandvalues.Forexample, apps can have groupings like “sustainability”, “clean energy”, or“shariacompliant”.

FinancialtechnologyinnovatorslikeWealthfrontorBettermentcanhelpreduceinformation asymmetry, providing customerswith value added products. Theyarehavingamajorimpactonthefinancialindustrybydeliveringinformationto

investorsinacomprehensibleandtransparentway[160].

Retailinvestorsnowdemandaccesstothesamestrategiesandassetclassesoncerestricted to wealthy investors. For the past five years, financial technologystartupshavebeenenteringthemarkettoprovideaccesstoinvestmentsolutionstoeveryone[161].Theyoffersophisticatedtradingstrategiesbycopyingthoseofprofessionalportfoliomanagersorbyusing the electronic trading strategiesofhedgefundmanagers.

Some financial technology startups also offer alternative asset classes, likebecomingcreditorsinlendingplatforms.Somecompaniesalsoprovideanalyticsso that investorscan researchand test their strategies independently. Inaway,wecouldsaythatfintechisdemocratisingaccesstoinvestmentproducts.

SocialInvesting

Withatleast2.3billionactivesocialmediausersaroundtheworld[162],wealthmanagement companiesmust be able to tap these users as potential investors.However, these firmshave IT systems thatdonot allowcollaboration throughsocial channels. Thus, financial technology startups entering the investmentindustryareoutsmartinglargerandmorestablewealthmanagementfirms.Thisallowedforseveralsocialtradingnetworkstoemerge,suchaseToro,Zulutrade,andAyondo.

eToro, an innovative company offering online trading, provides a proprietaryplatform for its users so that they can discuss strategies and trades.Users canevencopythestrategiesofsuccessfulandpopularusers,whoallowpartoftheirportfolio tobemirrored. eToroverifies itspopular traders andgurus to ensurethatthesepeopleusetheirrealnamesandpictures.eTorointroducedacustomerrelationshipmanagement app in July 2016 so thatwell-known investors couldcommunicatewithotherusers[163].

SomeNovelInvestmentIdeas

InvestingChange

California-basedAcorns is an app, created byWalter and JeffCruttenden, forpeoplewho are anxious about and intimidatedby investing.Founded in 2012,

AcornsisnowavailableforAndroidandiPhone[164].

Acorns’usersconnectalltheircreditordebitcards,andevencheckingaccounts,totheapp.Acornsusesthechangefrompurchasesmadeusingthesecardsandcheckingaccountstoinvestinlow-costexchange-tradedfunds.Forexample,ifauserspends$11.49onlunch,theypay$12,becauseAcornsinveststhe51centsdifference.

On average, users invest between $30 and $180 permonth using thismethodalone. They can also invest moremoney by setting up automatic and regulardeposits or make one-off large investments using their checking accounts.Acornschargesitsusers$1permonthplusupto0.5%oftheirtotalinvestmenteachyear.

This idea is also being followed by banks, for example, HSBC has startedofferinganapphavingthesamefunctionalityintheUnitedKingdom.

InvestingasaGame

In the past, the stockmarketwas exclusively forwealthy individual investorsand large institutions. However, with the advent of technology, everyone caninvest in stocks.Vestlymakes stock investingagame.An individual canpickvirtualstocksfortheirportfolio.Theyearnpointsbasedontheperformanceofthesestocksandlearnaboutstocktradingwithoutlosingrealmoney.Theymayearnup to$3000 if their portfolio is ranked in the top100 at the endof eachmonth[165].

FemaleInvesting

Ellevest is a new company offering a roboadvisor specifically for womeninterested in investing. Founded by Sallie Krawcheck, it collaborates withcomputer engineers, entrepreneurs, and financial analysts to provide aninvestmentappforwomen[166].

Ellevest provides hundreds of customised and distinctive portfolios for thefemaleinvestor.Itsuggestsaninvestmentportfoliodependingontheinvestor’stimelineandgoals,andaninvestorcanchangetheportfolio ifshechangeshergoals. She can keep track of her portfolio’s progress through the app’s dailyportfolio-monitoring feature, also receiving an alert if her portfolio goes off-

track.

Ellevestprovides21exchange-tradedfundsforitsfemaleinvestors.Thesefundshavehighliquidity,lowfees,andtaxefficiency.Ellevestchargesalow0.5%ofall the assets under management and does not require a minimum initialinvestmentamount.Itoffersvariousaccounttypes,rangingfromthetraditionaltoRothIndividualRetirementAccount.

KeyPlayersServingIndividualInvestors

Inthissection,wereviewnotablecompaniesthataremakingimportantprogressin wealth management and focus on individual investors. Fintech is a veryturbulentindustry,sowhenyougettoyoureadthis,thecompaniesmighthavedrasticallychanged.

Registered inNewYorkasanonline investmentadvisor,Bettermentoffers itscustomersafullyautomatedanddiversifiedinvestmentmanagementsolutionata lower price than that offered by the traditional wealthmanager. It does notemployanyfinancialadvisorsorsalesrepresentatives.

Betterment invests infixed incomeETF(Exchange-TradedFunds)andpassiveindex funds. It offers tax-advantaged and taxable investment accounts thatinclude different retirement accounts. To optimise its portfolio, it usesmathematicalmodelsthatoptimiseinvestorreturnsinvariousways,consideringthetimingoftrades,assetallocation,anddiversification.

Bettermentdoesnotrequireaminimuminvestmentamount.Itchargesbetween0.15%and0.35%ofaninvestor’stotalinvestment.Forexample,aninvestorcanexpecttopay$150iftheyhaveanaccountbalanceof$100,000.

BettermentlaunchedBettermentInstitutional,aB2Boffering,inOctober2014.Itbecamethefirstroboadvisortoreachthe$5billionmarkinJuly2016.

Wealthfront is Betterment’s main competitor. Based in Redwood City,CaliforniaandfoundedbyDanCarrollandAndyRachleffin2008,itisanother

automatedinvestmentservicecompany.InDecember2014,ithadat least$1.7billionworthofassetsundermanagement[167].

Wealthfrontwasinitiallyamutualfundanalysiscompanybuttransformeditselfinto a wealth management firm. It started offering tax-loss harvesting inDecember 2012 for customers with an account balance of at least $100,000.Furthermore, it collaboratedwith theStateofNevada in2016 to launcha tax-advantagedcollegesavingsplan.

Wealthfront doesn’t offer its products and services to financial advisors likeBetterment does. According to Kate Wauck, Wealthfront’s spokesperson, thecompanyaims to create a standalonedirect-to-consumerbusiness, so it hasnoplanstoexpandtoservicefinancialadvisors.

Robinhoodhaspositioneditselfasastockbrokerforthemillennialgeneration.Ithasanappthatallowsitsuserstotransactindividualstocksatnocost.Launchedin December 2014 through the Apple App Store, it has since launched anAndroidapp[168].

Robinhoodaims toencourage themillennialgeneration to investbyofferingaway to transact stocks with minimal knowledge and effort. However, somecritics are sceptical about the idea because inexperienced investors could losemoneyeasily.Furthermore,theyoungergenerationhastodealwithstudentloandebts, and they do not typically have high-paying jobs. As such, youngprofessionalscannotaffordtolosemoneyinstocktrading.

Robinhoodmaymakecompromisesbecauseitdoesnotchargeinvestorsforthetransactions, so it may not be able to provide the necessary tools, customerservice, and research to its customers. It stays operational because it employsminimal workforce, earning interest on the unused cash deposits from theinvestors’accounts.Furthermore,ithasmillionsincashfromventurecapitalists’investments.

Robinhood isplanning tocharge3.5% interest formargin tradingand$10pertrade for phone-assisted trading. In September 2016, it launched RobinhoodGold,an improvedversionof theapp, foramonthly feeof$10.Thenewappallowsuserstotradeevenwhenthestockmarketisclosedandprovidesinstant

withdrawals,linesofcredit,andimmediatedeposits.

BasedinLondonandestablishedinApril2011,Nutmegdoesnotofferatradingplatform. It makes investment decisions for its customers based on their riskappetiteandinvestmentgoals.Itinvestsfundsincommodities,securities,cash,andotherassetclasseslikeexchange-tradedfunds[169].

Nutmegoffersonlineinvestmentmanagementtoitsclients.FoundedbyWilliamToddandNickHungerford,ithelpsitsclientsmeettheirfinancialgoals.Itearnsbetween 0.3% and 1%of the total investor’s funds. Since its inception, it hasalreadyattracted50,000investors[170].

Motif Investing provides a platform for financial advisors to connect withvarious generations of investors. Financial advisors pay for low-cost yetcustomisablefeaturesforadifferenttacticalapproachandclientportfoliotohelptheminstrategicinvestmentmanagement[171].

Motif Investing isa roboadvisorbutalsoaligns itselfwithbrokeragefirms. Itsuserscanbuildabasketormotifofexchange-tradedfundsandstocksandofferthemtoinvestorsfor$9.95.AninvestorcaninvestinamotifofferedbyMotifInvesting,build theirown,or invest inamotifofferedbya fellow investor.Amotifwill vary depending on its creator. Each has an index price, a return, avaluation,volatilityandadividendyieldpublished[172]. It iswell funded,withmorethan$126millionreceivedininvestments.

RachelMayerworkedasatraderatJPMorgan.Whensheleftthecompany,sheno longer had access to its tools tomake investment decisions.Togetherwithtwo of her classmates from her master’s course, she created an investmentplatformforaverage investors.Trigger,asan iPhoneapp,offers real-timedatafreeofchargetoinvestors[173].

Userscansetupfinancialtriggerstohelpthemmakeinvestmentdecisions.For

example,theycansetuparemindertosellaparticularstockifitspricereachesaparticularlevel,acertainpercentage,ortheone-yearhighorlowprice.Ifanyofthesethingshappen,theyreceiveanotificationsotheycanactonit.

TriggeralsoplanstoofferitsAPItobrokeragecompanieswhocouldrebranditanduseitfortheircustomers.Itoffersitsbasicservicefreeofchargebutplanstoearnmoneyfromspecialfeaturesandinstitutionalaccess.

KeyPlayersServingInvestmentManagers

Here,we lookat interestingcompanies that aremaking substantialprogress inwealthmanagementandarefocusedoninvestmentmanagers.

Riskalyze,arisk-alignmentsoftwarecompany,generated$20millioninfundingin October 2016 to fund the expansion of its robo-platform for financialadvisors.Based inSacramento, it provides aplatform for financial advisors toobtainariskscorefortheirclients,enablingthemtosuggesttherightinvestmentstrategy[174].

Riskalyze allows financial advisory companies to rebrand its digital adviceplatform for their own use. Established in 2011, Riskalyze planned to targetsmallinvestorsandlargebrokeragefirms.However,itfailedinitsstrategy,soittargetedfinancialadvisors,instead.

Based inMountainView,California,Addepar isa financial technologystartupoffering a wealth management platform aimed at high net worth individuals.Addepar’sCEOEricPoirierisscepticalabouttheabilityofartificialintelligencetoencroachupontheworkoffinancialadvisorsinthenearfuture[175].

Addeparprovides integrated,normalised,andreconcileddata through theopenAPIitoffers.Highnetworthindividualsworldwidehaveatleast$70trillioninassets, and Addepar plans to tap into this market through technology. Mostfinancial advisors do not understand how technology can help their high networth clients manage their wealth. Through Addepar, they can grow tounderstandeachoftheirclientsandhowtheyallocatetheirassets,howtheyplan

theirestate,trust,andtax.Addepar’sprimaryclientsarefinancialadvisorswhocanusethecompany’ssetof tools,data,andtechnologytoprovideservicestotheirhighnetworthclients.

Cateringtoprofessionalinvestors,SumZeroisonlyopentopeoplethatarepartof a research team in an investment banking proprietary trading desk, privateequity fund,mutual fund, or hedge fund.At present, it has 40,000basic usersand 10,000 members. Founded by Aalap Mahadevia and Divya Narendra inApril2007,SumZerolauncheditswebsiteinMarch2008[176].

SumZero began as a repository of investment research. Then, it collaboratedwith Match.com and LinkedIn to connect with new fund managers andinstitutional investors. Members have to deliver their best ideas so thatinstitutional investors, family offices, pension funds, and Ivy-Leagueendowmentswillnoticethem[177].

PersonalFinanceManagement

PersonalFinanceManagementincludesvariousservicesbutoftenreferstotoolsthat assistusers in their saving,budgeting, and investingdecisions.PFM toolscan be bank provided, basic third party apps, complex third-party apps, andaggregator tools. Aggregators and challenger banks provide themost excitingdevelopments.Majorbankinginstitutionsoftenofferpooreraestheticsintegratedinto theirmobileapps,whilstsomeof thenewprovidersofferstandaloneappswithgreatercreativity[178].

Although banks may not realise that personal finance management tools arevaluableonlywhenlinkedtootherservices,challengerbanksdoandput thesetoolsatthecentreoftheuser’smobileexperience.Theyprovidestrongvisualsto highlight important points. Generally, these personal finance managementtoolshavehigheraestheticstandardsandaremoreintuitivetouse.

Yet, personal finance management tools do not provide real insight into aperson’sfinancialsituationiftheyareonlybasedonaccountinformation.Withnoaggregate information, theirfunctionalitywillnotmatureasusersexpectorwant.IntheUSA,Movenisanexceptionamongstbanksbecauseitscustomerscanuseinformationfrommanyaccounts.Assuch,itisamarketleaderinPFM

solutions.

Third-party apps aggregate and add more functionality, like Tink, a SwedishPFM app that offers its users credit scoring. In Europe, the Second PaymentServices Directive (PSD2) is opening up the evolution of the PFM tools bymandatingopenbanking. Innovative financial technologystartupsmaybeabletomovequicklytomakeothermobileappsredundant.

MintistheleaderforPFM.Ithasmorethan10millioncustomersandhelpsitscustomersunderstandtheirtotalfinancialpicture,lookingattheirexpenditures,assets, and incomings. The app even allows for paying bills, can providefinancialadviceby linking tootherappssuchasLearnVestandCreditKarma,andevenofferscreditcardsandthirdpartyloans.

TheFutureinaFlash

The wealth management industry is progressing towards transparency andopenness.Thismeansthatmorepeoplewillgetaccess towealthservicesandpeoplewillfeelmorecomfortableconsolidatingtheirdifferentassetstocreateasingleviewoftheirwealth.

Switchedoninvestorsthatputalotofeffort intotheirportfolios,canachievemorewithlesseffort.Investorsthatdon’thavealottoinvestcanachievebetterreturnsontheircapitalwithouthavinghigh-riskexposure.

Open banking and future innovation also mean that robotic advice will getbetter and better, being able to advise on what is right for us, not onlyallocatingourmoneybetweensavinggoalsandexpenditures,butalsohelpingustosetandachieveourlifegoals.

CHAPTER9

THEPOWEROFBIGDATA

ThePowerofBigDatainaFlash

BigDatareferstolargedatasetsthatcannotbestoredandanalysedbyregulardatabasesoftwaretools.Althoughthereisnotapredeterminedsizethatmakesadataset qualify asBigData, thedatasetmustbe large enough thatmachinelearningtoolsaretheonlyonesthatcananalyseit.Typically,BigDataexceedsa certain number of terabytes and is stored across many different machines.Therefore,weassumethatastechnologyadvances,thesizeofBigDatawillbeadjusted accordingly. However, it is not all about the volume of data. Tounderstandbigdataproperlyitisalsoimportanttounderstandthevarietytype,thevelocity,andtheveracityofthedata.

Furthermore, the definition ofBigData varies by industry, depending on thetypesofsoftwaretoolsusedandthesizeofdatasetsthatneedtobestoredandanalysed.Thefinancialservicesindustryisdeemedtohavethelargestdatasetsbecauseofthenatureoftheindustry,takingintoaccounttraditionalenterprisedata related to customer experience, but also projections about the industry,trading activity, innovation, growth, and more. Therefore, Big Data in thefinancialservicessectormaybereferredtoinpetabytes(1000terabytes).

HistoryofData

Nearly 90% of available data has been recorded in the 2000s. However, datausageandtheneedtounderstandhowitworkedstartedintheancientworldwiththe introduction of the abacus in 2400 BCE in Babylon, Mesopotamia. In200AD, Greek scientists introduced the first central processing unit (CPU),knownastheAntikytheraMechanism,forastrologicalpurposes.

In1663,theintroductionofthefirstaccountingprinciplesbyGrauntpavedthewayfor theuseofBigDatain themodernera.In1865,Devensusedtheterm

“business intelligence” for the first time to describe how the collection andanalysisofdatacanofferacompetitiveadvantage.Then,in1880,Hollerith,anemployee of the US Census Bureau, generated the Hollerith TabulatingMachine,whichwouldbecomethefatherofautomatedcomputation.[179]

In the mid-1950s, Davenport introduced Analytics 1.0, featuring descriptiveanalyticsandreportingdatawithstructureddataanalysis.Analytics1.0arestillused forspreadsheetanalysis inExcel. In1965, theUSgovernment releasedaplanforthefirstfederaldatacentre,aimingtostore742milliontaxreturnsand175millionsetsoffingerprintsonmagnetictape.

Inthe1990s,thefirstmentionsofBigDataappeared,thefirstonebeingapaperwrittenbyCoxandEllsworthforaconferenceonvisualisation.

In 2000, Lyman and Varian released “How Much Information?” the firstcomprehensive study of information quantification in computer storageterms[180].

In2011,McKinsey’s “Bigdata:Thenext frontier for innovation, competition,and productivity” stated that the financial services and investment sector wasleading the pack,withmore stored data per firm than any other industry.Thestudy also estimated that, in 2010, 7.4 exabytes of data were stored bycompaniesand6.8exabytesofdatawerestoredbyconsumers.[181]

Nowadays, the termAnalytics3.0 isbeingusedbyorganisations thataspire tointegrateAnalytics 1.0 (traditional analytics)withAnalytics 2.0 (BigData) togeneratemeasurablebusinessimpact.

HowBigDataWorks

Big data platforms can be thought of as a big engine, such as that of a largeaeroplane. It is very powerful, and it craves information as fuel. Systemswillfeedinformationwhichcanbeeitherfunctionaloroperational.Machinelogsandsensorscanalsofeedinformation,aswellasexternalsourcessuchaswebpages,socialnetworks,andinformationproviders.

Inside this big engine, data is captured and managed, with the objective ofconverting it intomeaningful insights thatmanagement can use.Different bigdataproviderswillbespecialisedinanalysingdifferentcases.Thebestoneswill

beabletomakesenseofbothstructuredandunstructureddata.Forasystemtoworkwell, agooddatadesignandarchitectureneed tobedeveloped.Systemsthat canprovidemeaningful insightswith little human assistancewill be clearwinners.

Abigdataplatformwillalsohaveafrontendusedbyexecutivesandanalysts.Thisshouldallowthemtomanagethebusinessandrunscenarios.

HowtoUseBigDataInnovatively

TherevolutionofBigDataistransformingthewaybusinessesorganise,operate,andcreatevalue.Changeson thisscale requireeffective leadership,andCEOswho capitalise on this opportunity will increase their companies’ long-termsuccess.

CustomerSegmentation

BigData is increasingly enabling businesses to empowerindividual consumersandfindnewwaystoinvestigateexistingmarkets.Throughtheuseofpredictivemodels,BigDataenablesbusinessestoreachouttotheircustomersanddivideupthepopulationbasedonage,sex,geolocation,onlinepurchases,webclicks,socialmediaactivities,smartconnecteddevices,andmore.Simultaneously,thegrowing use of social media-enabled platforms allows consumers to connectwithbusinessesandparticipateincustomersurveysthatgenerateusefulinsightsonwhat customers need. In thisway, businesses can customise their productsandcanruntargetedmarketingcampaignsefficiently.

CustomerPersonalisationandContextualisation

Nowadays,businessesareaimingtoconvertonlineshoppingintoacustomisedconsumer experience through the collection and processing of Big Data.Personalisationisaboutprovidingcustomerswithanexperiencethatisuniquetothem.Particularlyintheretailandfinancialservicesindustries,personalisationiscriticalduetothewiderangeofproductsandservicesavailable.

Contextualisation refers to providing a different experience depending on thecontext of the customer, which might include time of day, weather, andgeolocation.Banks,brokerage firms, and financecompanies, aswell asonlineretailers, use big data analytics to collect information about consumer

preferences,purchasingbehaviours,geolocations,andanyotherinformationthatcan be digitally recorded. In doing so, they can identify customer interests aswellaspredict theircurrentand futureneeds.This information is thenused toprovidecustomerswithapersonalisedexperience,helpingthemlocatewhattheywant, when they want it, at the best possible price. Personalisation andcontextualisationalsosavecustomers’timeandincreasescustomersatisfaction,whilstsavingmoneyforbusinesses.

Marketing

The use of real-time data enables businesses to adopt a customer-centricapproachtomarketing.Bigdataanalyticsusecallcentredata,transactiondata,and customer information to determine customer preferences and needs anddelivertheoptimalproductand/orservice.

AccordingtoMcKinsey,75%ofanaveragecompany’srevenueisgeneratedbyitsstandardproductline,and30%ofthepricingdecisionsfailtodeliverthebestprice.Witha1%price increase translating intoan8.7%increase inoperatingprofits, assuming no loss of sales volume, optimum-pricing offers significantpotentialforimprovingafirm’sprofitability.[182]

According to DataMeer, Customer Analytics are the most popular use of bigdata, utilised for sales and marketing (48%), enabling marketers to employcustomer acquisition strategies as well as increase revenue per customer andimprove existing products. Customer Analytics are followed by OperationalAnalytics (21%), Fraud and Compliance (12%) New Product & ServiceInnovation(10%)andEnterpriseDataWarehouseOptimization(10%).[183]

OnlineScoring

Although, in the past, the use of big data was not widespread, nowadays anumber of new players have entered the field, using big data technology andanalytics. Online lending services have proliferated as it has become easy toenter the market, while, at the same time, the demand for such services hasincreased. Online scoring takes into account both traditional data, such asbankinghistoryanddatafromsocialnetworksandmobileoperators.Thisofferslendersseveralways tocross-check theircustomersbeforeopeningup linesofcredit.

Several companies are developing processes to rate customers usingunconventionaldatatodecidewhethertograntloans.Wediscussthecompaniesinthisspace,includingAffirm,inourlendingchapter.Otherbusinessestolookat are alternative credit scorers, such asAire.io andBranch.Aire.io, based inLondon,isdevelopinganewcreditscoresystem,targetedatpeoplewithathinfile. It uses data from social networks, as well as self-declared informationgatheredinavirtualinterview.Globally,over4.5billionpeoplehaveathinfile,soitisahugemarket.

China is probably the main contributor to the thin file stats. The opportunitythere ishugeasChina’scentraliseddatabasecoversonly22%of thecountry’sinhabitants.Inadditiontothis,SMEsonlyreceive25%ofbankdisbursedloans,providingmajoropportunitiestonon-banklendingorganisations.

Chinaisdevelopingasocialcreditsystemcoveringpeople’swholelives.Itwillrateallcitizensbasedoncommercial,social,andcreditfactorsthatwillactabitlikeaBigBrother,determiningwhatpeoplecanandcannotdo. Itwill lookateverything, including web searches and information shared in chat rooms, aswellasdatafromtheirjob,suchastheirperformancereviewrating.

RiskManagement

BigData technologies present significant opportunities for addressing the riskandregulationchallengesinthefinancialservicesindustry.Comprehensiveandreal-time data can improve the predictive power of risk models; it can alsorevolutionise response times and system effectiveness, extend the current riskcoverage,andgeneratecostsavings.

According to the Economist Intelligence Unit (EIU), retail banks are moreconcernedwithcredit risk thancommercialand investmentbanks (53%versus43%), and they also tend to be slightlymore concerned than commercial andinvestment banks about market risk (28% versus 23%). On the other hand,investment banks aremore concerned than retail banks about operational risk(29%versus19%)andcompliancerisk(20%versus14%).

Outof208 riskmanagementandcomplianceexecutivesat retailbanks (29%),commercial banks (43%) and investment banks (28%) in 55 countries on sixcontinents, 42% of respondents currently integrate and query big data whencreating risk profiles, whereas 47% of respondents plan to invest in big data.

Regarding predictive analytics and data visualisation, 41% of respondents arecurrently using advanced big data analytics and 44% plan to obtain them by2020.

Operationalriskisanotherkeyarea,wherelossesarenowbiggerthantheonesfound incredit risk.These include internalandexternal fraud, systemfailures,business disruption, and client related issues. New tools used for applyinglearning from data to operational risk can become massive cost savers andmitigaterisks.

CustomerRemediation

Big Data initiatives in many firms revolve around improving customerremediation. Banks need to examine their records and review the informationtheyhaveonmillionsofcustomers, toperformknow-your-customerprocesses.In many cases, they do not need to contact the customer to complete this asexternaldatasourcescanprovide the informationrequired tomeet regulations.Somecompanies are specialising in putting together internal and external datasources to provide a single view of customers, hence minimising customercontact. This paves the way for a reliable 360-degree view of customers andprospects.

BigDataintheFinancialServicesIndustry

Thefinancialservicessectorimplementsbusiness-driveninitiativestoaccelerategrowth, engage customers, and achieve competitive differentiation throughinnovation. Since the financial crisis of 2008, financial services firms havetransformedthemselves,seekingtoreducetheircostsandcapitaliseonvaluableinsightsgeneratedbyBigDataacrossdifferentmarketsandcustomers.

ArecentsurveybyNewVantagePartners,targeting44Fortune1000andleadingfirms and technology decision-makers, found that 69.6% of financial servicesfirms view Big Data as critically important to their business success. Withregardstoinvestment,62.5%offirmsinvestedinBigDatain2015,comparedto31.4%in2013.ThepercentageoffirmsreportinganexpectedinvestmentinBigDataofgreaterthan$50min2017is26.8%,comparedto5.4%in2014.Finally,37.0%offirmsadoptedBigDatatogaingreaterbusinessinsightbycapitalisingonawidervarietyofinformationandbetterdataagility.[184]

A key challenge for financial firms is gaining a 360-degree view of theircustomersthroughabroaduseofBigData.Inthiscontext,adata-drivencultureisnecessary.

KeyPlayersinBigDataAnalytics

In this section, we look at interesting companies that are making significantprogress in Big Data Analytics.We had to handpick just a few, as there areseveralhundredoperatinginthisspace.

ClouderaisaPaloAlto-basedbigdataunicorn.Itslastroundoffundingraisedover a billion dollars. Cloudera has impacted enterprise data management byoffering thefirstunifiedPlatformforBigData,anenterprisedatahubbuiltonApacheHadoop, an open source software platform for distributed storage andprocessingofverylargedatasets.Clouderaoffersenterprisesasingleplaceforstoring,processing,andanalysingalltheirdata,empoweringthemtoextendthevalue of existing investmentswhile enabling fundamental newways to derivevaluefromtheirdata.

Theyhavemorethan180customersinthefinancialservicesareaandfocusoncreatingvaluablecustomerinsights(buildinga360-degreeviewofacustomer),fraud detection, cyber security (using machine learning to predict crime andmoney laundering), and risk and compliancemanagement (reducing costs andincreasingthespeedofcompliance).

Databricks is a San Francisco based company which was created by theinventorsofApacheSpark,anopensourceengineforBig-Dataprocessing.Itiswell funded, having received $60million in 2016 in new financing. Clouderaalreadyoffersaconvenientwaytostorealotofdata,soDatabricksistacklingthenextproblem,whichishowtomanagethisdataefficiently.

In the financial services area, it can help assess risk and predict results usinghidden insights. It can also helpwithmoney launderingdetection andproductrecommendation using a 360 view of the customer. Some of their customersincludeCapitalOne,LendUpandHaven.

AvantisaChicago-headquarteredpersonalloanplatform.TheyleverageBig

Dataanalytics tomakebettercreditdecisionsandprovideeasyandconvenientloans of up to $10,000 to near-primeborrowers.Usingbig data and advancedmachine-learning algorithms, AvantCredit analyses thousands of trends andpatterns in lieu of the traditional one-size-fits-all credit model to offercompetitiveratesonanindividualbasis.

Theyofferdebtconsolidation,homeimprovementandemergencyloansbetween$1,000 and $35,000 for 24 – 60 months at a fixed rate that ranges between9.95%and36%.Itscustomerbaseisestimatedatmorethan450,000people.[185]

The borrower needs to have a minimum credit score, show proof of steadyincome and be a US resident over 18 years old. Before applying for a loan,borrowerscanchecktherate thatapplies to theircase.Then, theycansigntheloancontractonline,andfundswillbeintheiraccountbythefollowingbusinessday.Theplatformalsoallowselectronicfundstransfersfortheloaninstalments,andthereisnopenaltyfeeforprepayingtheentireamount.Avantwasfoundedin2012.

Foundedin2013,WeLabisaHongKong-basedInternetfinancecompanythatuses exclusive risk management technology to analyse Big Data and offerreliable credit services to individual borrowers in the Asian market. WeLaboperates twoleadingonline lendingplatforms,Wolaidai inChinaandWeLendin Hong Kong, seeking to offer its customers a seamless mobile lendingexperience.Furthermore,thecompanyhaspartnershipswithtraditionalfinancialinstitutions,which useWeLab’s sophisticated credit riskmanagement tools tousebigdataanalyticsandoffertheircustomersadvancedfintechsolutions.

In January, WeLab raised $160m in Series B funding from domestic andinternational investors, includingKhazanahNasionalBerhadwealth fund, INGBank,andstate-ownedGuangdongTechnologyFinancialGroup (GTFG).ThiswasthefirsttimethatfundswereraisedbyaChinesefintechfirmandoneofthefirst times that an international financial institution (ING) financed a leadingChinesefintechplayer.[186]

QualtricsisaUtah-based,leadingsurveyandinsightplatformthatsupportsdatasearches and delivers real-time insights. The platform offers customersatisfaction and employee engagement surveys, employee assessment tools,marketresearch,videotutorials,mobilesurveysandmore,anditcanbeusedbyboth novices and thosewith experience. The platform features a user-friendlyinterfaceandinnovativetoolsthatcanassistusersinbuildingnewsurveysandanalysing the insights gained. Advanced users can effectively customise theirsurveystogaininsightsthatwillaffecttheirdecisionmaking.

Qualtrics support a range of industries, including airline, automotive, B2B,financialservices,retail,andtravel&hospitality.Italsooffersarangeofhelpfulresources regarding insight-driven data, including a resource library, blog,innovationexchange,andmore.Qualtricswasfoundedin2002.[187]

IBM Watson is an artificially intelligent computer system that providesautomated data analysis, automatic visualisation, and predictive analytics. Thesoftware uses DeepQA and the Apache UIMA (Unstructured InformationManagementArchitecture) framework to provide automated reasoning, naturallanguage processing, knowledge representation, informationretrieval, and machine learning technologies on open domain questionanswering.[188]

IBMWatsonwaslaunchedin2013whenIBMannouncedthatitwasgoingtobeusedasamanagementdecision-makingtoolforlungtreatmentattheMemorialSloan-KetteringCancerCentreinNewYork,inconjunctionwiththeWellPointhealthinsurancecompany.Sincethen,Watson’susehasbeenexpandedtogrowand transform businesses through the combination of cloud-based enterprisesearches,contentanalysisandcognitivesolutionsacrossdatainsights.

TheIBM-specificbankingsolutioncontainsadvancedpredictiveanalytics,withboth cognitive analytics and industry-specific models and customisations tothose models. The solution helps fine-tune customer segmentation at a verygranular levelbyanalysingcustomertransactions,spendingbehaviour,andlife

events.

Alteryx is an Irvine, California-based software company and a leader in dataanalytics.Alteryx’splatform interfaceenablesusers toprocessandmodularisethe software development model efficiently, therefore leveraging data in atransparent way. Analytics are tied into workflows, and they can be used formarketing analytics and machine learning. Furthermore, the company haspartnered with Tableau Software, Microsoft, Qlik, Amazon Web Services,Cloudera and Experian Marketing Services, thereby offering its customers arange of financial, marketing, operational, real estate, and sales analytics.Alteryxwasfoundedin2010.[189]

Alteryxprovidesfinancialservicesinstitutionswithdeeperinsightsthroughfastdatapreparationandblending,easiertouseanalyticsandsimplewaystoshareanalytics with decision makers. They serve retail banks, providing help withproduct offering and servicing, capital markets, offering segmentation, andinsurance,offeringriskandpriceoptimisationsolutions.

Founded in 2007, Gooddata is a San-Francisco, California-based softwarecompany thatusesbigdataanalytics tooffercloud-basedbusiness intelligencesolutionstoarangeofindustries,includingfinancialservices,healthcare,hotels& casinos, media, restaurants, and retail. Through its data-driven guidedanalytics, Gooddata enables businesses and decision-makers to realign theirbusiness models and gain access to business insights. The company alsocustomises its analytics applications to the needs of each business to createexponentialvalueforthecompany.[190]

In the financial services industry,Gooddata benchmarks portfolio sales acrossdifferentlocationsandagentstogaininsightsintogeographicaltrendsanddriveincrementalsales.Theycanalsocorrelatelocalindicatorswithpurchasingtrendstoproactivelyrecommendportfolioproductstoindividualagentsandbranches.Additionally, they can use data to improve the operational efficiency ofbranches.

Founded in 2010, Domo is cloud-based business management software thatintegrates with spreadsheets, databases, social media, and any existing cloud-based software solution.The suite offers businesses awide variety of datasetsanddeliversarangeofsocialintegrationfeatures.Domocanbeequallyusedbysmall businesses aswell as large organisations, as it offers real-timedata in asingle dashboard that incorporates comprehensible visualisations of data andbusinessintelligencetools.

WithitsheadquartersinUtah,Domocombinesallimportantmetricsforbanks,allowing them to see deposits over time, set notifications for new accountactivity, manage credit risk portfolios, and track treasury and non-interest feeincome. They have a strong client base that includesMastercard, Capco, andLendio.[191]

TheFutureinaFlash

The use of big data is expected to become key for competition, fosteringinnovationandgrowth.Thegrowingvolumeanddetailofinformationgatheredby enterprises, combined with the rise of social media and the Internet ofThings,isexpectedtofurtherfueltheexponentialgrowthofbigdataoverthecomingyears.

As data grows, it is expected that tools to analyse data will improve, andintelligence will come as standard with business analytics software such asBusiness Objects or SAS. It is also expected that real-time insights willimprovetheirquality,andmoreandmoreusecaseswillemerge.

Monetisationofdatawillalsobecomeaprofitablearea.Bankshaveaplethoraof information on customers, and new technologieswill allow them to striketherightbalancebetweenvaluableinsightsandanonymization.

Managingdata isalwayscomplex,andwecanexpectmore regulations tobeintroduced to ensure that it is treated properly.Having an experiencedChiefInformationOfficer(CIO)leadingthewaywillcertainlyhelp,sowecanexpectmorecompaniestocreatepositionsofthistype.

CHAPTER10

THEINTERNETOFTHINGS

TheInternetofThingsinaFlash

The“InternetofThings”(IoT)isfastgainingrecognitioninmanyindustries.Inthe financial services industry inparticular,whichhas longcapitalisedon theintangible, the IoToffersgreatopportunities for transformingbusinesses, andIoT applications have great potential. Although there is not one singledefinition of IoT, put simply it is a suite of technologies and applicationsallowing deviceswith embedded sensors to be connected to the Internet andexchange data, using the same Internet Protocol (IP). Such devices may beelectronics,software,pacemakers,kitchenappliances,andcars.

Givenitsvastpotential, theInternetofThingshasawidevarietyofusesinabroad range of industries. These include retail, manufacturing, health,hospitality, waste management, and, of course, financial services. Theseconnecteddevicesareusedthroughoutthephysicalworldandseektoimprovequalityoflifeaswellasmakingindustriesmoreproductive.TheIoTnetworkisbuilding not only thing-to-thing relationships but also people-to-thingrelationships.

WhatDrivestheGrowthofIoT?

According toGartner, the Internet ofThingswill explodeby2020,withmorethan26billionconnecteddevices.[192]Otherreportssuggestthattherewillbe34billionconnecteddevicesby2020,ofwhich24billionwillbeIoTdevices,and10billionwillbesmartphones,tablets,andothertraditionalcomputingservices.[193]Businesseshavebeen the first to adopt the IoT, implementing it to lowertheir operating costs and improve their productivity.This has enabled them toexpand into new markets or develop new product lines. Simultaneously,consumers are adopting IoT technologies to improve their quality of life, andgovernmentsareincreasinglyusingtheIoTtoreducespending.Below,wecover

thedriversofgrowthfortheIoT.

Urbanisation

Urbanisation is a keydriverof IoTgrowth.As citiesbecomemorepopulated,consumerspendingincreases.Forexample,inSoutheastAsiaalone,thereare26citieswith over onemillion residents, and an estimated 49.7%of the region’stotalpopulationisexpectedtobelivinginurbanareasby2025.[194]Theworld’smost densely populated cities can be found in this region such as Tokyo-Yokohama (37.8m), Jakarta (31.3m), Delhi (27.8m), and Seoul (23.6m).[195]Regardingpopulationdistributionbycontinent,Asialeadswith56.6%,followedby North America, 12.9%, Africa, 10.7% and Europe, 10.2%, with SouthAmericaaccountingfor8.1%andOceania1.4%.[196]

Thegrowthofcitiesrequires thedevelopmentofefficienciesandstrategiesforthemtoremainviable.TheIoTcanmakecitiesmoresustainableandadaptable.Placing devices on objects can help public security and safety departments,transportationdepartments,andcanbeavaluableaidinmanaginginfrastructure.

TheIoTcanbecomeveryhandywhenmanagingscarceresources,mainlywater,power, natural gas, food, and healthcare. By using models that optimise theutilisationoftheseresources,acitycanimproveitsqualityoflife.

SmartphonePenetrationGrowth

By 2020, smartphone penetration is expected to reach 2.87 billion users, anincreaseof54.3%from1.86billionusersin2015.[197]Thehighestsmartphonepenetration is in South Korea, where it is 88% of a total population of 49million,andinAustralia,with77%ofatotalpopulationof23million.Itisalsohighin theUnitedArabEmirates,with75%ofa totalpopulationof6million,and in Israel,where it is 74%of a total population of 23million.TheUnitedStates ranks 5thwith 72% smartphone penetration out of a total population of325million.[198]Arguably, the IoThas an even higher potential for growth insmaller hubs, i.e. fast-developing countries, which are leaders in smartphonepenetrationandteledensity.

SmartphonegrowthdrivestheInternetofThings.Thesedeviceshavethree-axisaccelerometers, gyroscopes, magnetometers, compasses, and barometersembedded. Investment in smartphones ensures that the quality of these

components improveswithevery release,and the IoTbenefits fromthis.Also,the smartphone is the logical remote control for all connected devices, storingdatafromfitnesstrackers,managingintelligenthomes,aswellasotheruses.

RisingDemandforConnectedDevices

Connected devices are being invented at a very fast pace, and this drivesconsumerdemand.Anestimatedcompoundannualgrowthrate(CAGR)ofmorethan 24% until 2021 is expected as a result of increasing smartphone andInternetuse,industrialIoTadoptionandsmartcityprojectsacrosstheworld.[199]Government IoT initiatives and thegrowingnumberof connecteddevices thatgenerate and exchange a greater amount of data also explain much of theestimatedgrowth.Internetpenetrationof54.6%isexpectedby2020.[200]

IncreasingNeedforInventoryManagement

Inventorymanagement is important forbusinessesas it allows them tocontroltheirorderingandstoragecostsandtheiruseofproducts.Thereal-timetrackingofinventoryusingradio-frequencyidentification(RFID),whichusestheIoT,isthe next big thing in inventory management. In fact, applications can helpbusinesses track theirproducts inreal-timebyrecognising thebarcode labeloftheproductandusingtheembeddedGPSlocation.Therefore,organisationscaninstantlychecktheirproductlocationandinventorylevelsandforecastdemand.Anestimated$13.2billionRFIDtagsareexpectedtoexistby2020.[201]

Cloud-basedPlatformGrowth

Increasingly more businesses, governments, and consumers are becomingconnected, or expect things to be connected. In this context, cloud-basedplatformsgainacompetitiveedge.Anestimatedtotalspendingof$173billiononpubliccloudinfrastructureisexpectedby2026,up355%from$38billionin2016.[202]Additionally,AmazonWebServices (AWS) reported a 59.3%YoYgrowthinQ32016,from$2.08billionto$3.23billion[203],whereasMicrosoft’scloud-based products such as CRM, Azure, and Office365 are expected togenerate $30billionby2018, accounting for 11%of the company’s revenues.[204]

TheImpactofIoTonBusinesses

Firmsareproducingsmarterandmoretechnologicallyadvancedproducts.ThisimpactsIoTonbusinessesinseveralways.Perhapsthemostvisibleeffectisthebusiness landscape itself, as many industries are adjusting or have alreadyadjusted to the new norms. The IoT comes with mainstream technology and,fromthispointofview,someindustriesmaynotbeabletokeepupwiththenewdevelopments,whileothersmaysimplyfollowtheleadofothers.

Thelogisticsindustryisoneofthefirstareasexpectedtofacealowerdemandfor their services due to the IoT automation. The growth of the Internet ofThings and theproliferationof socialnetworks,mobileoperators, and“smart”deviceshavechangedbusinessmodels.

Real-timeData

Digitisationof informationaswell as instantexchangingand reportingofdatabetween interconnected devices facilitates control and optimises processes.Companiesarenowabletochecktheirinventorylevelsandreportinefficienciesandwillknow if there is a shortageora surplusof aproduct. In fact, the IoTshiftswastemanagementtoanewlevelbyintroducingreal-timecontrol,therebyloweringcompanies’costsdramatically.

RemoteAccess

As the IoTbecomes increasinglypopularandagrowingnumberofbusinessesstartcapitalisingonthevastnetwork,cloud-basedsoftwarewillmakeiteasiertomanage a production line or an entire business remotely, leading to fasterprocessing.Forexample,agascompanyneedingtoperformregularchecksonitstanksandspendingenormousamountsofmoneyontravelandwastinghourssitting in trafficcansaveoncommutingandeffectivelycontrolbusinesscosts.Ultimately, this could mean higher profits due to lower operating costs andimprovedreturnonassets(ROA).

IncreasedProductivity

The IoT allows a business to be run remotely andmore productively. In thiscontext, real-time data, remote access, and faster processing are likely toincreasetheproductivityofbusinessesusingtheIoT.Althoughthereisacostforshifting from the tangible to intangible, mostly related to the upgrade of thebusiness’ devices, eventually, the shift will pay off with more efficientlyproducedproductsandservices.

TheIoTinCategories

ThereareroughlyninecategoriesinwhichcompaniesaredevelopingIoT:

Thewearablecategorycapturesanydevicethatisattachedtothebody,andthesearemostlyfitnesstrackersandsmartwatches,althoughitincludessmartclothesandinfanttrackerssuchassmartsocksTheconnectedhomecategoryisaboutdigitalisingthehomeandcoverslights,soundsystems,heating,openingdoors,andevensmartdoorbells.Theinfrastructurecategorylooksatprovidingtherightnetworksandsensorssothatdevicescanworkproperly.Thehealthcarecategorydealswithmedicalinstrumentssuchassugarleveltrackers,pacemakers,andthermometers.Theutilitiescategorydealswithtechnologytotracktheuseofelectricity,gas,andwatertooptimiseitsusage.TheindustrialcategorylooksatusesfortheIoTinindustrieswhereexpensiveassetsarerequired,suchasminingoragriculture.Theretailcategoryfocusesoncreatingmoreinteractiveshoppingexperiences,usingconnectedsensorsandmobileappsThedronecategoryaimsatusingdronestobecomemoreautonomousandhelpstocapturedataforconstructionandotherprojectsTheautomobilecategoryusesIoTtotransformthecarinsurancemarketandimprovedrivinghabits.

CombiningIoTandBlockchain

IoT is often associated with Blockchain. Blockchain is a distributed ledgercoveredindetailinanotherchapter,butinessence,itisanimmutabledatabasethat is hosted through the Internet. Blockchain can expand the use ofcryptographicdataintheIoTspace,makingcustomerinformationmoresecureandtransactionsfaster.BusinessescanalsocapitaliseonthedigitalisationofIoTtomanage complexity and lower costs usingBlockchain, which has a provenrecord of virtual, cost-effective, decentralised networks. In doing so, they aremorelikelytobuildtrustincustomerrelationships,eliminatepotentialpointsoffailure,andensuremoreflexibleandsecuretransactions.

Oneconcreteapplicationforcombiningthesetechnologiesistrackingahistory

ofuniquedevicesandtheinteractionwithothers,whichcouldhelpforauditingand insurance purposes. Another is empowering smart devices to becomeindependentagents thatperformtheirowntransactions.Atypicalexample isavending machine managing its stock and reordering, or a smart car that canidentifywhenitneedsmaintenance,scheduleit,drivetothegarage,payfor it,and record its MOT. Commonwealth Bank of Australia, Wells Fargo, andBrighannCottonhavemadethefirstglobaltradetransactionscombiningtheIoTandblockchaintechnology.Inthesharingeconomyofthefuture,theintegrationofIoTandblockchainmayenablethefullautomationofday-to-dayoperations.

TheIoTinFinancialServices

TheInternetofThingswilltransformthefinancialindustryinanunprecedentedway. Today’s chief financial officers (CFOs) are faced with non-financialresponsibilities, especially technology-related, including IoT. A survey byMcKinseyshowedthatlessthan33%ofCFOsquestionedbelievethatthereisagrowing need to digitise their businesses and be more competitive.[205]Simultaneously, data analysts expect an added economic value of up to $15trillionby2020.[206]As the financialservices industrybecomesmoreactive inthe IoT, the benefits derived from it will increase. Remotely-accessed,comprehensivedataembeddedintoconnecteddevicesisusedininsurance,peer-to-peerlending,andrealestate,providinggreatexamplesofanindustrythat isbeingrenewed.

Insurance

Insurancecompaniesareadopting the IoT to integratepolicies,premiums,andcustomers into a comprehensive, readily accessible database,which can lowercoverage costs. For instance, in auto insurance, the IoT is employed in thecalculation of the actual mileage covered and the driving behaviour of thepolicyholder through a tracking device. In home insurance, smart embeddeddevicescandetectfire,waterleaks,orhighlevelsofcarbonmonoxide,therebyloweringinsurancepremiumsastheriskundertakenbytheinsurerwillbelower.Inhealthcare,largecompanieslikeAppleorSamsungaretrackingthehealthofindividualsthroughsophisticatedmonitoringdevices,andVitalityoffersrewardsbasedonthelevelofactivitydonebythepolicyholders.TheintegrationofIoTintheinsurancesectorandtheincreasingnumberoffintechstartupsisexpectedto further drive the growth in this sector, in new areas including agricultureinsurance,carinsuranceandhealthinsurance.

RealEstate

FintechstartupsareemployingtheInternetofThingstocreatenewopportunitiesin commercial real estate. With IoT technology, startups collect data aboutrepair,maintenance,andenergyuse,therebybeingabletobetterassessthevalueofaproperty.Also, throughoccupancysensors,energycostscanberegulated,and building maintenance can be lowered up to 30%, especially in industrialzoneareas.Shouldthisdatagopublic,itcouldcreateatradingmarket,providinginvestorswithhigher transparencyandaccuracywhenbidding.Thismeans theinvolvement of IoT in real estate could also revolutionise real-time biddingmarkets.

O2OandIoTinFinTech

Ecommercegiants suchasAlibaba andAmazonworked reallyhard todisruptthe retail industry. However, after a while, they realised that operating onlyonline is not feasible for long-term dominance. Amazon has started opening2000AmazonFreshstores,andAlibabaisinvestingmorethan$300millioninadiscountsupermarketinChina.

Online-to-offline (O2O) commerce is a commonly used business strategyseeking to shift prospective customers from online stores to brick-and-mortarbusinesses.WiththecorrectsoftwareandbyoperatingintheIoTnetwork,O2Oidentifies prospective customers online through Internet advertising and emailmarketingcampaignsandshiftsthemtotheofflinebusiness.Hence,customers,whoaremoreenticedinviewingtheactualproduct,visittheonlinestore,selecttheproducttheywantandaredirectedtothebrick-and-mortarstore,wheretheymake theactualpurchase.CompanieswithbothanonlineandofflinepresenceemploytheO2Obusinessstrategyasameanstocross-sell.

Inthefintechindustry,O2Oisbecomingincreasinglypopular.Asidentified,theIoT related statistics are mostly favourable for Southeast Asia due to largepopulations,swifturbanisation,andhighsmartphonepenetrationgrowth.China,Indonesia, Singapore, and Seoul have become fintech hubs. In actual figures,fintech growth in Asia reached $4.5 billion in investments in 2015 and isexpected to attractmore investmentwith a focusonnew technologies like theInternetofThings.[207]

Chinaisa leader inO2Odueto its largepopulationandtheopenness tousing

technology.UnliketheUKandtheUSmarketsthataremostlyfocusedonclick-and-collect services, the O2O market in China includes on-demand services,daily deal sites, and click-and-collect services. Chinese consumers can useKuaidi’sZhuanChetaxiappandgeta60%discountontheirtaxirideoruse58Daiojia’shomeservices toearnarebate.Hence, theO2Omarket inChinahasgonebeyondonlinegrocery shopping, including travel, transportation, laundryservices,orfooddelivery.Therefore,althoughitishardtoaccuratelyassessthesizeandgrowthofChina’sO2Omarket,statisticsshowan increaseof35%inO2O sales and services in 2015with a projected growth of 28% in 2016 andover20%by2018.[208]

ChallengesFacedbytheIoT

Although the InternetofThingspresentsenormousopportunities, especially inthebanking,insurance,andhealthcaresectors,therearechallengesthatneedtobeaddressed.

High-FrequencyTrading

Algorithmic and high-frequency trading (HFT) can be further automatedwiththe use of the IoT.By eliminating human involvement and allowing themorecomprehensiveuseofreal-timealgorithmicdata,high-frequencytradingcanbeswifter and more accurate. However, although the entire system will becomemore efficient, HFT can push the markets up technically based on themomentum that global economic and political events create. Hence, althoughalgorithmsdonotaccountforreal-worldevents,theyfollowthenoisegeneratedby theseevents,creatinganunprecedentedbarrageof trades,which,combinedwith the IoT, can be impossible to catch upwith.Ultimately, IoT data, if nothandledproperly,maycreateabubble.

DataManagement

Anothermajor challenge that anybusinesswill face is themanagementof theenormousamountofIoT-generateddata.Failingdatamanagement,especiallyinthefinancialsector,whichrequires integrityandcarefulprocessing,maycausedisruption of the stream of information. Also, the validity of data is at stake,consideringthat thefinancialsector ishighlyregulatedand,assuch,eachcaserequiresacarefulapproach.Distributedledgersandbigdatamighthelptotacklethischallenge.

SuccessfulIoTUseCasesintheFinancialSector

The financial sector has been struggling to integrate innovative solutions intotheir services, seeking to improve customer service and work innovation intotheir customer-centric approach. Following the 2008 financial crisis, largefinancial institutions, as well as smaller commercial banks and insurers, areexperimentingwithnewtechnologies.TheIoT,withitsvastpotential,pavestheway for the successful integration of technology into the financial sector,loweringrisksandenhancingcustomervalue.

Ingenico Group, a global leader in seamless payments, and Intel Technologyjoined forces in April 2016 to bring secure payments for the IoT. ThecollaborationrequiredthejointdevelopmentofamobiletabletthatwillsupportEuroPay,MasterCard,andVisa(EMV1)paymentsaswellasNFC(NearFieldCommunication)payments,therebypreventingcreditcardfraud.

GroceriesbyMasterCard is anapp that enables consumers todo theirgroceryshopping using IoT. The application connects consumers to leading grocerystores through the Wi-Fi-enabled touch screen of the Samsung Family HubRefrigerator, allowing them tomanage their grocery shopping and select theirfavourite brands. The app is developed by MasterCard in cooperation withSamsung and ecommerce platforms FreshDirect or ShopRite. The app isexpected to revolutionise grocery shopping, allowing for better control ofhouseholdfinances.

MasterCardStartPath

StartPathGlobalbringstogetherstartupsfromallovertheworld,allowingthemto gain access toMasterCard’s network and enter newmarkets. The programrequires physical and virtual engagement, and it looks for startups in severalsectors,includingbanking,logistics,wearables,andmore.

VisaMobile Location Confirmation is an IoT app developed by Visa, which

instantly records credit card transactions and compares them with the reallocationof thecardholder.Theappeliminates theriskofcreditcardfraudandreduces the possibility of cards being declined whilst travelling. The IoT appuses mobile geolocation data in real time in collaboration with FinsphereCorporation,aleadingcompanyingeospatialanalysis.

AlfaActivity isan IoTapp launchedbyAlfaBank,a leadingRussianbank incooperationwith42Agency,amarketingconsultancyandadvertisingagencyinMoscow.The app allows customers ofAlfaBank’s retail branches to connecttheironlineaccountstotrackerdevices.Thebankrewardscustomerswhoworkoutwith higher interest rates on their savings accounts. The app runs throughFitbit,JawboneUp,andRunKeeperplatforms.

TheFutureinaFlash

TheIoTcouldbethenextindustrialrevolution.Itisclearlyheretostay,andasnewgenerationsareborn,theywilltaketoitasnaturallyastheydotomobilephones. The devices will spread everywhere andwill needmanagement andhigh of security. Interacting with robots and connected machines will benormal.Theywillbeabletomanageourprofilesandcheckouridentities.Thismeans that less manual work will be required and that processes will beincreasinglyefficient.

CHAPTER11

BLOCKCHAINANDDISTRIBUTEDLEDGERS

BlockchainandDistributedLedgersinaFlash

Blockchainisseenasthenextrevolutioninfinancialservicesaroundtheworld.

Wewill go back to basics to understandwhat the components of blockchaintechnology are and how they work. The technology promises to be used inseveralways in our daily lives, for example, the creation of smart contracts,improvement of payments, maintenance of medical records, and digitalisingouridentities.

Cryptocurrency is one of the applications of blockchain. This new form ofcurrencyhasthepotentialtomakepaymentscheaperandeliminatetheneedforfiat(physicalorpaper)money.Wewill lookat thestoryofBitcoin, themostpopularcryptocurrency,andEthereum,thesecondmostimportantone.

AboutDistributedLedgers

In recent decades, we have seen how banks can take wrong turns. Trust ininvestment groups has been proven to be prone to exploitation. As a result,peoplehavebeenlookingforasystemoftransactingmoneythatisfraud-proof.

A disruptive technology that could help solvemany of the financial system’scurrent problems is theDistributedLedger.Oneof the reasonswhybanksgetinto trouble is lack of trust in each other, as trust is vital to the success offinancial transactions. Distributed ledgers allow people to trust each otherunreservedly.

Distributedledgersareatypeofdatabase.Theirkeyfeaturesarethattheyholddata that has been replicated and shared across multiple sites, countries, orinstitutions.Thisdatahasbeenstoredwithconsensus,meaningthatthereisno

doubt about its authenticity, and it is typically public. Instead of groupingtransactionsintoablock,recordsarestoredconsecutivelyinacontinuousledger,and new transactions can only be added after a quorum has been reached byparticipants.

TheuseofDistributedLedgersisgreatforreal-time,securedatasharing.Therearedifferent typesofdistributedledgers,andthemaindifferenceis thewayinwhich consensus is achieved. Examples of distributed ledgers are Ripple,Multichain,andtheHyperledgerProject.

Ledgers can be either public or private. Public ledgers allow anyone tocontributedata,andallparticipantscanseeanidenticalcopyoftheledger.ThisisthecasewithBitcoin,adatabasethatgoesagainstcensorship.Privateledgersallow the distribution of identical copies of the ledger, but only to a limitednumber of participants. This is the type of ledger that banks are consideringwheninvestinginthetechnology.

WhatisBlockchain?

A blockchain is one type of data structure that can provide consensus andsecurity when sharing data. It is themost secure databasemodel uponwhichfinancialtransactionsinthedigitalworldcanbebuilt.

Thecommonnotionabouttraditionaldatabasesisthattheyarestoredinasingleserver with that server entrusted to manage that database, whereas, in ablockchain database, there is a decentralised system, inwhich there aremanyinterdependent computers involved in managing the database. This makes itvirtuallyimpossibletohackthedatabasebecausenosinglecomputeristrusted.

However, the immutabilityofblockchain-basedcurrencieshasbeencalled intoquestionafterEthereumwasattackedon June17,2016.Thehackingbeganataround4a.m.whensomeonefoundawaytousebugsinthecodetowithdrawmoney from theDecentralisedAutonomousOrganization (DAO). In less thanfourhours, thehackerhadwithdrawn$45million,which resulted inadrop inthepriceofetherof40%andtheDAOtokenby70%.

Byprinciple,distributedledgersareinherentlyhardertoattackbecauseacyber-attackwouldhavetoattackallthemultiplesharedcopiesofthesamedatabasesimultaneously to be successful. This is not to say that distributed ledger

technologiesareinvulnerabletocyber-attackbecauseifsomeonecanfindawayto‘legitimately’modifyonecopy,theycanmodifyallthemultiplecopiesoftheledger.

Blockchain systems are typically comprised of twomajor components. Thesetwocomponentsareapeer-to-peernetworkandadatabase.

Regarding the network, Blockchain compromises a group of computersconnected through a communication model known as Peer-to-Peer Network.This is themechanismbywhich computers communicate newchanges to thatdatabase.

Thesecondmajorcomponentoftheblockchainsystemisthedatabaseitself.Thedatabase is an accumulation of the transaction history. The system allows fortransactionstoberecordedintheorderinwhichtheyoccur.

TheComponentsofBlockchain

Let’stakeamoredetailedlookatthesecomponents.

A peer-to-peer network is a network consisting ofmany computerswhich arecalled“nodes”.Thesenetworksofnodessimplyconnecttoeachother.Thereisno limitonhowmanynodesareallowed toconnectwithinanetwork. In fact,todaytherearenetworkswiththousandsofnodesconnectedinachain,andthetotalnumbereitherclimbsorfallsonadailybasis.

Having this number of nodes interconnectedmeans there is no single point offailure,asafailureinatransactioncannotbecausedbyonesolecomputer.Nosinglenode in thenetwork canhack thedatabaseor sensor information in thedatabasebecausealloftheothernodescouldsimplypropagatetheinformationinthedatabase.

Whenanewmessageappears,itcouldbesenttoanyofthenodes,anditdoesnotreallymatterwhichparticularnodeitis.Themessageisusuallysenttomanynodestostartwithandisdifficulttotrace.Whenthenodesgetthemessage,theysenditontoalloftheirneighbouringnodes,andsoon.Themessagewillthenpropagate rapidly throughout the entire network, which is how a peer-to-peernetworkworksinablockchain.

Thesenodesarelocatedinvariousplaces,andmessagesappearinseveralplacesatonce,making it impossible to tellexactlywhere themessagecamefrom. Inthismanner,thetransactionisfreefromcensorship.

Now, let’s dissect what is inside the database, the other component ofblockchain. The database is a set of historical transactions. These transactionsareadditionstothedatabase.

Somepeoplemightask,ifadatabaseisahistoryoftransactionsandthereisanexistingweb of databases,where does the transaction history begin?The firstblock of a blockchain is called “Genesis” block, which is basically empty.PeoplebeginsubmittingtransactionstoallowmodificationstotheGenesisstate.

Someone carries out a transaction andpropagates it through the network. It isvery difficult to tell who made the transaction due to peer-to-peer networktechnology. That transaction or message will be added to the previoustransactionsthathavebeenundertaken.

As transactions accumulate, we begin to create blocks of transactions.Transactions in each block are grouped together, creating a consensus of theorder in which those transactions occurred. In the samemanner, when a newblockisaddedtothenetwork,itconnectstothepreviousblock.Tosecurethesetransactions,acryptographicsignatureisembeddedattheendoftheblock.

A cryptographic signature is very important in a blockchain system. Severalpropertiesofthecryptographicsignaturesecurethedatabase,andthesignatureiswhatestablishesalinktothepreviousblock.ThefirstblockestablishesalinktotheGenesisblock.Allsubsequentblocks,throughcryptographicsignatures,linktotheblockthatprecededthem.Thesignatureessentiallyenablestheseblockstocreateachain.

Howreliableisthecryptographicsignature?Itisamathematicaltechniqueusedto validate the authenticity of a message. If someone tried to change theinformation in the transaction history within a block, the signature wouldbecomeinvalid.Whenitisnolongervalid,itsendssignalstoeverynodeinthenetwork letting them know that someone tried to interfere with or makealterationstothatparticularblock.

When therearealreadyanumberofblocks in thenetwork,andsomeonegoesbackintothehistoryandmakeschangestotheoldtransactionsordirectlyalters

theGenesisblock,thesignaturesonallblockswillbedeemedinvalid.

Simply put, the blockchain system is a collection of unchangeable, permanentrecordsofchangestothedatabase.

TopCryptocurrencies

Moneyisoneofthebasicpillarsofsociety.Itisthelifebloodoftheeconomy.Itexists to facilitate trade, and through the centuries trade has become complex.Trade occurs between and among peoples, companies, and across borders. Arecord of transactions is kept in a ledger, and information in a ledger is oftenisolatedandclosedtothepublic.

This iswhywe need third parties ormiddlemen such as banks, governments,papermoney,andaccountantstofacilitateourtransactions.

With the advent of digital technologies, physical cashwill be usedmuch less.The essence of cryptocurrency is to digitise the transfer of money. Theunderlyingtechnologybehindcryptocurrencies isblockchain.Withblockchain,networksofcomputersmaintaincollectivebookkeepingonthecloud.

A cryptocurrency is a medium of exchange. This is designed for exchangingdigital information. The process by which exchange of information occurs ismadepossiblebytheprincipleofcryptography.

Cryptography is used to secure the transactions.Moreover, it is also a tool tocontrol the creation of new coins. The first cryptocurrency to be created wasBitcoin,waybackin2009.

Twoyears later, the first alternativecoin toBitcoinwascreated,Namecoin. Itwascreatedfor thepurposeofformingthedecentralisedDomainNameServer(DNS)andmakingcensorshipalotharder.

AsofJuly2016,thereweremorethan700cryptocurrenciesavailableforonlinetransactions.[209]

Digital currencies are currently not bound by the laws, rules, and regulations,which regular bill-and-coin currencies are directly linked to. The lack ofgovernance is a problem as it can allow terrorists and money launderers to

transact. Cryptocurrencies, like any other assets, may rise and fall quicklyregardingtheirprice,whichmakesthemhighlyvolatileandrisky.

Inthissection,welookatsomeofthetopcryptocurrenciesincirculation.

This is the cryptocurrency that started it all. Itwas first defined in a paper in2008 and then released in 2009 by Satoshi Nakamoto. Satoshi Nakamoto isactually not a real person, but an online profile, whose physical identity isunconfirmed.Thecoinsarecreatedor‘mined’bysolvingcomplexmathematicalproblemsthroughtheuseofcomputerpower.

Bitcoin breaks new ground in the way transactions can be conducted. It wascreatedtoprovideanalternativetothebankingsystem.Itisanopenaccountingsystem that allows computer networks globally to track ownership of digitaltokens,Bitcoin,aspartofpurchasing.

Despite Nakamoto’s cryptic online presence, his creation has been widelyrecognised among programmers and developers around the world. The firstknown transaction with Bitcoin took place in October 2010. A resident ofFlorida offered 10,000 Bitcoins to anyone who would order him a pizza.Someone living inLondon tookhimupon theofferandmadea long-distancephonecall toPapaJohn’s.Today, theamountpaidfor thatpizzahasgrowntoabout$5million.

Bitcoin needed to be more widely accessible for it to thrive and gain moremarket capitalisation.This isbecause,unlikephysical currency, thevalueof acryptocurrency isdeterminedby itsutilityor adoptionbymerchants andotherusers. Initially, the currencywas traded in forums.Slowly,otherorganisationssuchasWikileaksstartedacceptingdonationsandpaymentsinthecurrency.

ThefirstBitcoinexchangeonthemarketwasMt.GoxinTokyo.ByNovember2010, thetotalvalueofBitcoinwasalready$4million.Theexchangeratehadrisen to 50 cents a coin. Bitcoin’s value continued to climb, and by February2011,itwasalreadyonparwiththeUSdollar.ThisgaverisetomoreusersandspeculatorscominginandinvestinginBitcoin.

TheMtGoxsystemwashackedin2011,drivingthepriceofBitcoindownward.Bitcoin’svaluewentdownsignificantly.However,in2012,aftersufferingfrom

stagnation,hacksandonlinetheft,Bitcoinmanagedtoclawitswayupagain.Asofmid-February2017,Bitcoinhasthebiggestmarketcap,ataround$17billion.[210]

There used to be several players operating within the Bitcoin ecosystem thatprovidedwallets,exchanges,paymentprocessors.Therearenowplatformsthatprovideafullsuiteofservices,includinginsuranceonpayments.TopplatformsareCoinbase,Xapo,Circle,anditBit.

Another interesting development to keep an eye on is the creation of theColoured Coins protocol. By colouring bitcoins, people can turn them into atoken that represents anything that they want to trade, making the Bitcoinnetworkalotmoreuseful.

Thisinventionallowspeopletoskipthereceiptandtransferofphysicalcurrencyandswapitemsusingasmartbartermechanism.Paymentforitemscancomeinmanyshapesandcolours,ratherthanjustusingcash.

This cryptocurrency is similar to Bitcoin, but it allows for decentralisedorganisationstobebuiltontopoftheblockchain,andforsmartcontractstobeexecuted automatically when certain events have happened. Ethereumblockchainwas foundedbyVitalikButerinand launched in July2015.VitalikButerinisaformerBitcoinminer.HefoundedEthereumtopromoteandsupportdecentralised tools and apps. Ethereum houses Ether, its cryptocurrency. Theplatformexecutespeer-to-peer‘smartcontracts’tomakeautomatedtransactionsover its blockchain.Thismeans that by using its built-in algorithmsusers cantransferEtherovertheblockchaintootherusers.

Smart contracts written in code make Ethereum more than just a distributedledger. Ethereum allows developers to create projects powered by smartcontractsontheEthereumBlockchain.ThemostnotableEthereumprojectwastheDecentralisedAutonomousOrganizationorDAO.

TheDAOwasaleaderlessorganisation,writteninopensource,whichconsistedofcontractssavedintotheEthereumdatabase.By2016,theDAOhadcollected$150mworthofcontractsinEther.However,anattackinJunemeantalossof3.6millionEthers,whichequatedtoalossof$50million.

Following the attack, the Ethereum community held a vote. The majority ofparticipantswereinconsensustochangeEthereum’scodetogetthestolenfundsback.However, aminority of users disagreedwith this.Theminority assertedthattoprovideasoundhistoryablockchainhastobefreefromtampering.So,they continued to mine the old version of the blockchain. This is how theplatform was split into two: Ethereum (ETH) and Ethereum Classic (ETC).Ethereum Classic is a continuation of the original Ethereum blockchain; itshistoryisuntamperedwithandfreefromexternalinterference.Ethereum(ETH),bycontrast,isablockchainthattookactiontorestorefundstotheirowners.Thisistheblockchainthatmovedthosefundstoanotheraddress.

As ofmid-February 2017, themarket capitalisation ofEthereumwas standingabove$1.1billion,andthatofEthereumClassicwas$0.1billion.

Released in 2012, Ripple is a real-time gross settlement system, a currencyexchange and remittance network. A few banks, such as Santander, haveintegratedthesystemintotheiroperations.Asofmid-February2017,itsmarketcapitalisationwas$211million.

Released by former Google employee Charles Lee in October 2011, Litecoinwas created as an alternative to Bitcoin. In mid-February 2017, Litecoin wascappedat roughly$188million. Itshighestpeakwas recorded in2013at$1.2billion.

Moneromakesuseofringsignaturetechnology.Thiscurrencyissecure,private,anduntraceable.Thisismostlyusedbyindividualswhomaintainprivacyontheweb.AsofFebruary2017,itsmarketcapitalisationwas$184million.

CryptocurrencyWallets

In the physicalworld, papermoney is stored in awallet. In the digitalworld,cryptocurrencies are stored in a ‘client.’ Cryptocurrency wallets allow digitalmoney tobe stored,givingusers control tomovemoney to anyoneanywhere.

Anelectronicwalletcomeswithsecurityfeaturestokeepdigitalmoneysecure.

Acryptocurrencywalletcanbekeptinseveralplaces.Itcanbeinstalledonanydevicesuchasalaptop,adesktoporamobilephone.Incasetheuserlosesthedeviceonwhichtheirwalletiskept,thepasswordofthewalletcanbebackedupandsavedonaseparatememorydevice.

Therearealsoonlinecryptocurrencywalletswhereuserscanregisterandcreateanaccountandputmoneyonthem.Theadvantageofonlinewalletsisthatuserscanalwaysaccesstheirmoneyanywhereandfromotherdevices.

Some of the top cryptocurrency wallets include Mycelium, HolyTransaction,Cryptonator,andJaxx.

HowBlockchainwillimpactFinancialServices

Blockchain promises to democratise the global financial system,whichmeansthat everyone with mobile devices will be given equal access. Financialinstitutions should realise the significance of blockchain in the financialindustry.

As the technology evolves, financial authorities will end up trembling at theenormous impactofblockchain ineveryfacetofdaily life.Trulyempowering,blockchain could eventually render traditional methodologies of carrying outtransactionsobsolete.

Whether it is tradingof assets, values, shares, options, or anyderivatives, thistechnologymaycreateamoreefficientandflexiblefinancialsystem.Itmayalsohelppreventdepressions.

Commoninefficienciesfacedbycurrentfinancialsystemswillbeaddressedwithblockchain. For example, a lot of redundancy and mistakes in post-tradesettlementswillberemoved.Notonlywillitsavehugeamountsofmoneypaidtotrustedthirdparties,butitwillalsohelptomaketheglobalfinancialsystemmoreefficient.

The ultimate disruption will not come from blockchain alone, but from acombination of different blockchains (e.g. identification blockchain, securityblockchain)withothertechnologies,suchasAPIs.

InvestmentinBlockchain

InthereportreleasedinAugust2016byWorldEconomicForum(WEF)entitled“Thefutureoffinancialinfrastructure”,WEFsaysthatawarenessofblockchaintechnologyhasgrownrapidly,althoughsignificanthurdlesremain.[211]

In the same report, it states that over US$1.4 billion has been invested inblockchaintechnologyoverthepastthreeyears.Ithasalsobeendiscoveredthat90 central banks are engaged in Distributed Ledger Technology discussionsworldwide,andaround80%ofbanksarepredictedtoinitiateDistributedLedgerTechnologyprojectsby2017.

Thefinancialsectorwillcontinuetofocusonthisbreakthrough.Itwasestimatedthat, for the first sixmonths of 2016, the total venture capital investment intoblockchaintechnologiesandBitcoincompanieswas$290million.[212]

Currently, the banking sector has been actively engaged in the opportunitiescreated by blockchain. It is unsurprising that the banks are putting theirresourcesintoblockchainbecausetheywillhavetoadoptmajorchangesinthewayfinancialservicesaredeliveredinthefuture.

A survey entitled “Blockchain Adoption in Capital Markets” by GreenwichAssociates, reported that investment in Blockchainwould reachmore than $1billionbytheendof2016.[213]Inthesamesurvey,themajorityofrespondentsagreedontheenormouspotentialofblockchainasagamechangerinthemarketwithin the next five years. The participants included bank executives, assetmanagers,andblockchaintechnologycompanies.

UseCasesforBlockchain

Blockchain allows for many uses. Through blockchain, our ability as end-consumers tomake transactions is being taken from the physicalworld to thedigital world. This revolutionary system will solve inefficiencies in variousindustries.Belowaresomeofthefirstusecasescurrentlybeingworkedupon.

SmartContracts

Standard paper contracts are characterised by their legal wording and rely onthirdpartiesforenforcement,and,inthecaseofproblems,onthepublicjudicial

system.Smartcontractsuseacomputercodethathasbeenprogrammedtoallowfacilitation,execution,andenforcementofagreementsusingblockchain.Smartcontractscaneliminate theneed formiddlemen,as theycanbeautomatedandself-executing. By programming certain conditions, the contracts can self-execute,forexample,chargingapenaltyifcertaineventshavetakenplace.Thisis seen as the biggest area where transformation is taking shape. By usingblockchain as a part of contractual instruments, a lot of changes will unfold.With blockchain, something can be recorded on a shared ledger and, oncerecorded, the transaction will appear in the database and will be irrefutabledigital proof that the transaction happened on a particular date between twoparties.

Agoodapplicationofsmartcontractsisthemusicindustry.Settingupapublicblockchainofmusicallowsformusictobesoldandbenefitsdistributedinrealtime between the different parties in the value chain. There are use cases inmany areas such as securities, syndicated lending, trade finance, swaps, andderivatives.

Ethereumwasoneofthefirstpublicblockchaincompaniestoimplementsmartcontracts using bytecode, sets of instructions which are interpreted by theEthereumsystem.

Payments

Payment transactions traditionally involve using trusted third parties such asbanksand remittancecentres.However,withblockchain,payment transactionscould become hassle-free and save payment transfer fees, which are usuallycharged by intermediaries. This is a critical development area because it willhaveabigimpactonfinancialinstitutionsandregulatoryauthorities.Blockchainprocessespaymentsinjustafewminutes,whilstittakesseveralhourstomakepaymentsusingthirdparties.

ThefundamentalfeatureofDistributedLedgerarchitectureisthatitmaintainsanaudittrail.Itvalidatesandauthenticatesthechainofvaluetransfersinanopenand transparent fashion so that each transaction is checked and validated byevery participant in the network. Moreover, funds transfers can be recordedusing private keys by both originator and beneficiary. Thus, it will beincreasinglydifficulttolosetrackofthesourceanddestination.

R3 CEV Consortium is a leading firm that handles complex financialtransactions around the world using blockchain. As a distributed databasetechnology company, it leads a consortium of more than 70 of the world’sbiggestfinancialinstitutions.Thisisthebiggestbanks’responsetoblockchain,thoughwhatitwillresultinisstillunclear.

It created an open-source distributed ledger platform called ‘Corda.’ Cordaprovidesaplatformwithcommonservices toensure thatanyservicesbuiltontoparecompatible.

DigitalMedicalRecords

Thenextbigthingtolookoutforinhealthcareindustryisthedisruptiveimpactofblockchain in thewaypatients’ recordsaremanaged.Userscannow takealook at health records from the comfort of their own homes. Blockchaintechnology makes it possible to access and store medical information aboutpeople in real time. This will also result in an opportunity for the healthcommunity toshare ideas,and in turn,helpgeneratemoreaccurateanswers tomanyquestionsaboutdifferentillnesses.

However, customer records will remain secure because of features such asprivacyandanonymity.Privacyensuresthatonlyauthorisedpartiesmayaccessthemedicalrecordwhilstanonymitywillensurethatidentifiableinformationisomittedandonlysummaryorpartialdataisshared.

ElectronicVoting

Another application for blockchain is online voting.You can now cast a voterightfromyourdigitaldevice.Thisactionwillberecordedinthedatabaseasatransaction. The blockchain will keep track of the tallies of the votes. Sinceblockchainisanunchangeable,permanentrecordof transactions,everyonecanagreeonthefinalcountofvotes,andnorecountsareneeded.

InAustralia, theAustralia Post has floated this idea in a paper presented to aparliamentary Electoral Matters Committee. Australia Post believes that anevotingsystemwiththeaidofblockchainwillboostdemocracy.

They believe that blockchain would be used to store a cryptographicrepresentationofballotswhichwouldbeverifiablebyvoterswhovalueprivacy.

ClearingandSettlement

Thepost-tradesettlementisanimportantpartofthetradingprocess.Thiscanbevery slow, taking on average two days, and expensive, requiring severalintermediaries.[214]Asofnow,transactionspassthroughvariousintermediaries,and the records are stored in a centralised ledger. Entities that facilitatetransactions are custodians, depositories, brokers, and clearing houses.Blockchain allows for irrevocable transactions and real-time activity,which inturnachieveshighlevelsofaccuracyandlowlevelsofsettlementrisk.

Usingblockchaintechnology, thecentralisedledgerwouldturnintodistributedledger.Thecentralisedledger,whichistraditionallymaintainedbytheclearinghouse,wouldnowbecomeadistributedledgerthatwouldrequireauthenticationfrom each party. If any of the parties does not authenticate it, the transactionbecomes invalid. The biggest hurdle in making this a reality, rather thantechnology, isreachinganagreementbetweendifferentplayers in theindustry.This doesn’t mean that we will never see Clearing and Settlement through adistributedledger.Itjustmeansthatitwilltakesignificanttimetoachieve.

SmartAssets

Smart assets are those assets whose ownership is recorded on a blockchain.Sinceblockchainisarecordofthehistoryoftransactions,thetradinghistoryoftheassetisrecorded,andtheaudittrailiskeptsothatfactsabouttheassetcanbeverifiedbeforemakingapurchase.Itisuseful,atapersonallevel,tostoreaclearrecordofeverythingyoubuyforguaranteesinsuranceandsales.Itisalsousefulfor businesses. For example, trade finance takes a lot of documentation.Documentationslowsdownprocesses,sobydigitalisingit,speedisgained.Theblockchaincanalsorecordmanykindsofrelevant information,suchaswhoissendingtheasset,whenitwillexpire,whattaxesaredue,etc.Byhavingmoreinformation, the asset becomesmore valuable, and further efficiencies can begained.

DigitalIdentity

Traditionally, we are used to proving our identity using physical passports,driver’s licences and other government-issued IDs. Today, there are severalcompaniesusingblockchain technology toprovidedigital identity.The ideaofhavingour identities securely storedon thenet is very appealing.The reliable

anddecentralisednatureofinformationmakesblockchainakeyenabler,aswellas the immutabilityof thenetwork.We look into thisusecase indetail inourIdentitychapter.

TheFutureinaFlash

Theareaswherewecanexpectdisruptionare:

identification,whereidentitieswillbecomestrongerandsecuredusingcryptographyaccounting,wheretransparencywillmakelifeeasierforregulatorstoreviewfinancialreportingandauditfirmsinsurance,whereactuarialriskswillbeeasiertocalculateforindividualsandfirmsmovingvalue,wherepaymentsandpurchaseswillbefasterandcheaperstoringvalue,wherecurrentandsavingaccountscouldberevolutionisedlending,wheretheblockchaincouldbeusedforissuing,trading,andsettling

Blockchainiscurrentlyinitsinfancy,butoverthecomingyears,wewillstartto seegrowthbasedon thepilots andexperiments thathavebeen successful.Newoperatingmodelswill emergewhichwill be implemented globally, andsomeprocesseswillbecomeobsolete.Wecanexpectthetechnologytobefullyembeddedby2025.

CHAPTER12

THERISEOFINSURTECH

TheRiseofInsurtechinaFlash

Theuseoftechnologyintheinsuranceindustryisleadingtoinnovationandishelpingitmeettheneedsofthemodernworld.Industrydisruptorscanofferastate-of-the-art way to reduce costs and increase customer engagement.Changes in customerhabitsmean fintechs canoffer customisedproducts andservicesthatmaymakeincumbentinsurerslosemarketshare.

Blockchain and smart contracts are usable in insurance technology and arebeneficial as they create immutable ledgers of valuable assets. Insurtech alsobenefits fromthe InternetofThings,asvaluable informationcanbe retrievedfrom devices attached to assets that have been insured. Insurers can useinsurtech to customise their products to make them adaptable to dynamiccircumstances, and they can also harness the benefits of wearables topersonalise their insurance products and upgrade the delivery of health care.Lastly,peer-to-peernetworkscanprovideamoreefficientend-to-endprocess,changingthestandardinsurancebusinessmodel.

HowInsuranceWorks

The concept of insurance dates back to the time when sailing ships suffereddamageor lost their cargo.Merchants realised that if theydivided their goodsbetweendifferentships, theycouldprotect themselves fromheavy losses.Thismeantthatifoneshipsuffereddamage,theywouldonlyloseasmallportionoftheircargo.Indoingso,theyinsuredthemselvesagainsttotalfinancialruin.

Atpresent,insurancetakesvariousforms.Apersoncanbuyinsuranceandjoinotherpeoplewhopaypremiumsto the insurer,whouses themoneytopayforclaimsmadebypeople theyhave insured.Aperson receivesa legaldocumentcalled a policy when they buy insurance. This policy contains the insurance

details,includingtheitemscovered,thepremiums,andthepaymentfrequency.It isimportantforthepotentialclienttounderstandhisinsurancepolicybeforetheysignonthedottedline.

Insurance is protection against any accidental or unexpected events.There aredifferentkindsofinsurance.Themainonesare:

agriculturalinsurance,forunexpectedweatherandcropproductionhealthinsurance,forcoveringmedicalfeesliabilityinsurance,forpayingofflawsuitsandclaimslifeinsurance,forcoveringlovedonesinthecaseofasignificantperson’sdeathmortgageinsurance,forcontinuingmortgagepaymentsincaseofjoblosspropertyinsurance,forcoveringmostrisksrelatedtopropertysuchasfire,theft,andweatherdamagereinsurance,forinsurancecompaniesmanagingtheriskthattheremightnotbeenoughmoneytopayforclaims

Insurancefirmspoolfundsfromindividualstopayforclaimsandpayexpensesfortheprovisionandsellingofinsuranceprotection.Theyalsoinvestthemoney,andanyearningsfromtheirinvestmentsoffsettheinsurancecosts.

Unlike other products, rate setting for insurance is complex. Individuals paypremiumsinadvance,soinsurersdonotknowtheactualcostsoftheinsurance.In essence, they compute premiums based on the cost of every claim and thefrequencyofclaims.

Insurance fraud is always rampant after major catastrophes and duringrecessions. Individuals and even organised crime syndicates can perpetuatefraudulent insurance transactions like inflating actual claims and submittingclaimsfornon-existentdamages,injuries,ormedicalservicebills.

Many countries regulate insurance companies to ensure that they follow theinsurance laws that protect not only the insured individuals but the companiesthemselves.However,thesestatutesvaryfromcountrytocountry.

MarketSize

In 2015, insurtech received at least $3 billion in investment. This is not asimpressive as it sounds, considering that car insurance firms spend at least $6billiononmarketingeachyear.However,largeinsurersareadaptingtomeetthedemandsof thedigitalworld[215].Venturecapital firmsarebettingon startupsthatcanbringlifetothesector.

In2015,venturefundingfordigitalhealthcarehitabout$5.8billion.Healthcarestartupscontinuetogrowinnumber.Theycollectpersonaldatafromcustomersto improve the insurer-customer relationshipandhedge risks, reduceexpenses,andprovideexcellentcustomerservice.

According to Technavio, a company focused on technology research andadvising, insurtech will grow by at least 10% every year between 2016 and2020.TechnaviolookedatinvestmentinvariousinsurtechplatformsinEurope,theAmericas,Africa,Asia-Pacific,andtheMiddleEast.InitsGlobalInsurtechMarket 2016-2020 report, it focused on the increased need for customersatisfaction, rationalisation of transaction procedures, and for the growth ofonlinebusinessecosystems[216].

According to Technavio, numerous insurers and financial institutions willenhance their products and services or collaborate with financial technologyfirmstoofferinnovativesolutionstotheirclients,whoaredemandingimprovedonlineexperiences.

Furthermore,transactionprocesseswillbecomeeasierthankstonewtechnology.For example, insurance companies nowuse electronic payment systems.Theywill invest in adopting technology that will enhance the functionality of theirpaymentsystems.Theywillspendmoneyonthepreventionofcyber-attacksbyensuring that they have systems in place to ascertain, control, enhance, andreducerisk.

WiththeemergenceofthenewgenerationandtheageingoftheBabyBoomers,insurtech products can take advantage of these new opportunities by offeringcustomisedservicesandinsurancesecuritysupport.Differentventurecapitalistsare investing in insurtech innovators, which use software for portfoliomanagementandinsuranceproducts.Theseinsurtechcompaniescandisrupttheinsuranceindustrybyusingpowerfulanalyticstoolsandbigdata.

DriversofDisruption

Insurershavebeenmeetingcustomers’expectationsbyinnovatinglittlebylittle.Yet,opportunitiesstillaboundfornewbusinessmodelsandradicalinnovation.Themaincausesofdisruptionareincreasedcustomerexpectations,anincreasedpaceofinnovation,andtheappearanceofnewplayers.

As inother sectors, scaledcloudcomputing,opensource frameworks,andon-demand development have broken down the barriers to entering this industry.Newplayerscaninnovatetofillthegapsthatpresentinsurerscannot.

Althoughmanypeoplebelievethattheinsuranceindustrywillexperiencemajordisruption, only a few incumbents are relying on the use of Insurtech, eventhough 74% of insurance companies believe that innovations in financialtechnologyposeachallengetothem[217].

Despiteemergingtrends, traditional insuranceprovidersarenot innovatingfastenough.43%oftheseinsurersbelievethattheyalreadyusefinancialtechnologyas their corporate strategy, yet only 28% of them have explored collaborationwith financial technology startups. Only 14% of these insurance companiesparticipateinincubatorprogramsand/orventures.

Existingcompaniesarefocusingonplayingcatch-upwiththeircompetitorsandfailing to be proactive. They have no consistent strategy for dealing withdisruptionandarenotthinkinglongterm.Executivesneedtospecifyhowtheywant their companies to benefit from insurtech and embrace a strategy ofinnovation.

Consumerhabitsarechanging,andtheyexpectmorepersonalisedproductsandservicesthatcatertotheirneeds.Insurtechcanactasafacilitator,butitmustbea priority for companies because standalone competitors may eventually putthematriskoflosingmarketshare.

Although insurtech is still in its infancy, new business models have alreadyemerged, such as pay-as-you-go insurance and micro-insurance. Financialtechnologycouldmakeproducts and servicesmorecost-friendly,personalised,andeasy-to-use.

Peer-to-PeerInsurance

Several firmsarebettingonpeer-to-peer insurance. In thismodel, someof the

responsibilities and the risks of the insurance firms are passed onto thepolicyholders.Decisionscanincludedefiningriskpools,decidingwheretousetheproceedsofthepool,andhavingasayonwhotoadjudicateclaimsto.

Themodeldiffersdependingon thecountry’s legislationand the typeof riskscovered. Some firms support amodel where there is an insurer that managesclaims above a certain limit (broker model), and others don’t depend on aninsureratallbuttakeonreinsuranceifthefundsrunout(carriermodel).Inbothmodels, if there are funds left at the end of the year, these are credited to thepolicyholderstobeusedinthefuture.

Creating affinitynetworks is key for thismodel towork, as this deterspeoplefrominflatingclaimsorraisingfraudulentclaims.Theyarealsokeytokeepingacquisitioncostsdown,aswordofmouthisveryeffective.

Themainplayers rightnowin thewesternworldareUSbasedLemonadeandGermanbasedFriendsurance.

BlockchainedInsuranceandMachineLearning

Financialtechnologyisbenefitingfromblockchaininnovation,andInsurtechisno exception. Reputational systems built on blockchain, through decentralisedinsurancemarkets,havethepotentialtoenableinsurerstocalculateactuarialriskbetterforeverycustomer,leadingtobetterquotesforcustomers.

Blockchain can also help with fraud and risk prevention. By holding adecentralised digital repository, policies, transactions, and customers can beverified by considering a historical record. This would allow detection ofduplicatetransactions,andthosedonebysuspiciousparties.

Luther Systems is one of the companies working in this space. Based in theUnited Kingdom, it specialises in blockchain technology. In September 2016,Founders Factory and Aviva chose the company to participate in theirAcceleratorProgram,aproject thataims tohelpcompaniesbyproviding themwithmentoringandsupport[218].LutherSystemsisstillrelativelyunknownbutis working with Aviva to simplify smart contracts through templates that acustomercansignonline.Italsoaimstoimproveefficiencyandtransparencyintransactionmanagementsystems.[219]

A paper by Juniper Research forecasts that the use of insurtech could causeproduct revenues to increase by combining machine learning and blockchaintechnologyandcreatingmorepersonalisedproducts.Moreover,thepaperclaimsthatrevenuescouldincreasebyupto34%eachyear,from$175billionin2016to$235billionin2021[220].

Juniperalsopointsoutthatblockchaininvestmentswillenablesmartcontractstodrive growth and allow for the creation of excellentmobile applications. Thepaper predicts that blockchain will help insurance companies to customiseproductstoadapttothechangingcircumstancesofcustomers.

WearablesinInsurance

Atpresent,buyinghealthinsurancehasbecomeeasy.Apersonneedstofillinaform and provide a summary of their health condition. Later changes in theirhealthcanaffectinsurancerisk,butinsurersignorethem.Wearablesmaybeableto change this practice. They may reform insurance by customising risk andinsuranceandmodifyinghealthcaredelivery.

Therearetwowaysthatwearablescoulddisruptinsurance.Firstly,insurerswillhaveadynamicviewofaperson’shealthbytakingadvantageofwearablesthatcan produce data signals. Insurance premiums could be reduced if a personbecomes healthier. With wearables, insurers can get real-time data from aninsuredindividual.

Secondly, things could change regarding health care delivery. Healthcareworkerswouldbeabletolearnaboutpatientsthroughwearablessothattheycandeliver health care more cheaply, quickly, and effectively. Individuals withmedicalproblemscanusewearables tomonitorheart rate,bloodpressure,andpulse.Healthcareworkerswillbeabletocheckthedatafromthewearablestomakedecisions.

Companiesthatself-insuretheiremployeescouldusewearablesbecausehealthyemployees are more productive, and their health care costs less. Venturecapitalists invest in health insurance because there is a need for products andservices.

Despite this, wearables still face many challenges. Firstly, not everyonecurrentlywants awearable. StrategyMeetsAction, a research firm inBoston,

discovered that 22% of insurance companieswere consideringwearables as astrategy.Yet,inthatsamesurveyin2014,theresearchcompanyfoundoutthatonly3%oftheinsurersthemselvesworeadevice[221].

Secondly, wearables can detect a medical condition like diabetes. A person’sinsurance premiums could goup if they arewearing a device and their healthdeteriorates.

Thirdly, countries regulate data privacy, yet regulations vary. In fact, in theUnitedStatesofAmerica,regulationcanvaryfromstatetostate.Insurersmustdisclose that they will be using private data in their pricing to their clients.Insurancepolicyholdersmustbeopentosharingtheirdatawithinsurersandbeaware of the potential for data hacking. As such, insurers must assuage thecustomers’fearsbyensuringthesecurityoftheirsystems.

WhatTraditionalInsuranceFirmsCanDo

Because insurtech is booming, insurers are collaborating with financialtechnology innovators, who are willing to learn about the insurance industry.These financial technology startups may not always provide instantaneoussolutions, but they arewilling to adapt. Insurersmust be able to communicatewith startups and understand that these innovatorsmay fail, whilst embracinginnovationthemselves.

Ingenious solutions can reduce losses and improve the customer claimsexperience. Insurance companies must employ individuals who can lead thesearchfor innovativesolutions.Findingtherightpartner tocollaboratemaybedifficult, anda financial technologycompanymight form linkswithnumerousglobalinsurers.

InterestingInsurTechIdeas

Microinsurance

Microinsurance is about hand picking features that offer the right level ofprotectiontoacustomerfortheshortestamountoftime.Severalfirmswillstartofferingthistypeofcover.

OnAugust4,2016,Ageas launchedBackMeUp[222], anapp-based insurance

coverage that authorises individuals to personalise their policies by specifyingitems that theywish to include in their cover.BackMeUp is specifically forMillennials,who are looking for better insuranceproducts and services.Thereare no annual contract charges and penalty fees, and users can even uploadphotosofitemstheywanttheirinsurancetocover.

For £15 a month, an individual can protect three items from malicious andunforeseen destruction, and loss and theft. They can claim up to £3,000 permonth.Asidefromthethreecovereditems, theycanclaimforayearlymobilephone screen repair, are covered by UK and worldwide travel insurance formedicalemergencies,cancellations,andlostitemsandcanclaimamaximumof£1,500forthereplacementofhouseorcarkeysorlocks.

SuperFastCarInsurance

Launched inOctober2015,Cuvva isan iOSappfor individualswhowantcarinsurancecoverinlessthan10minutes[223].Apersonneedstodownloadtheappandregister.Theyalsoneedtouploadtheirpicture,aswellasanimageoftheirdriver’s license, and have to input the car’s details, like the estimated vehiclevalueand the registrationnumber.Then theywill receivenumerousquotes forvariousdurationsoftime.

Once they receive the quotes, the person can opt for the rate that suits theirrequirements.Theyuploadaphotoof theirvehicleandauthorise thepayment.Theycangetcoverageforaslittleasonehour.Thenexttimetheyusethesameinsurancetheprocessisquickerbecausetheyalreadyhavehisdetails.

Headquartered in Edinburgh, Cuvva aims to learn about risk and work withregulatorsandriskcommittees.AccordingtoFreddyMacnamara,Cuvva’sCEOandFounder,forinsurers,acar’stimeontheroadisimperative.Anunderwriterdecides the premium based on this time, the individual’s driving history,location,andvehiclevalue.

Cuvva offers real value to the consumer when they want it most. The teambehind it is flexibleandresponsive to theneedsof itscustomers. Itprovidesacustomer experience that is straightforward, favourable, simple, and clean.Moreover,ithasanexcellentsocialelement.BecauseofCuvva,individualscanhaveinsurancewhentheyarebehindthewheelevenforashorttime.

Peer-to-PeerCarInsurance

UK-based Guevara introduced its initial version of its P2P car insuranceplatformin2014.Theappallowsitsuserstocombinetheirpremiumstoreducesharedpremiums,with excess fundsbeing returned to them.90%of theapp’susershaveloweredtheirpremiumssince2015[224].

An individualcanopt to joinapeer-to-peerpool ifa familymemberor friendhasinvitedthem,orGuevaracanselectthemostappropriatepoolforthembasedontheirlocationandriskprofile.Consequently,thecompanytriestoenticeuserstoenlistwithamutualgrouptolowerpremiumsandadvocateP2Pfunctionalitybyreducingthemotivationtoclaim.

Guevara’sappcollectsdatafromgroupsandaccidentreports.Furthermore,thecompanyprovidesamessageboardforusers todeliberateonclaimsandmakecollaborativedecisions.

InsuranceTailoredforDigitalBusinesses

DigitalRisks is a broker that usesmedia and technology to offer insurance todigitalbusinesses.ItcollaborateswithAvivatoensurethatitsproductmeetstherequirementsofdigitallyfocusedandfast-growthSMEbusinessesandstartups.Theproductisavailableonamonthlysubscription[225].

DigitalRisksfocusesondigitisationandlegacyissuesthathadbeenplaguingtheinsuranceindustryforyears.Utilisingthemostrecenttechnicalframeworks,thesystemsprovidedbythecompanyarescalableandresponsivetochanges.Asaninnovativeinsurtechbrand,DigitalRisksoffersitscustomersexcellentproductsandservicesthatmeettheirneeds.

By working with Aviva, Digital Risks can expand its reach to fast-growthbusinesses. Its automated brokering infrastructure has enabled them to changethe insurance buying process. Instead of offering the traditional pricecomparisonfeature,DigitalRisksprovidesaplatformthattakesindividualrisksandlocationintoconsiderationtoprovidethebest-suitedinsurer.

ArtificialIntelligenceLedInsurance

The United Kingdom has its own AI insurance advisory app, named Brolly,whichprovides important insights through itsmobile appsandwebsite.Brolly

empowers its customers to decideon their insurance.Through the app, clientslearn if they are under or over insured. Furthermore, they receive informationaboutinsurerswhoprovidecost-effectivecoveragethatmeetstheirneeds[226].

Brollyisaninsurancecompanywithacleanslateandafocusonthedigitalage.Itsgoalistoredesignthecustomerexperience,basedonitscentralisedapproachanddataanalytics.BrollyaimstobetheUK’sinsurancehubforpolicyholdersandtodistributeproductsdirectlytoitsusers.

Established by experienced insurance executives, Spixii started its businessdistributing off-the-shelf products. It aims to be a brand that can connectcustomers with insurance products through Chatbot, an automated insuranceagent. Clients feel that they are communicating with a real insurance agentonline.

TheultimategoalofSpixiiistointeractwithitscustomersinadynamicwaytofacilitate higher customisation levels through automated underwritingfunctionalities, based on dynamic data. The insurer can assess risk based onexceptionalinformationlevelsforaparticulartrip.Thismeansthattheinsurancepremiumismorereflectiveoftheneedsofthecustomer.

InsuranceasaService

Instandaoffers a customisableplatform for the insurance industry. It is a self-serviceproduct,createdbyexpertswithhands-onexperience,workingtogetherwithsoftwaredevelopersand insurers.Becauseof thechallengesanddemandsof meeting market opportunities, the Instanda team provides a solution forinsurerswhodealwithrecurrentproblems[227].

Insurers canmanage their businesses using Instanda’s business toolkitwithouttheneedtohiredevelopers.Theycanimplementchangesquicklyandeasily.

Instada’sdynamicteamofexperiencedpractitionersandexperts,withdesigners,developers, and senior consultants, provide large-scale projects for majorinsurers.InstandaisamemberoftheworldwiderosterofalumniofMicrosoft’sAccelerator Program, an initiative that empowers entrepreneurs to be gamechangers.

Insly is a software-as-a-service platform designed for insurance brokers.

Initially, itwas only for the use of Estonian-based IIZI. The platformworkedwell, so IIZI sold it to other brokers.When the platform accumulated a clientbaseof at least 30brokers fromEstonia,Finland, andLatvia, IIZI created thenewspinoffInsly,tofocusoncapturingalargermarketshare[228].

In2014,InslyjoinedtheStartupBootcampFintechAcademy.Currently,ithasagrowing customerbase in theUnitedKingdom, theUnitedStates ofAmerica,andothercountries.CustomersupportisonlyinEnglish,althoughtheplatformrunsinsevendistinctlanguages.

Asacloud-basedsoftware-as-a-serviceplatform,Inslydoesnotinvolvelicensecostandsoftwareinstallation.Aninsurancebrokerpaysforthesubscriptionpermonth.Also,theycanalsouseprofessionalservicesforstandardisingreportsorcertainproducts.

UK-basedRightIndemisaself-serviceplatformforlossadjustersandinsurers.As a software-as-a-service provider, RightIndem aims to improve customerservice by transforming the claims journey to an exhaustive multi-channelclaimsmechanismforthebenefitoftheclaimant[229].

RightIndempromotesproductivity,computesexactcarvaluations,andimprovesclientretention.Ithasamodelthatenablestheseamlesstransferofmultimedia,documents,anddatabetweeninsurersandpolicyholders.

KeyPlayersinInsurtech

OscarHealth’saimistohelpdevelopthecustomerinterfaceofhealthinsuranceby providing easy-to-understand health care products, and tools like fitnessmonitorsandsmartwatches thatsave thecustomer timeanddiscount insurancepremiums. Founded in 2012, it uses technology that legacy insurers cannotoffer[230].Itisverywellfunded,withmorethan$727millioninvestedinitandavaluationofmorethan$3billion.

Oscarappuserscancommunicatewithadoctorandgetprescriptionsfromthecomfort of their home. The customer can also use geolocational data andGeofencingtoselectdoctorswithintheirneighbourhood.Theycanmonitortheirmedicalhistoryandearndiscountsiftheymaintainanactivelifestyleusingthe

Misfitsteptracker.

Oscar Health is available to families, couples, and individuals in Texas,California,NewJersey,andNewYork.Ithasatleast40,000membersinNewJersey andNewYork.Customers can pay lower premiums if they use fitnessdevicesortrackers.

CloverHealthisanupandcominghealthinsurerthatusespreventativecareanddataanalysistoofferacheaperalternativetoMedicareprivateversions,aswellas enhancing health care for the elderly. It uses technology that can recognisewhenpatientsneed interventionandmedical treatment tosavemoney forboththe insurerand thepolicyholder.CloverHealth is forpolicyholders insuredbyMedicareAdvantage,andtheFederalgovernmenthasallowedittohaveprivateinsurers oversee the coverage. The Federal government finances the premiumandpaysfortheclaims.

CloverHealth has lower overhead costs because of its efficient operations. Itssoftwareandalgorithmscandetermineifpolicyholdersareatriskofexpensivetreatments or hospitalisation. Furthermore, Clover Health can send nursepractitioners to check on patients and organise important tests. It monitorspolicyholders who have a serious illness so that medical practitioners cancounselthemtopreventcostlytreatments.

ZhongAnisaChinesedigitalfirstinsuranceproviderfoundedin2013asajointventurebetweenAlibaba,Tencent,andPingAnInsurance.Sofar,ithaswrittenmore than 3.6 billion policies, and in June 2015 raised $931M from investorsincluding Morgan Stanley, China International Capital Corp., and KeywiseCapital Management. The company is reportedly planning a domestic IPO.ZhongAnstartedsellingreturn-deliveryinsurance,butitthenmovedontomostofthetypicalinsurancecategoriessuchasautoinsuranceandhealthinsurance.

Zhong An is investing in blockchain and artificial intelligence, through anincubatorthattheyrecentlycreated.

Insurance, in the past, used to excel at sharing risk by pooling funds frompolicyholders.Yet,attheturnofthe20thcentury,insurersbecameinterestedinprofit, so they now competewith insured individuals for the samemoney.Atpresent, both parties have misaligned priorities. Policyholders want supportwhiletheinsurerswanttomeettheirresponsibilitiestotheirshareholders.

Due to high administrative and overhead sales costs, the insurer reduces thepayouttoclaims,andclaimantshavetoprovethattheirrequestislegitimate.

Launched on September 21, 2016, Lemonade seeks to eliminate the conflictbetween the insurers and the policyholders through its platform. It does notprofit from thenon-payment of claims, yet enhances insurance engagement. Itearnsthroughaflatfeeuserspayforusingitsplatform[231].

Lemonade is a peer-to-peer insurance platform that groups policyholders,according to thegoodcauses theywish tohelp.For instance,agroupofuserscould be passionate about seeking a cure for cancer or helping local youthgroups. Lemonade donates the group’s unspent premiums to that good causeaftereveryterm.ApolicyholderwhomakesafraudulentclaimisawarethattheyarenotonlydefraudingLemonadebutalsotheirpeersandacharitablecause.

LemonadeutilisesArtificialIntelligencetointeractwithitsusers.Itprovidesanautomated customer experience for everything, from sending out a quote tomanagingclaims.Pay-outiseasyastheclaimantinformsthecompanythroughthe app. They create a brief video testimonial to explain the claim, andLemonade will send the payment as soon as possible. Lemonade, using itsclaimsbot“AIJim”,setarecordbypayingoutaninsuranceclaiminjustthreeseconds inDecember2016.Lemonadehassetabenchmarkforfastpayouts ininsurance.

BasedinSanFrancisco,Metromileisavehicleinsurancestartupthatprovidesadriving app andpay-per-mile insurance.Founded in 2011byStevePretre andDavidFriedberg,itsusage-basedinsurancecaterstolow-mileagedrivers.Itdoesnot consider driving behaviours or styles when deciding on discounts orrates[232].

ApolicyholderneedstheMetromilePulsedevicetobeattachedtoaportinhisvehicle to relay mileage data to Metromile’s servers. The National GeneralInsuranceunderwritestheinsurancepolicies.MetromileinsuranceisavailableinseveralstatedintheUnitedStates.Uberdriversinsomestatescanalsoavailofthispay-per-mileinsurance.

Moreover,Metromile’sdrivingappprovidesinsightstothedriver,likeavehiclehealthmonitor and alerts to notify the policyholder if they park their car in astreetsweepinglocation.UserscanrecovertheirstolencarsthroughMetromile’scarlocatorappfeature.

The Zebra is an Austin-based startup that makes online insurance shoppingconvenientandtransparenttocustomers.Itallowspotentialcarinsurancebuyersto compare quotes from numerous insurers, and consumers are shown howinsurerscomputetheinsurancepremiums.

Established in 2012,CEOand co-founderAdamLyonsworked in the vehicleinsuranceindustryandunderstoodbrokerageandunderwriting.Healsorealisedthat customers do not understandmost insurance concepts.TheZebra aims toprovidereal-timequotesfromcarinsurerswhenaconsumerfillsoutasimplifiedformonline.

However, The Zebra is not an insurer, so it has no interest in closing aninsurance deal. It only offers quotes from at least 200 insurers in all USstates[233]. Aside from receiving quotes, customers can also evaluate claimssatisfaction, read customer reviews, and learn about the coverage offered byinsurers.Thepurchasingprocessisalsosimplifiedthroughthewebsite.

Established in 2014, PolicyGenius serves customers wanting to receivecustomised quotes from different insurers around the USA. PolicyGenius hasbuiltaninsurancecheck-upinterfacesouserscandiscover theircoveragegapsandreadaboutsolutionsfortheirexactneeds.FoundedbyFrancoisdeLameandJennifer Fitzgerald, former McKinsey consultants, it offers pet insurance,renters’insurance,long-termdisabilityinsurance,andlifeinsurance[234].

The founders of PolicyGenius aim to narrow the gap between the number ofAmericansthatneedlifeinsuranceandtheactualnumberofcitizenswhohaveinsurance.Currently,only44%ofAmericanfamiliescanaffordlifeinsurance.

TheFutureinaFlash

Purchasing insurancewill become easier as technology innovation advances.Thiswillopenthedoorforofferingadditionalproductsandreachingbillionsofuninsuredcustomersthatdidn’tevenknowtheycouldbenefitfromthesetypesofproducts.

Big data analytics, together with wearables and the Internet of Things, willmaketheend-to-endprocesseasierandcheaper.Calculatingriskswillbefasterand more accurate as information gets stored and shared into distributedledgers.

CHAPTER13

IDENTIFICATION,CYBERSECURITY,ANDREGTECH

Identification,Cybersecurity,andRegtechinaFlash

In the final chapter, we look at three topics that are hot in fintech and aresupportingthegrowthoftheindustry.

Paper-basedidentification,wherepeopleholdpassportsanddriver’slicenses,issomewhatoutdated.Itisexpensivetoidentifyindividuals,anditalsoleavesaproportion of the population unable to apply for financial services products.Technologies suchasbiometrics andblockchaincanhelpmake identificationmoreinclusiveandefficient.

Cybersecurityisamassiveindustrythathasemergedalongsideecommerce.Asmoreandmorefundsmovedigitally,cybercriminalshavefoundeasywaystocommitcrimesanddefraudpeople,withoutevenneedingtoinvolvethemselvesinviolentacts.

Regulation technology is the response from the technology industry to theefficiencyproblemsgeneratedby thehighamountof regulatory requirementsthat financial institutions have. They aim to manage risks appropriately andkeepfirmscompliant.

TraditionalWaysofUsingIdentification

Itisimportanttounderstandhowidentificationprocessesworktraditionally.InWesterncountries,citizensprove their identityusing their social securitycard,passport, or driver’s license. Yet, in many cases, some people have troubleprovingtheiridentity.Forinstance,ahomelesspersonintheUSmaynothaveaccesstoaPOBoxbecausetheycannotprovideaphysicaladdress,andwithoutaPOBox,theycannotapplyforajob.

Furthermore, government-issued identification is important for opening a bankaccount.Apersongoestoabranchandprovidesidentificationtoabankofficerto initiate security processes. Normally, an anti-money laundering groupreceivesanautomatednotificationtostartthereviewprocess.

The initial phase of the anti-money laundering procedure is to identify thecustomer by collating and authenticating their information. Next, the bankperformscustomerduediligencetodeterminetheanti-moneylaunderingratingoftheclient.Theclientcanonlyopenabankaccountafterthewholeprocesshasbeensuccessfullycompleted[235].

The use of digital identities is essential for amore efficient world. Annoyingidentificationmethodsincludecreatingandrememberingpasswords,aswellasusingtechnologiessuchasCAPTCHA.Newsolutionsarenecessary,especiallywiththeproliferationofdigitalservices.Millennialsfinditeasiertoentrusttheiridentities tosocialmediasites,whilesomepeople feeldisturbedaboutsharinginformationonthesesites.

UniqueIdentificationSysteminIndia

A very innovative identification case is that of India. A project of the IndianGovernment since January 2009, the Unique Identification Authority of India(UIDAI)aimedtoassigna12-digituniqueidentificationtoallIndianresidents.It was responsible for the plan and policies for the project’s implementation,including thedefinitionofprocessesandmechanisms interlinking itwithotherdatabases.

TheUIDAI aimed to eliminate fake and duplicate identities by authenticatingand verifying each resident’s identity in a cost-effective and easy way atanytime,anywherearoundIndia.OnDecember16,2010,theIndiangovernmentstarted accepting the UIDAI as an official document. UIDAI’s ChairmanNandan Nilekani stressed that the 12-digit unique ID could provide residentswithaccesstogovernment,healthcare,andfinanceservices[236].

TheUIDAIcollectsaresident’sdemographicandbiometricdataandthenusesthem to assign a 12-digitAadhaar, an identity number, to every resident. Atpresent, it is the largest project of its kind around the world. The IndianParliament passed the Aadhaar (Targeted Delivery of Financial and otherSubsidies,Benefits,andServices)Actof2016onMarch11,2016[237].

AccordingtoanUIDAIreport,asofDecember15,2016,thereareatleast1.09billion residents enrolled.This represents 85%of India’s population.Differentforums opposedAadhaar because of privacy issues. On September 23, 2013,India’s SupremeCourt released a ruling that stated thatAadhaarmust not bemandatorybutvoluntaryandthat theIndiangovernmentmustprovideservicesevenifaresidentdoesnothaveAadhaar.

IdentificationfortheUnbanked

The number of people worldwide who state that they have an account at afinancial institution or with a mobile money supplier has grown very fast inrecentyears.However,anestimatedtwobillionadultslackaccesstoanaccount.Itisestimatedthat38%ofadultsintheworldareunbanked,46%indevelopingcountries.[238]

EvenintheUnitedStatesofAmerica,manyresidentscannotusebanks.Infact,somedepositorstakeadvantageoffinancialservicesprovidedbyanotherentityforcashingchequesandpaydayloans.Forsomepeople,itmaynotbepracticaltohaveaccesstoabankaccountastheycannotmaintainit.

Unbanked is a term that refers to families that donotpossess anyaccounts inany financial institution. In 2015, an estimated7%ofAmerican familieswereunbanked,whilstabout19.9%ofhouseholdswereunder-banked,meaningtheyhavepoor access tomainstream financial services.Thismeans that at least 25millionfamiliesintheUSAwereeitherunbankedorunder-banked[239].

An unbanked individual cannot receive salaries through direct deposits. Theycannot build a credit history and may have trouble with savings and moneytransfers.AlthoughtherewasasteadydeclineintheunbankedpopulationoftheUS between 2013 and 2015, millions of residents still do not have a bankaccount.

Inthe2015NationalSurveyofUnbankedandUnder-bankedHouseholdsbytheFederalDepositInsuranceCorporation,57.4%ofrespondentsclaimedthattheydid not keep a bank account because they had no money to maintain one.Furthermore,theydidnottrustbanks,wantedprivacy,anddidnotwanttopayexcessivefees.

Unbankedresidentsalsofeelthatthebanksareunwillingtohavethemasclients.

In the same FDIC survey, 55.8% of the respondents said that banks wereuninterestedinprovidingservicestotheirhouseholds,sothey,inturn,declaredthemselvesuninterestedintheservicesbankscouldprovidethemwith.

Having a bank account provides several benefits. Firstly, many governmentsinsure deposits in the banking system against loss, and a bank account letsindividuals take advantage of money managing services. What’s more, thedepositor receives an ATM card, which can also be used as a debit card,meaningtheydonotneedtocarrylargeamountsofcash.Otherbenefitsincludeinterest accrual andbuildingup a credit history,whichopensupopportunitiesforaccessingaffordablelending.

UsingBiometricsasIdentification

Biometricsuseselectronicmethodologiestorecogniseacustomerthroughtheirbiological traits and characteristics like voice recognition, iris, finger veinpatterns, and fingerprints. Every person has unique biometric characteristics,which are difficult to forge. As such, biometrics are beneficial not only infinancialservices,butalsoinforensicstudies,lawenforcement,andimmigrationcontrol. Numerous financial institutions worldwide use biometrics toauthenticatecustomersandemployees.

Because of stricter employee and client identification protocols, and thedigitationoffinancialservices,biometrictechnologyhasbecomeastrategicandimportant part of security platforms for countering identity fraud and theft. Italso enhances brand reputation and customer trust, providing an excellent toolfor secure online, branch, and ATM transactions. The need for biometricsbecame apparent because of the increased reliance on technology in financialservicesandtheriseincybercrime.

For financial institutions, biometrics can be a means for increasing theircustomer base, improving customer service, and reducing fraud. They helpfinancialregulatorscrackdownonmoneylaunderingandfraud.

Thereareseveralbenefitsofusingbiometricsasamethodofidentification,bothgenerallyandintheworldofbanking.Theseincludehavingauniqueidentifierforeachcustomer that isveryhard to replicate.Theyalsoallow thosewithoutofficialdocumentstoidentifythemselveswithoutpresentinganypaperwork.Intheshortterm,theconstructionofacentralisedbiometricsdatabasethatcanbe

usedby several institutions is likely, as itwould reduce thecostof registeringcustomersandgenerateaquickreturnoninvestment.

UsingBiometricsinBankTransactions

Financial institutions are replacing their old access methodologies likepasswords, signature-based branch service, token-based electronic and PIN-based ATMs and mobile banking with biometrics solutions to protect theircustomersandimprovetheirservices.

When a customer opens a bank account, a bank employee captures theirbiometric details, such as their fingerprints or facial picture. Then the bank’ssystemchecks foramatch in itsdatabase to reduce the riskof fraud.Onceanaccount is set up, bank personnel can verify a customer’s biometrics beforeperforming transactions. Bank branches like finger vein and fingerprintbiometrics because they make identification faster and are easy-to-use, user-friendly,andreliable.

InATMs,theuseofbiometricsisexperiencingsignificantgrowth.AcustomerusestheirbiometricstogetherwiththeirbankcardorPIN.Banksfrequentlyusefingerprints, facerecognition, irisrecognition,andfingerveinpatternsas thesebiometric methodologies are accurate, compact, and flexible. Japan hasdistributedatleast80,000biometricATMsaroundthecountryforits15millionbankingcustomers[240].

InInternetbanking,biometricauthenticationisthroughvoice,face,fingervein,and fingerprint recognition through scanners, microphones, and webcams. Byrequiring biometrics in addition to the conventional password for onlinetransactions, banks can protect their customers against identity theft bycybercriminals.

In2013,JuniperResearchdidastudyonmobilebankingandfoundthatabout400millionpeopleperformedbankingtransactionsthroughtheirmobilephones.A lack of confidence in mobile banking security was still significant, butbiometrictechnologyincreasespeople’sconfidenceinthesetransactions[241].

Byusingasinglebiometricsign-insolution,bankscaneradicateloopholesinthedatasecurityandvulnerabilityofpasswords.Furthermore,theycanprotecttheircustomersandthemselvesfromdatabreachesandunauthorisedaccess.Theycan

alsolessenregulatoryfinesandothersecurityrisks.

Toprovidegreatonlineidentification,technologyisrequired.TheFastIdentityOnline Alliance (FIDO) is an organisation that focuses on developingspecifications and certifying products that enable stronger and simpler onlineauthentication.LaunchedinFebruary2013,itisaconsortiumofindustryplayersfounded by Lenovo, PayPal, and Nok Nok Labs, amongst others. As ofSeptember2016,ithadmorethan260members[242].

ThegoalofFIDO is to reduce relianceonpasswordswhileprovidingabetterauthentication experience. It uses a device-centricmodel and authentication isthroughtheuseofpublic-keycryptography.Auserregistersontheirdevicebyrecordingauniquepublickey ina server.Theyalsounlock theirdeviceusingbiometrics.

It all started towards the end of 2009 when Validity Sensors’ RameshKesanupalli approached PayPal’sMichael Barrett to discuss the possibility ofPayPal using biometrics to identify online users. Barrett insisted that abiometrics solution should follow some sort of industry standard that supportsnumerous vendors.Therefore,Kesanupalli approached other fingerprint sensorsuppliers,industryexperts,anddevicedistributorstodesignacryptographickeythatcouldunlockabiometricdevice[243].

In 2011, NXP, Yubico, and Google started working on a 2nd-factor, openstandarddevice to facilitatewebauthentication,whichnophishingscamcouldcontrol.InApril2013,thisgroupjoinedFIDOAlliance.

OnDecember9,2014,FIDOpublishedthecompletedUniversalAuthenticationFramework and Universal 2nd Factor for device manufacturers to use. Sincethen, membership continues to grow and includes top biometric suppliers,leading security hardware providers, and major software platform suppliers.Furthermore, FIDO aims to ensure that dominant software platforms includebuilt-inFIDO technologies to ensure that theuser experiencebecomes simple,intuitive,andsecure.

AperfectcomplementforFIDOisOpenIDconnect.OpenIDisanauthenticationlayer developed by the OpenID foundation, which allows end users toauthenticate themselves by using a different authentication provider and alsoretrieveinformationaboutthemselvesfromthesameserver.

OpenIDallowsuserstousetheirexistingaccountstologintomultiplewebsites,withoutneedingtocreatenewpasswordsforeachofthem.Theuserassociatestheir informationwiththeirOpenIDaccountandthenshares thiswhenvisitingwebsites.Theuserisalwaysincontrolregardinghowmuchdatatheyshare.TheOpenID account is the only one that holds the identification data, and thatproviderthenconfirmsyouridentitytothewebsitesyouvisit.

OpenID’s main goal is to enable sharing identification on numerous sites. Itdelegates theauthentication tootherorganisationssuchasFIDO,whichmakesthesetechnologiescomplementary[244].

Using Google, Twitter, LinkedIn, or Facebook, identifier portability is anapproach that gives users the power to control the identity attributes that theywant to use across numerous sites on the web. Furthermore, users control towhomtheycanprovetheiridentityinaprivateandsecuremanner.

Although there is no authentication involved, OpenID Connect transmitsauthenticationover thenetwork.Theusersprotect their identity throughFIDOand use it across theWorldWideWeb through OpenID Connect. OpenID isquicklybeingadoptedon theweb,withoveronebillionOpenIDenableduseraccountsandover50,000websitesacceptingOpenIDasaloginmechanism.

UsingaDistributedLedgerforIdentification

Digital identification can be problematic because it involves legal, political,technical,andsocietalissues.PersonallyIdentifiableInformation(PII)definesaperson’swayoflife.Itiscrucialbecauseitascertainsaperson’saccesstopeopletheyknow,theirpastactions,theircreditworthiness,theirmedicalrecords,etc.

Storingdataincentraliseddatacentrescanbepronetohacking.Inaddition,datascience technology can discover identities through PII data. For instance, it ispossibletoidentifyapersonthroughtheirmedicalrecordsorfinancialrecords,withouttheserviceproviderknowing.Thus,itmaybesafertostorePIIdatainablockchain.

Blockchain technology is decentralised, trustless, and inflexible.No institutionor government can control the PII data. Furthermore, no entity can modify arecord.Itcanonlyaddamendmentstoarecord.

Some banks see themselves as custodians of identity and believe they can beauthenticators. Yet, various blockchain companies also want to play animportant part in the future of identity. Theoretically, blockchain technologypromotestheindependenceofentities,aswellastherelianceofthesepartiesonan auditable, secure, and shared information source[245]. This is certainly atechnologycomponentthatwillenabletheidentificationofthefuture.

TheUNIdentityAspiration

By 2030, the United Nations wants every person on Earth to have biometricidentities with a Geneva-based central database. Refugee populations are thefirsttargetsforthisplan.CollaboratingwithAccenture,theUnitedNationsplanstoimplementbiometricidentificationtorecogniseandmonitorrefugees[246].

The United Nations High Commissioner for Refugees (UNHCR) will adoptAccenture’sBIMS(BiometricIdentityManagementSystem),whichwillcollectfingerprints, iris, and facial biometric data. Refugees will use this biometricidentification card as their official documentation. BIMS and Accenture’sUniqueIdentityServicePlatform(UISP)willsendthedatatotheGeneva-basedcentraldatabasesystemthatUNHCRofficescanusetotrackrefugees.

AFindBiometricsreportclaimsthatnearly1.8billionadultsworldwidehavenoofficialdocumentation.Assuch,theycannotavailofimportantservicesandfacedifficultieswith trans-border identification.The implementationof a biometricidentificationcardforrefugeeswillprovewhetheritisfeasibletousethesystemonalargerscale.Thus,theUnitedNationsisaimingtowardstheimplementationofbiometricidentificationworldwidethroughitsIdentificationforDevelopmentinitiative.

CybercrimeandItsHistory

Moderntechnologyconnectsgovernments,financialinstitutions,businesses,andpeople.Digitaltechnologyofferstheplatformforthisconnectivityandprovidesnumerous significant benefits. Yet, it also offers a way for unscrupulousindividuals to perpetuate criminal activities, from vandalism to classified

informationtheft.

Hackingcanalteraprocedureorproducttoeithersolveaproblemorchangethewayitworks.Coinedinthe1960s,itdescribesthevariousactivitiesperformedbysomeMITenthusiastswhoalteredthemodeltrains’operation.Thesepeoplefoundways to alter some functionswithout the need to re-engineer thewholedevice[247].

The curiosity and resourcefulness of these individuals led them to learn thecomputer code of the early computer systems. Keith Thompson and DennisRitchiehacked theoriginal systemanddeveloped theUNIXoperatingsystem.Mostpeopleknowtheterm“hack”asaningeniouswaytoimproveafunctionorfixaproblemwithadeviceorproduct.

Inthe1970s,hackingbecamemalicious.Phreakersortech-savvypeoplefoundout the correct tones and codes of the early computerised phone systems thatallowed free long distance calls. They imitated operators, performed differentexperiments,andwentthroughBellTelephoneCompany’srubbishtosearchforsecretinformation.Theyhackedthesoftwareandhardwaretotakeadvantageoffreelongdistancecalls.

Lawenforcement found it difficult to dealwith hackingbecause therewas nolaw for prosecuting hackers. Furthermore, investigators had no technologicalskills. As communications and computer systems became more complex,cybercriminalsalsohadmoreopportunities.

Lawrence Berkeley National Laboratory systems administrator Clifford Stollnoticed some accounting irregularities in 1986. He invented the first digitalforensictechniquestodetectifanunauthoriseduserwasaccessinghiscomputernetwork.HishoneypottacticattractedhackerstoreturntothenetworkuntilStollcould gather enough data to find the source of the intrusion. Eventually, hisstrategy led to the arrest ofMarkus Hess and his associates, who sold stolenmilitarydatatotheKGB.

In 1990, 150 FBI agents confiscated at least 20,000 floppy disks and 42computers, which criminals had used for illegal telephone and credit cardtransactions. Yet, law enforcers could also make mistakes with theirinvestigations. For instance, Steven Jackson Games publishing company wasaccused of having an illegally copied document in its possession. The Secret

Serviceconfiscatedthecompany’scomputers.Theseizureofcomputersforcedthe publishing company to miss deadlines and lay off employees. The SecretServicereturnedthecomputersbutdeletedcomputerdataandaccessedcompanyemails.However,itdidnotpresschargesagainstthecompany.

In1990,becauseof threats tocivil libertiesbroughtaboutby themistakesandimpulsive activities by law enforcers, lawyers, technologists, and otherprofessionals formed the Electronic Frontier Foundation (EFF) to protectconsumersfromillegalprosecution.

Viruses like the ILOVEYOU and the Melissa infected millions of personalcomputers and caused the failureof email systemsworldwide.Theypromptedthe development of antivirus technology to recognise and prevent viruses.Furthermore, people became aware of the risks of opening emails andattachmentsfromuntrustedsources[248].

In the late 2000s, credit cards became the focus of attacks. Albert Gonzalezheaded a group of unscrupulous individualswho stole credit card informationfrom customer transactions of the UK outlet TKMaxx and US retailer TJX.According to reports, the breach of security lost the company about $256million.

In2006,SunshinePressinIcelandlaunchedthewebsiteWikiLeaks,anon-profitorganisation that leaks secret news, information, and classified media fromundisclosedsources.According to itswebsite, thegrouphadabout1.2milliondocumentsitplannedtopublish.JulianAssangeistoutedasthegroup’sfounder,director, and editor-in-chief. Other publicly known associates of AssangeincludeSarahHarrison,JosephFarrell,andKristinnHrafnsson[249].

ManyofthedocumentsreleasedbyWikiLeaksbecamefront-pagenews.Somereleased documents were about the wars in Iraq and Afghanistan, and, morerecently,releaseddocumentswereemailleaksthatdamagedtheUSDemocraticPartyandHillaryClinton.

TheCybersecuritySector

Cybersecurityisoneofthefastestgrowingsectorsinthetechworld.Worldwide,it had an estimated size of $77 billion in 2015. Itsmarket size could grow to$170billionby2020[250].

Inthepast10years,theUSFederalgovernmenthasspentcloseto$100billiononcybersecurityalone.Thisisclearlyimportantifwereflectonthefactthatthe2016USpresidentialelectionwascertainlyaffectedbycybercriminals.In2016,thegovernmentallocatedabudgetof$14billion.Onaverage,cyber-attackscostbusinessesupto$500billionperannum,notincludingunreportedcybercrimes.

In 2014, Heartbleed, a security bug that caused catastrophic damage to thecorporate IT community, resulted in monetary damages costing billions ofdollars. It is difficult to determine the possible cost-per-breach because acompanyhastocomputethedirectdamageandthepost-attackinterruptionstobusiness operation. Research companies and industry analysts, as well assuppliers,offerdifferentformulasandestimates.Assuch,companiesdecide tocalculatethedamageontheirown.

IntheUSA,thecyberinsurancemarketgrewto$2.5billionin2015.Thismaygrow significantly and may even expand worldwide in the next five years.Financialandbankingservicesarealsoexpandingintothecybersecuritymarket.ThegrowthoftheInternetofThingswillalsoincreasesecurityspending.

Intheglobalarena,Israelisthesecondlargestcyberproductsexporter,behindthe US. The Asia Pacific market is also developing due to denial-of-serviceattacks, and theadoptionofmobiledevicesandcloudcomputing. In theLatinAmericanregion,cybersecurityandcybercrimespendingarealsogrowing.Yet,there is a labour epidemic when it comes to global cybersecurity. In the USalone, there are at least 200,000 unfilled positions. By 2019, the shortage incybersecurityworkforcecouldreach1.5million.

TypesofCybercrime

There are different types of cybercrime. In this section, we provide a briefdescriptionofthemainones.

Backdoor

A backdoor is a secret way of circumventing security controls or normalauthentication in an algorithm, a cryptosystem, or a computer system. It mayoccur due to poor configuration or original design.Authorised personnelmayadd a backdoor to provide others with unauthorised access. An unscrupulousperson may add it for malicious intentions.Whatever the reason, a backdoor

createsvulnerability[251].

DistributedDenialofServiceAttack(DDOS)

A denial-of-service attack can bring down a network or machine. It deniesservice to intended users by overloading the capabilities of a network ormachine.Itcanalsoenterthewrongpassworddeliberatelytolockthevictim’saccount.AddinganewfirewallrulecanblockanetworkattackcausedbyanIPaddress. Yet, it is difficult to defend a network from numerous DistributedDenial-of-Serviceattacks,whichcancome fromabotnet andother techniqueslike amplification and reflection attacks. The cost of aDDOS attack averageshalfamilliondollars.[252]

Phishing

Phishing instructsusers togiveoutdetails toa fakesite that is identical to theoriginalsite.Itacquiresuserinformationlikecreditcarddetails,passwords,andusernames. According to research undertaken by Ponemon Institute, theannualcost toabusiness in theeventofasuccessfulphishingattackisaround$3.7million.[253]

Clickjacking

KnownasUserInterfaceredressattackorUIredressattack,clickjackingallowsanattackertotrickauserintoclickingalinkorbuttononadifferentwebpage.Inotherwords,theattackerishijackingtheclicksoftheuser.

Spoofing

Asamaliciousorfraudulentactivity,spoofingiswhenanattackerisdisguisedasaknownsourcetothereceiverandcommunicateswiththem.Thisiscommontodeviceswithlow-levelsecurity.

SocialEngineering

Socialengineeringisa typeoffraudthatconvincesauser todisclosesensitiveinformation. For instance, an attacker sends a fakeCEO email to finance andaccountingdepartments.AccordingtotheFBI,thisschemecostsUSenterprisesatleast$2billioneverytwoyears.

DirectAccessAttacks

An authorised user, who gains computer access, can copy data, modify theoperating system, use wireless mice, or install covert listening devices,keyloggers, or software worms. Standard security measures may protect thesystem, but using a tool or booting another operating system can bypass suchmeasures.ItispossibletopreventdirectaccessattacksthroughTrustedPlatformModuleandDiskencryption.

Eavesdropping

Eavesdropping is the unauthorised real-time interception of privatecommunications. The programs NarusInsight and Carnivore, for example,eavesdroponinternetserviceproviders’systems.Itisalsopossibletoeavesdroponclosedsystemswhenthereisalackofencryptionorwhentheyareweak.

CybersecurityCategoriesandPlayers

Cybersecurityisquitefragmented,andthereisaprofusionofstartups.Thesefallunder11categories.Wecandefinitelyexpectconsolidationinfuture.

NetworkandEndpointSecurity

Network and endpoint security includes methods used to protect corporatenetworksfromremotedevices.Everyremotedeviceconnectingtothecorporatenetworkcanbeapotentialsecurity threat.Thus, there isaneed tosecureboththecorporatenetworkandendpoint[254].

RedCanaryisaleadingstartupinthiscategory.Itspecialisesinprotectingthecomputer networks of companies against vulnerabilities caused by remoteconnections of tablets, laptops, and other electronic devices of the companies’employees. Cylance, on the other hand, uses AI algorithms to identify andpreventmalwareandextremethreatsinendpoints.

IoT/IIotSecurity

IoTSecurity refers to theprotectionof connectednetworksanddevices in theInternet of Things, which includes entities and objects that can initiate datatransferautomaticallyandwithuniqueidentifiers.Themainissueisthatproduct

designoftendoesnot includesecurity.Mostproducts in theInternetofThingshaveunpatchedandoldembeddedsoftwareandoperatingsystems.Thus,thesedevicesareprimarytargetsofsecuritybreaches[255].

Securing the Internet of Thingswill become of paramount importance, as wehave already seen the devastating consequences that hacking cars and othervehiclescanhave.ArgusCyberSecurity isacybersecuritystartupthatfocusesonprotectingconnectedvehicles.Ontheotherhand,IndegyofferssecurityforIndustrial Control Systems in critical infrastructures like water utilities,manufacturingfacilities,energy,petrochemicalplants,etc.

ThreatIntelligence

Threatintelligenceisrefined,analysed,andorganisedinformationaboutcurrentor potential attacks against an organisation. It aims to help corporationsunderstandtherisksofexternalthreats.Itprovidesin-depthinformationsothatcompaniescanprotect themselvesagainstdamagingattacks[256].Agood threatintelligenceproviderisFlashpoint,whichtargetsmaliciousactivitiesonthewebtoexposeandpreventthreatsandattacks.

MobileSecurity

Mobile security involves securingbusiness andpersonal information storedonmobilephones.Sincesmartphonescompilesensitiveinformation,itisnecessaryto protect the corporation’s intellectual property and the smartphone user’sprivacy. Today, mobile phones have become preferred targets. As such,everyonemusttakepartinsecuringinformation,fromthedeveloperstotheendusers[257].Zimperium provides mobile threat protection for iOS and Androiddevices.

BehaviouralDetection

Behavioural detection tracks the executable events of malicious software toprevent criminal actions from happening. Examples of prohibited operationsincludemodifyingsystemsettingsanddeletingfiles[258].Cloudsecurityconsistsof control-based policies and technologies that protect infrastructure, dataapplications, and information related to the use of cloud computing.Furthermore, the policies and technologies comply with the rules ofregulators[259]. Darktrace is a firm that identifies cyber-attack threats and

mitigatesrisksbydetectingtheorganisation’sabnormalbehaviour.

CloudSecurity

Cloud Security focuses on technologies andmechanisms that can secure dataand applications that are held in the cloud. Tigera is a cybersecurity startupfocusing on securing the delivery of workload and application across private,public,andhybridclouds.

DeceptionSecurity

Deception technology is a collection of techniques and tools to prevent anattackerwithinanetworkfromdamaging thesystem.Itmisdirects theattackerby using decoys. Furthermore, it prevents them from reaching their target andgoingdeeper intothenetwork.ItsproductsmimicrealITassetsandruneitheron emulated or real operating systems. These services dupe the attacker intothinkingthattheyhavealreadyfoundtheirtarget.Itdoesnottakeovertherolesof the other security products but enhances them[260]. Illusive Networks canidentify, deceive, and disrupt attackers before they can even wreak havoc tocompanies.

ContinuousNetworkVisibility

Continuous network visibility allows the cloud to handle network security todetectenterprisethreats,makethemvisible,andaccelerateincidentresponse.Ituses the cloud to build a retention window with advanced visualisation,automated retrospection, and full-fidelity forensics. With continuous networkvisibility,itbecomeseasierforsecurityprofessionalstodealwiththreatsinrealtime[261]. Protectwise visualises and responds to network activity to thwartcyber-attacksimmediately.

RiskRemediation

Risk remediation is a technique, which allows the application ofcountermeasures to lessen the susceptibility of cyber assets to various attacktechniques, tactics, and procedures related to advanced persistent threats[262].Websecuritycanbepublicandinternal.Itisgoodifthenetworksetuphastightpermissions, the web applications and web server often receives updates andpatches,andthewebsitecodeisofhighquality[263].

AttackIQ focuses on identifying vulnerabilities in the processes, people, andtechnologies,andthenofferssolutionstosolvetheproblem.

WebsiteSecurity

Websites are unfortunately prone to many security risks, and so are anynetworkstowhichwebserversareconnected.Webserversandthesiteshostedpresentthemostserioussourcesofsecurityriskformanycompanies,especiallySMEs. This category consists of software installed on websites to preventaccounttakeover,contentscraping,aswellasotherintrusionsinwebsites.ShapeSecurityandDistilNetworksidentifymaliciouswebsitetraffic.

QuantumEncryption

Quantum cryptography is the practice and study of techniques for securecommunicationinthepresenceofthirdpartiescalledadversaries.Post-Quantumprovides technology for the encryption of data and wireless communicationsusingquantummechanics.

RegulationTechnology(Regtech)

Regulation technology, sometimes called RegTech, is the last topic we’llexamine. RegTech is currently seen as being the next revolution to hit theFinancial Services industry, usedmostly to reduce the cost and complexity ofcomplyingwith theprofusionof regulations thathavebeen institutedsince thefinancialcrisisof2008.

Regulationsandrequirementshavebeentightenedinseveraldifferentindustries,butespeciallyinfinancialservices.Thishasledtoademandfortechnologythatcanhelpadaptquickly tochanges in lawsand regulations.Regulationprojectscanbeveryexpensive,duetotheamountofdatathatneedstobemanaged,thecomplexityofprocesses,aswellasmandatoryfilings.

Several industries need Regtech propositions, including financial services,government and legislation, environment, healthcare, vendor riskmanagementandeventhecannabisindustry.

Within financial services, there are differentRegtech firms that have differentspecialities.

Know your Customer (KYC) and Anti-money laundering (AML) providersfocuson technology that canhelp identify customers economically andensurethat they are not being used as vehicles formoney laundering. Some examplecompaniesinthiscategoryareTrunomi,Contego,andComplyAdvantage.

Operations risk management providers manage day-to-day risks of financialservicesinstitutions,includingissueidentification,trackingandmonitoring,datastorageandreporting.Portfolioriskmanagementfirmsanalysetheriskinherentin investment portfolios to understand risks and ensure that banks are notoverexposed. Enterprise risk management providers look at identifying otherriskstothebank,includingfraudriskandcreditrisk.ExamplesofcompaniesinthisspaceincludeFenergo,Finomial,andArgosRisk.

Reporting providers like Capital Confirmation and Certent aim to incorporatedata analytics into reporting to make this process more efficient. It includesautomation of regular and ad hoc reporting. Tax management providers offersoftware tomake the collection of tax revenue easy, aswell as keeping goodrecords and making filing easy. Finally, trade-monitoring providers allowcompanies to monitor employees to ensure that they are not performingunauthorisedtransactionsfromatradeperspective.

TheFutureinaFlash

We predict a global identification system, which might be one of the mostrewardingchangesthatwegettoexperienceinthenextfewdecades.Aglobal,inclusive system could not only make our lives easier but also increase thequalityoflivesofmillionsofpeopleindevelopingcountries.

We can expect cybercrimes to continue growing and new strategies to bedeveloped as technologies evolve.We can also expect cybersecurity firms toconsolidateandhugesecuritycompaniestoevolve.

Regulationwillcontinuechangingastheworldaltersandfacesnewchallenges.Regtechfirmswillmatureoverthenextfiveyears,andthiswillhelpfinancialinstitutionstobebetterprotectedwhenlegislationsandruleschange.

ENDNOTES

Chapter21. Further, faster: Mastering digital reinvention in retail banking, Dirk Vater,Mike Baxter and Richard Fleming,http://www.bain.com/Images/BAIN_BRIEF_Mastering_digital_reinvention_in_retail_banking.pdf2.TheSecondPaymentServicesDirective (PSD2):Abriefing fromPaymentsUK,http://www.paymentsuk.org.uk/sites/default/files/PSD2%20report%20June%202016.pdf3. 4 Banking Business Models For The Digital Age, Ben Robinson,http://fintechnews.ch/fintech/4-banking-business-models-for-the-digital-age/7566/4. Application Programming Interface, David Orenstein,http://www.computerworld.com/article/2593623/app-development/application-programming-interface.html5. Strong growth continues at Shawbrook in 2014,https://www.shawbrook.co.uk/newsroom/2014/09/strong-growth-continues-at-shawbrook-in-2014/6. 2014: Another Record Year, http://www.aldermore.co.uk/about-us/newsroom/2015/02/2014-another-record-year/7.AboutFidorBank,https://www.fidorbank.uk/about-fidor/about-us8.RocketbankweathersRussiabankingstorms,https://www.ft.com/content/3ecb8bfa-d495-11e5-829b-8564e7528e549.Number26 isnowa truebankas itnowhasa fullbanking license,RomainDillet, https://techcrunch.com/2016/07/21/number26-is-now-a-true-bank-as-it-now-has-a-full-banking-license/10. This guy turned 22 last week— but he’s about to launch a startup RBSwants to partnerwith,OscarWilliams-Grut, http://uk.businessinsider.com/loot-bank-ceo-ollie-purdue-interview-2015-811.It’sgameonasMondo,theUKbankingstartup,finallybecomesalicensedbank, SteveO’Hear, https://techcrunch.com/2016/08/11/its-game-on-as-mondo-the-uk-banking-startup-finally-becomes-a-licensed-bank/12. Atom becomes UK’s first digital-only bank, Jill Treanor,https://www.theguardian.com/money/2016/apr/08/atom-first-uk-digital-only-bank13. Tandem Bank welcomes its first customers; Loot steps into the fray,

https://www.finextra.com/newsarticle/29714/tandem-bank-welcomes-its-first-customers14. Mobile-only bank Starling wins its licence, Tim Wallace,http://www.telegraph.co.uk/business/2016/07/14/mobile-only-bank-starling-wins-its-licence/15.Monese, theUK banking app for immigrants and expats, finally lands oniOS,SteveO’Hear,https://techcrunch.com/2016/07/28/monese-ios/

Chapter31. Remittances: Funds for the Folks Back Home, Dilip Ratha,http://www.imf.org/external/pubs/ft/fandd/basics/remitt.htm2. Online-Remittances, Life.SREDA VC,http://fintechranking.com/2016/03/26/online-remittances/3. Peer to Peer Money Transfer Firms,http://moneytransfercomparison.com/peer-to-peer/4.Transferwise,https://en.wikipedia.org/wiki/TransferWise5.SkypeForCash:HowTransferWiseIsUpendingTheWayConsumersMove$3 Trillion Around The Globe, Samantha Sharf,http://www.forbes.com/sites/samanthasharf/2016/05/26/skype-for-cash-how-transferwise-is-upending-the-way-consumers-move-3-trillion-around-the-globe/#77d356784f3a6. Online-Remittances, Life.SREDA VC,http://fintechranking.com/2016/03/26/online-remittances/7. How social media is reshaping global money transfer, See Kit Tang,http://www.cnbc.com/2015/11/12/startup-fastacashs-xopo-app-lets-users-transfer-money-through-social-media.html8.WhatsApp,https://en.wikipedia.org/wiki/WhatsApp9. WhatsApp Now allows you to Transfer Money to Your Friends, Anjana,http://fitnhit.com/technology/whatsapp-transfer-money/7319/10.ShouldYouSendMoneytoFriendsThroughFacebookMessenger?,SusanJohnston Taylor, http://money.usnews.com/money/personal-finance/articles/2015/04/07/should-you-send-money-to-friends-through-facebook-messenger11 Facebook given licence to launch Messenger payments in Europe, RianBoden, https://www.nfcworld.com/2016/12/09/348944/facebook-given-licence-launch-messenger-payments-europe/12. Snapchat launches Snapcash money transfer service, Sophie Curtis,http://www.telegraph.co.uk/technology/social-media/11239010/Snapchat-launches-Snapcash-money-transfer-service.html

13.WeChat,https://en.wikipedia.org/wiki/WeChat#WeChat_Payment14. Western Union and Viber to provide cross-border money transfercapabilities,Jumat,http://www.antaranews.com/en/news/102976/western-union-and-viber-to-provide-cross-border-moneytransfer-capabilities15. How nanopayments finally came of age, Tom May,http://www.techradar.com/news/internet/how-nanopayments-finally-came-of-age-614212/2

Chapter41.Peer-to-peerlending:everythingyouneedtoknowabouttheleadingwebsites,Tara Evans, http://www.telegraph.co.uk/personal-banking/savings/peer-to-peer-lending-everything-you-need-to-know-about-the-leadi/2.CreditEase’sOnlinePlatformYirendaiBecomestheThirdMajorP2PLenderto IPO and China’s First, Jason Jones,http://www.lendacademy.com/crediteases-online-platform-yirendai-becomes-third-major-p2p-lender-ipo-chinas-first/3.StartupSpotlight:LendingRobotsimplifiespeer-to-peerlendingforinvestors,TaylorSoper,http://www.geekwire.com/2014/lendingrobot/4.DigitalDisruption,AUKReport,March2015,BBAwithAccenture,pp.25-26,5. Retail Banks Wake Up To Lending, Richard Fleming and John Fielding,http://www.bain.com/publications/articles/retail-banks-wake-up-to-digital-lending.aspx6.OnlineLending,http://fintechranking.com/2016/03/24/online-lending/7. http://www.independent.co.uk/student/student-life/finances/graduates-who-fail-to-make-student-loan-repayments-should-face-arrest-like-new-zealanders-education-a7158396.html8. The Rise Of Peer To Peer Student Loans, Robert Farrington,http://www.forbes.com/sites/robertfarrington/2014/08/13/the-rise-of-peer-to-peer-student-loans/#55aed3bf50279.SoFi,https://en.wikipedia.org/wiki/SoFi10.HowCommonbondStarted,https://commonbond.co/about11.WhyCommonBondWillMakeYouForgetEverythingYouThoughtYouKnew About Student Loans, Murray Newlands,http://www.forbes.com/sites/mnewlands/2015/11/04/why-commonbond-will-make-you-forget-everything-you-thought-you-knew-about-student-loans/3/#49df3054360b12.LendingStartupEarnest Jumps IntoTheStudentLoanRefinancingGame,Laura Shin, http://www.forbes.com/sites/laurashin/2015/01/27/lending-startup-

earnest-jumps-into-the-student-loan-refinancing-game/#3f886d0b36a913.LendingStartupEarnest Jumps IntoTheStudentLoanRefinancingGame,Laura Shin, http://www.forbes.com/sites/laurashin/2015/01/27/lending-startup-earnest-jumps-into-the-student-loan-refinancing-game/#3f886d0b36a914.With$63MillionUnderManagement,StudentLoanHeroJoinsThe“MintFor Student Loans” Crowd, Sarah Perez,https://techcrunch.com/2013/02/19/with-63-million-under-management-student-loan-hero-joins-the-mint-for-student-loans-crowd/15. LendEDU IsMaking Student Loan Refinancing Easier, Jonathan Shieber,https://techcrunch.com/2016/02/09/lendedu-is-making-student-loan-refinancing-easier/16.ACase ofRegulatoryEvolution:AReview of theUKFinancialConductAuthority’s Approach to Crowdfunding, Robert Wardrop & Tania Ziegler,http://www.crowdfundinsider.com/2016/07/88046-case-regulatory-evolution-review-uk-financial-conduct-authoritys-approach-crowdfunding/17.ACase ofRegulatoryEvolution:AReview of theUKFinancialConductAuthority’s Approach to Crowdfunding, Robert Wardrop & Tania Ziegler,http://www.crowdfundinsider.com/2016/07/88046-case-regulatory-evolution-review-uk-financial-conduct-authoritys-approach-crowdfunding/18. In Defence of Online Lending, Ryan Weeks,https://techcrunch.com/2016/06/02/in-defense-of-online-lending/19. Factoring: What It Is and How to Choose a Service, Sara Angeles,http://www.businessnewsdaily.com/9336-choosing-factoring-service.html20.Kabbage,https://en.wikipedia.org/wiki/Kabbage21.TheSix-MinuteLoan:HowKabbageIsUpendingSmallBusinessLending--And Building A Very Big Business, Darren Dahl,http://www.forbes.com/sites/darrendahl/2015/05/06/the-six-minute-loan-how-kabbage-is-upending-small-business-lending-and-building-a-very-big-business/#421059a53a1722. How OnDeck Plans to Make Alternative Lending a Blue Chip Business,Jeremy Quittner, http://www.inc.com/jeremy-quittner/on-deck-wants-to-make-alternative-lending-mainstream.html23.PayPalWorkingCapital,https://www.paypal.com/workingcapital/24. PayPal’s “BillMeLater” ServiceBecomes “PayPalCredit,”AsCompanyExpands Credit Products Globally, Sarah Perez,https://techcrunch.com/2014/07/30/paypals-bill-me-later-service-becomes-paypal-credit-as-company-expands-credit-products-globally/25. Square Capital Starts Offering Loans More Broadly, Leena Rao,http://fortune.com/2016/08/10/square-capital-loans/

26. With New Funding In Tow, Lendio And Creditera Are Helping SmallBusinesses Secure Loans And Avoid Bad Credit, Rip Empson,https://techcrunch.com/2013/08/28/with-new-funding-in-tow-lendio-and-creditera-are-helping-small-businesses-secure-loans-and-avoid-bad-credit/27. How Does Fundera Work and Make Money?, J.B. Maverick,http://www.investopedia.com/articles/active-trading/092415/how-does-fundera-work-and-make-money.asp28.China’sAlibaba partnerswith banks, agencies to introduceB2B financingand rating services, Zen Soo,http://www.scmp.com/tech/ecommerce/article/1900654/chinas-alibaba-partners-banks-agencies-introduce-b2b-financing-and29. Why SoFi Will Take Mortgage Market Share from Wells Fargo andJPMorgan Chase, Peter Cohan,http://www.forbes.com/sites/petercohan/2015/11/30/why-sofi-will-take-mortgage-market-share-from-wells-fargo-and-jpmorgan-chase/#46d4988c78ba30. Online Mortgage Startup Lenda Expands, Aims To Shake Up Industry,Laura Shin, http://www.forbes.com/sites/laurashin/2015/02/25/online-mortgage-startup-lenda-expands-aims-to-shake-up-industry/#715ed261222731.loanDepotRisestoBecome5thLargestMortgageLenderinUS,JDAlois,http://www.crowdfundinsider.com/2016/11/91973-loandepot-rises-become-5th-largest-mortgage-lender-us/32. Sindeo launches 5-minute digital mortgage, Brena Swanson,http://www.housingwire.com/articles/38273-sindeo-launches-5-minute-digital-mortgage

Chapter51.WorldEconomicForum,TheFutureofFinTechAParadigmShift inSmallBusiness Finance, Michael Koenitzer, Giancarlo Bruno, Peer Stein, ArnaudVentura & Peter Tufano,http://www3.weforum.org/docs/IP/2015/FS/GAC15_The_Future_of_FinTech_Paradigm_Shift_Small_Business_Finance_report_2015.pdf2. Edinburgh Group, Growing the global economy through SMEs, RobertoD’Imperio, http://www.edinburgh-group.org/media/2776/edinburgh_group_research_-_growing_the_global_economy_through_smes.pdf3. Federation of Small Businesses,http://www.fsb.org.uk/media-centre/small-business-statistics4. BBVA, https://www.bba.org.uk/news/statistics/sme-statistics/bank-support-for-smes-4th-quarter-2015/#.Vv09BcvruM85.WorldEconomicForum,TheFutureofFinTechAParadigmShift inSmall

Business Finance, Michael Koenitzer, Giancarlo Bruno, Peer Stein, ArnaudVentura & Peter Tufano,http://www3.weforum.org/docs/IP/2015/FS/GAC15_The_Future_of_FinTech_Paradigm_Shift_Small_Business_Finance_report_2015.pdf6. BBVA, The ‘fintech’ revolution: A threat for banks or an opportunity?,http://www.centrodeinnovacionbbva.com/en/news/fintech-revolution-threat-banks-or-opportunity7. WhiteCase, How fintech deals are reshaping financial services, Prof. Dr.Roger Kiem, Gavin Weir, Guy Potel, and Dr. Philip Trillmich,http://www.whitecase.com/publications/insight/how-fintech-deals-are-reshaping-financial-services8.Fortune,YourNeighborhoodBankIsAbouttoHaveIts‘UberMoment’,IanMount,http://fortune.com/2016/03/31/citi-bank-staffing-uber-moment/9. Why fintech won’t kill banks, http://www.economist.com/blogs/economist-explains/2015/06/economist-explains-1210. Harvard Business School, The State of Small Business Lending: CreditAccess during the Recovery and How Technology May Change the Game,Karen Gordon Mills, and Brayden McCarthy,http://www.hbs.edu/faculty/Publication%20Files/15-004_09b1bf8b-eb2a-4e63-9c4e-0374f770856f.pdf11. Citigroup, Digital Disruption - How FinTech is Forcing Banking to aTippingPoint,KathleenBoyle,https://ir.citi.com/12. McKinsey, Engaging customers: The evolution of Asia–Pacific digitalbanking, Vinayak HV, Stuart Kamp, Sergey Khon, and Gillian Lee,http://www.mckinsey.com/industries/financial-services/our-insights/engaging-customers-the-evolution-of-asia-pacific-digital-banking?cid=other-eml-alt-mip-mck-oth-170113. Techcrunch, BBVA continues its fintech acquisition run, buys Holvi, anonline-only business bank, Ingrid Lunden,https://techcrunch.com/2016/03/07/bbva-continues-its-fintech-acquisition-run-buys-holvi-an-online-only-business-bank/14. Finance Magnets, Leumi, CIBC and NAB Form Strategic Alliance forFintech Innovation, Avi Mizrahi,http://www.financemagnates.com/cryptocurrency/news/leumi-cibc-and-nab-form-strategic-alliance-for-fintech-innovation/15. Reuters, Santander UK launches money management app with KalixaPayments and Monitise,http://www.reuters.com/article/idUSFWN10105B2015072216.Cogni,http://www.cogninow.com/17.Holvi,https://about.holvi.com/

18.RevolutforBusiness,https://business.revolut.com/19.Tide,https://beta.tide.co/20.Tochka,https://tochka.com/banking21. Accenture, SME Banking 2020,https://www.accenture.com/t20160505T043700__w__/gb-en/_acnmedia/PDF-16/Accenture-Unlocking-Revenue-SME-Banking.PDF22. NatWest selects FreeAgent for business banking platform,https://www.finextra.com/pressarticle/67700/natwest-selects-freeagent-for-business-banking-platform23.Zenefits,https://www.zenefits.com/services/24.Gusto,https://gusto.com/partners/accountants25. Gusto Raises $50MAt A $1B Valuation To Take On Zenefits, MatthewLynley, https://techcrunch.com/2015/12/21/gusto-is-looking-for-another-50m-to-take-on-zenefits/26.Hibob,https://www.hibob.com/27. Hibob raises $7.5M to help SMEs manage their people, Steve O’Hear,https://techcrunch.com/2016/06/06/hibob/28.Sprout,http://sproutsocial.com/29. Most Innovative Social Media Platform: Sprout Social, Kin Davis,http://www.dmnews.com/marketing-strategy/most-innovative-social-media-platform-sprout-social/article/481846/30.http://www.chicagobusiness.com/section/fast-5031. Forbes, Most Innovative Growth Companies,http://www.forbes.com/companies/xero/32. Rocketing through $300 million, Rod Drury,https://www.xero.com/blog/2016/11/rocketing-through-300m/

Chapter61. Mobile consumer behavior reshaping digital commerce, Lauren Horwitz,http://searchcrm.techtarget.com/feature/Mobile-consumer-behavior-reshaping-digital-commerce2. How does a POS system work?, Ben Taylor,http://www.mobiletransaction.org/how-pos-system-work/3. Two Unique Models for mPOS Success, http://blog.mondato.com/two-unique-models-for-mpos-success/4. The Evolution of mPOS: The Payments Industry in Flux,http://www.mahindracomviva.com/wp-content/uploads/2015/08/The-Evolution-of-mPOS_White-Paper.pdf5.Mobile is revolutionizing the waymerchants accept payments andmanage

their businesses, John Heggestuen, http://www.businessinsider.com/mobile-is-revolutionizing-the-way-merchants-accept-payments-and-manage-their-business-2014-12?nr_email_referer=1&utm_source=Sailthru&utm_medium=email&utm_content=TechSelect6. Square notes EMV pickup in first-quarter earnings, BI Intelligence,http://www.businessinsider.com/square-notes-emv-pickup-in-first-quarter-earnings-2016-57.This is Square’s plan tomaintain its growth after a successful first quarter,Andrew Meola, http://www.businessinsider.com/square-plans-to-grow-capital-instant-deposit-invoices-2016-38.AboutUs,https://www.klarna.com/us/about-us9.Klarna,AUnicorn,IsComingToTheU.S.AndGoingAfterU.S.CreditCardCompanies, Connie Loizos, https://techcrunch.com/2015/10/28/klarna-a-unicorn-is-coming-to-the-u-s-and-going-after-u-s-credit-card-companies/10. Klarna Is Making The Jump To Real-World Commerce,http://www.pymnts.com/news/international/europe/2016/klarna-physical-commerce/11. LifePay Launched Internet Acquiring And Lending Services,http://fintechranking.com/2015/03/27/lifepay-launched-internet-acquiring-and-lending-services/12.AboutSumUp,https://sumup.com/about13.Allset,https://www.crunchbase.com/organization/allset#/entity14.AboutOne97,http://www.one97.com/about-one9715. iPad Cash Registers: Coming To a Store Near You?, Jacqueline Emigh,http://www.tabletpcreview.com/feature/ipad-cash-registers-coming-to-a-store-near-you/16.Toast, FromEndecaVets,OrdersUp $30MForRestaurant Software, JeffEngel, http://www.xconomy.com/boston/2016/01/05/toast-from-endeca-vets-orders-up-30m-for-restaurant-software/17.RestauranttechstartupToastraisingmoremoneyasithits1,000customers,Curt Woodward, http://www.betaboston.com/news/2015/08/07/restaurant-tech-startup-toast-raising-more-money-as-it-hits-1000-customers/18. Toast Debuts an Inventory Management and Reporting Solution,http://hospitalitytechnology.edgl.com/news/Toast-Debuts-an-Inventory-Management-and-Reporting-Solution10761219. Shopify’s iPad Point-of-Sale System Gets Its Own Apps, Sarah Perez,https://techcrunch.com/2015/07/21/shopifys-ipad-point-of-sale-system-gets-its-own-apps/20.ELaCarteRaises$35MilliontoExpandPay-at-the-TableTechnology,Lora

Kolodny, http://blogs.wsj.com/venturecapital/2014/09/24/e-la-carte-raises-35-million-to-expand-pay-at-the-table-technology/21.RevelSystems,https://en.wikipedia.org/wiki/Revel_Systems22. Internet Acquiring, http://www.okkocapital.com/en/out-services/internet-acquiring/23.AboutUs,https://stripe.com/about24. Here’s your ultimate list of payment gateway providers and key industryplayers,AndrewMeola, http://www.businessinsider.com/list-payment-gateway-providers-2016-1125. Stripe Ramps Up Payments Fraud Prevention, Leena Rao,http://fortune.com/2016/10/19/stripe-fraud-prevention/26.StripelaunchesWorksWithStripe,adirectoryofappsthatintegratewithitspayments, Ingrid Lunden, https://techcrunch.com/2016/11/07/stripe-launches-works-with-stripe-a-directory-of-apps-that-integrate-with-its-payments/27.HowtoSellOnline,https://squareup.com/ecommerce28.AboutUs,https://www.paypal.com/ph/webapps/mpp/about29.AboutBraintree,https://www.braintreepayments.com/about-braintree30. TwoYearsAfterAcquisition, Braintree’sAuthorized PaymentVolume toCross $50B this Year, Bill Ready,https://www.braintreepayments.com/blog/two-years-after-acquisition-braintrees-authorized-payment-volume-to-cross-50-billion-this-year/31.Business,https://www.klarna.com/uk/business32. Online acquiring: Stripe and Competitors,http://fintechranking.com/2016/03/20/online-acquiring-stripe-and-competitors/33. Apple v. Google v. PayPal: WhoWill Win The $4.5TNMobile WalletsWar?http://www.forbes.com/sites/groupthink/2016/05/16/apple-v-google-v-paypal-who-will-win-the-4-5tn-mobile-wallets-war/#1c36a7297cbe34. Are we on the brink of a T-Commerce revolution?, Ben Sutherland,http://vizeum.co.uk/p/are-we-on-the-brink-of-a-t-commerce-revolution/35.AmericanExpressPushesECommerce toTVCommerce,BrianSteinberg,http://adage.com/article/media/american-express-pushes-e-commerce-tv-commerce/240048/36.AmericanExpressPushesECommerce toTVCommerce,BrianSteinberg,http://adage.com/article/media/american-express-pushes-e-commerce-tv-commerce/240048/

Chapter71. The venture capital funnel, https://www.cbinsights.com/blog/venturecapital-

funnel/2. CrowdExpert.com Investment Crowdfunding Industry Size Estimate, DavidPricco,http://crowdexpert.com/crowdfunding-industry-statistics/3.Kickstarter,https://en.wikipedia.org/wiki/Kickstarter4. How Kickstarter Grew Fast--by Slowing Down, Zoe Henry,http://www.inc.com/zoe-henry/kickstarter-slowed-down-to-stay-in-control.html5.AngelList,https://en.wikipedia.org/wiki/AngelList6. A Pretty Insane Internal Rate of Return for AngelList Investors, JDAlois,http://www.crowdfundinsider.com/2016/10/91479-pretty-insane-internal-rate-return-angellist-investors/7.Indiegogo,https://en.wikipedia.org/wiki/Indiegogo8.Indiegogo,https://en.wikipedia.org/wiki/Indiegogo9.6TopCrowdfundingWebsites:WhichOneIsRightForYourProject?,KateTaylor, http://www.forbes.com/sites/katetaylor/2013/08/06/6-top-crowdfunding-websites-which-one-is-right-for-your-project/#b982db765f8010.Crowdfunder,https://en.wikipedia.org/wiki/Crowdfunder11GoFundMe,https://en.wikipedia.org/wiki/GoFundMe12RocketHub,https://en.wikipedia.org/wiki/RocketHub136TopCrowdfundingWebsites:WhichOneIsRightForYourProject?,KateTaylor,http://www.forbes.com/sites/katetaylor/2013/08/06/6-top-crowdfunding-websites-which-one-is-right-for-your-project/#6e9bf8c265f814HowtoFundraise,https://gogetfunding.com/how-to-fundraise/156TopCrowdfundingWebsites:WhichOneIsRightForYourProject?,KateTaylor,http://www.forbes.com/sites/katetaylor/2013/08/06/6-top-crowdfunding-websites-which-one-is-right-for-your-project/#6e9bf8c265f816.AboutUs,https://startsomegood.com/about?view=what_we_do17. What is Equity Funding?, https://www.syndicateroom.com/investors/what-is-equity-crowdfunding18.CrowdCube,https://en.wikipedia.org/wiki/Crowdcube19.SeedRs,https://en.wikipedia.org/wiki/Seedrs20. Top 10 Equity Crowdfunding Sites for Investors & Entrepreneurs, BrianMartucci, http://www.moneycrashers.com/equity-crowdfunding-sites-investors-entrepreneurs/21.Companisto,https://en.wikipedia.org/wiki/Companisto

Chapter81. 10 Disruptive trends in wealth management, Gauthier Vincent, et al,

https://www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us-cons-disruptors-in-wealth-mgmt-final.pdf2. How Wealth Managers Can Ride the Financial technology Wave, RohitMahna, http://www.wealthmanagement.com/technology/how-wealth-managers-can-ride-financialtechnology-wave3. Robo-retirement, http://www.investopedia.com/terms/r/roboadvisor-roboadvisor.asp4. 10 Disruptive trends in wealth management, Gauthier Vincent, et al,https://www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us-cons-disruptors-in-wealth-mgmt-final.pdf5. The Rise of RoboAdvice: Changing the Concept of Wealth Management,Accenture, https://www.accenture.com/_acnmedia/PDF-2/Accenture-Wealth-Management-Rise-of-Robo-Advice.pdf6.RoboAdvisors toRun$2Trillionby2020 ifThisModel IsRight,MichaelRegan, https://www.bloomberg.com/news/articles/2015-06-18/robo advisors-to-run-2-trillion-by-2020-if-this-model-is-right7.THEROBOADVISINGREPORT:Marketforecasts,keygrowthdrivers,andhow automated asset management will change the advisory industry, SarahKocianski, http://www.businessinsider.com/the-robo-advising-report-market-forecasts-key-growth-drivers-and-how-automated-asset-management-will-change-the-advisory-industry-2016-68. 10 Disruptive trends in wealth management, Gauthier Vincent, et al,https://www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us-cons-disruptors-in-wealth-mgmt-final.pdf9.Financial technology firms are takingon the1%,but can they fix finance?,Nicole Kobie, http://www.wired.co.uk/article/future-of-investment-wired-money-201610. 10 Disruptive trends in wealth management, Gauthier Vincent, et al,https://www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us-cons-disruptors-in-wealth-mgmt-final.pdf11. How Wealth Managers Can Ride the Financial technology Wave, RohitMahna, http://www.wealthmanagement.com/technology/how-wealth-managers-can-ride-financialtechnology-wave12 eToro Review – Must Read Before Investing, Andrew Black,http://www.modestmoney.com/etoro-review-must-read-investing/3596313. This AppMakes Investing As Easy As Swiping Your Debit Card, LibbyKane,http://www.businessinsider.com/acorns-investing-app-2014-1014.Thisnewappislikefantasysportsforthestockmarket—andit’sofferingcash prizes, Nathan McAlone, http://www.businessinsider.com/vestly-is-like-

fantasy-sports-for-the-stock-market-2016-415. Ellevest: What to Know about This Robo advisor, Barbara Friedberg,http://www.investopedia.com/articles/investing/061516/ellevest-what-know-about-roboadvisor.asp16.Wealthfront,https://en.wikipedia.org/wiki/Wealthfront17. How Robinhood Makes Money (AAPL, EFTC), Steven Richmond,http://www.investopedia.com/articles/active-trading/020515/how-robinhood-makes-money.asp18.Nutmeg,https://en.wikipedia.org/wiki/Nutmeg_(investment_company)19. 7 Top Non-U.S. Robo advisors, Zina Kumok,http://www.investopedia.com/articles/financial-advisors/032216/7-top-nonus-roboadvisors.asp20. 9 Top Robo advisors for Financial Advisors, Barbara A. Friedberg,http://www.investopedia.com/articles/financial-advisor/062316/9-top-roboadvisors-financial-advisors.asp21. 7 Robo Advisors That Make Investing Effortless, Rob Berger,http://www.forbes.com/sites/robertberger/2015/02/05/7-robo advisors-that-make-investing-effortless/4/#6941778e442022. This former JPMorgan trader built a free app that sends custom financialsignals to your smartphone, Nathan McAlone,http://www.businessinsider.com/trigger-app-sends-you-custom-financial-signals-2016-623.Riskalyzedraws$20million incapital for roboplatformandotheradvisorproducts, Liz Skinner,http://www.investmentnews.com/article/20161031/FREE/161029901/riskalyze-draws-20-million-in-capital-for-robo-platform-and-other24. Addepar’s strategy: Focus on HNW, arm advisors with digital tools,SulemanDin,http://www.financial-planning.com/news/addepars-strategy-focus-on-hnw-arm-advisors-with-digital-tools25.SumZero,https://en.wikipedia.org/wiki/SumZero26. Hedge Fund Manager Puts Profile on Social Media, Lures $20 Million,Selina Wang, https://www.bloomberg.com/news/articles/2016-02-16/hedge-fund-manager-puts-profile-on-social-media-lures-20-million27. PFM isn’t dead: it’s just that nobody has got it right yet, Chris Ward,http://www.maparesearch.com/pfm-isnt-dead-its-just-that-nobody-has-got-it-right-yet/

Chapter91. The Hollerith Machine,

https://www.census.gov/history/www/innovations/technology/the_hollerith_tabulator.html2. How Much Information? Peter Lyman and Hal R. Varian,http://www2.sims.berkeley.edu/research/projects/how-much-info/3. Big data: The next frontier for innovation, competition, and productivity,McKinsey Global Institute, http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/big-data-the-next-frontier-for-innovation4.Usingbigdatatomakebetterpricingdecisions,WalterBaker,DieterKiewell,and Georg Winkler, http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/using-big-data-to-make-better-pricing-decisions5. Big Data: A Competitive Weapon for the Enterprise,https://blogs.adobe.com/digitalmarketing/wp-content/uploads/2015/10/laxalt-fig1.jpg6. Big Data Executive Survey 2016, Randy Bean, http://newvantage.com/wp-content/uploads/2016/01/Big-Data-Executive-Survey-2016-Findings-FINAL.pdf7.Avant,Rates&Terms,https://www.avant.com/rates_terms8.WeLabraisesUS$160MinSeriesBfinancingfromKhazanahandINGBank,http://www.welab.co/series_b_release?locale=en9.Qualtrics,https://www.qualtrics.com/10. This is Watson, IBM Journal of Research and Development,http://ieeexplore.ieee.org/xpl/tocresult.jsp?reload=true&isnumber=6177717&cm_mc_uid=98990303915214833709656&cm_mc_sid_50200000=148337357711.Alteryx,http://www.alteryx.com/12.Gooddata,https://www.gooddata.com/13.Domo,https://www.domo.com/

Chapter101.GartnerSays6.4BillionConnected“Things”WillBeinUsein2016,Up30Percent From 2015, Rob van der Meulen,http://www.gartner.com/newsroom/id/31653172.Here are IoT trends thatwill change theway businesses, governments, andconsumers interact with the world, John Greenough and Jonathan Camhi,http://www.businessinsider.com/top-internet-ofthings-trends-2016-1?IR=T3. Institute of Southeast Asian Studies, Urbanisation in Southeast AsianCountries, https://www.iseas.edu.sg/images/centres/asc/pdf/UrbanSEAsia-prelimasof13Jul10.pdf4. Demographia World Urban Areas, Built Up Urban Areas or WorldAgglomerations, 12th Annual Edition, April 2016,http://www.demographia.com/db-worldua.pdf5. New Geography, Largest 1,000 cities on earth: World urban areas: 2015

Edition, http://www.newgeography.com/content/004841-largest-1000-cities-earth-world-urban-areas-2015-edition6. Statista, Number of smartphone users worldwide from 2014 to 2020 (inbillions), https://www.statista.com/statistics/3360695/ number-of-smartphone-users-worldwide/7.TheHub,SmartphonePenetrationByCountry-Top10,PhillipKissonergis,http://thehub.smsglobal.com/smartphone-penetration-by-country-top-10/8.TechSciResearch,GlobalInternetofThings(IoT)ServicesMarketByType,ByApplication,ByRegion,CompetitionForecast&Opportunities,2011–20219. eMarketer, https://www.emarketer.com/Article/Slowing-Growth-Ahead-Worldwide-Internet-Audience/1014045?SOC100110.RFIDForecasts,PlayersandOpportunities2016-2026,RaghuDasandPeterHarrop, http://www.idtechex.com/research/reports/rfid-forecasts-players-and-opportunities-2016-2026-000451.asp11. Forbes, Roundup Of Cloud Computing Forecasts And Market Estimates,Louis Columbus,http://www.forbes.com/sites/louiscolumbus/2016/03/13/roundup-of-cloud-computing-forecasts-and-market-estimates-2016/#4e0886cf74b012.Statista,QuarterlyrevenueofAmazonWebServicesfrom1stquarter2014to 3rd quarter 2016 (in million U.S. dollars),https://www.statista.com/statistics/250520/forecast-of-amazon-web-services-revenue/13. Forbes, Roundup Of Cloud Computing Forecasts And Market Estimates,Louis Columbus,http://www.forbes.com/sites/louiscolumbus/2016/03/13/roundup-of-cloud-computing-forecasts-and-market-estimates-2016/#4e0886cf74b014.McKinseyAre today’s CFOs ready for tomorrow’s demands on finance?,Survey, http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/are-todays-cfos-ready-for-tomorrows-demands-on-finance?cid=other-alt-mip-mck-oth-161215.DeloitteUniversityPress,Thederivativeeffect:Howfinancialservicescanmake IoT technology pay off, The Internet ofThings in the financial servicesindustry, Jim Eckenrode, https://dupress.deloitte.com/dup-us-en/focus/internetof-things/iot-in-financial-services-industry.html16. Reuters, Fintech growth accelerates in Asia with record $4.5 billioninvestments, Elzio Barreto, http://www.reuters.com/article/us-asia-fintech-idUSKCN0WD0O017. eMarketer, Understanding China’s O2O Commerce Marketplace,https://www.emarketer.com/Article/Understanding-Chinas-O2O-Commerce-

Marketplace/1014374

Chapter111. Can cryptocurrencies fulfill the function of money?http://capitalism.columbia.edu/files/ccs/workingpage/2016/ammous_cryptocurrencies_and_the_functions_of_money.pdf2.EasiestwaytotrackCryptocurrencieshttps://www.coingecko.com/en3. The Future of Financial Infrastructurehttp://www3.weforum.org/docs/WEF_The_future_of_financial_infrastructure.pdf4. Investment in Blockchain Pass $290 Million Six Monthshttps://cointelegraph.com/news/investments-in-blockchain-pass-290-million-in-six-months5. Greenwich Associates: One Billion Dollars to be Invested in BlockchainTechnology in 2016 http://www.the-blockchain.com/2016/06/23/one-billion-dollars-invested-blockchain-technology-2016/6. Rebooting financial services: http://santanderinnoventures.com/wp-content/uploads/2015/06/The-Fintech-2-0-Paper.pdf

Chapter121.How Insurtech IsRapidlyChanging InsuranceAndHealthTech Industries,Vladislav Solodkiy,http://www.forbes.com/sites/vladislavsolodkiy/2016/10/20/how-insurtech-is-rapidly-changing-insurance-and-health-tech-industries/#3e1d16084ba92.Globalinsurtechmarketforecasttogrowatcompoundannualgrowthrateofmore than 10% between 2016 and 2020, new report suggests, CanadianUnderwriter, http://www.canadianunderwriter.ca/insurance/global-insurtech-market-forecast-grow-compound-annual-growth-rate-10-2016-2020-new-report-suggests-1004104479/3. Opportunities await: How InsurTech is reshaping insurance, PwC,https://www.pwc.com/ca/en/insurance/publications/pwc-how-insurtech-is-reshaping-insurance-2016-07-en.pdf4.AvivaandFoundersFactorysearching for“thenextbig thing”,PaulLucas,http://www.insurancebusinessmag.com/uk/news/breaking-news/aviva-and-founders-factory-searching-for-the-next-big-thing-37828.aspx5. 11 UK insurtech startups to watch: from peer-to-peer and by-the-hourinsurance, to back office tools for insurers, Scott Carey,http://www.techworld.com/picture-gallery/startups/11-uk-insurtech-startups-watch-3645315/6.BlockchaintoHelpInsurtechSoarto$235BillionIndustry,JustinOConnell,https://www.cryptocoinsnews.com/insurtech-blockchain-industry/

7. Wearables could help to heal Health & Life insurance,https://dailyfintech.com/2016/10/06/wearables-may-heal-health-life-insurance/8. Insurance app Back Me Up launches,https://www.finextra.com/pressarticle/65594/insurance-app-back-me-up-launches9.CuvvalaunchesanInsurTechappforshort term, instantcar insurance,RickHuckstep, https://dailyfintech.com/2015/12/17/cuvva-launches-an-insurtech-app-for-short-term-instant-car-insurance/10. Guevara, http://www.the-digital-insurer.com/dia/guevara-peer-to-peer-car-insurance/11. InsurTech Futures: Digital Risks partners with Aviva, Sian Barton,http://www.insuranceage.co.uk/insuranceage/news/2462195/insurtech-futures-digital-risks-partners-with-aviva12. Brolly – An AI driven Insurance Advisory Application, http://www.the-digital-insurer.com/dia/brolly-ai-driven-insurance-advisory-application/13.AboutUs,http://instanda.com/insurance-software-providers/#about-us-intro14. Insly– a globalSoftware as aService insuranceplatform,RickHuckstep,https://dailyfintech.com/2015/05/07/insly-a-global-software-as-a-service-insurance-platform/15. RightIndem – SaaS platform that speeds up the claims process,http://www.the-digital-insurer.com/dia/rightindem-saas-platform-speeds-claims-process/16.OscarHealth–TheHealthInsuranceStartupThatWantsToRevolutioniseHealthcare, http://www.the-digital-insurer.com/dia/oscar-health-health-insurance-startup-wants-revolutionise-healthcare/17.LemonadeareLive.Insurancewillneverbethesameagain!,RickHuckstep,http://www.the-digital-insurer.com/blog/insurtech-lemonade-are-here-and-insurance-will-never-be-the-same-again/18.Metromile,https://en.wikipedia.org/wiki/Metromile19. The Zebra, A “Kayak For Auto Insurance,” Grabs $17Million To BetterEducate Drivers About Rates & Coverage, Sarah Perez,https://techcrunch.com/2016/01/27/the-zebra-a-kayak-for-auto-insurance-grabs-17-million-to-better-educate-drivers-about-rates-coverage/20.PolicyGenius,https://en.wikipedia.org/wiki/PolicyGenius

Chapter131. The AML KYC Onboarding Lifecycle Process Flow,http://www.advisoryhq.com/articles/the-aml-kyc-onboarding-lifecycle-process-flow/

2. How India’s Unique ID System is Changing Lives, Lauren ClyneMedley,http://blogs.worldbank.org/voices/how-indias-unique-id-system-changing-lives3. Aadhaar, https://en.wikipedia.org/wiki/Aadhaar#Aadhaar-enabled_biometric_attendance_systems4. Greater financial inclusion for the unbanked is possible,http://www.gallup.com/businessjournal/182945/greater-financial-inclusion-unbanked-possible.aspx5. The Problems of Being Unbanked, ValuePenguin,http://www.nasdaq.com/article/the-problems-of-being-unbanked-cm7168816. The Power of Biometrics: Banking the Unbanked, Elaine Bliss,http://www.cartes-america.com/files/the_power_of_biometricsbanking_the_unbanked__elaine_bliss.pdf7. The Impact of Biometrics in Banking, John Trader,http://blog.m2sys.com/financial-services/impact-biometrics-banking/8.FIDO,https://en.wikipedia.org/wiki/FIDO_Alliance9.HistoryofFIDOAlliance,https://fidoalliance.org/about/history/10. Introducing Digital Identity Week on Daily Fintech,https://dailyfintech.com/2016/12/12/introducing-digital-identity-week-on-daily-fintech/,11. How Blockchain Fits into the Future of Digital Identity, Bryan Yurcan,http://www.americanbanker.com/news/bank-technology/how-blockchain-fits-into-the-future-of-digital-identity-1080345-1.html12.TheUNPlansToImplementUniversalBiometricIdentificationForAllOfHumanityBy2030,MichaelSnyder,http://www.infowars.com/the-un-plans-to-implement-universal-biometric-identification-for-all-of-humanity-by-2030/13. A Brief History of Cyber Crime,https://www.floridatechonline.com/blog/information-technology/a-brief-history-of-cybercrime/14.DefiningMomentsintheHistoryofCyberSecurityandtheRiseofIncidentResponse, Ted Julian, http://www.infosecurity-magazine.com/opinions/the-history-of-cybersecurity/15.WikiLeaks,https://en.wikipedia.org/wiki/WikiLeaks16. The Business of Cybersecurity: 2015 Market Size, Cyber Crime,Employment, and Industry Statistics, Steve Morgan,http://www.forbes.com/sites/stevemorgan/2015/10/16/the-business-of-cybersecurity-2015-market-size-cyber-crime-employment-and-industry-statistics/5/#509c6fdb581b17.Computersecurity,https://en.wikipedia.org/wiki/Computer_security18. What DDOS really cost businesses,

https://lp.incapsula.com/rs/incapsulainc/images/eBook%20-%20DDoS%20Impact%20Survey.pdf19. The cost of phishing & value of employee training,https://info.wombatsecurity.com/hubfs/Ponemon_Institute_Cost_of_Phishing.pdf20. Endpoint Security, Vangie Beal,http://www.webopedia.com/TERM/E/endpoint_security.html21. IoT security (Internet of Things security), Margaret Rouse,http://internetofthingsagenda.techtarget.com/definition/IoT-security-Internetof-Things-security22. Threat Intelligence, Margaret Rouse,http://whatis.techtarget.com/definition/threat-intelligence-cyber-threat-intelligence23.MobileSecurity,https://en.wikipedia.org/wiki/Mobile_security24. Behavior Detection,http://www.pcmag.com/encyclopedia/term/67445/behavior-detection25. Cloud computing security, Margaret Rouse,http://searchcompliance.techtarget.com/definition/cloud-computing-security26. Deception technology, Margaret Rouse,http://whatis.techtarget.com/definition/deception-technology27.AboutUs,https://www.protectwise.com/about.html28. Cyber Risk Remediation Analysis,https://www.mitre.org/publications/systems-engineering-guide/enterprise-engineering/systems-engineering-for-mission-assurance/cyber-risk-remediation-analysis29. Web Security Basics, http://www.beyondsecurity.com/web-security-and-web-scanning.html

ACKNOWLEDGEMENTS

Manythankstothefollowingpeoplefortheirhardworkanddedication

Research:FlorencedeBorjaRonaleaTalabocChristinaPomoni

Editing:KatieUniacke

Proofreading:BrianCross

Coverdesign:IlianGeorgiev

Interiordesign:ShabbirHussain

Illustrations:Bloomingsun

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