Imad A. Moosa - Fintech - A Revolution or A Transitory Hype - Edward Elgar Publishing (2022)

Fintech
To Nisreen, Danny, Ryan and Ivy

Fintech
A Revolution or a Transitory Hype?
Imad A. Moosa
Professor of Economics, Kuwait University, Kuwait
Cheltenham, UK • Northampton, MA, USA

© Imad A. Moosa 2022
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Contents
List of figuresvi
List of tablesviii
Prefaceix
Abbreviations and acronymsxi
1 Fintech: what is in a definition? 1
2 The evolution and revolution of fintech 18
3 Functions and market structure 33
4 The technology 55
5 The benefits and costs of fintech 81
6 The war on cash 105
7 Cryptocurrencies: a revolutionary innovation or a scam? 138
8 The implications of fintech for financial stability and inclusion 162
9 The regulation of fintech 176
10 The fintech hype 197
References210
Index227
v
Figures
1.1 The frequency of Google search (Index 0–100, monthly

observations)4
1.2 The frequency of Google search (Index 0–100, annual

observations)5
2.1 Fintech evolution milestones 1830–1999 23
2.2 Fintech evolution milestones 2000–2020 24
2.3 Fintech sectoral innovations 29
2.4 Innovative market support services 30
3.1 Line of business of world’s top 50 fintech companies 42
3.2 B2B and B2C products and services 43
4.1 Technology and output in finance 55
4.2 Feed-forward ANN 60
4.3 The components of artificial intelligence 62
4.4 Regtech applications 73
4.5 Recording of a new transaction on a blockchain 75
4.6 Centralised vs. decentralised databases 76
5.1 Technology in the production function 82
5.2 Capital-deepening technology 102
6.1 Proportion of cash payments (%) 130
6.2 High scores of means of payment on 11 criteria (smiley face) 132
7.1 The dollar price of bitcoin (daily observations, 0 = 19/08/2016) 147
vi
Figures vii
7.2 Index of the bitcoin price of a commodity 154
9.1 Regulatory response to fintech risks 189
9.2 Mapping of regulatory responses to fintech activities 192

Tables
1.1 The frequency of Google search (Index 0–100) 4
1.2 Selective definitions of fintech obtained from a Google search 9
1.3 Definition/description of fintech in popular media 12
1.4 Reference of definitions to fintech characteristics 15
2.1 Growth rates of Fintech start-ups 21
3.1 Examples of the activities of fintech companies 35
3.2 A brief description of the terms associated with products

and services 44
4.1 AI applications 57
4.2 The use of big data 65
4.3 Examples of Regtech companies 74
4.4 Potential applications of blockchain technology 77
5.1 Challenges and benefits of fintech start-ups 85
5.2 Operational loss events relevant to fintech 96
5.3 Sources of operational risk relevant to fintech 97
7.1 Peaks and troughs in the dollar price of bitcoin 148
9.1 Examples of failed fintechs 186
10.1 Ranking of top inventions 203
10.2 Classification of claims in favour of fintech 207
viii
Preface
The word “fintech” (short for “financial technology”) has become a house-
hold term, and not just a word that is used in academic journals. The popular
media often publish stories about fintech and how emerging small firms
utilise state-of-the-art technology to change the world of financial services.
However, the word “fintech” means more than one thing. In one sense it refers
to technology per se, the technology used by financial institutions to provide
financial services. In this sense, fintech is not a new phenomenon but rather
a phenomenon that goes back to the 19th century or even earlier, which means
that it is better to use the full expression “financial technology”. However,
the word is used more appropriately to refer to the industry, the collection of
financial institutions using technology to provide financial services. In this
broad sense, the industry includes already established financial institutions and
the emerging firms that compete with them. In a narrow sense, “fintech” refers
to emerging firms that compete with traditional financial institutions and aim
to disrupt them by providing better-quality and cheaper financial services. The
emergence of these firms creates regulatory problems, as they bring with them
costs and benefits.
This book is mainly about the fintech industry in a narrow sense. Confusion
arises because (as we are going to see in Chapter 1) fintech is defined in so
many ways that any definition may refer to the technology, the industry in
a broad sense or the industry in a narrow sense. In Chapter 2, we look at
the historical evolution of the technology used in the provision of financial
services, which has led to the emergence in the 21st century of the fintech
industry in a narrow sense. The question of whether fintech is an evolution
or a revolution is also examined. In Chapter 3, we look at the structure of the
fintech industry in both a broad and a narrow sense. The types of technology
used by financial institutions are examined in Chapter 4, where it is argued
that the term “financial technology” may be flawed because the same types
of technology are used in other sectors of the economy. It is even argued that
these technologies contribute more to human welfare when used in sectors
other than finance where the contribution is simply some sort of extravaganza.
Chapters 5, 8, 9 and 10 are about the fintech industry in a narrow sense, as the
discussion leads to the inevitable conclusion that fintech is a transitory hype.
In some cases, fintech is a source of scam—nothing exemplifies this better
than the hype and scam of cryptocurrencies, which is the subject of Chapter
ix
x Fintech
7. In Chapter 6, we deal with the war on cash (in which fintechs take part),
arguing that it is a part of an elaborate conspiracy against ordinary people. This
conspiracy, it is argued, has two other components: ultra-low/negative interest
rates and the bail-in legislation.
Writing this book would not have been possible without the help and
encouragement I received from family, friends and colleagues. My utmost
gratitude must go to my wife, Afaf, who bore most of the opportunity cost of
writing this book and helped with the drawing of diagrams. I would also like
to thank my colleagues and friends, including John Vaz, Kelly Burns, Vikash
Ramiah, Liam Lenten, Brien McDonald and Nirav Parikh.
In preparing the manuscript, I benefited from the exchange of ideas with
members of the Table 14 Discussion Group, and for this reason I would like to
thank Bob Parsons, Greg O’Brien, Greg Bailey, Bill Breen, Paul Rule, Peter
Murphy, Bob Brownlee, Jim Reiss and Tony Pagliaro. My thanks also go to
friends and former colleagues who live far away but provide help via means of
telecommunication, including Kevin Dowd (whom I owe big intellectual debt),
Razzaque Bhatti, Ron Ripple, Bob Sedgwick, Sean Holly, Dan Hemmings, Ian
Baxter, Basil Al-Nakeeb, Nabeel Al-Loughani, Khalid Al-Saad and Mike
Dempsey. Last, but not least, I would like to thank Alex Pettifer, Editorial
Director at Edward Elgar Publishing, who encouraged me to write this book.
Naturally, I am the only one responsible for any errors and omissions that
may be found in this book. It is dedicated to my daughter Nisreen, my son
Danny, my grandson Ryan and my granddaughter Ivy.
Imad A. Moosa
December, 2021
Abbreviations and acronyms
ABC Australian Broadcasting Corporation
ADBI Asian Development Bank Institute
AGI Artificial general intelligence
AI Artificial intelligence
AIG American International Group
AML Anti-money laundering
ANI Artificial narrow intelligence
ANN Artificial neural network
API Application programming interface
ASI Artificial superintelligence
ASIC Australian Securities and Investments Commission
ATM Automated teller machine
B2B Business-to-business
B2C Business-to-consumer
B2G Business-to-government
BaFin Federal Financial Supervisory Authority
BBC British Broadcasting Corporation
BCBS Basel Committee on Banking Supervision
BFA Bali Fintech Agenda
BIS Bank for International Settlements
BTCA Better Than Cash Alliance
C2C Consumer-to-consumer
CBS Columbia Broadcasting System
CCTV Closed-circuit television
CD Certificate of deposit
CD Compact disc
CDO Collateralised debt obligation
xi
xii Fintech
CEN Crimes Enforcement Network

CEO Chief Executive Officer
CFA Chartered Financial Analyst
CFD Contract for differences
CFO Chief Financial Officer
CFPB Consumer Financial Protection Bureau
CFTC Commodity Futures Trading Commission
CFTRA Currency and Foreign Transactions Reporting Act
CGAP Consultative Group to Assist the Poor
CIC Collaboration and Internet Computing
CNBC Consumer News and Business Channel
CNP Card not present
Covid Coronavirus disease
CPA Certified Practising Accountant
CPI Consumer Price Index
CRM Customer Relationship Management
CTR Currency Transaction Report
DeFi Decentralised Finance
DJIA Dow Jones Industrial Average
DVD Digital video disc
e-KYC Electronic Know Your Customer
ECB European Central Bank
EU European Union
FBI Federal Bureau of Investigation
FCA Financial Conduct Authority
FCIC Financial Crisis Inquiry Commission
FIIB Future Institute of International Business
FOMO Fear of missing out
FSB Financial Stability Board
FSCA Financial Sector Conduct Authority
FSI Financial Stability Institute
FX Foreign Exchange
G2B Government-to-business
Abbreviations and acronyms xiii
G2P Government-to-people
GDP Gross domestic product
GFC Global Financial Crisis
GPS Global Positioning System
HKMA Hong Kong Monetary Authority
IaaS Infrastructure as a service
IBM International Business Machines
ICA International Currency Association
ICO Initial coin offering
IEEE Institute of Electrical and Electronics Engineers
IMF International Monetary Fund
IOSCO International Organisation of Securities Commissions
IoT Internet of Things
IRS Internal Revenue Service
IT Information Technology
KYC Know Your Customer
LIBOR London Inter-Bank Offered Rate
LMI Lenders Mortgage Insurance
LSE London School of Economics
MAS Monetary Authority of Singapore
MIT Massachusetts Institute of Technology
ML Machine learning
MPIfG Max-Planck-Institut für Gesellschaftsforschung
NASDAQ National Association of Securities Dealers Automated
Quotations
NBER National Bureau of Economic Research
NLP Natural language processing
NLU Natural language understanding
NSA National Security Agency
NYU New York University
OCC Office of the Comptroller of the Currency
OECD Organisation for Economic Co-operation and Development
OTC Over-the-counter
xiv Fintech
P2P Peer-to-peer
PaaS Platform as a service
PC Personal computer
PIMCO Pacific Investment Management Company
PIN Personal identification number
POS Point-of-sales system
PPP Paycheck Protection Program
PVA Private Vaults Australia
R&D Research and development
SaaS Software as a service
SBA Small Business Administration
SEACEN South East Asian Central Banks
SEC Securities and Exchange Commission
SIFI Systemically important financial institution
SME Small and medium-sized enterprise
SMS Short Message Service
SPNB Special purpose national bank
SSRN Social Science Research Network
SWIFT Society for Worldwide Interbank Financial
Telecommunications
TI Texas Instruments
UK United Kingdom
UN United Nations
UNCDF United Nations Capital Development Fund
US United States
USAID United States Agency for International Development
VAT Value Added Tax
WEF World Economic Forum
WMD Weapon of mass destruction
ZIP Zone Improvement Plan
1. Fintech: what is in a definition?
1.1 INTRODUCING FINTECH THROUGH RIPPLE
The current system of transferring funds from one country to another is slow,
inconvenient, costly and ambiguous. Consider the process of transferring
$100 from one bank in a rural town in country A (Rural Bank A) to a bank in
a rural town in country B (Rural Bank B). The process starts with the transfer
of $100 from Rural Bank A to a large urban bank in the same country (Urban
Bank A). The transaction is settled via the central bank of country A (Central
Bank A), which debits the account of Rural Bank A and credits the account of
Urban Bank A. Urban Bank A transfers the money to an urban bank in Country
B (Urban Bank B), with which it has a corresponding banking relationship.
With the transfer of funds from Urban Bank B to Rural Bank B, the account
of Urban Bank B with Central Bank B is debited while the account of Rural
Bank B with Central Bank B is credited. Eventually, the beneficiary, who has
an account with Rural Bank B, receives $100 when Rural Bank B credits the
account of the beneficiary. The process is rather cumbersome and expensive
because it involves fees and commissions.
The current international payment system relies on a central “settlement
institution”, which is typically a central bank or a monetary authority of some
sort. The settlement institution holds deposits from each bank that is a party to
a transaction involving the transfer of funds from one bank to another for the
purpose of settling obligations between banks. The process works by adjusting
the balances of the transacting parties, which means that the settlement insti-
tution provides the key mechanism required for the purpose of transferring
funds. Any payment system that depends on a central settlement institution
involves risks and inefficiencies.
Cross-border payments are more complicated to process and involve more
risks than domestic payments in the absence of a global central settlement
institution that holds the accounts of banks across national borders. Instead
of a central settlement institution, cross-border payment systems rely on an
interbank correspondent-banking system. The system involves contractual
arrangements under which a bank located in one country (a correspondent)
holds domestic currency-denominated deposits owned by a foreign bank. The
problem is that most cross-border payments involve two banks that do not have
1
2 Fintech
a correspondent-banking relationship with each other, as is the case with Rural

Bank A and Rural Bank B in our example. This is why the payment made by
Rural Bank A to Rural Bank B must go through Central Bank A, Urban Bank
A, Urban Bank B and Central Bank B. The process is expensive because it
involves foreign exchange spreads and fees.
For a long time, it has been realised that cutting out the middleman (interme-
diary) leads to efficiency and cost savings (the intermediary in this case is rep-
resented by the institutions coming in between Rural Bank A and Rural Bank
B or between the sender and receiver of funds). Therefore, it may be a good
idea to devise a payment system that allows Rural Bank A to deal with Rural
Bank B directly (or for the sender to deal directly with the receiver). A system
like this is more transparent, faster, more convenient and less costly than the
current system. An example of this system is Ripple, which is open-source
internet software that enables users to settle payments across national bounda-
ries in multiple currencies.
In the Ripple system, funds are moved through an alternative settlement
mechanism called “distributed settlement”, which functions without a central
settlement institution. The settlement takes place through a public ledger that
is distributed among, and algorithmically updated by, the collective actions of
the participants rather than a central settlement institution. It is a public ledger
because every participating party can see and update the ledger, which records
every single transaction processed through the Ripple protocol, and keeps
track of the balances of participants. In essence, a public ledger is a publicly
maintained record-keeping system. While the correspondent banking system
requires each participating bank to update its ledger, the Ripple system
requires the updating of a single public ledger that represents every partici-
pant’s balance. The system, therefore, is capable of processing a collection of
fund transfers immediately. According to some estimates, distributed ledger
technologies could save banks up to $20 billion per year in infrastructure
costs related to cross-border payments, securities trading, and compliance
(Santander InnoVentures et al., 2015).
This is just one example of how financial technology (Fintech, fintech,
FinTech or FINTECH) can be used to streamline financial transactions, with
the objective of making the settlement of these transactions easier, faster
and cheaper. Traditionally, a visit to a bank or another financial institution
is needed to transfer funds or apply for a mortgage or a small business loan.
Fintech has made it possible to invest, borrow, save and transfer funds through
online and mobile services without ever setting a foot inside a bank. Naturally,
it is not all rosy, because the use of sophisticated technology in the provision
of financial services brings with it not only benefits but also challenges and
costs. For example, the regulatory challenges posed by Ripple can be enor-
mous, as no centralised institution can be forced by the regulators to make
What is in a definition? 3
positive changes to the protocol and because credit and liquidity risks can
only be controlled through the system’s rules and procedures that determine
rights and obligations. There is more to fintech than Ripple and the underlying
technology.
1.2 TERMINOLOGY
While technology has always been an integral part of the financial services
sector, the term “fintech” has only become widely used in the past few years.
It has not been a common expression or a household name for a long time,
as it was added to the Merriam-Webster Dictionary in 2018. However, the
term’s origin can be traced back to the early 1990s with the establishment of
the “Financial Services Technology Consortium” by Citicorp (the predecessor
to Citigroup) to facilitate technological co-operation, in an attempt to alter the
perception of being “out of touch with market preferences” (Hochstein, 2015a,
2015b). This view is challenged by Schueffel (2016), who argues that the term
was used as early as 1972, citing Abraham Leon Bettinger, the vice president
of Manufacturers Hanover Trust, who described fintech as “an acronym which
stands for financial technology, combining bank expertise with modern man-
agement science techniques and the computer” (Bettinger, 1972). Trying to be
diplomatic, Schueffel goes on to suggest that “it still may well be the case that
the imitators of the Fintech project at Citibank in the beginning of 1990s did
not know of Bettinger’s research and used the identical term for their undertak-
ing by coincidence”. However, he points out that “neither academia nor prac-
tice can unambiguously be identified as the birthplace of the term Fintech”.
An indication of the growth of awareness of fintech is the frequency of
Google search where figures are available on Google Trends (https://trends
.google.com/). Frequency is measured as an index taking the maximum value
of 100 during a time period that can be specified in advance. For the purpose
of comparison, data were collected on the frequency of Google search for
“fintech”, “financial technology”, “digital finance” and “digital financial ser-
vices” over the period May 2005 to May 2021. The data are plotted in Figure
1.1, showing exponential growth in the search for “fintech” until November
2019. This kind of explosive growth cannot be seen in the search for “financial
technology”, even though they are the same. As a matter of fact, the search for
“financial technology” has been declining, most likely because people and the
media prefer the abbreviation over the full expression. Another explanation is
that “fintech” may refer not to the technology as such but to a new industry
consisting of new firms using technology to provide financial services. The
search for “digital finance” and “digital financial services” has also been
growing but not at the same pace as the search for “fintech”. In Figure 1.2,
we observe the growth of Google search for the four items using annual data.
4 Fintech
Table 1.1 The frequency of Google search (Index 0–100)
Term Maximum Minimum

Value Year Value Year
Fintech 100 2019 2 2008
Financial Technology 100 2006 54 2015
Digital Finance 100 2020 32 2011
Digital Financial Services 100 2018 11 2006
Table 1.1 shows the years in which Google search for the four terms reached
its peak and trough. The peak of Google search for “financial technology” was
reached in 2006, compared with 2019 for “fintech”.
Figure 1.1 The frequency of Google search (Index 0–100, monthly

observations)
Figure 1.2 The frequency of Google search (Index 0–100, annual

observations)
1.3 DEFINITION OF FINTECH: GENERAL

CONSIDERATIONS
Since around 2010, numerous fintech companies (or fintechs) have been
established with the objective of introducing technology (through apps that
can be installed on mobile devices) to conduct financial operations involving
customers and providers of financial services. The number and variety of new
companies established for this purpose have grown remarkably, both in scale
and scope, and this is why fintech may be defined to cover more than finance.
For example, Leong and Sung (2018) define fintech as “a cross-disciplinary
subject that combines Finance, Technology Management and Innovation
Management”. They argue that this definition “provides audiences better
understanding on what is FinTech and its potential” when presented to “dif-
ferent audiences with different backgrounds, such as students and business
professionals”. This is perhaps the only definition that describes fintech as
“multidisciplinary”, while the use of the terms “technology management”
and “innovation management” does not add anything to the understanding
6 Fintech
of the concept. A better definition would simply be “the use of technology in

finance” or some variation thereof.
Leong and Sung (2018) formalised their definition by talking to young
people (aged 16–30 years) and business professionals at events (such as
public talks, conferences and various meetings). Most of those who were
asked about their understanding of fintech responded by saying that they were
either “unclear” or did not know. Most of those who had an idea about fintech
focused on technology, such as blockchain and e-payment, without displaying
a general understanding of what it means. Likewise, Schueffel (2016) pro-
poses a definition that is based on “synthesis building on commonalities of
the definitions that have been applied to Fintech in literature”. He argues that
“representing a synthesis of many previously suggested definitions, it may
serve as a common denominator, yet it may not be comprehensive or distinct
enough for all authors and under all circumstances”. However, he notes that
another reason why the suggested definition can merely serve as a starting
point for future explanations of the term is that definitions change over time.
The definition suggested by Schueffel (2016) is that “Fintech is a new financial
industry that applies technology to improve financial activities.”
Some observers believe that fintech is inherently difficult to define because
the industry changes rather quickly over time as more and more technology
entrepreneurs enter the market. Zavolokina et al. (2016) describe fintech as
“the word which originates from marriage of finance and technology”, adding
that it “designates currently a novel, innovative and emerging field”. A widely
held view is that a universally accepted definition of fintech is not available; as
Varga (2017) argues that “a great variety of definitions of the concept exist in
academic practice and business journals”, which he attributes to the “fast evo-
lution” of the industry. Zavolokina et al. (2016) argue that “FinTech is a very
broad phenomenon” and that “its meaning still remains ambiguous for most of
the people”. The absence of an industry-wide consensus on a single definition
of fintech is attributed by Gray and Leibrock (2017) to the blurred boundaries
between technology providers and financial services firms. They identify two
common characteristics that emerge from the definitions of fintech. The first
characteristic is that fintech involves the use of innovative technologies for the
provision of financial services. The second characteristic is that fintech has the
potential to enhance, transform and/or disrupt business models, applications,
regulatory oversight, processes or products. This transformational potential,
they argue, is “what distinguishes fintech from previous waves of technologi-
cal innovations”.
Opinions differ on whether fintech encompasses only newly emerging
technology-based financial companies, or if existing (traditional) finan-
cial institutions are part of the fintech universe if they are producing new
technology-based services. There seems to be an agreement that fintech refers
to companies that develop financial services by relying on state-of-the-art

technology. After reviewing several definitions, Varga (2017) proposes a defi-
nition that can be used to distinguish fintech from traditional, transforming
or already digitised financial institutions and to emphasise the importance
of technology, service and business model design, and the regulatory envi-
ronment with regard to fintech companies. The definition goes as follows:
“Fintech refers to non- or not fully regulated ventures whose goal is to develop
novel, technology-enabled financial services with a value-added design that
will transform current financial practices.”
The definition that Arner et al. (2015) start with is that fintech refers to “the
application of technology to finance”, suggesting that this definition gives
rise to three specific observations. The first observation is that fintech is not
an inherently novel development for the financial services industry because
the adoption of technology by the finance industry can be traced back to the
19th century. The second observation is that the financial services industry
has been one of the prime purchasers of information technology (IT) products
and services, and by the mid-1990s the finance industry became the single
largest purchaser of IT, a position it retains to this day. The third observation
is that fintech is not confined to specific sectors (such as financing) or business
models (such as peer-to-peer lending)—it rather covers the entire spectrum of
services and products traditionally provided by the financial services industry.
Fintech may be defined by the outcomes it brings. Tikam (2020) identifies
three outcomes, the first of which is disruption—that is, when technology is
used to disrupt or transform financial services by creating new products and
business models that fall outside the realm of traditional financial services (for
example, peer-to-peer lending). The second outcome is technology-induced
operational efficiency when technology is used to improve performance or
reduce the cost of providing financial services. The third outcome is better cus-
tomer experience when technology is used to improve customer service (for
example, mobile banking). This means that a possible definition for fintech is
that it involves the use of technology to disrupt or transform traditional finan-
cial services, enhance performance and improve customer service.
Out of the tens of definitions found in the literature, no one definition is
the best definition and no definition is completely right or wrong. Fintech
is involved when someone deposits a cheque without visiting a bank branch
by taking a picture of the cheque and uploading it to the bank’s mobile app.
Fintech is also involved when a phone is tapped to pay for a restaurant meal by
using Apple Pay. It is also involved when someone transfers money by using
an app. And it is involved when PayPal is used to make or receive a payment.
These are examples of the modern use of technology in finance. Examples of
the traditional use of technology are paying with a credit card (online or oth-
erwise) and the withdrawal of cash without visiting a bank branch by using an
8 Fintech
ATM, where the ATM could be located 10,000 miles from the bank branch of
the customer. Defining fintech boils down to the formidable task of combining
tens of finance-related activities in one definition.
We have already seen that the term “fintech” was added to the
Merriam-Webster Dictionary in 2018, where it is defined as “products and
companies that employ newly developed digital and online technologies in
the banking and financial services industries”. It has also made it into other
dictionaries. In the Oxford Dictionary, it is defined as “computer programs and
other technology used to support or enable banking and financial services”. In
Dictionary.com, it is defined in two different ways. The first is that it repre-
sents “digital technological innovations utilized by customers or institutions in
the financial services industry”. The second is that it is a “company that uses or
develops such technologies”. In the Collins Dictionary, we find the following
definition: “digital technology used to support banking and financial services”.
We can see that the definition may refer to technology, products or companies
that are related: the fintech industry consists of companies that use specific
technology to come up with products that facilitate financial transactions.
A Google search for “definition of fintech” produces tens of definitions that
refer to technology, industry, companies and ideas. By far, most of the defi-
nitions are put in terms of technology, as displayed in Table 1.2, which is not
exhaustive. One of the definitions under “Technology” contains two important
words that appear frequently in the literature on fintech “start-up” and “dis-
ruption”, referring to emerging companies disrupting the activity of existing
financial institutions. This definition, however, gives the wrong impression that
financial technology is used by new technologically based companies when in
fact existing financial institutions also use technology (this is an issue that will
be dealt with in detail later). Another definition has the words “streamline”
and “digitise” in addition to “disrupt” to imply that new fintech companies do
more than disrupting the status quo. Yet another definition refers to “financial
literacy” to highlight the connection with fintech. The industry-based defini-
tions describe fintech as an “economic industry”, “emerging industry” and a
“new financial industry”. One definition under “Companies” describes fintech
companies as enablers, enhancers and disruptors of financial services. We will
find out as we progress how fintech companies disrupt, streamline, digitise,
enable and enhance the provision of financial services.
A related concept is that of “alternative finance”, which refers to the
financial products and services provided by non-mainstream firms (where
mainstream firms are banks and insurance companies). However, an alter-
native finance business may also be a fintech business. For example, while
peer-to-peer lending is an alternative finance business (because it is not pro-
vided by traditional financial institutions) it is also a fintech business because
an electronic platform is central for borrowers to obtain loans directly from
Table 1.2 Selective definitions of fintech obtained from a Google search
Technology
• Computer programs and other technology used to support or enable banking and financial services.
• The technology and innovation that aims to compete with traditional financial methods in the delivery of
financial services.
• New tech that seeks to improve and automate the delivery and use of financial services.
• Technology that is utilised to help companies, business owners and consumers better manage their
financial operations, processes and lives by utilising specialised software and algorithms that are used on
computers and, increasingly, smartphones.
• The integration of technology into offerings by financial services companies in order to improve their use
and delivery to consumers.
financial services.
• The technology start-up scene that is disrupting sectors such as mobile payments, money transfers, loans,
fundraising and even asset management.
• The application of new technological advancements to products and services in the financial sector.
• A term used to describe any technology that delivers financial services through software, such as online
banking, mobile payment apps or even cryptocurrency.
• A broad category that encompasses many different technologies, but the primary objectives are to change
the way consumers and businesses access their finances and compete with traditional financial services.
• A catch-all term for any technology that is used to augment, streamline, digitise or disrupt traditional
financial services.
• A general comprehensive term for financial technologies, many of which are rapidly changing the finan-
cial industry.
• Collaboration between finance and technology for better products and efficient processes.
financial services.
• Technologies as diverse as cryptocurrency tools, financial transaction platforms and industry-specific
middleware programs.
• Technological innovations that relate to concepts such as financial literacy and education, stock invest-
ment, cyber security, blockchain technology, retail banking, and cryptocurrencies like bitcoin and ripple,
among other innovations.
• Fintech refers to innovative digital technology solutions that aim to optimise financial services and
banking.
• Technology-enabled innovation in financial services that could result in new business models, applica-
tions, processes or products with an associated material effect on the provision of financial services.
• The technology and innovation intended to compete with traditional financial methods in the delivery of
financial services.
• The use of technology in finance to disrupt traditional business models in financial markets as well as
bringing about new and uncharted risk territories.
10 Fintech
• New and innovative financial services developed by utilising recent advances in information and telecom-
munication technology.
• Technology applied to financial services, which has a significant impact on our daily lives, from facil-
itating payments for goods and services to providing the infrastructure essential to the operation of the
world’s financial institutions.
• Fintech is the term used to describe any technology that delivers financial services through software, such
as online banking, mobile payment apps or even cryptocurrency.
• Fintech is a broad category that encompasses many different technologies, but the primary objectives are
to change the way consumers and businesses access their finances and compete with traditional financial
services.
Industry
• An economic industry composed of companies that use technology to make financial services more
efficient.
• An emerging industry that uses technology to improve activities in finance.
• A new financial industry that applies technology to improve financial activities.
• A service sector that uses mobile-centred information technology to enhance the efficiency of the finan-
cial system.
• Industrial changes forged from the convergence of financial services and IT.
• The application of technology in the financial sector.
• Fintech brings all together: the new business models, processes, products, services and applications that
emerge around the financial services industry and are digitally available for the client in a more efficient
way.
Companies
• Companies that combine innovative business models and technology to enable, enhance and disrupt
financial services.
• Companies are businesses that leverage new technology to create new and better financial services for
both consumers and businesses.
• An umbrella term describing several different companies, products and services.
• A term used to describe companies that use artificial intelligence, data science and blockchain technology
to secure and enhance finances.
• Companies that specialise in providing the services needed to conduct financial transactions through
technology.
• A wide range of companies using software to provide financial services.
• New businesses that aim to challenge existing financial institutions by using technology to deliver value
to the customer in an alternative way.
Ideas
• Any innovative ideas that improve financial service processes by proposing technology solutions accord-
ing to different business situations, while the ideas could also lead to new business models or even new
businesses.
• Ideas that provide solutions for customers unable to get loans from a traditional bank and consumers to
shop online without using a credit card.
lenders. Some alternative finance businesses are not fintech businesses—an

example is a company that competes with banks by providing services without
using disruptive technology. This happens, for example, when a better-quality
service is provided or lower prices are offered. The distinction, however,
seems to be subtle.
Sometimes the term “internet finance” is used. For example, Xie et al.
(2016) refer to “internet finance” as a “spectral concept”. This term, according
to them, “covers all forms of financial transactions and financial interme-
diaries and markets, such as commercial banks, securities firms, insurance
companies and stock exchanges”. They make it explicit that “internet finance”
and “fintech” “are essentially different words for the same concept”. They
also describe internet finance as a “third way to conduct financial activities”
in addition to indirect financing via commercial banks and direct financing
through financial markets.
1.4 DEFINITIONS OF FINTECH IN THE MEDIA
Fintech has attracted significant media attention, resulting in a range of defi-

nitions adopted by various media outlets. Zavolokina et al. (2016) suggest
that the popular media is “one of the important observers and reflectors of the
general consensus of the public, but also plays a role of the social entity which
influences it, and therefore is worth attention of the researchers”. They attempt
to explore the way in which fintech is perceived through the lens of the media
and how the perception of the phenomenon has developed over time. Table
1.3 reports some of the definitions appearing in newspapers and magazines in
both English and German. The definitions emphasise various aspects of the
phenomenon: the application of IT in finance, start-ups, new technologies, new
companies, digitalisation, new markets, new business models, new generation,
battle between old and new, change of processes, etc. Zavolokina et al. (2016)
make the observation that the media definitions and descriptions exhibit a large
discrepancy in perception, indicating the lack of agreement on what fintech is
all about.
1.5 DEFINITIONS ADOPTED BY INTERNATIONAL

ORGANISATIONS
The World Economic Forum (WEF), which describes fintech as “a contraction

of finance and technology”, defines it as “the use of technology and innova-
tive business models in financial services” (World Economic Forum, 2015).
Fintech is also described by the WEF as “companies that provide or facilitate
financial services by using technology”. Fintech, according to the WEF, “is
marked by technology companies that disintermediate formal financial insti-
12 Fintech
Table 1.3 Definition/description of fintech in popular media
Source Definition/Description
The Independent This is a new and emerging branch of Britain’s financial services industry.
The Telegraph The area where technology and finance intersect, which ought to be an
industry in which Britain excels.
The Guardian The application of technology in financial services to create disruptive
business models and inclusive products.
The Banker The R&D function of financial services in the digital age. It is less to
do with technology, more to do with business model reinvention and
customer-centric design.
The Boston Globe Companies seizing a moment when the needs of the financial industry and
capabilities of technology are coming together, aiming to take advantage
of modern computing speeds, troves of data, and the ubiquity of mobile
devices.
The Economist A slew of start-ups that reckon they can do better and disrupt financial
services.
Forbes Fintech firms are pioneering a distinctive online and digital-based approach
that promises to greatly enhance small businesses access and efficiency to
funding for growth.
The Times Fintechs are broadening access to a range of services that they claim can
help us manage our spending, save more money, and make investments in
our long-term financial security.
Süddeutsche Zeitung An armada of start-ups that want to compete with traditional banks.
The Globe and Mail Fintechs are targeting traditional business models and the banks, investment
companies, and insurance distribution networks upon which they are built.
Business Week Fintech is one of the growth areas in an otherwise shrinking industry.
Tagesanzeiger Fintech is not only a threat to traditional banking business – it is also
a chance, not only in business with end customers.
Neue Zürcher Zeitung The digitalisation of financial services.
The Daily Telegraph Technology that permits new ways of paying for things, money transfers,
loans, fundraising and so on.
Süddeutsche Zeitung Fintechs are digital bank start-ups.
Neue Zürcher Zeitung New digital business models in financial sector.
Süddeutsche Zeitung Fintechs are young distinguished financial start-ups.
Financial Times Fintech, the hope that technology will nurture new ways of doing finance, is
a phenomenon of the moment.
The Times Pretty much anything involving finance and technology.
The Guardian A blend of financial services and digital technology that aims to
revolutionise high-street banking for customers and strip out costs for banks.
tutions and provide direct products and services to end users, often through
online and mobile channels”. Therefore, the WEF sees fintech both as the use
of technology and as the industry that provides financial services by using
technology.
The Basel Committee on Banking Supervision (BCBS) has opted to use
the Financial Stability Board (FSB)’s working definition: “technologically
enabled financial innovation that could result in new business models, appli-
cations, processes, or products with an associated material effect on financial
markets and institutions and the provision of financial services” (BCBS,
2018). The adoption of this definition is justified on the grounds that it is useful
in the light of the current fluidity of fintech developments. The BCBS notes
that the term “fintech” is used to describe a wide array of innovations, both by
incumbent banks and entrants, be they start-ups or larger technology firms.
Unlike the definition of the WEF, this definition implies that fintech is the use
of technology rather than the industry.
In a survey of supervisory agencies conducted by the BCBS, most of those
agencies have not come up with their own definitions of fintech, on the grounds
that other definitions already exist or that it would be premature to define
a field narrowly while it is evolving rapidly. However, it is noted that the
definitions adopted by supervisory agencies have two characteristics. The first
characteristic is that fintech pertains to an innovative service, a business model
(which can be provided by an incumbent bank or a non-financial company) or
a new-technology start-up in the finance industry. The second characteristic is
that the definitions make clear distinctions between innovation and disruption,
in the sense that innovation fits within existing regulatory frameworks whereas
disruption requires the development of new rules. The BCBS also identifies
innovative fintech services, which are divided into “sectoral innovations”
(credit, payments, investment) and “market support services” (data applica-
tions, distributed ledger, etc.).
The former managing director of the IMF, Christine Lagarde, defines
fintech as follows: “Financial technology, or fintech—a term that encompasses
products, developers and operators of alternative financial systems—is chal-
lenging traditional business models” (Lagarde, 2017). The formal definition
adopted by the IMF is spelt out by Taylor et al. (2019) as follows: fintech is
“the advances in technology that have the potential to transform the provision
of financial services spurring the development of new business models, appli-
cations, processes, and products”. This is actually the definition used in the
IMF–World Bank’s Bali Fintech Agenda (BFA), which was launched in 2018
as a framework of high-level issues that countries should consider in their own
domestic fintech policy discussions (see, for example, IMF, 2018).
14 Fintech
1.6 CHARACTERISTICS OF FINTECH AS

REFLECTED IN THE DEFINITIONS
Fintech can be understood to be the underlying technology, an industry (con-

sisting of fintechs) or a new way of providing financial services. We have
already seen some 70 different definitions reflecting certain characteristics.
We have also seen from the discussion so far that fintech is supposed to be
associated with, (i) a novel development in the finance industry as a result of
the use of novel technology, (ii) disruption and transformation of traditional
financial services, (iii) enhanced performance and improved customer service,
and (iv) non- or not fully regulated ventures. In at least one definition, refer-
ence is made to new kinds of risk associated with the rise of fintech (Lončarski,
2016). These characteristics are problematical. How do we distinguish between
novel and non-novel developments and between novel and non-novel technol-
ogy? How do we measure disruption and transformation? How do we identify
enhanced performance and improvement in customer service?
Given these characteristics, it is not clear whether or not fintech includes tra-
ditional financial institutions that use technology to provide financial services
or that it is limited to new firms that work on new business models. Surely, the
use of novel technology, the transformation of traditional financial services,
improved customer service, and exposure to new kinds of risk are applicable
to traditional financial institutions that have adopted novel technology, but the
characteristic of non- or not fully regulated ventures is limited to new fintech
firms. This aspect is naturally of importance for regulators. The criterion of
regulation is defined by the regulatory perimeter (the boundary that separates
regulated and unregulated financial services activities) that is evolving. The
boundaries between fintech start-ups and traditional incumbents are blurring
quickly as they become increasingly interconnected.
No single definition encompasses all of these characteristics. Some of the
definitions do not refer to novel technology, but rather to any technology. For
example, we have the definition that “fintech is the term used to describe any
technology that delivers financial services through software, such as online
banking, mobile payment apps or even cryptocurrency”. We also have the
other definition that “fintech is a broad category that encompasses many differ-
ent technologies, but the primary objectives are to change the way consumers
and businesses access their finances and compete with traditional financial
services”. Surely, “any technology” and “many different technologies” are
not exactly “novel” or “state-of-the-art” technology. Oddly, one of the defi-
nitions plays down the role of technology by referring to the “R&D function
of financial services in the digital age”, which is “less to do with technology
and more to do with business model reinvention and customer-centric design”.
Table 1.4 Reference of definitions to fintech characteristics
Reference to % Examples
Novel, innovative and new 31.4 • Fintech is a new financial industry that applies technology to
technology improve financial activities.
• Fintech designates a currently novel, innovative and emerg-
ing field that attracts attention from the publicity.
• New and innovative financial services developed by utilising
recent advances in information and telecommunications
technology.
Improved performance and 21.4 • A broad category that encompasses many different tech-
efficiency for the benefit of nologies, but the primary objectives are to change the way
customers consumers and businesses access their finances and compete
with traditional financial services.
• Collaboration between finance and technology for better
products and efficient processes.
Risk and regulation 2.9 • Fintech refers to non- or not fully regulated ventures whose
goal is to develop novel, technology-enabled financial ser-
vices with a value-added design that will transform current
financial practices.
• The use of technology in finance to disrupt traditional busi-
ness models in financial markets as well as bringing about
new and uncharted risk territories.
Traditional versus new, 44.3 • The technology and innovation that aims to compete with
emerging business models traditional financial methods in the delivery of financial
and start-ups, disruption and services.
transformation • The technology start-up scene that is disrupting sectors such
as mobile payments, money transfers, loans, fundraising and
even asset management.
• An armada of start-ups that want to compete with traditional
banks.
• A catch-all term for any technology that is used to augment,
streamline, digitise or disrupt traditional financial services.
None of the above 21.4 • The application of technology to finance.
• Computer programs and other technology used to support or
enable banking and financial services.
• Technologies as diverse as cryptocurrency tools, financial
transaction platforms and industry-specific middleware
programs.
• Industrial changes forged from the convergence of financial
services and IT.
• Fintech is one of the growth areas in an otherwise shrinking
industry.
16 Fintech
On the other hand, Bouwman et al. (2005) define technology as a “manner of

organizing things, coordinating processes, and performing tasks more easily”,
which, according to Alt et al. (2018), “recognizes analog as well as digital
technologies, which have both spread in the financial sector”.
By going through the 70 or so definitions we have seen so far, we can
identify the characteristics of fintech emphasised by these definitions. We
can look at the definitions in terms of reference to (i) novel, innovative and
new technology; (ii) improved performance and efficiency for the benefit
of customers; (iii) risk and regulation; (iv) traditional versus new, emerging
business models and start-ups, as well as disruption and transformation; and
(v) none of those. Table 1.4 reports the percentages of definitions that make
reference to a particular characteristic. Out of a total of 70 or so definitions,
31.4% make reference to novel, innovative and new technology, and 21.4%
refer to improved performance and efficiency for the benefit of customers.
Reference to traditional versus new and start-ups/disruption can be seen in
more than 44% of the definitions. Only a small number of the 70 definitions
refer to risk and regulation, and more than 21% do not make any reference to
these characteristics.
On the assumption that fintech encompasses new firms and excludes exist-
ing traditional financial institutions, a comprehensive definition that reflects
all of the characteristics may be the following: fintech (as a process) is the use
of novel technology to improve the efficiency of providing financial services,
which means that the process involves the disruption of existing business
models by newly emerging, lightly regulated firms. Whether or not such
a definition (or any of the other definitions) is useful for practical purposes is
another matter.
1.7 CONCLUDING REMARKS

What is in a definition? Why is it that so much fuss is made about the definition
of fintech, and what value added do we have from the quest for the “perfect
definition”, if ever there is such a thing? How about just accepting a simple
definition such as “the use of technology to provide financial services and
execute financial transactions”? In reference to the industry, a simple defini-
tion is that fintech is “the industry that provides financial services by using
state-of-the-art technology”. Alt et al. (2018) make it simple, as it should be,
by suggesting that, “like similar compound terms, such as BioTech, FinTech is
a rather simple and obvious combination of an application domain (financial)
and technology”. No fuss is made about the definition of BioTech or any other
Tech for that matter.
It is not clear why the definition of fintech seems to be such a big deal that
has led to a thriving industry producing definitions that do not describe fintech
accurately. Schueffel (2016) argues that no common definition of fintech has

yet been derived and that no attempts have been made so far to extract a con-
sensual meaning of fintech. He urges efforts to make the definitions “precise
and uniform” and puts forward two reasons why “we need sound definitions
for the term Fintech”. The first reason is that “a real definition is a prerequisite
of significant theoretical and empirical research” and it is “the basis of an
efficient communication with others”. The second reason is that “a nominal
definition of the expression Fintech is needed as a linguistic convention”. He
concludes that “a real definition of the term Fintech is especially important to
the community of scholars in order to apply a systematic scientific approach
to the research object(s)” and that “a sound real and nominal definition is
required to enhance efficiency when communicating about the research
object”. Likewise, Leong and Sung (2018) suggest that “the lack of clear
definition and weak public understanding of FinTech had led to many practical
problems”—for example, discouraging potential students to consider FinTech
as a career, resulting in a shortage of FinTech professionals”.
Let us look at some definitions. For example, on www.lexico.com, an ele-
phant is defined as “a very large plant-eating mammal with a prehensile trunk,
long curved ivory tusks, and large ears, native to Africa and southern Asia”.
Water is defined as “a colourless, transparent, odourless liquid that forms the
seas, lakes, rivers, and rain and is the basis of the fluids of living organisms”.
A car is defined as a “four-wheeled road vehicle that is powered by an engine
and is able to carry a small number of people”. These definitions are adequate
for knowing what an elephant, water and a car are, but they are inadequate
for knowing how elephants breed, how water evaporates and condenses, and
how the internal combustion engine propels a car. Likewise, defining fintech
as “the use of technology in the provision of financial services” or “the use of
technology in the provision of financial services by emerging innovative firms
that disrupt traditional financial institutions” should be sufficient for knowing
fintech as opposed to “trantech”, the use of technology in the provision of
transportation services. However, the definition on its own does not and should
not tell us anything about the costs and benefits of fintech. We do not have tens
of definitions of banks, but we know how banks work and how they should
be regulated. Therefore, the obsession with defining fintech is unwarranted
and cannot be justified by the reasons suggested by Schueffel (2016) and by
Leong and Sung (2018). We just need to remember that “fintech” is used to
refer to the use of technology or to the industry that uses technology to provide
financial services.
2. The evolution and revolution of
fintech
2.1 AN OVERVIEW
Several accounts have been suggested for the evolution of fintech, in the broad
sense of using technology in the provision of financial services. These accounts
differ with respect to dates, milestones and driving forces. For example, some
accounts trace fintech back to the use of computer technology to facilitate the
back office operations of banks and trading firms. Other accounts trace the use
of technology in the provision of financial services back to the 1950s, when
the finance industry introduced credit cards, data analysis and new forms of
risk assessment. The introduction of credit cards in the 1950s was followed
by several technological innovations, including ATMs, electronic trading
floors and algorithmic trading. Some accounts go back to the 1860s, when
signature-verifying technologies were used by banks for the first time.
However, some observers think that the fintech revolution started in the 21st
century, particularly since the end of its first decade, as the concept of fintech
became broader in its reach and deeper in its scope. Despite its proclaimed
disruptive nature, fintech has not made traditional financial firms obsolete,
perhaps because a large segment of the population still prefer to conduct
financial transactions by talking to real human beings. However, a widespread
belief is that fintech is revolutionising the global financial landscape by forcing
traditional financial institutions to review their business models and come up
with effective, low-cost, customer-centric solutions.
Before the era of the internet, traditional financial institutions thrived on
what may be called “traditional fintech”. In the late 1990s and early 2000s,
online fintech companies, such as PayPal, entered the market but did not
threaten traditional financial institutions seriously until the advent of the global
financial crisis. As a result of the crisis, trust in traditional banking was under-
mined (even eroded) while millennials welcomed free online financial ser-
vices. Tikam (2016) considers millennials as much a driving force of fintech
as talented tech-savvy entrepreneurs, the global financial crisis, technological
innovation and appropriate regulation. The millennials love technology and
they are addicted to their phones at a stage in life where they need financial ser-
18
The evolution and revolution of fintech 19
vices. Tech-savvy young graduates no longer aspire for a career in investment

banking, choosing instead to enter the new sector of fintech. In the post-crisis
period, banks and other traditional financial institutions became more reluctant
to take on risk by lending, which made small and medium-sized businesses and
first-time homebuyers struggle to get loans through traditional channels. The
new fintech firms provide an alternative by utilising technological innovation
fuelled by a more connected society, availability of information, and the ability
to acquire and analyse big data. Lax regulation, particularly in London, has
also propelled the new fintech industry.
Some statistics may be helpful at this stage. Andjelic (2021) uses statistics
from various sources (including surveys) to tell us the following. More than
88% of incumbent financial institutions believe that part of their business will
be lost to independent fintech companies in the next five years. In the first half
of 2020, fintech companies acquired $25.6 billion in investments globally.
Digital banking services are becoming increasingly popular, as 46% of the par-
ticipants in a survey use digital financial services. To boost customer retention,
77% of traditional financial institutions plan to focus more on technological
innovations. The total transaction value of digital payments grew from $4.1
trillion in 2019 to $5.2 trillion in 2020. These figures are impressive, showing
the rise and rise of fintech as a new industry.
The fintech industry in a broad sense has evolved from a fragmented use of
technology in the provision of financial services to a full-fledged ecosystem
that consists of (i) large, well-established financial institutions; (ii) big tech
companies that are active in the provision of financial services but not exclu-
sively so (such as Apple, Google, Facebook and Twitter); (iii) companies that
provide infrastructure or technology that facilitates the provision of financial
services (including MasterCard, Fiserv, First Data, and exchanges such as
NASDAQ); and (iv) the disruptors, which are fast-moving companies, often
start-ups, focused on a particular innovative technology or process. This eco-
system is dependent on a variety of technologies, which will be examined in
detail in Chapter 4.
Millennials are not the only enthusiastic customers of fintech firms—even
governments have become customers by making digital payments and trans-
fers to households and businesses. Government payments to households,
commonly referred to as G2P, include payments (or transfers) of tax refunds,
subsidies, social programmes, salaries, stipends, pensions, scholarships and
emergency assistance. Pre-Covid-19 examples of digitised G2P payments
include Brazil’s Bolsa Familia programme (providing low-income families
with monthly transfers via electronic benefit cards issued by a state-owned
financial institution), Mexico’s direct electronic payments to the bank accounts
of providers of goods and services to the federal government (as well as
payroll payments to the accounts of most federal employees), and India’s use
20 Fintech
of electronic means of payment for government salaries, pensions, tax refunds

and other G2P payments (Agur et al., 2020). Payments to businesses from
the government (G2B) have also been increasingly disbursed through digital
payment channels.
2.2 THE EFFECT OF Covid-19
The Covid-19 pandemic has provided a boost to the fintech industry as lock-
downs and social distancing forced people to resort to digital financial services
and e-commerce. In Table 2.1 we can see the growth rates of fintech start-ups
in 2020 compared with 2019 according to data obtained from Statista. In 2019
growth was anaemic, even negative as in the case of the Asia Pacific region.
In 2020, on the other hand, growth was spectacular. According to the DeVere
Group (2021) the use of fintech apps increased more than 61% between the
start of the pandemic and April 2021. One can only wonder what the situation
would have been if life had continued without the complications brought about
by the pandemic.
Several reasons can be suggested as to why the pandemic provided a boost
for the adoption of fintech. The pandemic has led to an increase in the use of
digital banking that is driven by the ease of use and limited access to traditional
banking services due to restrictions on movements and the shift to working
from home. Furthermore, the pandemic has led to an increase in the demand
for essential goods and e-commerce activities, as consumers strived to mini-
mise in-person contact. In response to the price increases caused by disruptions
in supply chains, consumers might have resorted to hoarding and stockpiling
essential goods, using digital payments for acquiring these goods. To cope
with the situation, regulators supported the shift to digital channels by waiving
fees on digital payments temporarily, increasing limits for digital transfers and
allowing for electronic know-your-customer (e-KYC) instead of in-person
identity verification.
Agur et al. (2020) point out that digital financial services allow for social
distancing and that the services provided by fintech take on added value in
the response to the Covid-19 crisis. These services include connecting entre-
preneurs with banks, employees, suppliers and new markets, and facilitating
peer-to-peer transactions. However, they warn that “attempting to quickly
scale up digital financial services in the short timeframe during which a crisis
response needs to be formulated is not merely challenging but potentially also
risky”. Specifically, they warn of the risks to stability and integrity, arguing
that operational constraints, cyber-attacks, fraud, money laundering, data
and privacy may worsen if the use of digital financial services is scaled up in
response to a crisis. These issues pertain to regulation as well as the question
of costs versus benefits, both of which will be dealt with in detail in other
Table 2.1 Growth rates of Fintech start-ups
Region 2019 2020

The Americas 1.6 51.8
Europe, Middle East and Africa 0.1 106.1
Asia Pacific -0.5 67.3
chapters. For the time being, it suffices to say that scaling up digital financial
services during a crisis involves greater risk if proper safeguards and regula-
tions are not in place.
In response to the financial difficulties created by the pandemic, the US gov-
ernment introduced the Paycheck Protection Program (PPP), which was par-
tially implemented by using fintech. Erel and Liebersohn (2020) suggest that
fintech was used disproportionately in ZIP codes with fewer bank branches,
lower incomes and a larger minority share of the population, and also in indus-
tries with little ex ante small-business lending. They also found that the role
of fintech in PPP provision is greater in counties where the economic effects
of the pandemic were more severe. Their estimates show that more PPP pro-
vision by traditional banks causes a statistically significant but economically
small substitution away from fintech, implying that fintech mostly expands the
overall supply of financial services, rather than redistributing it.
Even after life returns to “normal”, it is likely that some changes in behaviour
as a result of the pandemic will persist, including the ways in which consumers
do banking, pay bills and conduct transactions. Walden and Foreman (2020)
identify “five pandemic-sparked fintech trends worth keeping an eye on”.
The first is that the adoption of fintech among older populations has gone up.
Temporary closures or reduced hours of bank branches forced some customers
to accept the status quo and download the apps of their financial institutions.
Walden and Foreman report that, in April 2020, Fidelity National Information
Services saw a 200% increase in new mobile banking registrations, while
mobile banking traffic went up 85%. An April 2020 survey revealed that
people over 60 are using technology more frequently to pay bills online, as
77% of the respondents said that they had recently conducted a financial trans-
action online. Another study, conducted by the National Retail Federation,
reported that, as a result of the pandemic, nearly half (45%) of baby boomers
are shopping online more frequently (Gaskin, 2020).
The second trend identified by Walden and Foreman (2020) is that consumer
perceptions of online banking are shifting. They refer to a survey conducted in
June 2020, revealing that 44% of those in the 18–34 years age range enrolled
in online or mobile banking for the first time during the Covid-19 crisis.
They refer to another study revealing that a large segment of the participants
(69%) said that fintech was a “financial lifeline” during the pandemic. The
22 Fintech
growing consumer interest in fintech is attributed to the desire of consumers

to use budgeting apps to re-establish control and keep an eye on precarious
bank account balances. At the same time, some fintech companies offered
aid or relief programmes while others slashed their fees. Even after the end
of lockdown and reopening of stores, some customers remain uncomfortable
venturing out. It is plausible to suggest that, once customers experience the
convenience of mobile banking, they may never go back to traditional banking.
Naturally, there are those who do not believe in mobile banking and prefer to
deal with human beings.
The third trend is that low-cost remittance platforms (such as TransferWise)
are gaining traction. Walden and Foreman (2020) note “an area that may
change forever as a result of Covid-19 is remittances”. In the Covid-19 era,
the savings on fees are particularly critical for financially stressed consum-
ers, including migrant workers sending money to relatives overseas. This is
particularly important because the financial activity of sending and receiving
remittances has not been as quick as other activities to embrace fintech. The
financial pressure exerted by Covid-19 is likely to boost low-fee remittance
and payment transfer services, particularly if they are transparent, fair, and use
reliable exchange rates. Walden and Foreman (2020) report that TransferWise
saw a 17.5% increase in new users in March 2020.
Trend number four is that traditional banks and credit unions are striving
to improve customer experience online. However, it seems that customer sat-
isfaction rates of banks that operate exclusively online remain comparatively
low. A survey conducted by J.D. Power revealed that, prior to the advent of the
pandemic, customers were generally less happy with digital-only services than
they were with in-branch or a mix of in-person and online interactions (Walden
and Foreman, 2020).
Last, but not least, the pandemic has led to the growth of online retail
spending in a big way, which may persist in a post-Covid world. It seems that
banks have realised that as they strived, at the early stages of the pandemic,
to upgrade customers’ physical debit and credit cards to include “tap to pay”
technology. Due to fundamental shifts in the way consumers perceive and
depend upon digital financial services, these trends are likely to stick around
long after the end of the health crisis (hopefully). However, it is erroneous to
conclude that cash will disappear, and it is bad policy if governments put in
legislation to curb the use of cash. It is also far-fetched to think that banks as
we know them will disappear. The virus has contributed significantly to the
growth of fintech, but there is no reason to believe that growth will continue at
the same pace in a post-pandemic world.
2.3 TIMELINE OF EVOLUTION
Just like the issue of definition, a proposition that is often put forward is that
fintech is still poorly understood and so is the evolution of the sector. This,
however, seems to be an unnecessary dramatisation of the state of affairs.
Technology has been adopted in every other sector of the economy because it
is conducive to rising productivity and profitability. Furthermore, technology
has been adopted by the financial sector since the 19th century, but this adop-
tion has accelerated since the beginning of the internet age. As a matter of fact,
and as Khan (2018) argues, finance and technology have been intertwined ever
since the start of the modern society.
Figure 2.1 Fintech evolution milestones 1830–1999
Figure 2.1 displays the milestones of the evolution of fintech (both as an indus-
try and the application of technology to finance) from the 1830s to the 1990s.
The starting point is the invention of the telegraph in the 1830s, cumulating in
the 1990s with the worldwide web. We can see that most of the innovations
cannot be claimed exclusively by the finance industry, with some exceptions
24 Fintech
such as the ATM, SWIFT and travellers cheques. In Figure 2.2 we can see the
evolution milestones over the period 2000–2020, including the establishment
of some fintech companies (such as Robinhood, Square and Venmo) and
apps (such as Apple Pay). Again, some of the innovations (such as the mobile
phone) cannot be claimed exclusively by the finance industry.
Figure 2.2 Fintech evolution milestones 2000–2020
Two approaches to the evolution of fintech are identified by Varga (2017).

The first approach is suggested by Arner et al. (2015), who focus on the
source of financial innovation in the past two centuries by identifying three
distinctive phases of development. They do not restrict the term “fintech” to
current trends, but use it to describe an “ever-evolving and innovatory finan-
cial sector.” According to this approach, the evolution of fintech has gone
through three phases. The first phase lasted over the period 1866–1987, which
witnessed the physical foundations of modern telecommunication. The second
phase covered the period 1987–2008, during which a great deal of innovation
occurred as banks became increasingly digitised and invested heavily in IT
systems. The current phase is ongoing and involves both newly emerging
technology-enabled financial service companies and traditional banking insti-

tutions. It is not clear, however, why the end of the first phase coincides with
the global financial crisis, but it could be that the impetus was the loss of trust
in traditional financial institutions. It is also not clear why Varga (2017) puts
the end of the second phase at 1987 when Arner et al., whom he refers to, put it
at 1967 (for all we know, that could have happened inadvertently).
The second approach is the resource-based approach, which hinges on
a modification of the model of hierarchical needs to explain the “success
of fintechs”. Varga (2017) observes three evolutionary stages in the recent
growth of fintech. The first is the creation of an ecosystem fostered by techno-
logical progress and the availability of cheap telecommunication services. The
value drivers in this stage include cheap mobile phones and internet access,
cheap hardware and software, and global telecommunication infrastructure.
The second stage is the identification by fintech entrepreneurs of the power
of tailor-made, simplified business models that led them to focus on niche
segments of the financial sector to provide unique forms of value to customers.
The drivers in the second stage are rapidly scalable services, open innovation
approach and disruptive business models. The third stage is the development
and conscious use of human-centred design, as fintechs thought that public
disappointment in banks was creating an opportunity for better services and
more user-centric innovation. They started to strive for the innovation of new
and distinctive service designs, understanding customer needs, and mapping
out routes for a “frictionless user experience”. In this sense, “friction” is
anything that makes users stop and think, which represents a barrier between
users and the accomplishment of their objectives. The drivers in this stage
are state-of-the-art customer and data analytics, superior user experience and
a design-thinking approach, where the objective is to reduce interaction fric-
tion (which requires intuitive and consistent interfaces) and cognitive friction
(which pertains to the mental effort required to use a product).
Let us go back to the first approach and examine the timeline as suggested
by Arner et al. The Iyer Report (2017) follows the same timeline as Arner et
al., without calling the time intervals phases, stages or episodes. The three
phases are the following: (i) precursors to the digital age financial services
(1866–1967), (ii) digital age financial services (1967–2008), and (iii) new
age financial services (2008–present). The year 1866 is the start of the first
phase because that year witnessed the laying of the first transatlantic cable.
However, the report also mentions the year 1838 when the telegraph was
introduced, which begs the question as to why the first phase did not start
in 1838. The same phase witnessed the introduction of credit cards in the
1950s, as well as the first hand-held financial calculator, and the deployment
of the first ATM in 1967 (hence the significance of 1967). The second phase
(1967–2008) witnessed the establishment of automated clearing houses in the
26 Fintech
US and UK between 1968 and 1970, as well as the establishment of NASDAQ

in 1971—these developments ushered in electronic trading platforms. Other
developments during the second phase were online trading and banking. Wells
Fargo became the first bank to offer an online current account in 1995.
The third phase started in 2008, coinciding with the global financial crisis,
which is described by the Iyer Report (2017) as “the turning point for FinTech”.
Three reasons can be presented as to why the crisis was a game changer as far
as fintech is concerned. The first is that the crisis led to distrust of banks in
the minds of the general public. Mohan (2009) refers to a “complete loss of
confidence” following the failure of Lehman Brothers in September 2008 and
to a “complete lack of confidence and trust amongst market participants”.
Khan (2018) notes that the crisis provided the tipping point for the people
(particularly younger generations) who were much more comfortable dealing
with technology companies (such as Facebook, Alibaba, Tencent, Google and
Amazon) rather than traditional financial institutions. The second reason is
the large pools of highly qualified financial professionals who lost their jobs
during the crisis and started looking for alternative job opportunities. As Khan
(2018) puts it, the crisis-triggered job losses “ushered in a new age of FinTech
startups headed by these highly skilled but unemployed individuals”. The
third reason is regulatory factors that facilitated the establishment of fintech
firms to revive the financial sector. For example, fintechs are not subject to the
Basel capital and liquidity requirements. Khan (2018) refers to the “wave of
regulatory changes that were introduced to avoid the problems that led to the
collapse of 2008” and the resulting massive investments in IT. Another reason
is sometimes added as to why 2008 (the year of the crisis) was a tipping point,
which is the launch of the smart phone, even though it was launched in 2007
and has nothing to do with the crisis.
Arner et al. (2015) see three episodes or eras of fintech. The first episode
was Fintech 1.0, lasting from 1866 to 1967, which they divide into what they
call the first age of financial globalisation and the early post-war period. The
second episode was Fintech 2.0, which lasted between 1967 and 2008 and
witnessed the development of traditional digital financial services. They view
the year 1987 as a turning point for the fintech industry by making two obser-
vations. The first is the iconic image from Oliver Stone’s movie Wall Street,
picturing an investment banker handling an early mobile phone. The second
is the “Black Monday” stock market crash, largely believed to have been
caused by program trading. The third episode is Fintech 3.0, which started in
2008, as they suggest that the crisis was conducive to the growth of fintech for
a number of reasons, including the post-crisis regulatory reforms, the financing
gap resulting from the contraction of interbank markets and higher regulatory
capital requirements, operational cost reduction by downsizing and using
technology, public perception (growing distrust of formal financial institutions

from the public), and the emergence of the smartphone.
Arner et al. recognise as Fintech 3.5 the progress of fintech in emerging
countries in Africa and Asia, which started in 2008, in the areas of online
banking and “internet finance”. Examples are the 2007 introduction of M-Pesa
in Kenya, by Vodafone for Safaricom, the 2010 introduction by Alibaba of
loans to SMEs on its e-commerce platform, the creation in 2011 of Lufax
(an online internet finance marketplace), the 2015 announcement by India
of the creation of 11 new payment banks (for example, FINO PayTech) and
the establishment in 2015 of two new Chinese private banks, MyBank and
WeBank.
Some authors believe that fintech goes much further back than the 19th
century. Palmer-Derrien (2020) traces the origin of fintech to the invention of
theabacus (a calculating tool that is also called “counting frame”) in about 700
BC. Alt et al. (2018), who note that “the evolution of FinTech already suggests
that financial technologies have a longer legacy than the term FinTech itself”,
go back to the year 1500 and depict as phase 1 the period between 1500 and
1860. During that period, banks relied on physical media containing the
information/value, such as notes and coins, which they describe as “the first
applications of technologies used by banks”. Likewise, Khan (2018) argues
that “the first physical financial technology developed was money in the form
of coins which later transformed in to paper money” and that “much didn’t
change till the later part of the 19th century when the seeds of the modern
FinTech Era were sown”. Alt et al. (2018) refer to the second phase, extending
between 1860 and 1960 as the period of analogue technologies, particularly
the telegraph. They divide the period between 1960 and the present time,
characterised by the emergence of digital technologies, into two sub-periods:
1960–2008, which they refer to as banking IT; and 2008–present, which is the
age of fintech.
A different labelling of the phases is proposed by Khan (2018), who uses
the terms inception, early adoption, turning point, development and revolu-
tion. Inception is marked by the laying of the transatlantic cable in the 1860s.
The era of “early adoption” started in 1967 when the digitisation of analogue
systems into digital environments began to take shape, which Khan (2018)
describes as the time when “we saw the progressive development of early
FinTech & RegTech technologies that we see today”. He refers in particular
to the introduction of the ATM and the hand-held calculator TI 2500. The era
of early adoption also witnessed the advent of SWIFT (Society for Worldwide
Interbank Financial Telecommunications) in 1973, and NASDAQ in 1971. For
Khan (2018), the year 1999 marked the peak of this era with the beginning of
the dot-com bubble and the crash of 2000. The survivors of the bubble (such
as Amazon, Google and PayPal) went on to redefine the online experience.
28 Fintech
The era of “fintech extravaganza” started in the aftermath of the global

financial crisis, particularly with the launch of the bitcoin and the rise of
cryptocurrencies. The year 2010 witnessed the emergence of cryptocurrency
exchanges as the first purchase using bitcoin was made in May 2010, leading
to the production of a swathe of alternative cryptocurrencies soon after. On 22
May, the famous “bitcoin pizza transaction” occurred when Laszlo Hanyecz
paid 10,000 Bitcoin for two pizzas from Papa Joe’s. One of the earliest
robo-advisor services, Betterment, was founded in 2008 but launched to the
public in 2010. Robinhood was launched in 2013, making stock trading more
accessible to retail investors. Apple Pay and Afterpay were released in 2014.
In 2015, etherium networks introduced smart contracts to the cryptocurrency
world, and the first-ever initial coin offering (ICO) took place. In 2017, Google
released the technology that became Google Pay and neobanks started to
secure banking licences. In 2019, Fast was launched as a start-up intending
to make Amazon-style one-click checkout payments to all e-commerce busi-
nesses. In 2020, Beforepay was launched to allow people to cover unexpected
bills before payday (hence it is the fintech version of payday loans).
2.4 EVOLUTION OR REVOLUTION?
The terms “evolution” and “revolution” refer to change, with a distinctive dif-
ference: evolution is a slow and gradual change whereas revolution is a sudden,
dramatic and complete change. Revolution is a rapid triumph of new ideas and
breaking away from old concepts. Evolution is the process of small frequent
changes intended to improve and adapt the environment. Revolution replaces
old ideas with new promising unproven ideas, whereas evolution improves
existing working ideas in a gradual and continuous manner. Evolution involves
a quantitative change whereas revolution involves a qualitative change.
One example of revolution is the move from feudalism to capitalism with
the advent of the industrial revolution, but since then capitalism has been
evolving (for example, positive changes with respect to child labour and
working conditions). The industrial revolution was a revolution because it
involved a change from an agrarian and handicraft economy to an economy
dominated by machine manufacturing. The French Revolution was a rev-
olution because it involved a fundamental political and societal change in
France—it was inspired by aspiration for “liberté, égalité, fraternité” (liberty,
equality, fraternity).
In what way and sense is fintech a revolution? The expression “fintech
revolution” appears in the media quite often, but there is no agreement on what
it means and when the revolution started. If fintech is traced back to the inven-
tion of the telegraph in the 1830s, the process of adopting technology by the
financial services industry has been evolutionary, even though the production
of innovative technology accelerated recently, which is a natural consequence

of the accumulation of knowledge and expertise. Then why is it that we have
a fintech revolution but not a medtech revolution, even though technology has
been adopted by the healthcare industry on a continuous basis?
One view of the fintech revolution is that the most recent technical innova-
tion (developed during Fintech 3.0 according to Arner et al.) is in a class of its
own. Distinction is made between evolutionary and revolutionary innovations,
and therefore between evolutionary and revolutionary fintech. This means that
the adoption of technology by the finance industry was an evolutionary process
until perhaps the invention of the internet, after which the process became rev-
olutionary. This is why some commentators see fintech as involving innova-
tive products and technologies. The Basel Committee on Banking Supervision
(BCBS, 2018) has compiled a list of “sectoral innovations” (Figure 2.3) and
a list of “innovative market support services” (Figure 2.4). These are 21st
century innovations that presumably mark the difference between fintech
evolution and revolution.
Figure 2.3 Fintech sectoral innovations
The sectoral innovations include items such as mobile banks, mobile wallets,
digital currencies and robo-advice. The innovative market support services
include data applications, distributed ledger technology and cloud comput-
ing. These innovations and innovative services will be described in detail in
Chapter 4, but for the time being it suffices to note that one has to wonder why
any of these inventions are better (in terms of contributing to human welfare)
than the ATM. In what way are they more revolutionary than the telegraph,
telex and fax? It is not quite clear why telecommunication inventions should be
associated with the finance industry only. Why is it that artificial intelligence
30 Fintech
is claimed to be a financial technology when it is more useful in other fields?

In what way is cloud computing more innovative than the very invention of the
mainframe computer or the laptop?
Figure 2.4 Innovative market support services
Another view is that fintech is a revolution in the sense that it is a revolt of new
fintech start-ups against existing traditional financial institutions. For example,
Zavolokina et al. (2016) argue that “FinTech brings new opportunities to give
power to people, for example, by allowing transparency, reducing costs or
cutting middlemen and – what is even more important – to make information
accessible.” Fintech, they suggest, “affects banks which are cautious of being
disrupted and, therefore, try to catch on the FinTech-train, observing all
these thousands of start-ups which create alternatives to traditional banking
services”. Schueffel (2016) describes fintech as the “genie out of the bottle”.
However, Maule (2016) argues that, “rather than a staunch rival to current
financial services companies, in reality FinTech just represents a natural evo-
lution of the sector”. It is an evolutionary process in the sense that the financial
services industry has never been static and, like every industry, it is evolving
constantly. This sounds like a more realistic view than the views expressed by
fintech enthusiasts to glorify what is essentially nothing new.
The question whether fintech means revolution or evolution for the banking
sector is raised by Card (2016), who wonders whether fintechs are helping
banks evolve or planning a revolution. He quotes Rich Wagner, the CEO and
founder of Advanced Payment Solutions, saying that “the death of banks will
take a very long time because the finance directors of Fortune 500 and corpo-
rate businesses will stick with retail banks for many years to come”. However,
one line of business that is openly disrupted is international money transfers.
Here, a number of big names have emerged, such as TransferWise, World
Remit and World First. For years, banks made money by charging exorbitant
fees on international payments and hedging against exchange rates. The new
fintech companies providing money transfer services use web platforms to
slash these costs for both businesses and individuals. The CEO of World
First, who worked in banking before establishing his own business in 2004,
expresses the view that businesses were getting a bad service from banking on
foreign exchange and set out to offer them a better one. This, however, does
not make fintech a revolution.
In yet another sense of the fintech revolution, Blakstad and Allen (2018)
emphasise the role fintech plays in enhancing financial inclusion, an issue
that will be examined in detail in Chapter 8. Their argument is that fintech is
a revolution, in the sense that it will provide financial services to those billions
of people who do not have bank accounts. However, the contribution of fintech
to financial inclusion is questionable and exclusion may be a direct outcome
of the lack of access to the internet and unfamiliarity with the underlying tech-
nology. Even in this narrow sense, therefore, fintech may not be a revolution.
Some observers consider fintech to be a revolution only with respect to
a specific financial activity or a class of financial services. For example, some
would argue that Insurtech has revolutionised the insurance sector, which
means that fintech is a revolution because it brought technology to the provi-
sion of insurance services. However, Sentner (2018) argues that, as far as the
insurance sector is concerned, technology has been there all along. He dis-
misses the notion of “insurtech revolution” because “most of the folks involved
in insurance technology today are unaware that insurance was an early adopter
of technology”. In the 1960s, for example, Travelers (an American insurance
company that was the second-largest writer of commercial property casualty
insurance, and the sixth-largest writer of personal insurance through independ-
ent agents) installed one of the very first IBM mainframe computers, and its
peers were not far behind.
As we saw in Chapter 1, the word “fintech” may be used to refer to technolog-

ical applications in finance or the industry utilising technology in the provision
32 Fintech
of financial services, which may or may not include traditional financial insti-
tutions. In this chapter, fintech seems to refer to the application of technology
as we went back long before the term “fintech” appeared. The modern fintech
industry may be represented by Arner et al.’s Fintech 3.0 and Fintech 3.5, the
episode that witnessed the rapid creation of new firms concentrating on the
provision of specific financial services by using state-of-the-art technology.
As in the case of definitions, the historical evolution of fintech has been
made such a controversial issue. Who cares whether fintech can be traced
back to 1500, 1833, 1860, 1990, 2000 or 2008? What is important is whether
the use of technology in finance at the level witnessed now pays off in terms
of costs and benefits, which also leads to the question of whether or not the
industry should be regulated and to what extent, given that it brings with it
new kinds of risk and perhaps aggravates the risk of fraud. The answer to
these important questions does not depend on when phase 1 started and came
to an end, or whether the definition of fintech is short or long. The task is to
identify certain activities involving the use of technology to provide financial
services, measure the costs and benefits, and take appropriate regulatory action
if necessary. This task does not depend on whether the growth of fintech is
evolutionary or revolutionary.
Some fintech enthusiasts express the view that the development of fintech
was evolutionary for a long time, then it became revolutionary in the 21st
century. These are the same enthusiasts who hold the ludicrous view that
fintech will “give power to people” (presumably by putting them in a vulnera-
ble position in front of hackers and cyber criminals). Fintech is by no means a
“genie”, whether it is inside or outside the bottle. Fintech is not revolutionary
in the sense that banks will disappear as a result. It is undeniable, however,
that the new international money transfer services represent a cheaper alterna-
tive to the services provided by banks that do not shy away from ripping off
customers. However, this does not alter the fact that fintech is the evolutionary
application of the technology created by human endeavour to the provision of
financial services, just like any other economic activity for which technology
is suitable.
3. Functions and market structure
3.1 INTRODUCTION
The fintech industry in a broad sense consists of a variety of players, but many
of them tend to be start-ups that are focused narrowly on applying a particular
technology to enhance or transform a specific financial service. This is why, in
a narrow sense, the fintech industry consists of the start-ups. Examples include
robo-advisors (such as Wealthfront and Betterment), peer-to-peer lending
companies (such as LendingClub), and providers of digital wallets and online
payment services (such as Venmo). In this chapter, however, we consider the
fintech industry in a broad sense, the industry that consists of start-ups and
others.
Another segment of the fintech industry in a broad sense consists of estab-
lished technology companies, including Apple, Google, Facebook, IBM and
Microsoft, which use their knowledge and experience to provide financial
services as a way to expand their activities. Existing providers of finan-
cial infrastructure or payment and transaction technology are also becom-
ing increasingly active in advancing new or emerging technologies, while
a growing number of traditional banks and other financial institutions are
adopting fintech applications to transform their own business models. The
boundaries between these various types of companies are becoming increas-
ingly blurred as they enter into partnerships with each other.
Fintech applications are used in a wide variety of financial areas, from
retail-oriented services to capital markets and financial infrastructure. Several
taxonomies have been developed to classify and map the universe of fintech
applications. For example, the Financial Stability Board (2017) has proposed
a classification into five broad areas: (i) payments, clearing and settlement;
(ii) deposits, lending and capital raising; (iii) insurance; (iv) investment man-
agement; and (v) market support. Fintech companies that participate in core
banking activities (that is, deposits, lending and capital raising as listed under
(ii) above) have to make a strategic choice by deciding whether or not they use
their own balance sheets to fund credit intermediation activities, as this deci-
sion has important risk management implications. Those that use balance-sheet
financing are referred to as “balance sheet lenders”, whereas companies that
act as pure intermediaries between borrowers and lenders are known as “mar-
33
34 Fintech
ketplace lenders”. At this point, fintech companies that are active in this area
tend to adopt a hybrid model. Several other classification schemes have been
suggested, but (broadly speaking) fintech applications fall under four broad
areas: (i) payment and settlement, (ii) investment management, (iii) credit and
deposits, and (iv) insurance.
3.2 THE FUNCTIONS OF FINTECH COMPANIES
The word “functions” is used here to refer to the activities that can be classified
as fintech activities, which produce digital financial services. Fintech encom-
passes a variety of financial activities and transactions, such as transferring
money, depositing a cheque by using a mobile phone, bypassing a bank branch
to apply for credit, raising money for a new business by using crowdfunding,
and managing investments without the assistance of a real human being. Table
3.1 provides just a few examples of fintech companies specialising in the
provision of financial services by using state-of-the-art technology. The table
shows that there is more than finance in the activities of fintech companies as
listed by Fintech Weekly. For example, some of these companies provide soft-
ware that is used in the provision of financial services and for other purposes.
The following is a brief description of fintech functions, where overlapping
may be present. The description follows the literature where fintech applica-
tions are portrayed to be useful, revolutionary and life-saving. An alternative
view will be expressed in Chapter 5 where the dark side of fintech is exposed.
Banking
Prior to the advent of (modern) fintechs, traditional banks offered essential

services (such as funds transfer, loan payments and bank accounts) by requir-
ing customers to visit a physical bank branch. Mobile or digital banking, on
the other hand, enables consumers to have easy digital access to their bank
accounts on a mobile device. Two fintech banks, Discover and Ally, offer
a wide variety of accounts, including savings accounts, certificates of deposit,
money market accounts and current accounts. The savings accounts offered by
Discover and Ally do not require a minimum deposit to open. In fact, Ally does
not require a minimum amount to open any of its deposit accounts. Discover,
on the other hand, requires a deposit of at least $2,500 to open a certificate of
deposit (CD) account or a money market account. The global digital banking
market is set to reach $9 trillion by 2024 (Caicedo, 2019).
A fintech banking institution may be called a “challenger bank” or a
“neobank”, two terms that are often used interchangeably. Caicedo (2019)
suggests a classification of the current digital challenger banks, based on
their business models and the services they provide. Thus, distinction is made
Functions and market structure 35
Table 3.1 Examples of the activities of fintech companies
Activity Company Description

Accounting BILLINGENGINE Cloud invoicing solution
AI CONFIRMU Credit score
API banking EBICS BOX Processing of money transactions
B2B VAT4U Automated VAT recovery
Biometric payments KEYO Paying with a scan of palm
Bitcoin ATM BCB ATM Bitcoin ATM operators
Blockchain IBINEX Exchange-to-exchange ecosystem
Business loans BIZ2CREDIT Connecting small businesses with lenders
Compare BROKERCHOOSER Finding an online broker fitting customers’ needs
Compliant marketing BLUE OWL Compliance by focusing on regulatory requirements
Credit cards NUBANK Issuer with no annual fee and online-only operation
Credit rating MODEFINANCE Credit rating
Crowdfunding BANKTOTHEFUTURE Bringing investment opportunities to investors
Cryptocurrency LOCOINS LTD Crypto to cash exchanges
Currency exchange ESPAY PTY LTD Forex solutions
Data analytics 3FORGE Software for financial institutions
Digital banking ATOM Banking based on an app
Digital wallet CASHCLOUD Mobile wallet application
Financial planning ADVIZE Wealth management platform
Forex payments CURRENCY CLOUD Cross-border money transfer
Identity verification TRANSFERMYID Identity verification exchange network
Insurance BROLLY Artificially intelligent insurance advisory application
Investment BRICKNODE A cloud-based software platform
Invoice payments POM e-invoicing and e-payment technology solutions
Leasing FLEXVELOP B2B leasing through digitalised processes
Lending QUICKCREDIT Providing payday loans to salaried employees
Money transfer NTRUST Online and mobile money transfer
P2P lending VIAINVEST Peer-to-peer lending platform for private investors
Payment ACCUMULATE Mobile payment services
Personal finance EMMA A money management tool
Portfolio tracking SHARESIGHT Cloud investment portfolio tracking solution
Real estate BRICKVEST Online real estate investment platform
Regtech FENERGO Client Lifecycle Management (CLM) software
solutions
Robo-advising POLARIS A digital wealth management service
36 Fintech
Activity Company Description

Security BEHAVIOSEC Continuous authentication and verification technology
Software CRAYON DATA AI and big data
Tax compliance COMPLY EXCHANGE Compliance with the regulatory and tax landscape
Trading APHELION Built-in systems to create a foreign exchange platform
Wealth management FINTAPP Empowers naive investors
Source: https://fintechweekly.com/fintech-companies
among new banks, neobanks, beta banks and non-banks. New banks have full
banking licenses and compete directly with big traditional banks by offering
similar services and products. Neobanks do not have banking licenses, but
they enter into partnership with financial institutions to offer the services
typically provided by licensed banks. They require customers to have accounts
at an existing licensed bank, and then they offer more user-friendly interfaces
and fee-free services. Beta banks are joint ventures or subsidiaries of existing
banks that offer financial services through the parent company’s license. They
are often set up for the purpose of entering new markets, offering limited
services to a broader customer base. Non-banks (or non-banking financial
companies), which have no connections to traditional licensed banks, provide
financial services by other means, such as an electronic money (or e-money)
license. The services provided by non-banks are related to electronic means of
payment. They may offer loans but do not provide deposit services.
Crowdfunding
Crowdfunding (or crowdsourcing) allows entrepreneurs with innovative ideas

to obtain funding quickly and easily from small investors who can be anywhere
in the world. Crowdfunding platforms, such as Kickstarter and GoFundMe,
allow users to invest their money in businesses, products and individuals (such
as artists and inventors). Instead of having to go to a traditional bank for a loan
(or raise capital by issuing bonds), crowdfunding platforms make it possible
for entrepreneurs to go directly to investors to raise the funds needed to finance
a new project.
Crowdfunding comes in three types. Equity crowdfunding refers to the
process whereby people invest in the early stages of an unlisted company in
exchange for being shareholders. Reward crowdfunding, which is the most
common type, is a scheme whereby investors do not acquire equity in the
company, nor do they gain interest by providing loans. By making financial
contributions to a project, investors gain rewards (which are proportional to the
contributions) offered by the entrepreneurs in different forms. The third type is
donation crowdfunding, which is intended to raise funds by asking the public
to make small or large donations for different causes, typically for charity
purposes. Investors do not receive any ownership of equity, financial benefit,
or reward—instead, they are motivated by various factors, including the desire
to contribute to the achievement of the project’s goals. At most, contributors
realise special recognition in return for their contributions.
Mobile Payments and Money Transfer
By using increasingly sophisticated technology, services have been developed

to allow customers to exchange payments online or on mobile devices. The
payment app Venmo has become so popular that the phrase “I’ll Venmo you”
means “I will pay you later”. Some of the biggest companies (such as Apple,
Amazon and Alibaba) have entered the mobile payment market with enormous
investments to meet (and exploit) growing demand from customers who are
inclined to use fintech. Applications (such as Apple Pay, Google Pay, PayPal
and Amazon Pay) provide customer-friendly payment services. Unlike the
elaborate international money transfer process described in Chapter 1, it has
become easier than ever before to send money digitally anywhere in the world.
Distinction is made between digital wallets and mobile wallets. Digital
wallets are platforms used to make online payments, accessible from web
browsers and applications. Users link the platform to different options orig-
inated by the traditional payment system (such as debit cards, credit cards,
coupons, and gift and loyalty cards). Users select their preferred payment
option linked to the platform to pay sellers who accept payments made through
digital wallets. The platform then settles the underlying transactions (for
example, transferring funds from the bank account associated with the selected
debit card to the seller’s bank account). Mobile wallets are digital wallets that
are accessible from mobile phone applications, which sometimes carry digit-
ised versions of credit or debit cards.
P2P transfer services provide digital or mobile wallets so that users transfer
money between any two wallets within the platform. Typically, users add funds
to their wallets by depositing money in a bank account associated with the P2P
transfer company. To make a P2P transfer, the service provider charges a fee
for subtracting money from the sending user’s wallet and adding money to the
receiving user’s wallet. This means that the process does not require money
transfer from bank to bank, since the money associated with both wallets is
part of the provider’s payment ecosystem. Digital wallets are not only used for
P2P payments but also for other purposes such as the payment of utility bills,
international remittances, and the purchase of tickets.
While a digital wallet is a payment method, a payment gateway (or payment
processor) works as a channel for settling transactions between buyers and
sellers. Therefore, consumers can choose to pay via a digital wallet, but the
38 Fintech
website will still need the gateway or payment processor to complete the
transaction. Payment gateways, which have removed the interference of
a bank for every transaction, have the following attractive features: (i) they use
encryption to secure the transactions; (ii) they are compliant with the Payment
Card Industry Data Security Standards established to provide secure payment
solutions by forcing companies to use firewalls on their internal networks;
and (iii) a two-factor authentication feature is a must for payment gateways to
provide an additional security layer to their users. They are therefore a much
more secure mode of transaction, they help businesses expand their reach by
connecting to customers from all over the world, and they allow the settlement
of transactions much more rapidly than the standard manual processing used
by banks.
Cryptocurrency and Blockchain
Cryptocurrency and blockchain technologies are some of the best-known and

most-scrutinised functions of fintech. A cryptocurrency is defined by PWC
(2017) as a “medium of exchange created and stored electronically, using
encryption techniques, to control the creation of monetary units and to verify
the transfer of funds, decentralized from the Central Bank”. The owners of
a cryptocurrency digital wallet can transfer and receive cryptocurrency units
within a given cryptocurrency system. In Chapter 7, it will be argued that
cryptos cannot perform the function of a medium of exchange, at least as
things stand now. Cryptocurrency exchanges, such as Coinbase and Gemini,
allow users to buy and sell cryptocurrencies. Even though cryptocurrencies are
controversial, they have certainly taken parts of the investment world by storm,
perhaps owing to the fear of missing out. Scepticism about cryptocurrencies
is rife, to the extent that some commentators tend to think that it is a Ponzi
scheme. However, distinction must be made between cryptocurrencies and
the underlying technology of blockchain, which has the potential to move
into industries outside of finance to reduce fraud. For example, BlockVerify
helps reduce fraud by keeping provenance data on the blockchain. Chapter 7
is devoted to a discussion of cryptos, whereas the blockchain technology is
considered in Chapter 4.
Investment and Savings
Fintech has caused an explosion in the number of investing and saving apps.
Barriers to investing are being broken down by companies like Robinhood,
Stash and Acorns. While these apps differ by design, all of them are intended
to introduce small investors to financial markets. The underlying idea is that
investing in financial markets is no longer limited to wealthy people. With
investment apps like SoFi Active Invest, customers can get started with $1 and
trade stocks directly from mobile devices, without having to pay commissions.
Trading and Robo-Advising
The development of stock-trading apps is regarded as a significant fintech

innovation that enables investors to manage their wealth on their own. The
apps enable investors to buy and sell stocks at the tap of a finger on a mobile
device. Machine learning (a subset of artificial intelligence) is used to predict
the direction of market movements by running massive amounts of data
through algorithms designed to spot trends and risks. Robo-advising provides
algorithm-based portfolio recommendations and management to reduce costs
and boost efficiency. Distinction is made among e-trading, high-frequency
trading and copy-trading. E-trading involves the management of a portfolio of
financial assets (just as in traditional trading) where fintech companies provide
digital or mobile investment platforms that are accessible at any time. These
platforms also provide automated investment counselling and investment sim-
ulations. High-frequency trading is executed via automated trading platforms
that utilise powerful computers to process orders in a very short span of time.
Copy-trading is a fintech business model that enables traders to copy specific
positions managed by licensed traders through contracts for difference (CFD)
platforms, where a CFD is an agreement between an investor and a broker to
exchange the difference in the value of a financial asset between the time the
contract opens and closes. This means that a CFD investor never actually owns
the underlying asset but instead receives revenue based on the price change
of the asset. The Commodity Futures Trading Commission (CFTC) and the
Securities and Exchange Commission (SEC) prohibit US residents and citizens
from opening CFD accounts on domestic or foreign platforms, which means
that they are illegal in the US.
Robo-advising has reduced the cost of portfolio management. It allows
users to define questions and answers and configure a checklist that makes it
possible to determine a customer’s risk appetite. It provides a document repos-
itory where documents are stored such that only users with the appropriate
privileges can view them. It also provides 24/7 live updates on stock markets.
Lending and Credit Reporting
Gone are the days when a customer had to bring a ton of paperwork into
a bank to see whether they qualify for a loan. Now, the entire process can be
done on a laptop or a smartphone. Online marketplaces like LendingTree,
Credible and SoFi provide customers with multiple offers after entering some
basic information. Online mortgage lenders aim to simplify the homebuying
40 Fintech
process by allowing customers to compare instant quotes online and close

on a mortgage at a fraction of the time (and possibly cost) it would take with
a traditional lender. Some fintech companies (such as Better.com) even claim
to deliver a pre-approval in as little as three minutes following the submission
of an application.
Fintech allows the streamlining of risk assessment, which speeds up
approval processes and makes access easier. Fintech credit companies, which
allow customers to apply for loans on their mobile devices, include Tala, Petal
and Credit Karma. The fintech giant Kabbage, which provides small business
loans, is powered by transactional data that allow the company to make rather
quick lending decisions. Lending Club utilises peer-to-peer lending, which
allows customers to lend to each other to finance business ventures without
the involvement of a traditional financial institution. In the growing field of
credit reporting, Credit Karma provides free credit reports in exchange for the
ability to advertise loans and credit cards tailored to the specific needs of its
customers.
Associated with the activity of lending is the concept of “lending mar-
ketplaces”, which are online services that connect investors with borrowers
through a digital platform. Lending marketplaces allow individuals and small
businesses to receive loans from individual risk-taking investors who are
willing to invest their own money for an agreed interest rate. Platforms usually
display the borrowers’ profiles for investors to assess them and to determine
whether they want to take the risk of lending to them. The borrowers then
receive the loan amount (made available by an investor or a group of investors)
from the lending marketplace, which in turn receives a predetermined fee.
Fintech loans are of several kinds. A small business administration (SBA)
loan is used by a small business to finance working capital, payroll, purchasing
real estate, consolidating debt, refinancing business loans, expansion, and for
other purposes. A mid-prime fintech loan, which is one of the most common
forms of small business loans, offers rates that are competitive with those
charged on traditional bank and SBA loans. A fintech cash advance is a kind
of lending that is based on the future sales revenue of the borrowing company.
A fintech funding company determines what the small business can handle
as a maximum payment for the purpose of deciding how much funding to be
approved. Fintech invoice factoring is based on 30–90-day unpaid invoices,
such that a fintech lender provides a small business with a percentage of the
invoice’s value (minus a fee).
Insurance
The insurance part of fintech is known as Insurtech, covering everything

from car insurance to home insurance and data protection. Fintech firms enter
partnerships with traditional insurance companies to automate processes and

expand coverage. Companies such as Oscar Health and Credit Karma are
examples of Insurtech companies that have entered the healthcare and personal
finance industry. Other examples are Root Insurance and Policygenius. The
advent of Insurtech means that customers no longer need to sit with an insur-
ance agent to discuss policies, get a quote, or even file a claim, as everything
can be done on a mobile phone. The website Policygenius helps customers
compare several different types of insurance policies online. By entering some
basic information, the site matches customers with offers.
Insurance customer relationship management (CRM) software helps insur-
ance companies to collect, store and manage all users’ data in one place and
use it effectively to improve user-experience. It also helps companies to take
care of commission processing and the automation of other working processes.
Insurance CRM software has a task management feature that allows employ-
ees to manage daily activities with task summaries and schedules. It also has
a document management feature that aids the management of clients’ docu-
ments in one single place. A commission tracking feature helps track agent
commissions and their progress. And a workflow engine boosts operational
efficiency due to automatic document and commission generation. Hence,
insurance CRM software provides cost efficiency by improving the processes
with automatic document creation without any manual entries, and allows
employees to concentrate more on user-experience and sales rather on data
entry.
Budgeting
Budgeting apps have become popular among consumers. Traditionally,

budgets are constructed by using excel spreadsheets to keep track of income
and expenditure. Fintech allows consumers to do that on their mobile devices,
as budgeting apps automate the process while handling all of the calculations.
The apps import financial information from spreadsheets or directly from bank
accounts, streamline spending and saving plans, and generate budget reports.
Price Comparison Marketplaces
A price comparison marketplace is a platform intended to provide users with

key product information including price, features, availability in stores, rating,
reviews, and more. In addition to comparing prices, users can compare other
important characteristics of the desired product. Price comparison sites do
not sell goods—rather, they collect information at one place so that a user
can make a firm decision about what to buy. In the case of hotel comparison,
for example, details are made available on the hotel status (3, 4 or 5 stars),
42 Fintech
location, whether or not the price is inclusive of taxes, availability of WiFi,

whether or not breakfast is included, as well as customer ratings and reviews.
3.3 THE FINTECH INDUSTRY
In a broad sense, the fintech industry (or ecosystem) consists of (i) fintech
service providers; (ii) the technology used by fintech service providers to
transform financial services; (iii) intermediaries using fintech to broker finan-
cial services; (iv) regulators; and (v) fintech enablers, providing support for
the growth of the industry. These components of the broad fintech industry are
described in turn.
Fintech Service Providers
Figure 3.1 Line of business of world’s top 50 fintech companies
Service providers are the fintech firms executing the functions described in
the previous section and more. In Figure 3.1 we can see the line of business
of the world’s top 50 fintech companies, most of which are in the lending
business. Users of fintech are of two kinds: business-to-business (B2B)
users and business-to-consumer (B2C) users. B2B services make it possible
to execute financial transactions between two companies without any bank
intermediation. The two companies may be a manufacturer and a wholesaler,
or a wholesaler and a retailer. B2C, on the other hand, pertains to transactions
between companies and consumers. Familiar examples of B2C companies are

Amazon, Walmart, and other companies where individual customers are the
end-users of the products.
Figure 3.2 B2B and B2C products and services
Figure 3.2 displays the products and services of B2C and B2B under the
functions of lending, payments, financial management, insurance, and other
functions. Table 3.2 provides a brief description of some of the terms associ-
ated with the products and services that appear in Figure 3.2.
B2C as a business model typically involves a higher volume of customers
conducting small transactions, whereas B2B businesses deal with a small
44 Fintech
Table 3.2 A brief description of the terms associated with products and
services
Product/Service Description
Digital origination A digital origination platform makes the process of applying for a bank product
easier for customers. It is a sales and underwriting system that provides full flexibility
in offering bank products and services. Digital origination provides a consistent and
personalised user experience on all screen sizes.
Algo-based credit The use of algorithms to estimate the probability that an applicant will default by
assessment comparing his or her current and historical data to data on borrowers who have taken
similar loans in the past. An applicant is considered risky if people who share his or
her characteristics have paid late or defaulted.
Theme-based Lending for special purposes such as education and health.
lending
Asset-backed A specialised method of providing companies with working capital and term
finance loans that use accounts receivable, inventory, machinery, equipment or real estate
as collateral. It is essentially any loan to a company that is secured by one of the
company’s assets.
Off-balance The opposite of the traditional form of lending (on-balance lending) in which funds
lending owned by the lender are borrowed. Hybrid lending includes both.
Short-term working A loan to finance working capital is used by a business borrower to pay for inventory,
capital finance advertising and equipment, as well as meeting payroll and other operating expenses.
Invoice discounting A loan secured against outstanding invoices.
Invoice factoring Invoice factoring companies acquire unpaid invoices outright, allowing them to deal
with customers directly.
Point-of-sales A POS system allows a business to accept payments from customers and keep track
systems of sales. Modern POS systems are entirely digital.
Agent networks Financial service providers sometimes use agent networks instead of traditional
branches to reach more customers at a lower cost. Agent networks may comprise an
established distribution network, such as post offices and retail chains.
Micro-insurance The protection of low-income people against specific risks in exchange for regular
premium payments appropriate to the underlying risk. Micro-insurance products offer
coverage to low-income households or to individuals who have little savings. It is
tailored specifically for lower valued assets and compensation for illness, injury or
death.
Farmer insurance The provision of general liability and product liability insurance for farmers.
Hybrid insurance Insurers adopting this business model create an entirely new digital business, while
models leaving their existing one largely untouched.
Product/Service Description
Cloud-based core A core banking system is used to process banking transactions and post updates
banking system to accounts and other financial records. Cloud-based core banking requires the
migration of the bank’s core to a cloud provider, to exploit the provider’s computing,
tooling and operations power.
KYC support KYC means “know your customer” and sometimes “know your client”. KYC check
is the mandatory process of identifying and verifying the client’s identity when
opening an account and periodically over time. In other words, banks must make sure
that their clients are genuinely who they claim to be.
number of customers that make larger transactions. Some companies adopt

a hybrid model involving B2B and B2C, such as SaaS (software as a service)
companies. These companies typically have many different tiers of service,
tailored to companies or individuals. By far most of the users of fintech (about
60%) are in the B2C business, whereas 16% do B2B and B2C business.
Sometimes a C2C (consumer-to-consumer) business model is used to allow
individual consumers to find and transact with each other. Examples of
a C2C business are Etsy and eBay. Yet another business model is the B2G
(business-to-government) model, adopted by companies that focus on servic-
ing the government. An example of a B2G company is Northrop Grumman,
which has 90,000 employees and focuses on aeronautics, military equipment
and cyberspace. Some companies may have a B2G focus while also indulging
in B2B or B2C business.
It remains the fact that the majority of businesses are yet to adopt fintech.
Results from a CPA Australia (2021) survey of 620 members found that 70%
of businesses do not use any fintech applications, while 40% of businesses are
unaware of fintech applications. This result is consistent with EY’s Global
FinTech Adoption Index 2019, which reveals that 25% of global small and
medium-sized enterprises (SMEs) have adopted fintech into their business.
According to EY (2019), this adoption rate is expected to surge over the
coming years to 64%, with many SMEs expressing plans for future use of
fintech solutions. EY also found higher adoption rates in SMEs with an
international customer base, and that 96% of fintech adopters place strong
importance on online and mobile sales channels.
The Technology
Traditionally, technology was used at the back-end systems of established

financial institutions, but a shift has occurred, particularly since the beginning
of the 21st century, to a wide range of other applications that are more con-
sumer focused. New technologies (such as artificial intelligence, predictive
behavioural analytics and data-driven marketing) will take the guesswork and
46 Fintech
habit out of financial decisions. Learning apps are intended to learn the habits
of users and engage them in learning games to improve their automatic, uncon-
scious spending and saving decisions. Chatbots and AI interfaces are intended
to assist customers with basic tasks and also keep down staffing costs. Fintech
is also used to fight fraud by analysing information about payment history to
flag transactions that fall outside the norm.
The intermediaries using fintech to provide financial services enable con-
sumers to get better deals, using technology to search for the best financial
product at the best price. They also help customers improve the way they
manage their money by consolidating their products. For example, customers
can use an Application Programming Interface (API) to get access to all of
their investments and bank accounts under one roof, allowing them to manage
their investments and day-to-day budgets. APIs and other technologies will be
examined in detail in Chapter 4.
Regulators
Regulators play an important part in the fintech ecosystem by bringing trust

and credibility to licensed firms and reassuring investors that their money is
safe when dealing with these firms. Increasingly, regulators are playing an ena-
bling role to drive the growth of fintech, on the grounds that fintech firms are
conducive to safety in the financial system by stimulating more competition.
Caicedo (2019) argues that the growth of digital banking is accelerating around
the world, largely because of recent regulatory changes that make it easier for
new fintech companies to provide financial services. The regulation of fintech
will be discussed in detail in Chapter 9.
Enablers
Fintech enablers take many shapes and forms, including accelerators, incu-
bators, consultants, advisers, investors and the media. Enablers facilitate or
enhance an existing process or solution, motivated by the profit that can be
realised by contributing to the development of the fintech industry. In a narrow
sense, enablers are the technology platforms that rent out their core banking
infrastructure to enhance financial apps and services. In this sense, enablers
help fintech companies by providing them with core banking technology to
enhance compliance, authentication and payment processing.
3.4 START-UPS AS DISRUPTORS
Fintech start-ups are companies that rely on technology to address consumer

needs with respect to financial services. They aim at using technology to
improve traditional financial services and to make financial transactions safer,

faster and more efficient. A “fintech unicorn” is a privately owned start-up
with a valuation exceeding $1 billion (examples are Robinhood and SoFi).
Sometimes, distinction is made between “unicorns” and “semi-unicorns”,
the latter being companies that are valued at more than $500 million. While
the growth of start-ups was stagnant in 2019, it took off in 2020 as a result of
pandemic-related lockdowns, which forced people to shop online and conduct
contactless banking. The growth rate remained high in 2021.
Start-ups are designed to be a threat to, challenge, and eventually disrupt
entrenched traditional financial service providers (the incumbents) such as
commercial banks and finance companies. Disruptors are also called challeng-
ers. Entrenched, traditional financial institutions have been paying attention
to their potential disruptors, aiming to become more like the disruptors by
providing similar, technology-enhanced financial services. Examples of dis-
ruption and challenge include a new company that seeks to cut credit card
companies out of the online shopping process by offering consumers imme-
diate short-term financing for their purchases. Another example is a mortgage
company that seeks to streamline the home mortgage process (and obviate
traditional mortgage brokers) with a digital-only offering that can reward users
with a verified pre-approval letter within 24 hours of applying.
For incumbent financial institutions to preserve their market shares, they
will have to (i) scan the environment to identify new threats and opportuni-
ties, (ii) understand quickly the effect that emerging trends and technologies
could have on their business, and (iii) come up with solid strategies to react
(acquiring or working with fintech start-ups to building their own innovative
solutions). Andjelic (2021) reports the following facts and figures about the
relation between the incumbents and fintech companies. The first is that 88%
of incumbent financial institutions believe that part of their business will be
lost to stand-alone fintech companies in the next five years. The second is that,
in the next three to five years, 77% of incumbent financial institutions will shift
focus to internal innovations for the purpose of boosting customer retention.
The third is that, according to a 2020 global survey, 75% of banks are investing
in developing more customer-focused business models. Last, but not least,
55% of fintech representatives believe that differences in management and
culture are the biggest barriers for integrating fintech business start-ups into
traditional financial institutions.
Sometimes distinction is made between “traditional” and “emergent”
fintechs (for example, Tikam, 2020). Traditional fintech companies are
typically large technology vendors supporting the financial sector. Emergent
fintech companies, on the other hand, include disruptors and innovators that
disintermediate incumbent financial services firms or provide new technology
solutions to service existing needs. Tikam (2020) argues that this distinction
48 Fintech
“leads to a misleading assumption that disruptive Fintech can only come from
start-ups”. In reality, however, traditional banks and incumbent financial
institutions are in a position to leverage the power of fintech for the purpose of
enhancing operational efficiency and improving customer experience.
Tikam (2017) expresses the view that “Fintech startup is a misconception”
because “the Fintech sector has proven to be incredibly lucrative at attracting
entrepreneurs and incumbent players alike”. He argues that incumbent players,
and even some non-financial services corporate giants, are striving to tap this
business to disrupt the status quo, gain operational efficiency and improve cus-
tomer experience. He suggests that they do that by (i) setting up intrapreneurial
fintech start-up ventures within the group, but in a totally separate and auton-
omous business unit; (ii) leveraging their sizeable and highly invested infra-
structure to support new financial services models; (iii) making a better use of
their own customer data by using big data analytics, artificial intelligence and
automation; and (iv) exploring technology that helps them comply efficiently
and effectively with regulatory changes. Intrapreneurship is an entrepreneurial
activity within a large, established business, intended to address a new market
opportunity or develop a new way of doing things, outside the normal scope
of activities.
Related to the concept of start-ups are incubators and accelerators, which are
regarded as fintech enablers. A start-up incubator is a collaborative programme
for start-up companies (typically located in one central workspace) intended
to help start-ups in their infancy by providing workspace, seed funding, men-
toring and training. Start-up incubators are typically non-profit organisations,
often associated with universities and business schools, which extend invita-
tions to students, alumni and members of the community to take advantage of
the programme. Some popular incubator programmes include Y Combinator,
TechStars and Excelerate Labs. Beyond basic business resources, the benefits
of joining a start-up incubator include networking (access to a network of suc-
cessful business partners), mentorship (the opportunity to hear and learn from
the personal experiences of successful mentors in their chosen industry), and
support from other entrepreneurs (the opportunities and experiences shared
with the other members of the incubator).
An accelerator works in partnership with innovative firms exploring the use
of new technology to harness fintech innovations. Working in partnership with
an accelerator, firms have the opportunity to apply their technology to a “real
issue” and engage directly with some subject matter experts. Although the
terms “accelerator” and “incubator” are often used interchangeably, they are
different: accelerators are intended to accelerate business development, while
incubators are designed to nurture innovative business ideas. Ryan (2019)
identifies a number of differences based on purpose, programme design, range
of resources, sponsorship, seed funding, duration and the selection process. For
example, the purpose of an incubator is to help an entrepreneur to build a new

business from the ground up. Incubators accept start-ups when the venture is
still in its idea stage. The purpose of an accelerator, on the other hand, is to help
a start-up progress to the next stage of business development. Accelerators
work with entrepreneurs that already operate an established business.
3.5 FINTECH AND SHADOW BANKING
Shadow banking has always been a source of concern because shadow banking
institutions are unregulated or lightly regulated compared with traditional
financial institutions, particularly commercial banks and deposit-taking insti-
tutions. This is why shadow banking institutions have been used by traditional
ones to circumvent regulation. If fintech firms are anything close to shadow
banking institutions, regulators should consider the consequences of allowing
fintech firms to operate without or with little regulation.
The shadow banking system consists of non-bank financial institutions that
provide financial services as an alternative to those provided by traditional
commercial banks (which sounds like fintech firms). While traditional banks
are regulated by central banks and their operations are subject to international
banking regulation (such as the Basel accords), the shadow banking system is
not subject to the same regulation, which provides the means whereby regu-
lated banks can circumvent regulation by conducting business through shadow
banking. Effectively, therefore, the shadow banking system is a loophole in
the regulatory framework. Like regular banks, shadow banks provide credit
and boost the liquidity of financial markets but, unlike regulated banks, they
have no access to central bank funding or safety nets such as deposit insurance
and debt guarantees. Bill Gross, president of PIMCO, has the following to say
about shadow banking: “Beware our shadow banking system. … What we are
witnessing is essentially the breakdown of our modern-day banking system,
a complex of leveraged lending so hard to understand that Federal Reserve
chairman Ben Bernanke required a face-to-face refresher course from hedge
fund managers in mid-August” (Gross, 2007). The shadow banking system is
thought to have contributed significantly to the advent of the global financial
crisis (Simkovic, 2009; Gorton, 2010; Harvey, 2010).
The arguments for and against the regulation of the shadow banking system
could well be the arguments for and against the regulation of fintechs. Calls
for the regulation of shadow banking were rampant in the aftermath of the
crisis. The Economist (2014) suggested that “shadow banking certainly has
the credentials to be a global bogeyman” because “it is huge, fast-growing in
certain forms and little understood—a powerful tool for good but, if carelessly
managed, potentially explosive”. Furthermore, most observers agree that the
growth of shadow banking has been largely driven by regulatory arbitrage,
50 Fintech
with the objective of avoiding regulatory restrictions (for example, Acharya

et al., 2013).
Arguments for the regulation of shadow banking include vulnerability to
financial market shocks, contribution to the global financial crisis, circumven-
tion of regulation, systemic risk and regulatory failure (for a detailed discus-
sion, see Moosa, 2017). Most importantly, perhaps, is that shadow banking
is a conduit to fraud because the shadow banking system is characterised by
opaqueness, lack of transparency and inadequate disclosure. The big enablers
of fraud are products of shadow banking such as OTC derivatives, which are
exempt from the securities rules applicable to similar deals, and repos, which
were used by Lehman Brothers to hide losses.
Arguments against the regulation of shadow banking rest on the free market
principles. One argument is that shadow banking is superior to traditional
banking, which has proven to be inefficient and unsustainable over time (Fein,
2013). The other argument against is that shadow banking is a natural conse-
quence of growth, in the sense that economic growth gives rise to the need
for a diversified set of financing modes and sources. Another growth-related
argument is put forward by Wallison (2012), who goes as far as saying that
the regulation of shadow banking would “add costs that will impair economic
growth”. Yet another argument against the regulation of shadow banking is that
we do not know whether the system is bad because it is little understood (for
example, Reuters, 2013). The proponents of shadow banking also claim that
it provides important financial intermediation functions that are distinct from
those performed by banks and capital markets, as confirmed by its continued
growth (Claessens et al., 2012). Other arguments include the following: reg-
ulation is a knee-jerk reaction (Wallison, 2012), shadow banking is not inher-
ently unstable, and regulating shadow banking kills innovation. If, as shadow
banking enthusiasts believe, shadow banking is “innovative”, and since regu-
lation kills innovation (as free marketeers believe), the shadow banking system
should not be subject to regulation (Wallison, 2012). Last, but not least, there
is the argument that shadow financial institutions are self-disciplined by their
reputation concerns, which means that there is no need for external regulation.
This is the same as the grotesque free-market argument against the regulation
of fraud (fraudulent institutions are punished by the almighty market).
The characteristics of shadow banking are strikingly similar to those of
fintech firms, and it is these characteristics that are used to justify the desire
not to regulate them. Shadow banking is superior to traditional banking, as
fintech start-ups are superior to traditional financial institutions. The propo-
nents of fintech attribute the inferiority of traditional banks to their failure
to use enough technology, which makes them “inefficient and unsustainable
over time” as Fein (2013) believes. The argument that shadow banking is a
“natural consequence of growth” is equally applicable to fintechs, because
(like shadow banking) they provide much-needed, growth-triggered diver-

sified set of financing modes and sources. Wallison’s (2012) view that the
regulation of shadow banking would “add costs that will impair economic
growth” is equally applicable to fintech firms that provide cheaper financial
services. The proposition that shadow banking is little understood is even
more valid for fintech owing to the use of complex technology. As in the case
of shadow banking, the continued growth of fintech is indicative of its ability
to provide “important financial intermediation functions that are distinct from
those performed by banks and capital markets” as suggested by Claessens et
al. (2012). Those who argue against the regulation of shadow banking suggest
that regulating kills the innovation brought about by shadow banking, an
argument that is even more valid for fintech because of the technological inno-
vation brought about by fintech firms. And, as in the case of shadow banking,
self-discipline can be used as a regulating mechanism that precludes the use of
“costly regulation”.
The similarity between shadow banking and fintech has been debated for
some time. Gelis (2016) claims that fintech is often placed (by traditional
banks) under the shadow banking umbrella characterised by opacity, excessive
risk-taking, malpractice, negligence and fraud. Ghosh (2020) suggests that
shadow banks include fintech lenders, describing them as the “prime source of
the spike in auto-debit failures” (these are recurring automatic payments where
loan instalments are drawn every month from a bank account). Seru (2019)
refers to “the business model of fintech shadow banks” and to the “financial
technology adopted by shadow banks”. Buchak et al. (2018) examine the
growth of the market share of shadow banks in residential mortgage origi-
nation and emphasise the “dramatic growth among online fintech lenders”,
attributing this growth to regulatory differences and technological advantages.
However, Gelis (2016) disputes the classification of fintech under shadow
banking, putting forward two propositions. The first is that neither the fintech
ecosystem nor the fintech lending industry can be identified as shadow banking
according to the FSB’s definition (the technologically enabled innovation in
financial services that could result in new business models, applications, pro-
cesses or products with an associated material effect on financial markets and
institutions and the provision of financial services). The second proposition is
that peer-to-peer lending regulation should differ from traditional banks’ pru-
dential rules since both undertake different activities, are exposed to different
risks and pose different risks to the economy. In this sense, Gelis (2016) does
not suggest that fintech should not be regulated but that it should be regulated
differently. Whether or not “differently” means “lightly” is another matter,
but in any case these two propositions are flawed. As far as definitions are
concerned, we have seen that fintech is defined in tens of different ways, none
of which is necessarily the correct definition. While P2P lending is different
52 Fintech
from the lending of traditional banks, it involves more counterparty risk and
it is perhaps more susceptible to fraud. The common characteristic shared by
shadow banks and fintechs is “innovation”, financial innovation as the product
of shadow banks, and technological innovation as the product of fintechs.
3.6 FINTECH AND FINANCIAL INNOVATION
The 1980s, 1990s and early 2000s witnessed an explosion of “financial

innovation”, the products of “financial engineering” and “structured finance”,
whereby new financial products were “invented” and priced. Josse (2016)
argues that, while the innovation associated with financial engineering (such
as contingent capital bonds and mid-market debt funding) continues, this kind
of innovation is “small fry” compared with financial technology innovation.
Hence, he notes, “nothing short of a new financial innovation revolution is
going on due to fin tech”. The problem is that we have had bad experience
with excessive financial innovation (including fraud), which brings about the
possibility of having bad experience with excessive fintech innovation.
The innovation brought about by financial engineering created complex
problems and contributed to the advent of the global financial crisis. Financial
engineering has led to the explosive growth of financial markets and produced
instruments that no one understood and which turned out to be conducive to
the augmentation of risk rather than a tool for risk management. In his review
of Gillian Tett’s book, Fool’s Gold, Dominic Lawson (2009) tells a story about
an e-mail sent by one of the inventors of complex credit derivatives to one
of his colleagues. The e-mail read: “What kind of monster has been created
here? It’s like you’ve raised a cute kid who then grew up and committed a hor-
rible crime.” As financial assets became more complex and harder to price,
investors who were oblivious to the impending disaster were reassured by the
rating agencies and regulators (who rely on those agencies) that some complex
models provided by the issuers of securities predicted nothing to worry about
(Norris, 2008). Commenting on this state of affairs, George Soros (2008) sug-
gested that “the super boom got out of hand when the new products became so
complicated that the authorities could no longer calculate the risks and started
relying on the risk management methods of the banks themselves.” Teather
(2008) quotes Warren Buffett as saying that derivatives, which are products of
financial engineering, are “weapons of mass destruction”.
The Financial Crisis Inquiry Commission concluded that “over-the-counter
derivatives contributed significantly to this [the global financial] crisis”
(FCIC, 2011). According to the FCIC, the manufacturing and utilisation of
these tools represent a “key turning point in the march toward the financial
crisis”. In his review of Kevin Phillips’ book, Reckless Finance, Failed
Politics, and the Global Crisis of American Capitalism, Robert Solow (2008)
argued that “modern financial engineering creates unlimited opportunities

for bets that are only remotely related to productive activity, if at all”. Taleb
(2009) goes even further by suggesting that “complex derivatives need to be
banned because nobody understands them and few are rational enough to know
it”. He also calls for citizens to be “protected from themselves, from bankers
selling them hedging products, and from gullible regulators who listen to
economic theorists”. Partnoy (2010) believes that the only way to reverse the
trend of using derivatives to commit fraud is “for regulators to apply various
rules—prohibitions on fraud, disclosure requirements, banking regulations,
and so forth”.
It seems that financial innovation (the creation of exotic but toxic financial
products) has uncanny resemblance to technological innovation as applied to
finance (the creation of exotic financial services). Just like financial innovation
was glorified unconditionally and with exaggerated enthusiasm, financial tech-
nology is being glorified unconditionally and with exaggerated enthusiasm.
We are repeatedly told that fintech is the conduit to freedom from government
and banking “oppression”. Just like financial innovation grew extremely fast,
fintech is growing extremely fast. Just like the little-understood risk embodied
in financial innovation, fintech services pose the risk arising from little under-
standing of technology and the use of apps. Opaqueness seems to be a charac-
teristic of financial innovation and fintech innovation. And just like derivatives
are a conduit to financial fraud, fintech is showing signs of providing a conduit
to financial fraud. In general, however, there seems to be little difference
between financial innovation produced by using sophisticated mathematics
and fintech innovation produced by sophisticated science and engineering.

The financial services industry has always embraced state-of-the-art tech-
nology and utilised it for the purpose of providing financial services. This is
why in a broad sense, fintech encompasses traditional financial institutions
and new companies (or start-ups) that use technology to challenge and disrupt
traditional ones. In a narrow sense (and more commonly), the fintech industry
consists of fintechs, the disrupting start-ups.
It seems, however, that the ability of fintech start-ups to disrupt traditional
financial institutions is overstated. Eastman Kodak was disrupted and went
the way of the dinosaurs by the invention of digital cameras. Blockbuster
Video had a similar fate at the hands of the likes of Netflix. In both cases,
the companies collapsed because they failed to respond appropriately to the
challenges posed by new technology. Now, the question is whether banks and
other traditional financial institutions will suffer a similar fate at the hands of
fintech start-ups. This is what fintech enthusiasts tell us, but it is more like
54 Fintech
wishful thinking than reason, and in this particular case we are unlikely to see
a triumph of wishful thinking over reason. We will deal with this issue in more
detail in the very last chapter of this book.
The discussion so far shows that “fintech” is a rather loose concept that
is used in different senses to mean different things. The first sense is that
fintech refers to financial technology or the technology as used by financial
institutions. After all, fintech is short for financial technology. In another
sense, fintech refers to the industry comprised of all financial institutions
using technology, which is the fintech industry in a broad sense. The industry
in a narrow sense is made up of the new firms (start-ups) using technology to
provide financial services that are distinct from what is provided by traditional
financial institutions. In chapters 5, 8, 9 and 10 the discussion centres on
fintech in a narrow sense.
4. The technology
4.1 INTRODUCTION
As we saw in Chapter 3, the term “disruptive start-ups” is used to refer to

emerging firms that attempt to challenge traditional financial institutions
by using state-of-the-art technology to provide financial services that look
and sound different. One new company uses the blockchain technology to
merge money transfer and payments by a digital wallet that works worldwide.
Another company makes use of big data to meet the needs of millions of people
who have mobile phones but no access to financial services. This company can
create valid credit risk scores by analysing data obtained from mobile phones.
Some companies use artificial intelligence (AI) to gain quick and thorough
insights into their legal documents by analysing data from legislation and
contracts. By predicting a user’s identity on the basis of their typing patterns,
a new company uses biometric typing, also known as keystroke dynamics, to
protect payments, apps and devices. An application can be secured, simply by
typing biometrics through their application programming interface (API).
Figure 4.1 Technology and output in finance
55
56 Fintech
As we can see in Figure 4.1, technology is used by fintechs to produce financial

services in a way that is different from what has been done traditionally. The
output includes what may be seen as completely new products (for example,
paying by using a mobile phone rather than cash, cheques and credit cards).
Whether these new products make a material difference is another question
that will be dealt with in Chapter 5. The technologies described in this chapter
are more than what is exhibited in Figure 4.1, which provides examples of not
only technologies but also products. We have to understand also that these
technologies are not limited in use to the financial sector, but they have appli-
cations in other sectors, as will be demonstrated. This is why it may be odd
that fintech has become a household expression, whereas med-tech, trans-tech
or ind-tech (referring to medicine, transport and industry, respectively), for
example, have not. We start with a description of artificial intelligence
4.2 ARTIFICIAL INTELLIGENCE
Artificial intelligence (AI), also but rarely known as computational intelli-

gence, is intelligence displayed by computers and other machines, as opposed
to natural intelligence, which is displayed by humans and animals. It is
a wide-ranging branch of computer science concerned with building smart
machines capable of performing tasks that typically require human intelli-
gence. The very definition of AI indicates that it should have applications in
all fields, since the financial sector does not have monopoly over intelligence,
human or otherwise.
Currently, AI is more specifically known as narrow AI (or weak AI), in the
sense that it is designed to perform a narrow task (for example, driving a car or
playing chess and nothing else). However, the long-term aspiration of AI spe-
cialists is to develop general (or strong) AI. In another classification, AI may
be artificial narrow intelligence (ANI), artificial general intelligence (AGI)
and artificial superintelligence (ASI), such that ANI is considered weak AI,
whereas the other two types are classified as strong AI. AGI would perform
on par with another human while ASI (also known as superintelligence) would
surpass a human’s intelligence and ability. Neither form of strong AI exists
yet, but ongoing research in this field continues.
AI (in one form or another) is unlikely to exhibit human emotions like love
or hate, and there is no reason to expect AI to become intentionally benevo-
lent or malevolent. However, risk is inherent in the development of AI—for
example, the use of autonomous weapons, which are artificial intelligence
systems that are programmed to kill. These weapons could easily cause mass
murder if they were to fall into the wrong hands. Risk also comes from the
possibility that AI is intended to do something beneficial, but it develops
a destructive method for achieving its goal (for example, telling a self-driving
The technology 57
car to take you to the airport as fast as possible). Table 4.1 shows examples of
how AI is used in various fields, including the fight against Covid-19.
Table 4.1 AI applications
Application Description
Agriculture Defects and nutrient deficiencies in the soil
Artificial creativity Composing classical music (for example, MuseNet)
Auditing Continuous auditing of financial statements
Banking Customer support, detecting anomalies and credit card fraud
Chatbots Household virtual assistants such as Siri and Cortana
Covid-19 Using AI to enforce social distance requirements and speed
up testing. AI is also used to develop mathematical models to
determine the transmission rate of Covid-19
Cyber-security Detecting vulnerabilities and anomalous user behaviour
E-commerce Shopping recommendations according to browsing history, virtual
shopping assistants and chatbots, and fraud prevention.
Education AI tutors
Finance Ultra-high-frequency trading and numerous other applications
Government Mass surveillance
Healthcare Detecting diseases and identifying cancer cells
Hospitality Predicting hotel guests’ preferences
Human resources Staff hiring
Law Assessing the likelihood of a defendant becoming a recidivist
Logistics and supply chain Autonomous trucks and robotic picking systems
Marketing Delivery of highly targeted and personalised ads with the help of
behavioural analysis, pattern recognition, etc.
Military Intelligence collection and analysis, logistics, cyber operations,
information operations, command and control, semiautonomous and
autonomous vehicles
Navigation GPS technology, Uber
Retail Customer service
Robotics Carrying goods in factories and warehouses, cleaning offices and
large equipment, inventory management
Social media Removing propaganda and hateful content
Space exploration Identifying distant solar systems
Sports betting Predicting future outcomes
Vehicles Self-driving vehicles
Workplace health and safety Removing workers from hazardous situations
58 Fintech
The finance applications of AI are numerous. Azulay (2019) argues that “the
finance sector has proven itself an early adopter of AI in comparison to other
industries”, describing the applications of AI in finance as “myriad”. He pro-
vides an overview of the most popular and prominent AI capabilities available
to banks, insurance companies and other financial institutions. The applica-
tions include credit decisions (by utilising a variety of factors to more tradi-
tionally underserved borrowers more accurately), risk management (to identify
trends and risks), quantitative trading (identifying patterns that can be used to
make profitable trades), personalised banking (by using AI assistants, such as
chatbots, to generate personalised financial advice), cyber-security, and fraud
detection (using AI-enabled bots to detect compromised login credentials).
4.3 MACHINE LEARNING
Sometimes the terms “artificial intelligence” and “machine leaning” are used
interchangeably, but they are not the same. They are related in that AI encom-
passes ML, the latter being the study of computer algorithms that improve
automatically through experience. Distinction can be made among supervised,
unsupervised and reinforcement learning (for example, Bishop, 2006). Under
supervised learning, the computer is presented with example inputs and their
desired outputs. In unsupervised learning, no labels are given to the learning
algorithm, leaving it on its own to find structure in its input. In reinforcement
learning, a computer program interacts with a dynamic environment in which
it must perform a certain task (such as driving a vehicle or playing a game
against an opponent).
The distinction between AI and ML is described by Marr (2016) as follows:
AI is the broader concept of machines being able to carry out tasks in a way
that is considered to be “smart”, while ML is a current application of AI
based around the idea of giving machines access to data and letting them
learn for themselves. Rather than teaching computers and machines how to
do everything, it would be far more efficient to code them to think like human
beings, and then plug them into the internet to give them access to a vast
amount of information. Machine learning applications can read text and work
out whether the person who wrote it is making a complaint or offering congrat-
ulations. They can also listen to a piece of music, decide whether it is likely
to make someone happy or sad, and find other pieces of music to match the
mood. In some cases, they can even compose their own music, expressing the
same themes or something else that is likely to be appreciated by the admirers
of the original piece.
Differences between AI and ML can be more specific. While AI is a tech-
nology that enables a machine to simulate human behaviour, ML is a subset of
AI that allows a machine to learn automatically from available data. While AI
The technology 59
is intended to make a computer system solve complex problems like humans,

ML is intended to allow machines to learn from data for the purpose of produc-
ing accurate output. As ML is a sub-component of AI, the former has a limited
scope compared with the latter. While AI is about maximising the probability
of success, ML is more about accuracy and patterns. AI produces (among
others) customer support using chatbots, online game playing and intelligent
humanoid robots, whereas ML produces online recommender systems, Google
search algorithms, and Facebook auto-friend tagging suggestions.
An algorithm is a process or set of rules to be followed in calculations
or other problem-solving operations, particularly by a computer. Machine
learning algorithms build a model based on sample data, known as “training
data”, in order to make predictions or decisions without being explicitly
programmed to do so. Machine learning is related to statistics as they utilise
similar methods, but they differ in that, while statistics draws population infer-
ences from a sample, machine learning finds generalisable predictive patterns
(Bzdok et al., 2018). The term “data science” is sometimes used to describe the
overall field as it involves a combination of domain expertise, programming
skills, and knowledge of mathematics and statistics to extract meaningful
insights from data. Breiman (2001) distinguishes between a data model and
an algorithmic model, where the latter means more or less a machine learning
algorithm. Some statisticians have adopted methods from machine learning,
leading to a combined field that they call “statistical learning” (for example,
James et al., 2013).
Natural language processing (NLP) is heavily reliant on ML—in fact, it is
a combination of machine learning and linguistics. NLP is intended to read,
decipher, understand and make sense of human languages. The process starts
with a human talking to a machine, generating an audio that is captured by the
machine. The audio is subsequently converted into text, which is processed as
data. The output is converted back into audio, which enables the machine to
respond to the human by playing the audio file. ML is used to help machines
understand the vast nuances in human language, and to learn how to respond
in a way that a particular audience is likely to comprehend. Natural language
understanding (NLU) is a subset of NLP that focuses on reading comprehen-
sion and semantic analysis. An API (application programming interface) is
a software intermediary that allows two applications to talk to each other. An
NLP API is a machine-learning model for analysing text.
Related concepts include neural networks and deep learning. A neural
network, also called an artificial neural network (ANN), is an information
processing model that is inspired by the idea of how the nervous system,
which contains neurons, works. Neural networks consist of nodes that mimic
the biological function of neurons. A neural network can be used to classify
information in the same way a human brain does. For example, it can be taught
60 Fintech
to recognise images and classify them according to the elements they contain.
Neural networks have been used to teach computers to think and understand
the world like humans do, while retaining the advantages they hold over
humans such as speed, accuracy and unbiasedness. The addition of a feedback
loop enables learning by sensing or being told whether its decisions are right
or wrong, so that the adopted approach can be changed.
Figure 4.2 Feed-forward ANN
ANNs may take several shapes and forms, but the most common type is
the multi-layer feed-forward back-propagation or simply the feed-forward
network. This ANN, as shown in Figure 4.2, consists of layers of four inputs
and one output. In each layer, inputs are connected either to a preceding layer
or they come from the outside world. The input layer, which is connected to
the outside world on the input side, distributes signals from the outside world
to the other layers. The function of the output layer, which is connected to the
outside world on the output side, is to collect the features detected from the
The technology 61
signals and use those features to produce a response. The layers in between
(intermediate, hidden or middle layers) have no input or output connection
with the outside world and perform the function of detecting features of the
signals they receive. They also provide a link between input and output layers.
The network maps inputs into outputs in such a way as to make the signals
flow in one direction only (that is, from the input layer to the middle layer to
the output layer). It is obvious from Figure 4.2 that feed-forward networks are
fully connected, in the sense that each unit is connected to every output from
the preceding layer or one input from the outside world.
Just like ML is a subfield of AI, deep learning is a subfield of machine
learning. Neural networks make up the backbone of deep learning algorithms.
In fact, it is the number of node layers, or depth, of neural networks that dis-
tinguishes a single neural network from a deep learning algorithm, which must
have more than three (Kavlakoglu, 2020). The way in which they differ is in
how each algorithm learns. In deep learning, much of the feature extraction
part of the process is automated, thereby eliminating some of the manual
human intervention required and enabling the use of larger data sets. Classical,
or non-deep, machine learning is more dependent on human intervention to
learn. Most deep neural networks are feed-forward, meaning that they flow
in one direction only from input to output. However, a model can be trained
through back-propagation (that is, move in opposite direction from output to
input). Artificial intelligence, machine learning, neural networks and deep
learning comprise a nested system, as shown in Figure 4.3, such that each item
is a component of the prior item.
ML has numerous applications in day-to-day life. These include virtual per-
sonal assistants (such as Siri and Alexa), traffic predictions, video surveillance,
social media services, email spam and malware filtering, online customer
support, search engine result refining (such as Google), product recommen-
dations (online shopping), and online fraud detection. Other applications are
image recognition, speech recognition, medical diagnosis, and the extraction
of structured information from unstructured data. Numerous applications
can be found in healthcare, including disease identification, medical imaging
diagnosis, robotic surgery, robotic patient support tasks, personalised med-
icine, sharing patient information, patient autonomy, and patient safety and
outcomes. Machine learning is used to transform agriculture and has applica-
tions in animal behaviour studies. In mechanical engineering, ML is used for
mechanical system modelling.
The applications of ML in finance are numerous. The suitability of ML
to finance is attributed by Cheung (2020), who argues that ML is reshaping
the financial services industry like never before, due to the availability of
vast amounts of data generated by the finance industry. Financial institutions
use ML to streamline their processes, optimise portfolios, manage risk and
62 Fintech
underwrite loans. The applications include portfolio management, algorithmic

trading, high-frequency trading, fraud detection, loan and insurance under-
writing, risk management, chatbots, document analysis, trade settlements and
money-laundering prevention. Predictive analytics, which is based on ML,
is used to determine whether a transaction is fraudulent or legitimate and for
improving the ability of prediction systems to calculate the probability of fault.
Figure 4.3 The components of artificial intelligence
A future avenue for ML in finance is sentiment analysis, which involves the

perusal of enormous volumes of unstructured data (such as videos, photos,
audio files, social media posts, presentations, webpages, articles, blogs and
business documents) to determine market sentiment. Sentiment analysis makes
it possible to understand what people say, and importantly, what they mean.
Dixon et al. (2020) present a unified treatment of ML and various statistical
and computational disciplines in quantitative finance, such as financial econo-
metrics and discrete time stochastic control, with an emphasis on how theory
and hypothesis tests inform the choice of algorithm for financial data model-
ling and decision-making.
The technology 63
4.4 BIG DATA
The term “big data” refers to a huge data set that cannot be processed effec-
tively with traditional applications due to the challenge of capturing, storing,
transferring, querying and updating data in such large amounts. Simply stated,
humans cannot manage to sift through huge amounts of information and get
insights from it. The OECD (2020b) describes big data as “diverse datasets,
which can be anything from expanded datasets to social media data”, suggest-
ing that “the granularity of data has the potential to give insights into a variety
of predicted behaviours and incidents”. For example, the data set provided by
the 691,000 CCTV cameras found in the streets of London (operating 24/7,
365 days per year) is so huge that even an army cannot effectively sift through
the footage for suspicious activity.
Big data is characterised by volume, variety (data from different sources or
in different formats), velocity (the speed at which data are generated and at
which they need to be available for processing), veracity (trustworthiness of
sources) and value (usefulness for the underlying model). The OECD (2020b)
suggests that a common definition of big data is to view it in the 3Vs (volume,
variety and velocity), which are all “high” in the case of big data. High volume,
as defined by the OECD, is in multiple terabytes (where a terabyte is 1,000
gigabytes, requiring 1,500 CDs or 220 DVDs) or petabytes (one million giga-
bytes). High variety implies structural heterogeneity in a data set containing
structured data (such as tabular data found in spreadsheets or extracted from
databases) and unstructured data (such as text, images, audio and video).
Even though the term “big data” was used during the 1990s, its origin can be
traced to the May 2011 EMC world conference on the theme of “Cloud Meets
Big Data” (for example, Roczniak, 2011). Around the same time, a McKinsey
report was published, expressing the view that analysing large data sets (big
data) “will become a key basis of competition, underpinning new waves of
productivity growth, innovation, and consumer surplus”. The report predicts
that “the increasing volume and detail of information captured by enterprises,
the rise of multimedia, social media, and the Internet of Things will fuel
exponential growth in data for the foreseeable future” (Manyika et al., 2011).
The term “big data” may refer to more than the data itself—more generally to
the storage and fast processing of large amounts of data. The OECD (2020b)
suggests that the term “is not limited to the type of data, but also includes the
data processing and analytic aspect of big data”.
The processing of big data involves artificial intelligence, machine learning
and deep learning whereby it is possible to detect anomalies, calculate the
probability of an outcome and identify patterns. AI and related techniques are
used to take data from multiple sources and paint a picture of what customers
64 Fintech
are looking for. AI and big data have become interdependent, as none can work
without the other. The OECD (2020b) describes the connection between big
data and AI as follows: “Big data and artificial intelligence (AI) are two words
that are widely used when discussing the future of business”. According to
the OECD, “the potential for applying them in diverse aspects of business has
caught the imagination of many, in particular, how AI could replace humans in
the workplace”. Furthermore, the OECD believes that “big data and AI could
customise business processes and decisions better suited to individual needs
and expectations, improving the efficiency of processes and decisions”.
Big data sets are collected primarily from online sources. Google’s Eric
Schmidt notes that “we now create and store more data in 48 hours than was
created from the beginning of human civilisation to 2003” (Siegler, 2010).
Companies can learn what consumers want by analysing the content cus-
tomers share, the pages they like, the reviews they leave, the feedback they
give, and the sites they frequently visit. Big data is analysed for insights that
lead to better decisions and strategic business moves, and to find new growth
opportunities.
Table 4.2 displays the use of big data in finance and other fields. The ability
to collect and analyse big data offers significant benefits for a range of sectors,
including crime prevention, health and commercial enterprise, but it has also
made our most private, intimate and personal information more accessible than
ever before. The development of data-sharing technologies means that our
personal information is traded by data collectors. Information on communi-
cation patterns, social media behaviour and internet histories (with associated
inferences about preferences, political affiliations and sexual orientations) is
amalgamated, and made available to third parties. These are the features of
an advanced surveillance society, where it is difficult to do anything without
producing traceable data. For instance, big data and mass surveillance pose
a threat to liberty by empowering security organisations that excessively inter-
fere in the private lives of innocent citizens. Big data and mass surveillance
may also pose a threat to democratic freedoms by obstructing free expression,
particularly among political activists and journalists. Furthermore, big data
and mass surveillance can threaten social, political and economic opportunities
as our deepest and most personal secrets have become “discoverable” online.
Brown (2015) points out that “the volume of data collected by the NSA and
the associated costs make it the ultimate in Big Data case studies”. She sum-
marises the situation as follows: “Everybody’s a target. There’s the thing about
Big Data”. The connection between “Big Data” and “Big Brother” is quite
conspicuous.
Big data in finance refers to large, diverse (structured and unstructured) and
complex sets of data that can be used to provide solutions to long-standing
business challenges for financial institutions. Chen (2018) argues that big data
The technology 65
Table 4.2 The use of big data
Industry Examples of Applications

Finance Illegal trading activity, high-frequency trading, pre-trade decisions, sentiment
measurement, risk analytics, anti-money laundering, fraud mitigation
Entertainment Creating content for different target audiences, recommending content on demand,
measuring content performance
Healthcare Monitoring, managing by exception, real-time adjustments, performance optimisation,
customer service
Education Learning and management systems, measuring teacher’s effectiveness
Manufacturing Predictive modelling, manufacturing, competitive advantage
Government Mass surveillance, energy exploration, fraud detection, health-related research,
environmental protection
Insurance Transparent and simple products, customer behaviour and retention, claims
management, fraud detection, real-time monitoring of claims
Retail Trade Optimised staffing, analysis of inventory, customer prospecting, customer retention,
promotion of products
Transportation Traffic control, route planning, intelligent transport systems, congestion management,
logistics
Utilities Smart meter readers, consumption of utilities, asset and workforce management
Wholesale Optimised staffing, analysis of inventory, promotion of products
technology has become an integral part of the financial services industry and
will continue to drive future innovation. Big data is used in finance for mul-
tiple purposes. It is used for the purpose of generating real-time stock market
insights and predictions. Big data analytics is used to improve predictive
modelling to estimate rates of return and investment outcomes. Financial insti-
tutions use big data to explore customer needs and preferences to anticipate
future behaviour, generate sales leads, take advantage of new channels and
technologies, enhance their products, and improve customer satisfaction. Big
data can also assist risk management and fraud detection. Insurance compa-
nies, for example, access data from social media, past claims, criminal records
and telephone conversations while processing a claim (if anything suspicious
is found, it can flag the claim for further investigation).
4.5 QUANTUM COMPUTING
The 1950s witnessed the rise of digital (or classical) computing, but, as of the
1980s, scientists started to approach numerical calculations from an entirely
new perspective by using the intrinsic, quantum mechanical properties of
matter to carry out difficult calculations. Quantum computing is based on the
quantum physics observation that specific properties of particles can be found
66 Fintech
in two states, or any combination of the two states, at the same time. While tra-
ditional computers are based on dualistic processing systems (ones and zeros),
quantum systems can be 1 and 0 (or a mixture of 1 and 0) simultaneously.
This property (known as “superposition”) enables the exploration of immense
computational possibilities.
Big data may be so big that even a supercomputer might take a long time
to crack the problem, which means that ever more powerful computers are
required for the purpose of calculating probabilities accurately. This realisa-
tion has forced banks to resort to a new generation of processors that utilise
the principles of quantum physics to perform data crunching at enormous
speed. At the leading edge of quantum computing are companies such as IBM,
Microsoft and Google, which are building quantum computers that aim to do
things that classical computers cannot do. In 2019, Google announced that its
Sycamore quantum processor took a little more than three minutes to perform
a task that would occupy a supercomputer for thousands of years (Backes et
al., 2020).
Quantum computing is used in conjunction with artificial intelligence and
machine learning to solve complex problems very quickly. This combination
can be used to develop various techniques to combat cyber-security threats
and to create encryption methods that are collectively called “quantum
cryptography”. It is (or can be) used in computational chemistry to improve
the nitrogen-fixation process for creating ammonia-based fertilizer, create
a room-temperature superconductor, remove carbon dioxide for a better
climate, and create solid-state batteries. It can also be used in drug design
and development instead of the process that depends on trial and error. Other
applications are in logistics optimisation and weather forecasting.
The use of quantum modelling in finance is described by Orús et al. (2019).
Many problems in finance can be expressed as optimisation problems, which
can be very hard for traditional computers. The detection of patterns in past
data can be done more efficiently by using quantum computing, which has led
to the development of quantum machine learning algorithms (Biamonte et al.,
2017). Moreover, the behaviour of some financial systems can be predicted
by applying Monte Carlo methods. The act of sampling a distribution function
can limit the speed, and hence the applicability, of the underlying algorithm. It
has been suggested that this task could be performed efficiently by sampling
a quantum system (for example, Montanaro, 2015).
4.6 THE INTERNET OF THINGS
The Internet of Things (IoT) refers to the billions of physical devices that are
connected to the internet for the purpose of collecting and sharing data. Any
physical object can be transformed into an IoT device if it can be connected
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to the internet for the purpose of communicating information. A lightbulb that

can be switched on using a smart phone app is an IoT device, as is a motion
sensor or a smart thermostat. Other examples are smart home security systems,
autonomous farming equipment, wearable health monitors, smart factory
equipment and wireless inventory trackers. A “thing” may refer to a connected
medical device, a biochip transponder, a solar panel, a connected car with
sensors that alert the driver to fuel, tire pressure, maintenance, and more. A
“thing” is any object that is fitted with sensors to gather and transfer data over
a network. According to Murphy (2019), the number of networked devices
was 12.5 billion in 2010, but it is estimated that by 2025 this number will have
climbed to more than 50 billion.
The term “Internet of Things” was coined by Kevin Ashton in 1999,
although it took at least another decade for the technology to catch up with the
vision. Since then, IoT has gained significant momentum as a technology and
an active area of research and development (Zhang, 2020). A driving force for
the development of IoT is the wide availability of broadband internet, which
has reduced the cost of connecting devices with Wi-Fi capabilities and the
sensors built into them. IoT provides the data and insights that can be used to
boost revenue, reduce operating costs, improve efficiency, streamline work-
flows, visualise usage patterns, automate processes, meet compliance require-
ments, and compete more effectively in a changing business environment.
Murphy (2019) suggests that the IoT is “still a nascent technology in the
world of banking and finance”, even though it has already impacted other
sectors such as the manufacturing industry and healthcare. However, some
research findings indicate that 40% of financial institutions are currently
experimenting with IoT and big data. The wealth of data that can be gathered
from a range of devices within an IoT network can supplement the big data
collected from other sources. The combined collection of data can be used by
retail banks to analyse customers’ behaviour (for example, the regularity of
shopping) to offer personalised services designed to suit their lifestyles. The
data obtained from wearable payment devices (such as rings, bracelets and
smart watches, which are linked to the user’s debit or credit card) can be used
to construct customer profiles and enable fraud detection. The same data can
be used by financial institutions to enter partnerships with brands that can push
relevant deals through to customers. Insurance companies can use IoT data
to determine the premiums charged to a driver by monitoring actual driving
patterns rather than relying on indirect indicators, such as age, gender and
socioeconomic status.
More specific applications of IoT in banking and finance include, but are
not limited to, asset monitoring, customer insight, proactive customer service,
wearable payments, fraud detection, and investment. With respect to asset
monitoring, the IoT allows banks to observe equipment and improve the quality
68 Fintech
of decision-making. It can be used to collect data on ATM usage, customers’

personal records and market fluctuations. The IoT helps banks get insights into
the behaviour of customers, allowing them to evaluate their creditworthiness
by checking borrowers’ habits. The IoT can also help banks predict customers’
needs by scanning the data collected during their visits. An IoT system allows
banks to send announcements and finance-related news to wearable devices.
With respect to fraud detection, the IoT can be helpful for detecting and block-
ing potentially hacked accounts. For example, data collected by the IoT on the
activity of a customer are transferred to the cloud, where it is compared with
the customer’s behavioural patterns for consistency. If suspicious activity is
detected, the customer’s account will be disabled temporarily while the user is
notified. Investment decisions can benefit from the IoT by collecting real-time
data and executing autonomous trades.
4.7 AGGREGATORS
An aggregator is any device that provides multiple services to other devices or

users, either with its capabilities or by forwarding transmissions in a more con-
centrated and efficient way. New financial companies are using aggregation
technology mainly for the provision of payment and settlement services. To
place the innovation of aggregators in this context, traditional payment pro-
cessing models set up merchants with their dedicated accounts (a type of bank
account required for businesses) to accept payments made with debit or credit
cards. A merchant account is set under an agreement between an acceptor and
a merchant acquiring bank for the settlement of card transactions. Conversely,
a payment aggregator is a “master” merchant facilitating credit and debit card
transactions for sub-merchants within the same payment ecosystem.
Processing aggregators allow merchants to accept credit cards and bank
transfers without having to set up their merchant accounts. They pool a group
of merchants together into an aggregation, such that each merchant processes
payments within a joint merchant account. Every payment involves at least
three parties: the issuer or payer, the recipient or payee, and the party that pro-
vides the instrument for the transaction. Aggregators are intended to integrate
and enable transactions among parties, reducing transaction time and entry
costs for small businesses. They often use APIs to connect different parties,
although they function in the background and do not engage with customers
directly. Examples of fintech companies using aggregation technology are
PayPal, Apple Pay and Square.
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4.8 CLOUD COMPUTING
Cloud computing can be defined as “the delivery of on-demand computing

services (from applications to storage and processing power) typically over
the internet and on a pay-as-you-go basis” (Ranger, 2018). This arrangement
allows companies to rent access to applications and storage from a cloud
service provider rather than putting in place their own computing infrastruc-
ture and data storage facilities. By doing that, companies can avoid the cost
and complexity of owning and maintaining their own computing facilities—
instead, they pay for what they use, when they use it. On the other hand,
providers of cloud computing services can benefit from the economies of scale
by delivering services to a wide range of customers.
The term “cloud computing” has been around since the early 2000s, but
computing as a service can be traced back to the 1960s, when it was possible
for users to rent time on a mainframe computer rather than buying one them-
selves. With the advent of the PC, the demand for “time-sharing” services
diminished as it became increasingly cheaper to own a computer. In the late
1990s and early 2000s, the concepts of utility computing and grid computing
appeared. Utility computing is a service provisioning model in which a service
provider makes computing resources and infrastructure management available
to the customer as needed, and charges them for specific usage rather than
a flat rate. Grid computing is the practice of leveraging multiple computers,
often geographically distributed but connected by networks, to work together
for the purpose of accomplishing joint tasks. This was followed by cloud com-
puting, which took hold with the emergence of software as a service (SaaS).
The other models of cloud computing are infrastructure-as-a-service (IaaS)
and platform-as-a-service (Paas). IaaS refers to the fundamental building
blocks of computing that can be rented: physical or virtual servers, storage and
networking. PaaS also includes the tools and software that developers need to
build applications.
Several benefits can be derived from cloud computing. The main benefit is
that companies do not have to buy or maintain their own computing infrastruc-
ture. Another benefit is that companies can move faster on projects and test
out concepts without lengthy procurement and big upfront costs. It is useful
for seasonal applications that have big peaks in usage, as it makes financial
sense to have it hosted in the cloud, rather than have dedicated hardware and
software laying idle for much of the time. On the other hand, cloud computing
is not necessarily cheaper than other forms of computing, just as renting is not
always cheaper than buying in the long run. Furthermore, some companies
may be reluctant to host sensitive data in a service that is also used by rivals.
Using the same SaaS application as a rival may make it hard to create any
70 Fintech
competitive advantage if that application is core to the underlying business.

Migrating existing data or apps to the cloud may be much more complicated
and expensive.
The finance industry has not been averse to the rising popularity of cloud
computing. A financial consultant, Chris Skinner, has the following to say
about the inevitability of banks moving to cloud computing: “You cannot
become a digital bank without core systems renewal; you cannot renew core
systems without using cloud for data management; you need to consolidate data
in the cloud to be able to perform effective data analytics; and when you’ve
renewed core systems through the cloud to perform data analytics, then you
can innovate” (Cloud Secure Tech, 2016). According to the report, financial
institutions move to cloud computing for several reasons, including security
(as a result of increasing incidence of data breaches and cyber-attacks), cost
effectiveness, storage and big data (as cloud computing provides unlimited
storage), scalability (required to handle spikes in different sectors at certain
times), compliance (as compliance bodies work with some of the major cloud
vendors for monitoring purposes) and mobility (as cloud computing enables
employees to work on the go).
Despite the proclaimed benefits, the problems associated with cloud com-
puting are non-trivial, which is why some financial institutions are hesitant
to adopt it. The first is data and security privacy, as the cloud is not immune
to security breaches. The second is compliance, as some banking regulators
require that customers’ financial data be located in the same country. Certain
compliance regulations require valuable data not to be intermixed with other
data on shared servers. The third is the loss of control of critical business appli-
cations and data, which are looked after by a third party. And, as mentioned
before, renting is not necessarily cheaper than buying.
It is not clear how individual (and even corporate) users benefit from SaaS
when it is more expensive to rent the software than buying it outright. Surely,
software providers would have done their calculations and found out that
renting is more conducive to profit maximisation than selling. At one time,
the old equation editor would come with Word when the CD was bought.
These days, users subscribe to Word and to the (old) equation editor from two
different vendors, because the new equation editor in Word is inferior to the
old one. This sounds like pharmaceutical companies benefiting more from the
diabetes injections and tablets, which are taken for the rest of the patient’s life,
than finding a once-and-for-all cure.
4.9 BIOMETRIC IDENTIFICATION
Biometric identification, or simply biometrics, is a means of identifying and

authenticating individuals through unique biological characteristics. The term
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“biometric authentication” is used to describe the process of comparing data

on a person’s characteristics to that person’s biometric “template” to determine
resemblance. The objective is to capture an item of biometric data from this
person, which can be a photo, a voice recording, or an image or fingerprint.
This item of data is then compared with the biometric data of several other
persons kept in a database. Biometric identification has become widespread
in response to the growing threat of document fraud, identity theft and
cyber-crime.
Two types of biometrics (or identifiers) can be used: physiological and
behavioural. Physiological biometrics can be morphological or biological.
Morphological identifiers include fingerprints, the hand’s shape, vein pattern,
the eye (iris and retina), and the face. Biological identifiers include DNA,
blood, saliva and urine. Behavioural identifiers include voice recognition, sig-
nature dynamics (speed of movement of pen, accelerations, pressure exerted,
inclination), keystroke dynamics, the way we use objects, gait, the sound of
steps, and gestures.
Biometric technologies are used by law enforcement and public security
(criminal/suspect identification) and by the military (enemy/ally identifica-
tion). They are also used by immigration authorities and for civil identifi-
cation (citizen/resident/voter identification). Applications can also be found
in healthcare and subsidies (identification of patients and beneficiaries) and
physical access (owner/user identification). Commercial applications involve
customer identification. In all of these applications, biometrics are useful
because they are universal (as they can be found in all individuals), unique
(they make it possible to differentiate one individual from another), permanent
(they do not change over time), recordable (with or without consent), measur-
able and forgery-proof.
On the other hand, it can be argued that biometric authentication relies on
statistical algorithms, which means that it cannot be perfectly reliable when
used alone. Grimes (2019) argues against the use of biometrics because they
“are horribly inaccurate”, they are not secret (unlike passwords), and they are
“easy to fool”. Thus, he recommends the use of biometrics in conjunction
with at least one other non-biometric secret authentication factor. Likewise,
Korolov (2019) identifies, as a problem with biometrics, the possibility that
authentication credentials (such as fingerprint scans or voice recordings) can
leak from devices, from company servers or from the software used to analyse
them. Another problem is that a facial recognition system might not recognise
a user wearing makeup or glasses, let alone recognising someone wearing
a face mask, which most people do these days. The system may not recognise
someone who is sick or tired. Voices can vary—for example, people sound
different when they first wake up, or when they try to use their phones in
a crowded public setting, or when they are angry.
72 Fintech
The use of biometrics by governments for mass surveillance is criticised by

human rights activists. Breckenridge (2005) considers biometrics to be instru-
mental to the development of state authority. Pugliese (2010) argues that, “by
turning the human subject into a collection of biometric parameters, biometrics
would dehumanize the person”. The National Consultative Ethics Committee
for Health and Life Sciences (2007) refers to the “conflict between aspirations
to security through constantly improved biometric identification and respect
for human dignity”. The Italian philosopher, Giorgio Agamben, refused to
enter the US at one time, in protest at the requirement for visitors to be finger-
printed and photographed. He argued, “gathering of biometric data is a form
of bio-political tattooing, akin to the tattooing of Jews during the Holocaust”.
According to Agamben (2008), biometrics turn the human persona into a bare
body.
There is, of course, a difference between obtaining biometrics by coercion
of the state and voluntary provision for authentication in banking. Biometric
technologies, such as behavioural biometrics and biometric cards, offer
banks the chance to stay one step ahead of fraudsters. Financial institutions
are increasingly looking into biometrics to replace the PIN/password, which
may be more convenient for customers, given that the number of passwords
people have to manage is becoming a serious problem. For example, Marous
(2016) notes that, within five years, consumers will have (on average) over 200
accounts requiring passwords and argues that, even if only a few passwords
are used with slight variations, it is difficult to keep up with which account
goes with which variation. The result is the tedious “forgotten password”
function, which often requires the creation of an additional password. In short,
password fatigue is common. At the same time, a study commissioned by
Telesign (2016) indicates that online security is a serious issue for consumers,
particularly in the wake of hundreds of millions of personal records being
stolen through an increasing number of well-publicised hacks. This is why
Sood (2015) points out that voice biometrics, fingerprints, iris scans, and other
authentication options are beginning to replace passwords as a means to verify
a user’s identity and simplify the login process when banking online or via
a mobile device.
4.10 REGULATION TECHNOLOGY
Regulation technology (Regtech) is the management of regulatory processes

within the financial industry through technology, including monitoring,
reporting and compliance. The Regtech industry consists of companies that
use cloud computing technology through software-as-a-service (SaaS) to help
businesses comply with regulations efficiently. Regtech companies collabo-
rate with financial institutions and regulatory bodies, using cloud computing
The technology 73
and big data to share information. A bank that receives huge amounts of data
may find it too complex, expensive, and time-consuming to comb through.
A Regtech firm can combine complex information from a bank with data from
previous regulatory failures to predict potential risk areas that the bank should
focus on. Table 4.3 displays examples of Regtech companies and the tools they
have created. A schematic representation of Regtech applications can be found
in Figure 4.4.
Figure 4.4 Regtech applications
Regtech provides solutions for compliance with anti-money laundering (AML)

and the enforcement of sanctions. Financial institutions, which are responsible
for detecting and preventing suspicious transactions, handle a large number
of transactions on a daily basis. Transaction monitoring software can be used
to automatically control all of the transactions according to certain rules and
scenarios. If the rules are triggered, the software generates an alarm, leading
AML compliance officers to examine the underlying transaction. Thus, AML
compliance officers do not control all transactions manually, which means that
they only focus on alarming transactions.
74 Fintech
Table 4.3 Examples of Regtech companies
Company Activity
IdentityMind Global Provision of anti-fraud and risk management services for digital transactions by
tracking payment entities
Trunomi Secure management of the consent to use customer personal data
Suade Helping banks submit required regulatory reports without disruption to their
architecture
Silverfinch Connecting asset managers and insurers through a fund data utility to meet
solvency requirements.
PassFort Automating the collection and storage of customer due diligence data
Fund Recs Overseeing how data are managed and processed by the fund industry
Regtech also helps financial institutions improve risk management by ana-

lysing large volumes of information. The software offers a real-time account
value and risk exposure as well as built-in analytics that enable employees
to track and analyse compliance progress by providing metrics and charts.
Typically, the software is built on the cloud, making it easier for businesses
to access it anywhere. Fraud detection software is designed to raise flags over
suspicious transactions and alert the administration for further investigations.
The software generates notifications when fraud is suspected and the transac-
tion declines automatically.
4.11 BLOCKCHAIN TECHNOLOGY
A blockchain is simply a type of database that is different from a typical

database in the way the information is structured. It is a system of record-
ing information in a way that makes it difficult or impossible to change by
hacking or cheating the system. A blockchain is essentially a digital ledger
of transactions that is duplicated and distributed across the entire network of
computer systems. A distributed ledger (a collection of financial accounts) is
“distributed” because all network participants have a copy of the ledger for the
purpose of transparency. Blockchain is a particular kind of distributed ledger,
in the sense that not all distributed ledgers are blockchains, with the unique
characteristic being that data are stored in blocks. Each block has a certain
storage capacity, and when full capacity is reached, a new block is introduced
and chained onto the previously filled block. A chain of blocks forms a “block-
chain”, which grows as new blocks are added. Each block in the chain is given
an exact time stamp when it is added to the chain, which creates an irreversible
timeline of data entry.
Figure 4.5 shows how a transaction is validated and recorded on a block-
chain. The new transaction is transmitted to a network of computers scattered
The technology 75
around the world. If the transaction is validated (confirmed as legitimate)

by each and every computer in the network, it is added to a block and the
updated blockchain is stored on all computers in the network. The transactions
are recorded with an “immutable cryptographic signature” called a “hash”.
This means that, if one block in one chain was changed, it would be imme-
diately apparent that it had been tampered with. If hackers wanted to corrupt
a blockchain system, they would have to change every block in the chain,
across all of the distributed versions of the chain. Data are added and updated
in real-time via consensus of the different nodes running the software in the
network. However, once a new data set has been added to the ledger, it cannot
be removed or edited.
Figure 4.5 Recording of a new transaction on a blockchain

76 Fintech
In Figure 4.5, each computer in the network is connected to every other

computer—this is called “decentralisation”, which is a feature of blockchain.
On the other hand, a centralised system is in place when a company owns
a server comprising thousands of computers with a database holding all its
clients’ account information. All the computers are housed under one roof,
such that the company has full control of each of these computers and the
information stored therein. In a blockchain, the network consists of thousands
of computers (called nodes), but each computer or group of computers that
holds the blockchain is in a different geographical location, operated by sep-
arate individuals or groups of people. This kind of decentralisation is called a
“distributed ledger”. In Figure 4.6, we can see how centralised and decentral-
ised networks look.
Figure 4.6 Centralised vs. decentralised databases
Blockchain technology can be used for several purposes. The primary use of
blockchains today is as a distributed ledger for cryptocurrencies, most notably
bitcoin. In any industry, blockchain can be used for information-sharing across
organisations, supply chain management, co-ordinating logistics (as well as
payments, financial terms and contract rules), auditing (as records can be ver-
ified instantly and independently), compliance, and business contracts (setting
pre-defined rules for transactions between two or more parties engaged in
The technology 77
Table 4.4 Potential applications of blockchain technology
Industry/Application Description
Banking and finance Streamlining payment processing, speeding up and securing transactions,
minimising auditing complexity, making credit reports more accurate and
transparent
Charity Tracking donation allocation, reducing overhead and complexity of donation
payment processing, providing auditable trail for donations to prevent fraud
Cloud storage Boosting security through decentralised network, crowdsourcing unused
cloud storage
Education Digitising and verifying academic credentials
Energy Peer-to-peer energy transfer and smart utility metering
Government Reducing voter fraud, minimising government fraud, boosting accountability
and compliance for government officials, validating identity
Healthcare Patient databases, medical supply chain management, clinical trial
provenance
Human resources Background checks, verification of identity and employment history
Insurance Improving multi-party contracts, streamlining claims adjudication, reducing
disputes with transparency of shared data
Law enforcement Integrity of evidence, resistance to falsification of case data, tracking
criminal history
Legal Smart contracts
Media Control of ownership rights, copyright infringement, the use of smart
contracts for artist compensation
Motor vehicles Tracking vehicle history, supply chain parts management
Real estate Transparency of agreements, verification of property information, reducing
paperwork, recording land titles
Transportation Tracking journey stops, creating an immutable ledger of trip data
Travel Passenger identification, airline loyalty programmes
Wills and inheritances Using smart contracts to determine the validity of wills and allocation of
inheritances
a partnership). A smart contract is a computer code that can be built into

the blockchain to facilitate, verify or negotiate a contract agreement. Smart
contracts operate under a set of conditions that users agree to, such that, when
those conditions are met, the terms of the agreement are carried out automati-
cally. Doubleday (2018) comes up with the most comprehensive list of appli-
cations, as shown in Table 4.4. We have to bear in mind that these are potential
applications as the only actual application so far is that of cryptocurrencies.
In banking and finance, blockchain reduces settlement time. By integrating
blockchain into banks, consumers can see their transactions (such as deposit-
78 Fintech
ing a cheque) processed in as little as 10 minutes, basically the time it takes

to add a block to the blockchain, regardless of holidays or the time of day or
week. With blockchain, banks also have the opportunity to exchange funds
between institutions more quickly and securely. The application of smart con-
tracts can prove particularly important in the financial sector. When used for
financial transactions, smart contracts are conducive to increasing the speed of
and simplifying complex processes. Applications in finance also include stock
exchange transactions, asset ownership, document certification, tokenisation
of assets, credit reference, derivatives (with smart contracts), and payment
systems (cross border and peer to peer).
Despite these potential benefits of blockchain, problems and challenges are
present. The challenges pertain to interoperability, encryption, security, scal-
ability, energy consumption, and regulation. With respect to interoperability,
the blockchain technology is not bounded by any international rules and reg-
ulations that determine a unified standard. The integration of existing systems
with a blockchain-based model is a big challenge as the current systems and
processes cannot be eliminated entirely. Encryption is an issue because the
encryption used to store data can be compromised by finding loopholes in the
network, which makes the blockchain susceptible to hacker attacks. As far as
security is concerned, cryptographic networks are too complex to hack, so any
kind of security breach would require a high degree of computational power.
A blockchain network has to be secured with multiple security protocols. The
network should restrict participating authorities in accordance with the access
permission given to them. Scalability is an issue because the network created
through a blockchain should be able to handle the growing traffic while main-
taining the speed of accessibility for the participants.
If the blockchain technology is applied to financial institutions, it has to
ensure the capacity of handling large volumes of data. Energy consumption
is a problem because the use of the blockchain technology requires the con-
sumption of vast amounts of energy to carry out computational work. This
kind of computing power leaves massive carbon footprints that have adverse
environmental consequences. Regulation is a challenge because, if blockchain
is applied in the financial sector, the need for international and national regu-
lation around it will become mandatory. Currently, cryptocurrencies, the most
popular application of blockchain, are not governed by any regulation.
For some observers, blockchain is a hype. Roubini (2018) argues that the
financial services industry has been undergoing a revolution; however, the
driving force is not “overhyped blockchain applications” but rather artificial
intelligence, big data and the Internet of Things. He goes on to describe
blockchain as “the most over-hyped—and least useful—technology in human
history: in practice it is nothing better than a glorified spreadsheet or database”.
I would tend to agree with this statement.
The technology 79
Finance is not the first or an exclusive user of state-of-the-art technology,

which begs the question as to why we use the term “financial technology”, as if
the technology used in the financial sector has been produced by the financial
sector itself. Two issues must be stressed here. The first is that the technologies
used by the finance industry are not as revolutionary as electricity and the
steam engine, just to give two examples (we will come back to this issue in
Chapter 10). The second issue is that the finance applications of state-of-the-art
technology do not contribute as much to human welfare as applications of the
same technologies in other fields. In fact, the technology can be used not for
the benefit of but against consumers—for example, by convincing them to buy
things they do not need.
The technology used in the finance industry allows customers to pay by
using wearable payments devices, such as rings, bracelets and smart watches,
which are linked to the user’s debit or credit card. They can also pay by waving
their hands as a chip planted underneath the skin does the job. Is this a con-
tribution to human welfare compared with paying by cash, cheque or a credit
card? I tend to think that this is more like unnecessary extravaganza—it looks
“cool”, but it does not serve any meaningful business.
Let us compare how particular technologies are used in the finance
industry and other sectors of the economy. In the finance industry, artificial
intelligence is used to facilitate ultra-high-frequency trading, quantitative
trading and credit decisions. High frequency trading is a parasitic activity
that creates no wealth whatsoever and may lead to market instability. There
is no evidence that the so-called “quantitative trading” is more profitable than
“non-quantitative trading”. It was quantitative trading that brought about the
demise of Long-Term Capital Management and nearly caused a systemic crisis
in the late 1990s. As for credit decisions, it is not clear whether the technology
will lead to more or less people gaining access to credit. The subprime crisis
was caused by a deliberately bad credit granting policy, motivated by greed
and corruption. Artificial intelligence could not have changed the course of
events, had it been used for the purpose of screening borrowers. Compare that
with the use of AI for identifying defects and nutrient deficiencies in the soil,
detecting diseases and identifying cancer cells, designing global positioning
systems, identifying distant solar systems, and producing self-driving vehicles.
Surely, a GPS is better than paying for a bottle of wine with a mobile phone.
The same can be said about machine learning, which is used in finance to
optimise portfolios, manage risk and underwrite loans. In other fields, this
technology is used for disease identification, medical imaging diagnosis,
robotic surgery and robotic patient support tasks. Big data is used in finance
80 Fintech
for high-frequency trading and pre-trade decisions. In other fields, it is used

for traffic control, route planning, the design of intelligent transport systems,
congestion management, and logistics. In finance, quantum computing is
used for the purpose of detecting patterns in financial prices without any evi-
dence of success. In computational chemistry, quantum computing is used to
improve the nitrogen-fixation process for creating ammonia-based fertilizer,
create a room-temperature superconductor, remove carbon dioxide for a better
climate, and produce solid-state batteries. Surely, more can be gained by the
use of technology in other fields aside from finance. We do not need banks that
are good at using technology, but rather banks that do not rip off customers and
confiscate their deposits by invoking the bail-in legislation.
5. The benefits and costs of fintech
5.1 INTRODUCTION
One of the basic principles of finance is that of the risk–return trade-off: anyone
seeking higher returns must be prepared to bear more risk, and anyone wanting
to reduce risk must be willing to accept lower returns. This principle is often
expressed as the adage that there is no such thing as a free lunch. The lunch is
return, which is priced in terms of risk. This adage can be generalised to mean
that benefits bring with them costs, risks or challenges and that advantages
typically come with disadvantages. This applies to technology in general and
financial technology in particular. While fintech enthusiasts typically concen-
trate on the benefits, advantages and pros of fintech, they choose to ignore the
costs, disadvantages and cons of fintech and the risks and challenges associ-
ated with it. In this sense, fintech is defined in a narrow sense, consisting of the
new firms providing financial services by using state-of-the-art technology.
The perceived advantages of fintech stem from the observation that it can
enhance the financial services industry in many ways: by providing a better
customer experience, strengthening critical infrastructure components, boost-
ing access to the financial system, realising efficiencies, and reducing costs
for market participants and the investing public. For all of these benefits,
however, fintech may also produce negative consequences, such as exacer-
bating cyber-security threats and amplifying third-party risks. The desirability
of going all the way with fintech rests on a comparison of costs and benefits,
which is also true of technology in general. The starting point is to consider
the costs and benefits of technology in general from an economic perspective.
5.2 THE BENEFITS AND COSTS OF TECHNOLOGY
In the economics literature, the effect of technology or technological progress

is examined by using the concept of production function. The simplest produc-
tion function can be written as X f L, K , T , where X is output, L is labour,
K is capital and T is technology. In a two-dimensional diagram, the produc-
tion function can be represented by a nonlinear functional relation X f L
while allowing changes in capital and technology to be represented by shifts in
81
82 Fintech
f L . Alternatively, isoquants can be used to represent the levels of output

that can be produced by various combinations of L and K . Both these rep-
resentations are shown in Figure 5.1.
Figure 5.1 Technology in the production function
The function X f L is nonlinear as a representation of the law of diminish-

ing returns. The shape of the function tells us that the level of output rises as
more labour is employed but the rate of change of output declines with more
labour. Initially, labour is at L0 , producing (with a fixed amount of capital) the
level of output X 0 . Without a change in labour or capital, technology shifts the
function upwards, enabling the production of a higher level of output ( X 1 ) at
the same level of L . Another wave of technological progress shifts the produc-
tion function further upwards, allowing the production of a higher level of
output ( X 2 ) at the same level of L . This means that technology leads to an
increase in the productivity of both labour and capital. In terms of isoquants,
technology leads to a downward shift, which means that the same level of
output can be produced with smaller quantities of labour and capital. If, as in
Figure 5.1, the quantity of capital is kept at K 0 , technological progress allows
a smaller amount of labour to produce the same level of output. In both rep-
resentations, technological progress leads to lower levels of employment. The
benefit of technology is boosting productivity; the cost is unemployment and
consequently inequality.
The replacement of manual production processes by technology is quite
common. It is true that technology is creating new jobs, but technology
destroys more jobs than it creates. While the use of machines boosts efficiency
and performance, it also destroys jobs for unskilled labour as computers and
The benefits and costs of fintech 83
robots replace blue-collar workers. To keep pace with technology, workers

need to have more flexibility in work and be life-long learners, which may
not be possible for most people. The development of automation (enabled by
robotics and artificial intelligence) brings the promise of higher productivity,
more robust economic growth, increased efficiencies, safety and convenience.
However, difficult questions arise about the broader impact of automation on
jobs, skills, wages, and the nature of work itself. As wonderful as the gains
from technology are, these gains have been realised against a backdrop of rising
inequality, shrinking middle class, and difficulties in finding employment.
Furthermore, technology has adverse environmental effects because it
produces waste that causes pollution, contributes to global warming, and leads
to ecological imbalances and the depletion of natural resources. Adil (2021)
identifies the adverse environmental effects of technology as follows: heat
pollution, waste, deforestation, air pollution, water pollution, soil pollution,
mobile tower ultra-radiations, depletion of natural resources, non-recyclable
waste, and damage to the ozone layer. The collapse of ecological systems
and extinction of organisms from their natural habitats is a direct result of
technology. Evidence of how technology causes ecological imbalances can be
seen in wildlife extinction from their natural habitat to create more space for
farming and homes for more and more people as population grows. However,
technology also has positive effects on the environment by providing wind
turbines, solar panels, solar vehicles, and technology that can be used to clean
the environment.
Technology has an adverse effect on income and wealth inequality, pre-
sumably because skilled labour benefits more from technology than unskilled
labour. Modern technology substitutes for many of the jobs and tasks tradition-
ally performed by unskilled workers, while acting as a complement to skilled
workers. International trade reinforces this effect by encouraging specialisa-
tion in high-skill sectors in which developed countries have a comparative
advantage. Technology leads to redistribution of income from labour to capital
as workers lose their jobs. Jaumotte et al. (2013) find that technological pro-
gress has a greater (adverse) impact on inequality than globalisation. Derviş
and Chandy (2016) argue that “technology has often led to the creation of
strongly monopolistic markets for new goods and services”, a phenomenon
that can be observed clearly in a “digital economy” dominated by the likes of
Google and Apple. These are “winner-takes-all” markets where vast salaries
and profits are shared among a small number of executives and shareholders.
Needless to say, it would be ludicrous to suggest that we should stop using
technology because of its adverse consequences of creating unemployment,
aggravating inequality and hurting the environment. However, the costs of
technology should be acknowledged and considered against the benefits,
such that a particular technology is adopted if the benefits outweigh the costs.
84 Fintech
Something must be done about the adverse effects, which is why universal
basic income has been suggested to offset the effect of technology on poverty
and inequality. As a matter of fact, the use of technology is one of the fun-
damental arguments for the introduction of universal basic income (see, for
example, Moosa, 2021). These arguments apply as much to fintech as tech-
nology in general. Perhaps the case for fintech is weak because the costs could
outweigh the benefits.
5.3 AN OVERVIEW OF THE BENEFITS AND COSTS

OF FINTECH
A short list of the advantages and disadvantages (benefits and costs) of fintech
contains several entries. The advantages are faster transactions, low or no fees
for services, minimal paperwork, and a 24/7 mobile access anywhere. The
disadvantages, on the other hand, are the absence of physical branches (which
is also taken as a cost-reduction advantage), the need for internet access, diffi-
cult access to cash, and the lack of a long and reliable track record for fintech
companies. Fintechs, particularly PayPal, are leading an unlawful war on cash,
which is a major issue that will be dealt with in detail in Chapter 6.
Fintech companies provide speed and convenience because their products
are delivered online, which makes them easier and quicker for customers to
access, at least for customers who can use the technology and trust it. Fintechs
provide a greater choice of services because they can be offered remotely,
regardless of location. They offer cheaper deals because fintech companies
do not need to invest in a physical infrastructure like a branch network, which
enables them to offer cost-effective services. Their services are more person-
alised because technology allows them to collect and store more information
on customers, which puts them in a position to offer consumers personalised
products.
One disadvantage of fintech is unclear rights. Fintech companies are typ-
ically new to the finance industry and use different business models from
those adopted by traditional financial institutions, which makes it harder
to ascertain which ones are regulated, and what rights customers have if
something goes wrong. Another disadvantage is the ease of making a rash
decision. When financial products are bought online without anyone ever
meeting face to face, it becomes more likely for consumers to make bad
decisions. Technology-based risks are abundant in digital financial services.
Financial products bought online may leave customers more exposed to
technology-based risks (for example, improper use of personal data and the
possibility of falling victim to cyber-crime). Fintech may result in financial
ruin for those who are not familiar with the underlying technology.
Table 5.1 Challenges and benefits of fintech start-ups
Characteristic Challenge Benefit

Small management Limited capacity to tackle a wide Faster decision-making and execution
range of tasks
Limited experience Lack of understanding of the rules Ability to think about problems
governing relations with customers through a different set of lenses, which
from a regulatory perspective leads to innovation
Tight financial resources Difficulty of gaining scale and Ability to run a lean business and
inability to acquire the tools or talent focus on the critical items that allow
necessary to move the business to the them to obtain a minimum viable
next level product
Unidentified target Inability to bring or difficulty of Opportunity to pivot to another
market or undeveloped bringing a product to market and concept, business model or target
business model determine the size of an opportunity market when or if an opportunity
presents itself
Nascent data analysis Lacking the right talent to analyse Avoidance of having to deal with
capabilities data or deterring talent in a highly antiquated systems
competitive labour market because of
immature technological capabilities
Pressure to establish The possibility of introducing Efficiency gains and focus on
operations quickly products prematurely to meet producing a minimum viable product
deadlines
Limited practice with Exposure to potential litigation, fines Motivation to seek compliance
financial compliance and and enquiries from regulatory bodies
regulation
Table 5.1 provides a summary of the challenges and benefits associated

with the seven characteristics of fintech start-ups identified by Wirth (2017).
Fintech start-ups are characterised by having small management, limited
experience and limited financial resources. They have an unidentified target
market or undeveloped business model and nascent data analysis capabilities.
They are exposed to pressure to establish operations quickly and have limited
practice with financial compliance and regulation. For example, tightness of
financial resources may be an obstacle to expansion or the ability to acquire
the resources (human and otherwise) needed for expansion. Tight financial
resources, on the other hand, are conducive to the adoption of a lean business
model.
Fintech enthusiasts tend to concentrate on the positive effects of fintech, but
they ignore the negative side and the challenges facing fintechs. They ignore
the risks inherent in fintech operations—for example, the counterparty risk
arising from P2P lending. The regulators may have a limited knowledge of
new technology to be able to monitor new applications. No one seems to know
86 Fintech
or fully appreciate the implications of fintech for the profitability and stability
of traditional financial institutions, particularly the systemically important
financial institutions (SIFIs). There is limited knowledge of and familiarity
with new actors, products and delivery mechanisms. Fintech leads to serious
issues pertaining to data privacy and consumer protection. And there is the
law enforcement problem of dealing with fintech-related or enabled criminal
activity, such as the use of cryptocurrencies by criminals.
Seven key risk areas in digital finance are identified by Lauer and Lyman
(2015): inability to transact due to network/service downtime (interrupted and
incomplete transactions, inaccessible funds, etc.); insufficient agent liquidity
(customers do not have access to their own money); complex and confusing
user interfaces; poor customer recourse (unclear, costly and time-consuming
procedures); opaque fees and other terms (lack of transparency leaves con-
sumers without full understanding of prices as well as the terms and conditions
of the services they are using); fraud perpetrated on the customer; and data
privacy and protection (poor understanding of new uses of personal data, etc.).
Digital financial services, according to Porteous (2006), must be primarily
“transformational” rather than “additive”, which means that unbanked people
can gain access to financial services through their mobile phones without
having prior bank accounts. The promise of digital finance to “bank the
unbanked” pertains to the transformative model.
Now that we have gone through general and preliminary considerations of
the advantages and disadvantages of fintech, it is time to consider these issues
in some detail. The advantages (or benefits) of fintech are discussed in section
5.4, whereas the disadvantages (or costs) are discussed in section 5.5
5.4 ADVANTAGES OF FINTECH

Some of the advantages of fintech are straightforward, but others are ques-
tionable and perhaps exaggerated. Some are trivial, even though they are
claimed to be otherwise. And some are fictitious, coming out of those who are
over-enthusiastic about fintech (the fintech evangelists). Let us consider these
advantages in turn.
Faster Processing of Transactions
Fintech helps expedite processes that once took days, weeks or even months,
like requesting a credit score report or transferring money internationally.
Traditional modes of payment, such as cash and bank transfers, had longer
wait times when compared with the modern payment options provided by
fintech. Newer technologies have made it possible for money to change hands
within seconds without compromising security. Fast processing of transactions
is enabled by artificial intelligence and quantum computing, making it possible

to perform complex financial tasks rapidly, thereby reducing the wait time for
customers. The P2P transactions offered by Amazon, Google, Apple, and other
companies have resulted in almost zero waiting time. Customers can transfer
money simply by scanning a code without worrying about typing the bank
details of the beneficiary every time they perform a transaction.
Cheaper and Personalised Services
Fintech firms are in a position to offer cheaper services because they enjoy
lower operating costs and overheads than traditional financial institutions (for
example, they have lower operating costs than traditional financial institutions
because they need less office space and employees). Traditional financial
institutions have enormous operating costs, stemming from multi-layered
management structures and large offices in prime locations. The BCBS (2018)
notes that “innovations from fintech players may speed up transfers and pay-
ments and cut their costs.”
Chen et al. (2021) argue that fintech products are proclaimed to differ along
three dimensions: they require use of new technology and big data, they are
cheaper than what is offered by traditional financial institutions, and they are
designed to cater to specific consumer needs. Furthermore, the products are
offered with minimal paperwork. Noya (2019) suggests that fintech companies
focus on a single product, which they provide superbly, with lower costs and
exceptional user experience. They have a clear customer orientation because,
without the heavy legacy of traditional banks, fintech companies can focus on
solving users’ problems. The BCBS (2018) suggests that fintechs offer “better
and more tailored banking services” and that they “could help the banking
industry improve their traditional offerings in many ways”.
Boosting Competition
Fintech allows small firms to compete with large traditional financial institu-
tions, which must be good for competition and in the interest of consumers.
The BCBS (2018) suggests that fintech has the potential to lower barriers of
entry to the financial services market, elevate the role of data as a key commod-
ity, and drive the emergence of new business models. Noya (2019) notes that
fintech companies typically use some sort of advanced technology to achieve
a competitive advantage. One good example is Kabbage, a small-business
lender that gathers large amounts of data using artificial intelligence to grant
credit in just ten minutes.
Competition between disruptors and incumbents is influenced by regulation
as pointed out by the OECD (2020a). A main issue is whether regulation
88 Fintech
should aim at a level playing field or favour new entrants to promote com-
petition. It seems that governments are making it easier for the (potential)
disruptors to compete with the incumbents. For example, in 2019 the consumer
data right law was passed by the Australian parliament to create a new “open
banking” regime that will “shake up competition for consumers and boost
start-ups against the big banks” (Kehoe, 2019). The new rules require banks to
make customer data available to competitors on credit and debit cards, deposit
and transaction accounts, and mortgages if a consumer wants to move away
from banks and deal with a smaller lender or a fintech company. According to
the BCBS (2018), the competition provided by fintechs may have “potential
positive impact on financial stability” because the entry of new players com-
peting with incumbent banks could eventually fragment the banking services
market and reduce the systemic risk associated with players of systemic size.
Product Quality and Diversity
The solutions offered by fintech companies are not “one size fits all”. Rather,
these companies offer targeted (often niche) services that fill the gap of a par-
ticular financial need. Furthermore, fintech has created a diversified menu of
options, ultimately resulting in more accessible financial markets for ordinary
people, not just top income earners. In this sense, fintech has levelled the
financial playing field for ordinary people, giving them access to services pre-
viously reserved for the wealthy or individuals of a certain economic stature.
For example, technology and the availability of big data make it much easier
and cheaper to bring investment advice to more people, making a service open
to everyone.
Consider lending, for example. In the past, underwriters only had a few
data sets that they could use to assess risk, which means that a large number
of potential borrowers were turned down or charged a higher interest rate for
a loan. Fintech companies rely on a different set of information to underwrite
customers, looking at indicators that traditional banks do not consider, thereby
providing more people with access to personal and business loans. All of that
could never happen without powerful computer systems and software and
data scientists who can make sense of it all. The problem with this claim is
that there is no guarantee that looking at indicators that traditional banks do
not consider and using larger data sets gives favourable decisions concerning
borrowers who were once denied. It could be the other way round, in the sense
that more data reveal more weaknesses in the ability to pay, such that those
who were previously granted loans are found unqualified.
Financial Inclusion
Fintech is thought to enhance financial inclusion, which is “access to and

use of formal financial services”, including transactions, savings, credit, and
insurance for individuals and firms (Sahay et al., 2015). Digital financial
inclusion, or fintech-enabled financial inclusion, is digital access to and usage
of formal financial services through mobile phones and computers. Sahay
et al. (2020) assert that digital finance is boosting financial inclusion, even
where traditional financial inclusion is declining. The BCBS (2018) supports
the proposition that fintech is conducive to financial inclusion, suggesting that
“digital finance has improved access to financial services by under-served
groups”. Some of these claims are grossly exaggerated.
Aiding Regulation and Compliance
According to the BCBS (2018), fintech could be used to improve compli-

ance processes at financial institutions. Regtech enables the automation
of regulatory reporting and compliance requirements, and facilitates more
cross-sectoral and cross-jurisdictional co-operation for improved compliance.
By providing better monitoring devices to regulators, fintech can contribute to
the improvement of the efficiency of the international financial system.
Economic Growth and Public Finance
Ozili (2018) suggests that digital finance promises to boost the GDP of digital-
ised economies by providing convenient access to a diverse range of financial
products and services (and credit facilities) for individuals as well as small,
medium and large businesses. According to this line of reasoning, the avail-
ability of credit and financial services encourages people to spend, “thereby
improving GDP levels”. This line of reasoning is flawed because we know
very well that too much debt causes financial crises followed by recessions
(declining GDP levels). The levels of debt are already extremely high, and the
last thing any economy needs is more debt-financed consumption.
Manyika et al. (2016) present “precise” figures on the potential contribution
of fintech to GDP. Their quantitative analysis shows that $3.7 trillion could
be added to the GDP of emerging economies by 2025, a boost of 6%. This
growth, they note, will be associated with 95 million new jobs. Yet, they
suggest that this could be an underestimate as they do not quantify “a number
of long-term effects such as improved health care and education, a reduced
role for the informal economy, and a surge in business innovation”. The source
of this fantastic growth (which sounds too good to be true) is supposed to be
access to financial services by 1.6 billion unbanked people, and an additional
90 Fintech
$2.1 trillion in loans made to a wide range of businesses and individuals with

digital payment histories. Another source of growth is cost reduction: financial
service providers could save up to $400 billion annually in direct costs, while
businesses could save 25 billion hours of labour per year by switching from
cash to digital payments.
It is also suggested that governments in emerging economies could gain
$110 billion per year as digital payments reduce leakage in public spending
and tax collection—money that governments could devote to other priorities.
Manyika et al. (2016) note that digital payments have the potential to improve
government finances in emerging economies and improve the effectiveness of
government spending by helping to target it more accurately. They quantify
several sources of benefits for governments: plugging leaks in expenditure and
tax collection, improving the targeting of government subsidies, and efficiency
gains from government operations as a result of digitising payments. These
numbers sound more like back-of-the-envelope estimates that are thrown in to
make a point. Growth and government revenue do not come from more debt
or from switching out of cash. We have to bear in mind that economists are
notorious for producing figures that support their claims. It is ludicrous to talk
with confidence about figures that look so precise as if they were extracted
from a lab experiment (no wonder, then, that economics is often described as
the “dismal science”).
Reducing Poverty
According to Ozili (2018), “the goal of financial services made available via
digital platforms is to contribute to poverty reduction”, which can be accom-
plished by the availability of “affordable, convenient and secure banking
services to poor individuals”. Ozili argues that “recent improvement in the
accessibility and affordability of digital financial services around the world
can help millions of poor customers move from cash-based transactions to
formal digital financial transactions on secured digital platforms”. In what way
does the move from cash-based transactions to digital financial transactions on
secured digital platforms help the poor? The poor are poor because they do not
have the money to spend on essential goods, not because they use the cash that
they do not have. If digital finance enables the poor to borrow more, they will
be even poorer. If fintech is an enabler of fraud, some not-so-poor people will
become poor if and when they get swindled.
Positive Effect on Health and Education
Another exaggerated claim is made by Manyika et al. (2016), who suggest that
fintech can boost the quality and quantity of healthcare and education, leading
to improved human capital. It is well recognised in the literature that human

capital is as important as physical capital in spurring growth, particularly as the
knowledge economy grows. Human capital benefits from investment in edu-
cation and healthcare, but it is not clear how paying by a mobile phone is con-
ducive to better health and education. Manyika et al. (2016) explain how this
happens “in several ways”. One way is that, as women gain access to financial
services and become in a better position to control a portion of household
income, they tend to prioritise investment in education and health. Another
way is that micropayments can make school fees more affordable for poor
households (the same argument that fintech makes people rich). Moreover,
they claim, digital payments by governments to teachers and healthcare
workers reduce absenteeism, resulting in more and better services. Does this
mean that people who get paid in cash do not go to work regularly? They also
suggest that children who are healthier miss fewer days of school due to illness
and are better able to learn while in school than those who are less healthy.
This is true, but what has this got to do with fintech? These claims are amaz-
ingly preposterous, showing a massive suspension of disbelief and a triumph
of wishful thinking over reason (triumph is in the eyes of the beholder).
Reducing the Informal Economy
Manyika et al. (2016), again, suggest that digital payments enable greater
transparency, which (in turn) helps governments reduce the size of the large
informal economies that exist in many emerging economies. In essence what
they call for is to ban cash, which would improve tax collection and compli-
ance with labour laws. They refer to some econometric analysis revealing that
increasing electronic payments by an average of 10% per year could shrink
the size of the shadow economy by up to 5%. However, econometrics is a con
art that can be used to prove anything, particularly prior beliefs. They go on to
claim that reducing the size of the informal economy boosts the productivity
of the entire economy. The fact of the matter is that the informal economy is
a derogatory name for the sector where the under-privileged eke out a living.
As we are going to see, the war on cash is a war on all of us for the benefit
of banks and fintechs (and the consultants who serve them by spreading
propaganda).
Enhancing Liquidity
The list of benefits envisaged by Manyika et al. (2016) goes on and on. Yet
another alleged benefit is that fintech enhances liquidity because “as digital
payments become increasingly common, more transactions and payments can
take place”. In the absence of fintech, they imply, people tend to stash cash
92 Fintech
under the mattress or tucked into wallets, rather than circulating more freely
and channelled to funding investment via lending against deposit balances.
Have they heard of negative interest rates and the threat of confiscation coming
from the bail-in legislation? These are good reasons why wise people tend to
stash cash under the mattress. Wise people also keep cash in their wallets, just
in case the credit card is declined for a number of reasons, or that it cannot be
used because “the system is down”. Why is it that digital payments only are
associated with saving and investment? And what is the role of fintechs in this
flawed argument?
Promoting Innovation and New Business Formation
One more advantage that is claimed by Manyika et al. (2016) is that digital
payments enable a range of new business models to emerge, including new
types of financial services, such as P2P lending or new credit scoring methods,
micropayment opportunities for the poor, and new digital businesses including
e-commerce and on-demand services. All these services enable entrepreneur-
ship, innovation and job creation in the economy, spurring long-term growth.
Nice rhetoric, particularly in relation to the poor who will be less poor as
a result of digital payments!
Supporting Sustainable Development
In a special report, the United Nations (2020) identifies three ways whereby
fintech can contribute to sustainable development. To start with, it allows
savings to be channelled easily towards investments. This is, nowadays, an
extremely important issue as falling interest rates have brought the cost of
money close to zero with a persistent excess of liquidity. It is in this context
that retail savers are approaching alternative asset classes that were previously
aimed only at institutional investors. It also allows the mobilisation of inter-
national finance in a global world where the circulation of capital is getting
increasingly simple. Last, but not least, it promotes greater risk measurement
and management capabilities with innovative valuation models. Crowdfunding
is a concrete way of financial inclusion for smaller companies that have credit
needs largely unsatisfied by the traditional credit system (they are marginal-
ised because they are considered unattractive by traditional banks).
These claims are grossly exaggerated. Fintech cannot reverse the adverse
effects of the destructive policy of ultra-low or negative interest rates, which
discourages savings. Crowdfunding may be viable, but it comes at the cost
of a higher level of counterparty risk. I am not sure how fintech allows the
mobilisation of international finance, and I do not know what the innovative
valuation models are (it sounds like pure rhetoric).
5.5 DISADVANTAGES OF FINTECH
The fintech evangelists and fintech firms and promoters make it sound as if
fintech promises milk and honey without anything to worry about. The fact of
the matter is that, like financial innovation and shadow banking, fintech can
bring with it more problems than benefits. In this section, the disadvantages of
fintech are discussed in turn.
Adverse Effect on Financial Stability
The proponents claim that fintech boosts financial stability because of the
diversification away from traditional financial institutions. However, fintech
has a potential negative effect on financial stability in the absence of proper
regulation, particularly when financial literacy is low. In a comprehensive
report entitled Fintech and Financial Stability, the DTCC (2017) notes that
“over the last few years, investment in fintech initiatives has grown exponen-
tially across multiple sectors and could materially impact the financial ecosys-
tem and financial stability – either positively or negatively – over the next five
to ten years”. Assessing the impact of fintech on financial stability must be
done on a case-by-case basis, taking into account how each individual applica-
tion may affect the various dimensions of systemic risk. It may be too early to
judge whether fintech innovations are systemically beneficial or harmful. This
is an issue that will be discussed in detail in Chapter 8.
Adverse Effect on Financial Inclusion
As is the case with financial stability, fintech can create new risks that under-
mine financial inclusion. Despite enthusiasm about fintech and what it prom-
ises, expansion in the provision of digital financial services will not necessarily
lead to adoption by the general public or boost financial inclusion. Someone
without a bank account is unlikely to know how to use a computer or have one.
This person may have a mobile phone, but the possession of a mobile phone
does not necessarily lead to the abandonment of cash transactions. Sahay et al.
(2020) argue that fintech will boost financial inclusion because digital financial
services are faster, more efficient and typically cheaper than traditional finan-
cial services, which means that they are increasingly reaching lower-income
households and small- and medium-sized enterprises. The problem here is the
implicit assumption that most people have a reasonable degree of computer
literacy, which is not the case. Even people who are familiar with technology
are likely to hesitate before executing a financial transaction online.
94 Fintech
Most people, even those who are literate digitally and computer wise, would
rather explore the options of renewing a deposit by talking to someone face
to face than doing it by using internet banking. Even if the financial institu-
tion is trustworthy, people may be afraid that they miss something, such as
a better option, which for some reason does not show on the screen. They may
not understand something, in which case they want to talk to a real person.
Choosing among possible mortgage offers requires understanding of finan-
cial jargon including LMI premium, revert rate, repayment type, discharge
fees, LMI capitalisation, redraw, repayment holiday, and mortgage portable.
A screen may show five options with different parameters from which a cus-
tomer is asked to choose. If the customer does not understand this jargon, they
would most likely want to talk to someone, even on the mobile phone.
Relevant to this point is the concept of “digital divide”, which refers to the
gap between those who are in a position to benefit from the digital age (also
known as the computer age and new media age) and those who are not. Those
who are not in a position to benefit from the digital age do not benefit from
fintech (hence financial exclusion). People without access to the internet and
other information and communication technologies will be disadvantaged,
as they are unable or less able to obtain digital information or shop online.
Distinction is made between the global digital divide (the divide between
countries or regions or between developing and developed countries) and
the divide within countries, which refers to inequalities between individuals,
households, businesses or regions.
The divide is determined by accessibility and digital (or computer) literacy,
which is defined as the knowledge and ability to use computers and related
technology efficiently. A person (aged 5–69) is considered computer literate if
they can use a computer on their own. Computer literacy differs from digital
literacy, which is the ability to communicate or find information on digital
platforms. A person (aged 5–69) is considered digitally literate if he/she/they
can use a computer, laptop, tablet or smartphone on his/her/their own.
Figures released by the US Department of Education show that about 16%
of US adults are not digitally literate, compared with 23% of adults inter-
nationally. The percentage of US adults who are not digitally literate is not
measurably different from the percentages in the UK, Belgium, Canada and
Germany. The Netherlands and several Nordic countries (Sweden, Norway
and Denmark) have some of the lowest percentages of adults who are not digi-
tally literate, ranging from 11 to 14% (Mamedova and Pawlowski, 2018). The
numbers are higher in the developing world, which casts doubt on the validity
of the proposition that fintech will boost financial inclusion. We will come
back to this issue in Chapter 8.
Operational Risk
There are good reasons to believe that fintech will aggravate operational risk.
The Basel Committee on Banking Supervision (BCBS) defines operational
risk as “the risk arising from inadequate or failed internal processes, people
and systems or from external events” (BCBS, 2004). Mestchian (2003) sug-
gests the decomposition of the definition of the BCBS into four components.
Process risk is produced by inefficiency or ineffectiveness in various business
processes within the firm. People risk arises from employee error, employee
misdeeds, employee unavailability, and inadequate employee development
and recruitment. Technology (or system) risk is caused by system failure, data
quality and integrity issues, inadequate capacity, and poor project manage-
ment. External risk is caused by the actions of external parties (for example,
competitor behaviour, external fraud and regulatory changes) as well as mac-
roeconomic and socioeconomic events.
The BCBS (2004) classifies operational loss events under seven different
categories (internal fraud; external fraud; employment practices and workplace
safety; clients, products and business practices; damage to physical assets;
business disruption and system failures; and execution, delivery and process
management). Table 5.2 shows that, out of the seven operational loss events,
internal fraud (losses due to acts of fraud involving at least one internal party)
and external fraud (perpetrated by an external party) are highly relevant to
fintech. Some of the loss events have no connection, like damage to physical
assets by fire or natural disasters, but it is arguable that the installation of
expensive IT systems makes this type of loss event more costly for fintech
companies. Direct connection is obvious between fintech and system failure.
Therefore, five out of the seven categories are relevant to fintech. For example,
external fraud is often committed via computer hacking, which becomes more
frequent when transactions are conducted online. Problems with hardware
and software, as well as utility outage and disruption, become more serious as
computerisation is intensified. The same goes for errors in data entry.
In Table 5.3, we can see the relevance of fintech to the sources of operational
risk (people risk, process risk and technology risk). These are the sources of
risk of losses resulting from the failure of people, processes and technology.
Technology risk is particularly relevant because fintech is all about technol-
ogy. For a detailed discussion of these classifications, see Moosa (2007, 2008).
Aguayo and Slusarczyk (2020) refer explicitly to the operational risk arising
from the digitisation of banking services. They recognise electronic banking
services to include (i) account statements for a customer; (ii) information on
banking products (deposits, loans, securities); (iii) applications for opening
deposits and obtaining loans and bank cards; (iv) internal transfers to bank
accounts; (v) transfers to accounts in other banks; and (vi) currency con-
96 Fintech
Table 5.2 Operational loss events relevant to fintech
Type of event Examples

Internal fraud • Account take-over and impersonation
• Credit fraud
External fraud • Computer hacking
• Theft of information
• Forgery
Clients, products and • Account churning
business practices • Breach of privacy
• Misuse of confidential information
• Customer discloser violations
Business disruption • Hardware
and system failure • Software
• Telecommunication
• Utility outage
• Utility disruption
Execution, delivery • Incorrect client records
and process • Data entry, maintenance or loading error
management • Miscommunication
version. On the other hand, they recognise the sources of operational risk as
(i) defects and failures; (ii) loss of data integrity and unauthorised access to
customer data; (iii) violation of a technical system in an information space;
(iv) cyber-attacks; and (v) data integrity and unauthorised access to customer
data. They use the concept of “digital operational risk”, which they attribute to
internal sources (defects or failures) and external sources (fraud risk, techno-
logical risk and cyber risk).
Let us concentrate on fraud in digital finance, which is often referred to
as “digital fraud”. As financial institutions and businesses adopt the latest
systems to make digital payments more secure, the nature of digital fraud
continues to evolve. The new-age computer hacker uses more sophisticated
ways to obtain valuable customer information and login credentials to hack
into accounts. As a result, it has become rather common to lose security
authentication data, to download malicious apps, and to be the victim of credit
card fraud. Chris (2020) refers to the “fraud pandemic”, which is associated
with the “accelerated shift to online banking and mobile transactions”, which
has pushed financial institutions to re-evaluate the resilience of their fraud
management strategies.
Common types of fraud in digital transactions include malware, phishing,
account takeover and card not present (CNP). Malware refers to a computer
program that, when installed on a device, can collect information on financial
Table 5.3 Sources of operational risk relevant to fintech
People risk Process risk Technology risk

• Misuse of important • Employee error • New technology failure
information • Inadequate quality control • Technology-related operational
• Embezzlement • Inadequate security errors
• Unauthorised fund • Inadequate supervision • System failure
transfers • Inadequate account reconciliation • Outdated hardware
• Unauthorised trading • Inadequate transaction completion • Computer virus
• Inadequate transaction execution • Data security
• Inadequate transaction settlement • Hacking
• Lack of proper due diligence • Inadequate testing
• Loss of critical information • Incompatible software
• Inadequate systems
• System maintenance
transactions. Phishing can be used for gathering personal identifiable informa-

tion via deceptive e-mails and fake websites for the purpose of accessing cus-
tomer accounts. Account takeover occurs when a hacker posing as a genuine
customer takes control of an account and makes unauthorised transactions.
Card not present, or remote purchase fraud, involves the fraudulent use of card
details obtained through skimming, digital attacks, and unsolicited e-mails or
calls.
The failure of computer systems can cause huge losses without fraud—the
best example is algorithmic trading gone wrong. Algorithmic trading, where
a computer automatically executes trades based on pre-programmed instruc-
tions, has become a big factor in generating daily stock market volatility.
Computer algorithms are used to discern very quickly short-lived profit oppor-
tunities over units of time as small as microseconds and determine optimal
order submission strategies. The algorithms are used to monitor prices and
liquidity across different markets. Algorithmic trading programs can make bad
stock market days even worse.
High-frequency algorithmic trading has been the subject of intense public
debate since the 6 May 2010 “flash crash” (Bowley, 2010; Mehta and Kisling,
2010; Spicer and Younglai, 2010). The flash crash was a brief but dramatic
stock market crash as the US market (measured by the Dow Jones Industrial
Average) experienced its largest-ever intra-day point loss in history, only
to recover much of the loss within minutes (for a few minutes, $1 trillion in
market value vanished). The crash was initiated by Waddell & Reed Financial,
a little-known mutual fund where portfolio managers were becoming increas-
ingly worried that fears of a European fiscal crisis would spread to the US
stock market, which was already bearish. As a result, they decided to make
a trade that would limit their losses if the market continued to decline, instruct-
98 Fintech
ing their computers to start an automated program of selling financial contracts

that were linked to the DJIA. This action triggered a wave of selling that over-
whelmed the market as the Dow fell by 600 points in 15 minutes.
Customer and Investor Trust
The ability of the fintech industry to push traditional financial institutions out
of business depends on how much trust people have in fintech companies.
People do not hand their wallets to strangers—likewise, they hesitate before
sharing financial details and personal information with a hitherto-unknown
fintech company using a fancy app. Sahay et al. (2020) warn of “inappropriate
lending practices” by unregulated institutions, which could jeopardise trust.
Wilde (2020) identifies four areas of concern that appear to drive distrust
of fintech companies: data privacy, fear of the unknown, limited regulation
and scandals. He notes that while two of these “trust gaps” are becoming less
potent over time, the other two are “fuelling people’s aversion to fintechs”,
which “could prevent the sector from riding the new wave of digital accelera-
tion”. These areas of concern are assessed on the basis of a survey (conducted
on behalf of Edelman’s Trust Barometer) of over 33,000 individuals annually.
As far as data privacy is concerned, the survey shows that 62% of the
respondents are willing to give up more of their personal data if they believe
that the information can be used responsibly for a good cause and that
data-sharing is simply becoming a part of life. This may be true of sharing
personal information to fight the Coronavirus, but it is not true when it comes
to giving the information to a fintech firm or any other firm seeking to collect
information. Large segments of the population even refuse to give their per-
sonal information for the purpose of fighting the Coronavirus, thinking that the
hidden agenda of the government is to widen mass surveillance. In Australia,
for example, the government failed to convince most people to download
a contact tracing app, forcing the abandonment of the idea.
When it comes to fear of the unknown, 64% of the participants seem to
trust banks, insurance companies and traditional wealth managers, while only
47% trust peer-to-peer and digital payment companies, 48% trust blockchain
and crypto-companies, and 49% trust digital wealth and robo-advisory firms.
In fact, trust in these fintech sub-sectors is even weaker among those in
lower socioeconomic groups, which are supposed to be targeted (and helped)
by fintechs. Wilde (2020) believes that this gap should shrink over time as
he observes “year-on-year improvements in trust levels across all fintech
sub-sectors, as familiarity gradually builds”.
A widespread belief, as far as regulation is concerned, is that technology is
advancing more rapidly than ordinary people can cope with. In 2020, 61% of
the survey participants declared that “the pace of technology is too fast”, which
is plausible. The same number of people thought that the British government
does not have adequate understanding of emerging technology to be able to
regulate it effectively. Some 66% of the participants said that technology made
it impossible to know whether or not what they are seeing and hearing is real.
Ambivalence towards technology could override any improvement in familiar-
ity with the leading fintech brands, which would worsen the trust gap overall.
Scandals are not limited to traditional financial institutions. The
millennial-focused brokerage firm Robinhood was in the spotlight follow-
ing the suicide of a 20-year-old customer after seeing a negative balance of
$730,000. The note found on his computer by his parents on 12 June 2020
read as follows: “How was a 20 year old with no income able to get assigned
almost a million dollars’ worth of leverage?” The note, filled with anger
towards Robinhood, also said that he had “no clue” what he was doing as
he was trading options (Klebnikov and Gara, 2020). Another scandal is that
surrounding the spectacular collapse of German fintech firm Wirecard in late
June 2020. Subsequently, the firm was subject to fraud investigations, includ-
ing money laundering and even dealing in the armaments trade (Bright, 2020).
The scandal was so bad that, according to Laurent (2020), it “is making some
old-school bankers feel good about themselves” (it wiped out $12 billion off
the market value of the company in three days).
On the other hand, fintech companies may exploit lack of trust in traditional
banks in the aftermath of the global financial crisis and the countless scandals
that followed. Galarza (2020) argues it is nothing new that banks act “in
a manner that leads to distrust of financial services”, that “banks continue to
work for no-one but themselves”, that “banks are doing very little to rebuild
public trust”, and that “banks acting in an untrustworthy manner is something
we have all grown accustomed to”. Fraud is perceived as a cause of the global
financial crisis just as it was a cause of its prelude, the subprime crisis. Rakoff
(2014) reaches the conclusion that “in the aftermath of the financial crisis, the
prevailing view of many government officials was that the crisis was in mate-
rial respects the product of intentional fraud”.
This is why Rooney (2018) argues that “Fintech may be one of the few
industries looking back fondly at what happened to Wall Street after 2008.”
In fact, she attributes the rise of fintech to the “chaos and disruption of the
credit crisis”, which “instilled lack of trust in existing banks and brought on
new regulations and the rise of technologies that would allow scrappy Silicon
Valley start-ups to reshape consumer finance”. The problem is that traditional
financial instructions did not refrain from serious misconduct in the aftermath
of the crisis, as we have witnessed in the forex scandal, the LIBOR manipula-
tion scandal, fraudulent accounting practices (for example, Repo 105), manip-
ulation of the prices of gold and silver, and the Bernie Madoff fiasco, just to
name a few. It is not clear, however, how fintech companies can convince the
100 Fintech
public that they are different from the fraud-ridden traditional financial institu-
tions, now that they have scandals of their own. After all, fintechs are financial
institutions, and financial institutions are notorious for committing fraud and
ripping off customers.
Another aspect of trust is the trust of investors, particularly when a fintech
is floated as a public shareholding company. The fancy names of fintech
companies remind people of the fancy names of the dot-com companies that
went belly up, even though they promised investors huge returns based on
state-of-the-art technology. In a comment on dot-com companies, McCullough
(2018) describes them as follows: “They all vowed to ‘change the world’, had
crazy-high valuations, and were wildly unprofitable.” Just like the dot-com
bubble, the term “fintech bubble” is gaining acceptability, even though some
observers believe that the comparison is misplaced. For the neutral observer,
the resemblance is uncanny.
The War on Cash
Fintech companies are in a coalition with governments in the war on cash for
two different reasons. While fintechs see the absence of cash as a source of
business, governments want to monitor our spending patterns in the spirit of
Big Brother and in the name of “national security”, “fighting terrorism” and
“destroying the underground economy”. The war on cash is a major issue
that deserves further scrutiny, and this is why it will be dealt with in detail in
a separate chapter. For now, it suffices to say that the war on cash, in which
fintech companies like PayPal are prominent participants, is a bad by-product
of the rise of fintech. The war on cash, according to Dowd (2017), is intended
to “destroy what is left of our privacy and our freedom”.
The Loss of High-Touch Customer Service
A “high-touch” customer service is characterised by a high degree of human

involvement, as is the case with traditional microfinance transactions. Human
transactions are based on trust: the borrower trusts that the lender will conduct
a fair assessment of their credit worthiness, and will respect the terms and
conditions of the deal. The lender trusts the borrower with their money, along
with the principal and interest. Every day, billions of transactions are sealed
with a handshake, a signature and an eye-to-eye exchange. The human touch is
particularly important for low-income customers, where faith in the individual
is greater than the faith in an institution, let alone a robot or an algorithm.
A digital transaction redefines the trust relationship and the commitment
on both ends. Moreover, three parties (rather than just two) are involved when
a digital loan is granted through a mobile provider, and none of them sees
the other. Proponents of algorithm-based lending argue that it eliminates the

subjectivity factor in decision-making, replacing it with data-based decisions.
However, digital transactions with automated on-boarding may result in exces-
sive standardisation. The repayment capacity analysis may be lax or replaced
by an AI-driven algorithm. Which of the two delivers a better, fairer judgment:
an algorithm or a loan officer? What we know is that the debt burden and
repayment capacity of the borrower must be scrutinised adequately. If this is
not the case, it can lead to over-lending and customer over-indebtedness, or
a rejection based on opaque reasoning, including arbitrary profiling.
Transparency and Ethical Behaviour
Fintech lacks in transparency compared with conventional finance because

humans are more transparent than algorithms. Furthermore, it is hard to ensure
ethical behaviour from a salesperson who does not see the client in person, par-
ticularly when the salesperson is under pressure to deliver aggressive targets
prompted by greed. Rose-Palan (2018) gives an example of Wells Fargo,
where at least two million deposit and savings accounts were opened in the
names of customers without their consent.
A lending deal arranged on a mobile phone may lack transparency because
there is limited space on mobile devices to disclose information on terms, use
of personal data, the consequences of default and the mechanisms governing
grievance. A customer may not be even aware that they have accepted a loan
deal. For unknown reasons, an algorithm may blacklist a customer in a process
that may be difficult, costly, and slow to reverse. According to de Nogales
(2018), “more than half a million people are blacklisted in Kenya for amounts
as small as one US dollar—and unfortunately, they will not obtain any loans
until they are cleared (if and when)”. He points out that an algorithm may
reject a loan application on the basis of “alternative data”, which may include
“geolocation, frequency of SMS use, phone charging, medical records, or, for
the more Internet-savvy, browsing history, social media profiles, and online
purchasing records”. In what ways do browsing history and the use of social
media determine credit worthiness? Given these considerations, fintech may
actually lead to financial exclusion rather than inclusion.
Adverse Effect on Employment
At the beginning of this chapter, we saw how technology leads to a decline in

the amount of labour used to produce a particular level of output as a result of
a downward shift in the isoquant corresponding to that level of output. Fintech
is all about automation and the minimisation of the use of human workers (to
reduce the wage bill). This is why a shift from traditional, human-driven finan-
102 Fintech
cial services to fintech, where computers and robots call the shots, is likely to
create unemployment in the financial sector.
Fintech is capital-deepening technology, in the sense that it boosts the pro-
ductivity of capital more than that of labour. This can be seen in Figure 5.2,
where the isoquant corresponding to a given level of output shifts from I0 to I1.
Unlike what is shown in Figure 5.1, which displays the case of neutral technol-
ogy that affects the productivity of labour and capital equally (represented by
parallel shifts in the isoquants), Figure 5.2 shows that the isoquant shifts while
becoming flatter, as represented by the slope of the tangent to the isoquant. As
a result of the change in slope (which represents the marginal rate of substitu-
tion between labour and capital), it becomes possible to replace increasingly
large amounts of labour by the same amount of technology-improved capital.
This adverse effect on employment is clear—as a matter of fact, one of the pro-
claimed benefits of fintech firms is that they have lower operating costs (pri-
marily because of a small wage bill). The other side of this advantage is that the
growth of fintech is unlikely to be accompanied by growth in employment—it
is not a job-creating industry.
Figure 5.2 Capital-deepening technology

5.6 CONCLUSION
The increasing use of fintech solutions and emerging technologies brings not
only benefits but also risks. Exaggeration in the statement of the benefits of
fintech can be seen clearly in the work of Manyika et al. (2016), who make the
heroic statement that digital financial services contribute to progress towards
meeting the UN’s sustainable development goals. Specifically, they claim
that digital financial inclusion directly supports 10 of the 17 UN sustainable
development goals. These are the objectives of no poverty, zero hunger, good
health and well-being, quality education, gender equality, affordable and
clean energy, decent work, reduced inequalities, peace and justice, and strong
communities. Believing this extraordinary rhetoric amounts to nothing short of
a triumph of wishful thinking over reason.
Fintech will reduce poverty allegedly because poor people and small
businesses are able to invest in their future and because more government aid
reaches the poor as leakage is reduced. Nothing is said about how the poor
invest in their future when they are poor, which means that they have nothing
to invest. Fintech will lead to zero hunger because farmers are better able to
invest during planting seasons and smooth consumption between harvests
and because more food aid reaches the poor as leakage is reduced. Nothing
is said about how that is supposed to happen. Fintech will lead to good health
and well-being because of increased government health spending as leakage
is reduced and because financial inclusion for women can boost spending on
healthcare. Again, nothing is said about how that is supposed to happen. In any
case, when governments have more money, they do not spend it on healthcare
but rather on wars and spy agencies in the name of “national security”.
Fintech will lead to quality education, allegedly because “digital payments
to teachers reduce leakage and absenteeism”. Fintech will provide affordable
and clean energy because “mobile pay-as-you-go schemes create access to
clean energy” and because “better targeted subsidies increase use of renewa-
ble energy”. Fintech will lead to decent work and economic growth because
a greater pool of savings boosts lending capacity and because data history
of the poor and small businesses reduces lending risks. Fintech will reduce
inequality because financial inclusion gives greatest benefit to very poor
people and because more government aid becomes available as fraud and
theft are reduced. This is utter nonsense that does not deserve dignifying with
a comment, but it proves that economists can act as “hired guns”.
It is because of the negative consequences of fintech that a number of
fintech consumer protection initiatives have been launched. For example,
the Responsible Finance Forum has issued guidelines for responsible fintech
(https://responsiblefinanceforum.org/investor-guidelines/). The guidelines
104 Fintech
include the following: promoting responsible investment in digital finance,

fostering a proportionate legal and regulatory framework, promoting fair and
transparent pricing, improving disclosure of terms and conditions for cus-
tomers, and perhaps more importantly, preventing over-indebtedness. For the
fintech evangelists, fintechs should be provided with a regulation-free envi-
ronment, because they are doing such a good job to improve human welfare.
In reality, the benefits of fintech come with costs, risks and challenges that
must be taken into account when considering how to deal with fintech from
a regulatory perspective.
6. The war on cash
6.1 THE DECLARATION OF WAR
The war on cash is defined by Whitehead (2020) as a “concerted campaign to

shift consumers towards a digital mode of commerce that can easily be mon-
itored, tracked, tabulated, mined for data, hacked, hijacked and confiscated
when convenient”. Implicitly, this definition refers mostly to “Big Brother”, as
governments will, in the case of victory over cash, be in a position to monitor
and track all transactions, which takes mass surveillance to a new level and
extend the virtual concentration camp.
Naturally, governments claim that the war on cash is in the public interest
because the exercise is intended to fight terrorists, drug dealers, tax evaders
and (last but not least) Omicron (the latest variant of the Coronavirus).
However, banning cash will change criminals from those who rob someone
at gunpoint, having just withdrawn money from an ATM, to those who wipe
out the whole account by the click of a mouse (these are the hackers as in
Whitehead’s definition). As for confiscation, this may be a reference to the
ability of the government and banks to confiscate money by banning the use
of high denomination notes (which is what happened in India), by cancelling
bank notes according to a random selection by serial number (to force people
to keep their money at banks) and by empowering failed banks to confiscate
deposits to replenish their reserves and (of course) pay the top executives
well-deserved bonuses (bail-in legislation).
Governments around the world have declared war on cash by attempting to
stop people from using cash to pay for what they buy. They do that through
propaganda, by giving the impression that the use of cash is suspicious, by
passing draconian laws and directives to restrict or ban the use of cash, and by
requiring financial institutions to report certain types of cash transactions. The
ultimate objective of the perpetrators of this illegal war is the “ideal” situation
found in a “cashless society” where financial transactions are not settled by
using banknotes and coins, but rather through the transfer of digital informa-
tion between the transacting parties (this is electronic or digital money). This
war is a component of a conspiracy against ordinary people and for the benefit
of the financial oligarchy, involving also ultra-low or negative interest rates
and bail-in legislation. Fintechs are for the war on cash because it is a source
105
106 Fintech
of business for them, never mind that it represents intrusion on privacy and
violation of human rights, the right of ordinary people to use cash as a medium
of exchange and store of value.
6.2 COALITION OF THE WILLING
Three major players in the war on cash are identified by Desjardins (2017).
The initiator is the government, which is motivated by the proposition that
the elimination of cash will make it easier to track all types of transactions,
including those conducted by criminals. The enemy, according to Desjardins,
is “criminals and terrorists” because large denominations of bank notes make
illegal transactions easier to settle and anonymous. The third player is repre-
sented by those caught in the crossfire, ordinary people, because the coercive
elimination of cash will have potential repercussions on the economy and
civil liberties. For the sceptics, ordinary people are not caught in the crossfire,
but they are also the enemy, who should be subjected to mass surveillance
and surrender their will and livelihood to the government and financial insti-
tutions. Relevant to this discussion is the role of the government as seen by
Lysander Spooner, an American abolitionist and legal theorist, who is quoted
by Whitehead (2020) as saying that “the government, like a highwayman, says
to a man: Your money, or your life”. White (2018) argues that the phrase “war
on cash” suggests a parallel to the “war on drugs”.
In a comment on Desjardins (2017) Ronald West argues that the real enemy
is the governments and their masters (bankers) and that most of the people
(sheep) assist these pirates in carrying out their evil agenda, by using their
monetary products such as debit cards, credit cards, PayPal, e-transfers, etc.
For the likes of Visa, Microsoft and Vodafone, which provide the technical
infrastructure for digital money transfers, cash is a nuisance because they (Visa
et al.) do not generate profit and collect data from cash transactions. Digitised
transactions represent lucrative business and provide a boost for the market
power of these companies.
The war on cash is not fought by governments only, but rather by an
alliance or a collation of beneficiaries or potential beneficiaries, enablers
and cheerleaders. Scott (2016) suggests that banks, governments, credit card
companies and “fintech evangelists” want us to believe that a cashless future
is inevitable and good. Banks and credit card companies benefit from the war
on cash because when people cannot use cash, they will pay by using debit and
credit cards. Banks will also benefit by closing down branches and removing
ATMs, thereby saving the salaries of bank tellers. The “fintech evangelists”
are cheerleaders who promote the war on cash because the fintech industry will
benefit by providing alternative means of payment, such as mobile payments
and digital wallets. Thus, we are told (by the beneficiaries) that a “cashless
The war on cash 107
future” is both desirable and inevitable at some point. In truth, such a state of
affairs is neither desirable, nor inevitable.
A cashless society is portrayed (by the beneficiaries) as significant progress,
something fashionable, modern, convenient, secure and ideal. Anyone who
opposes the idea of a cashless society is reactionary, old-fashioned and does
not live in the modern world of technology. Yves Mersch, member of the exec-
utive board of the ECB, classifies advocates of the cashless society into three
groups (Lepecq, 2020). The first group are the “alchemists” who want to over-
come the restrictions that the zero lower bound (ZLB) imposes on monetary
policy. The second group is that of the law-and-order fanatics. The third group
is represented by fintech firms, which anticipate major business opportunities
arising from the abolition of cash. The concern, according to Scott (2016), is
“about a potential future world in which we’d have to report our every eco-
nomic move to a bank, and the effect this could have on marginalised people”.
He goes on to say that a cashless society effectively means “ask-your-banks
-for-permission-to-pay society”. McRee (2020) argues that the war on cash
is about banks and a power-hungry government wanting to “confiscate your
cash, steal your liberty and track every dollar you spend”.
While governments have launched the war on cash for the purpose of mass
surveillance, financial institutions (including fintech companies) promote and
participate in the same war because it makes their business more profitable.
Gordon (2016) examines the participation of Visa and PayPal, two beneficiar-
ies and promoters, by saying, “major companies like Visa have been keen to
inform cardholders through a recent campaign that they can ‘make contactless
payment with confidence and feel liberated from the need to carry cash’”.
Andriotis (2017) tells a story about Visa offering small merchants thousands
of dollars in return for refraining from accepting cash (in the name of liber-
ating people from cash). In July 2017, the company unveiled the initiative as
“part of a broader effort to steer Americans away from using old-fashioned
paper money”. Visa announced that it would give $10,000 per piece to up to
50 restaurants and food vendors to pay for their technology and marketing
costs, as long as the businesses pledge to abandon cash. We have to bear in
mind that Visa and other credit card companies make money out of credit card
transactions by charging commissions and even more by charging those who
do not pay on time at a rate in excess of 20%. It makes one wonder why the
low interest rate policies adopted by central banks worldwide are not applied
to interest rates on credit card balances.
The role of a prominent fintech firm, PayPal, is examined by Gordon
(2016), who tells us how “PayPal plastered cities and TV with adverts” to
convey the message that “new money doesn’t need a wallet”, along with
a video proclaiming that “new money isn’t paper, it’s progress”. In July 2020,
PayPal executives announced the death of cash as the company posted record
108 Fintech
earnings. According to CNBC, PayPal CFO (John Rainey) said that “the death
of cash has arrived” (Stankiewicz, 2019). Company executives said that the
society had reached an “inflection point” when it comes to the “death of cash”
and noted that 70% of consumers now fear for their health when it comes to
paying in stores (Lepecq, 2020). It is easy to detect the language of fear, which
is apparently not exclusive to governments trying to pass some draconian
legislation.
In 2017, another PayPal CEO, Dan Schulman, told CNBC that “the digital
revolution is making transactions cheaper and easier for millions of people
worldwide and will eventually push out traditional forms of payment, like
cash”. As if the language of fear is not enough, he plays the financial inclusion
card by referring to the plight of “2 billion people in the world that live outside
the financial system, and the things that we take for granted — paying a bill,
cashing a check, sending money to a loved one” (Gurdus, 2017). Dan’s only
concern is that those people cannot pay with a phone or a chip underneath the
skin, but I doubt very much that he is prepared to donate his bonus to a charity
that looks after the world’s poor.
Häring (2018) tells a story about a 2005 conference on payments, where
representatives of MasterCard promoted a “new generation of card solutions”,
with which they wanted to “go to war” (that is, using the new generation of
solutions as a weapon to defeat the enemy, which is cash). The Visa represent-
atives were confident that they would “win the war on cash” and “eliminate
cash from the financial system”. In a report on the conference, Adams (2006)
suggested that “while banks and governments have a shared desire to eliminate
cash, governments prefer to let the card companies take the initiative, because
they are afraid that the public would not like the war on cash.” In the same
conference, an official of the European Union declared his approval of the war
on cash and pleaded with card companies to reduce prices for card payments
in order to emerge victorious (Häring, 2018). Alexander Labak, President of
MasterCard Europe, said in a speech on “the future beyond cash” that the war
on cash had to be won and would be won, because “these old-fashioned coins
and bills were so expensive for society” (Labak, 2005). According to Häring
(2018), “the EU-Commission assisted with questionable calculations about
the high cost of cash, while the leading US-consultancy McKinsey provided
the rationale for the war on cash by presenting a study according to which the
profits of the financial industry would increase massively in the absence of
cash.” That is true, but who will pay for the increase in profit? In Chapter 5, we
saw how Manyika et al. (2016) exaggerated the benefits of fintech by making
unrealistic and ludicrous claims about how fintech is going to save humanity.
That was a publication of the McKinsey Global Institute, which is the research
arm of McKinsey & Company.
The war on cash 109
In 2017, the IMF came to the rescue by suggesting that the decline of
cash should appear to be a “gradual and unplanned side-effect of unrelated
measures and developments”. The Fund advised governments to let the
private sector go ahead, because “direct official action would cause popular
resistance” (Kireyev, 2017). The IMF recommended that government action
should, at least at the beginning, appear to be “benign”, taking the form of
phasing out large denomination notes and allowing generous upper limits for
cash payments. The Fund did not shy away from recommending deception by
suggesting that “measures against cash should be presented to be unplanned
and independent” and that these measures should be “closely coordinated with
the private sector”. The US consulting firm McKinsey & Company (2013) also
advised governments, banks and payment providers to co-operate in a “sys-
tematic war on cash”, suggesting a list of “harmless-seeming steps for govern-
ments to take”. These steps include the requirement that merchants accept card
payments without passing on the cost to their customers. McKinsey also sug-
gested that cash users should be confronted with the true cost of their payment
methods, including all indirect costs. To make the use of cash more expensive,
“the standards for security and maintenance in the cash circuit should be made
more stringent”. Well, using cash does not bring about a surcharge as is the
case with credit cards (let alone the interest charges on delayed payments). If
this is not a conspiracy against ordinary people, I do not know what a conspir-
acy is. And it is a conspiracy fact, not a conspiracy theory.
The coalition of the willing fighting against cash is formally represented by
the “Better Than Cash Alliance” (BTCA), which according to Häring (2018)
“has the goal of replacing cash by digital payments on a global scale”, suggest-
ing that “this Alliance is doing this with the explicit support of the government
of the 20 most powerful countries” (in reference to the G-20 countries). Häring
asserts that “the term ‘war on cash’ was coined not by critics, but by key
members of this Better Than Cash Alliance, as a rallying cry in their drive
to increase their profits”. The Alliance was founded in 2012 by the Bill &
Melinda Gates Foundation and the Omidyar Network of eBay founder Pierre
Omidyar, as well as Citibank and Visa. The US government was involved via
the development agency USAID, which belongs to the State Department. The
United Nations Capital Development Fund (UNCDF), based in New York,
provides the secretariat and the offices (and of course the good global image).
MasterCard was not among the founders of the Alliance, which Häring
(2018) explains by suggesting that “they needed a bit more cooling-off of their
fierce commercial campaign against cash, lest the press and the public might
develop doubts about the strictly altruistic goals of the new organization.”
With a delay of one year, as Häring puts it, “MasterCard joined this public–
private partnership of Wall Street, Silicon Valley and Washington”. However,
he refers to a “strong indication that MasterCard was closely involved already
110 Fintech
in the preparations for this anti-cash-alliance much earlier”. In a 2013 press

release, it was declared that MasterCard “is excited to join the Better Than
Cash Alliance to help educate and engage the public on the cost of cash to
society[,] which can be as much as 1.5 percent of a country’s GDP”, claiming
that “electronic payments have been proven to boost economic growth and
accelerate financial inclusion”, which requires a partnership of “businesses,
governments and NGOs” (Better Than Cash Alliance, 2013). We are not sure,
however, who proved what is alleged to have been proven, but then anything
can be proved by “hired guns” using the con art of econometrics to produce
precise figures such as the 1.5% of GDP.
While the Alliance strives to portray the war on cash as a noble cause and
in the public interest, MasterCard has made no secret of the fact that the war
on cash is desirable because it boosts profitability. That was true at least until
2010, the significance of 2010 being the year in which the scene was set for
the Better Than Cash Alliance. In that same year, an article was published
in Forbes about the massive increases in profits that MasterCard expected.
The author of the Forbes article quotes the CEO of MasterCard, Ajay Banga,
as saying that “the gains will be coming from the growth of card and other
electronic-based means of payment, which are a product of the war on cash”
(Guiterrez, 2010).
The BTCA describes itself as a “partnership of governments, companies, and
international organizations that accelerates the transition from cash to digital
payments in order to reduce poverty and drive inclusive growth” (https://www
.betterthancash.org/about). It also claims that “financial inclusion has been
broadly recognized as critical in reducing poverty and achieving inclusive eco-
nomic growth”. It seems, therefore, that the Alliance is a humanitarian organ-
isation, striving for financial inclusion and poverty reduction. Häring (2018)
disputes this proclamation by suggesting that financial inclusion and the war
on cash are synonyms, because “the goal is to push back cash payments – with
a focus on poor people in poor countries, who have until now not been using
formal banking services”. It is rather ludicrous (and sinister) to suggest that
poor people become rich, or less poor, by paying electronically rather than by
cash. Is this some sort of a sick joke or a justification for conspiracy against
the poor and vulnerable? The BTCA claims that its goal is to promote “the
transition from cash to digital payments in a way that improves lives”. This
statement is challenged by White (2018), who argues that standard economic
reasoning tells us that improving lives means adding attractive options, not
removing what people currently consider their best options. Häring (2017)
suggests that, by advocating coercive policies, the BTCA and like‐minded
agencies actually “support financial exclusion of poor people by preventing
them from using their preferred and often only means of payment”. This is
a classic example of claiming a noble cause and doing the exact opposite to
The war on cash 111
what it takes to serve the noble cause. Liberating the poor from cash sounds
like the Bush–Blair liberation of the people of Iraq by bombing their towns,
villages and neighbourhoods back to the Stone Age.
The role played by MasterCard and Visa is emphasised by Häring (2018),
who argues that the two credit card companies and their partners have been
openly pushing ahead with an “ostensibly well-meaning global conspiracy
to eliminate cash”. To that end, they have been running global marketing
campaigns to tell people that it is foolish and old-fashioned to use cash and
how modern and convenient it is to have someone else manage the payments
digitally (for the sake of humanity, of course). This sounds the same as the
campaign launched by the tobacco companies to convince young people (par-
ticularly women) that it is “cool” to smoke.
Other enablers, cheerleaders and conspirators are international organi-
sations. The World Bank and IMF, the standard-setting bodies (such as the
Financial Action Task Force, Capital Markets and Payments Infrastructure
Group, and Basel Committee for Banking Supervision) as well as economic
development agencies (such as USAID), are also participants in what Häring
(2018) calls the “stealth-war of the G20-partnership against cash”. These
institutions use their regulatory and financial power to serve the goals of the
BTCA. This explains the bewildering observation that the governments of
very poor countries, who should have other priorities, make the move towards
a cashless society a priority. International organisations implicitly or explicitly
threaten these governments to do what they are told or else.
The role of fintech in the war on cash and the move to a cashless society is
exemplified in the case of Sweden, arguably the first cashless society in the
world. In a tourism promotion piece (https://sweden.se/life/society/a-cashless
-society), it is stated explicitly that the move towards a cashless society is
driven by fintechs, many of which were founded in Sweden. One example
is Klarna, a payment system start-up founded in 2005 that has millions of
customers globally. Another is iZettle, which makes small cheap card payment
terminals that allow retailers to take payments by connecting it to a dedicated
app on a smartphone or tablet. Some Swedes have gone as far as the science
fiction exercise of getting a microchip implanted in their hands, so that they
can pay by simply waving a hand. What kind of welfare improvement does
this kind of technology bring? In what way is this extravaganza a life changer
compared with taking out a real wallet and paying by cash? And in what way
will something like this make the poor less poor and the financially excluded
financially included?
112 Fintech
6.3 MORE ON THE ROLE OF GOVERNMENTS
Two reasons can be suggested for why governments are leading the war on
cash. The first is Big Brother, the urge to spy on people, which has become
a common pastime for governments in “democratic” countries. The second is
that corrupt politicians drive the war on cash as a favour to the financial oligar-
chy, so that they are rewarded with lucrative jobs (or at least exorbitant fees for
speeches) when they are out of public service. And, as we have seen before, the
governments of poor countries do it because international organisations and
development agencies use carrots and sticks against them. For example, the
Nigerian government introduced a tax on cash withdrawals above a daily limit,
a ban on unlicensed cash courier services, and a prohibition of banks cashing
large third‐party cheques.
The main policy tactics (weapons) used by governments in the war on cash
are identified by White (2018) as follows: (i) abolishing high‐denomination
banknotes, (ii) placing a maximum legal value on cash payments, (iii) requir-
ing declarations from any party carrying a cash amount above a specified value
across the national border, and (iv) requiring banks to report to authorities any
cash deposits or withdrawals in amounts above (or suspiciously near) a speci-
fied value. He also refers to the additional weapon of a tax on cash withdrawals
above a threshold amount, lowering the threshold at which reporting a cash
transaction is mandatory or at which paying in cash is simply illegal. In just the
last few years, Italy made cash transactions over €1,000 illegal; Switzerland
proposed banning cash payments in excess of 100,000 francs; Russia banned
cash transactions over $10,000; Spain banned cash transactions over €2,500;
Mexico made cash payments of more than 200,000 pesos illegal; Uruguay
banned cash transactions over $5,000; and France made cash transactions over
€1,000 illegal, down from the previous limit of €3,000.
Governments around the world have been issuing laws and regulations to
prohibit or restrict cash payments by making them harder, more expensive
and legally suspicious. In the extreme, the use of cash could lead to a prison
sentence. Häring (2018) argues that “governments of all colors, from Sweden
to Saudi Arabia, are working together in harmony with one another and with
the leading private corporations of the IT, telecommunications and finance
sectors in a global public–private partnership against cash”. This is happen-
ing while governments are gradually forcing whole populations into large
government-run biometric data banks. Government action against cash is truly
global. In this section we look at some examples of what governments have
been doing to accomplish the ultimate objective of a cashless society.
The war on cash 113
India
The Indian government has taken one of the most visible actions against the
use of cash by removing the 500 and 1,000 rupee notes (roughly 86% of the
currency in circulation). This decision was taken by Indian Prime Minister
Modi in November 2016, with only a 4-hour warning. In theory, people were
allowed to exchange high-denomination notes up to 4,000 per person, but the
rest had to be routed through a bank account in a country where 50% of the
population do not have bank accounts. Deaths were reported as some people
committed suicide, whereas others were elderly people waiting in long queues
to exchange notes (Desjardins, 2017). Speaking in his monthly address on
national radio, Modi said that “the government understands millions have
been affected by the ban on 500 and 1,000 rupee notes”, but he defended the
action and advocated a transition to a cashless society, urging small traders and
daily wage earners to embrace digital payments (Osborne, 2016). The currency
shortage caused enormous hardship for the cash‐dependent unbanked people
who comprise half of the Indian population. As a result of the draconian action,
workers who are normally paid in cash went unpaid, and farmers were unable
to sell their produce. In the critical words of Norbert Häring (2017), “Narendra
Modi performed the great and brutal experiment of starving the whole of India
of cash for months”. White (2018) describes the action as follows: “a policy
ostensibly intended to inflict losses on tax evaders and criminals imposed
severe collateral damage on honest users of currency”.
Europe
In 2016, the European Central Bank (ECB) announced that it would stop
issuing €500 notes, and distribution stopped entirely in 2018, in a move that
was allegedly intended to curb fraud and money laundering. Another justifi-
cation is that cash makes it easy for people to withdraw large sums of money
from their banks, which can be a cause of bank runs in a fractional reserve
banking system, and that was a big problem during the 2008 financial crisis.
The real objective, however, is to make it difficult to avoid negative interest
rates (for example, Hayes, 2020). The problem is not cash, but the fraudulent
scheme of fractional reserve banking, which allows banks to create money out
of thin air and charge interest on it.
White (2018) describes restrictions on cash payments in 12 of the 28 EU
member countries. In Italy the maximum allowable consumer‐to‐business
or business‐to‐business cash payment by residents is currently €2,999.99; in
France and Spain the limit is €1,000; in Greece it is a mere €500. In early 2016
the German finance ministry proposed a national limit of €5,000, which was
met with strong political resistance from defenders of financial privacy.
114 Fintech
Australia
In 2016, the Australian government entertained the idea of banning the use
of the $100 note as part of a “crackdown on all but small cash payments”
(Martin, 2016). The move was inspired by similar moves in India and Europe.
This, however, is nothing compared with what could have happened had the
government got its way.
In August 2019, it was announced that Australians could face two-year
jail sentences and fines of up to $25,200 under proposed draconian laws
that limit the use of cash to $10,000, under the pretext of fighting the black
economy, including tax evasion, money laundering and other crimes. In
response, Senator Pauline Hanson said the following on her Facebook page:
“Effectively, if you are a person who keeps cash and uses it to buy a new small
car, for example, you will face the real threat of two years in jail and a fine that
would likely exceed the value of the vehicle” (Khadem, 2019). In December
2020, the bill was killed in the Senate, thanks to some brave senators from
small parties that refused to go with the coalition of the government and
opposition (the two-party dictatorship). Several federal MPs and stakeholders
raised concerns that the law would create an “Orwellian state” and push people
into the “clutches of the banks”. However, Khadem (2020) warns, the limit on
the use of cash could be revived at some stage and “the now-defunct law could
return in some other iteration once the COVID-19 pandemic has passed”. It
seems that war on cash has become a personal crusade of Prime Minister Scott
Morrison and his Treasurer, Josh Frydenberg, both of whom are prominent
members of the Reagan–Thatcher fan club.
Greece
In Greece, citizens must declare all cash over €15,000 held in safes and other
non-bank storage (talk about civil liberties). In June 2015, it was revealed that
the government and banks had agreed that people would not be allowed to
withdraw cash from safe deposit boxes. The plan was to seize the cash stored
in these boxes and compensate their losses by crediting an equal sum of euros
to their increasingly inaccessible deposits (Salerno, 2015a). Although this
measure was intended to curb cash outflows, it is likely that it was dictated by
the ECB, perhaps as a move to restrict cash transactions.
Norway
In January 2016, Norway’s largest bank, DNB, proposed to stop using cash
as a means of payment in the country. According to DNB’s executive, Trond
Bentestuen, “more than half of all cash transfers in the country are made
The war on cash 115
without the banks’ control, and so could be used for illegal purposes” (Lyon,
2016). DNB and Norway’s second-largest bank, Nordea, have largely stopped
keeping cash in their branch offices. The Norwegian Hospitality Association
has lobbied to abolish consumers’ right to pay in cash at all shops and restau-
rants since as far back as 2013. Finance Ministry spokesman Tore Vamraak
said, although the government saw where DNB was coming from, “we have no
plans to change the law in this area now”, because “there are many, including
the elderly, who still want to use cash and that must be allowed”. Vamraak
added, “it isn’t unproblematic for privacy to make every transaction traceable”
(The Local, 2016). In April 2017, the Norwegian government announced that
it would introduce a limit on cash payments at NOK40,000 to combat money
laundering by purchasing expensive objects (Wijnen, 2017).
Singapore
In 2014, the government announced that Singapore would stop issuing $10,000
notes, one of the world’s most valuable banknotes, in an attempt to tighten
its anti-money laundering controls. The Monetary Authority of Singapore
(MAS) said, given the “risks associated with large value cash transactions and
high-value notes”, it will stop producing the $10,000 note, even though those
already in circulation would remain legal tender indefinitely (Reuters, 2014).
On 3 November 2020, MAS announced that it would stop issuing $1,000 notes
from 1 January 2021 “to reduce money laundering and terrorism financing
risks” (CNA, 2020).
Sweden
In 2015, Swedish banks began removing ATMs even in remote rural areas.
According to Credit Suisse, the rule of thumb in Scandinavia is the follow-
ing: “If you have to pay in cash, something is wrong”. Commenting on the
move, Salerno (2015b) said that “the Swedish government abetted by its
fractional-reserve banking system is moving relentlessly toward a completely
cashless economy”.
The US
While a cash payment ceiling has not yet been introduced in the US, any
business that receives $10,000 in cash from a single customer must report it
to the tax authorities within 15 days on IRS/FinCEN Form 8300. The Internal
Revenue Service (IRS) shares the information with the Treasury’s Financial
Crimes Enforcement Network. Businesses that must often file Form 8300
include sellers of expensive cars, boats, aircraft, jewellery and furniture, as
116 Fintech
well as the providers of up-market services such as law firms, real estate agen-
cies, insurance companies and travel agencies.
Under the Currency and Foreign Transaction Reporting Act (CFTRA), any
party (an individual or a group travelling together) who brings $10,000 or more
of cash (or travellers’ cheques or other negotiable instruments) into the country
must declare the sum at the point of entry. Failure to make a declaration makes
cash subject to seizure. Under CFTRA (also known as the “Bank Secrecy
Act”) financial institutions are required to file a “Currency Transaction
Report” (CTR) with FinCEN for any deposit, withdrawal, currency swap,
or transfer involving $10,000, irrespective of whether or not the institution
employees handling it consider the transaction suspicious. A “Suspicious
Activity Report” must be filed for any activity perceived to be suspicious if it
involves $3,000 or more in cash. Subdividing deposits or withdrawals in order
to avoid triggering a CTR is itself a crime, called “structuring”.
The US government has confiscated tens of thousands of dollars from
people who committed the “crime” of making repeated deposits or withdraw-
als below the $10,000 threshold. White (2018) refers to the notorious case of
dairy farmers Randy and Karen Sowers, who frequently deposited cash income
from sales at farmers’ markets. In February 2012, Treasury officials confis-
cated $29,500 from the couple, charging them with structuring and without
suspecting them of any other crime. In 2015, the Maryland dairy farmer said
the following in front of a congressional subcommittee: “I was really taken
aback by that. I couldn’t believe… they would just come in and take my money
with no prior notice” (Sullum, 2016). This is not supposed to happen in the
“land of the free”, where in March 2009 there was uproar against proposals to
confiscate (or tax) the bonuses paid to the executives of the failed insurance
company, AIG, out of bail-out money.
6.4 WAR PROPAGANDA
Economists are notorious for providing intellectual justification for any policy
to support the views of the highest bidder. They also tend to put ideology
before economics and manufacture evidence (by using the con art of econo-
metrics) to support the propaganda machine. Some journalists who write about
economic matters do the same. For one reason or another, some economists
and journalists are very enthusiastic about the banning of cash, providing
intellectual (or at least articulate) justification for the actions taken by the
coalition of the willing. In addition to the “hired guns”, propagandists include
the beneficiaries themselves such as credit card and fintech companies that will
profit from the removal of cash by providing alternative means of payment. In
this section, some of these arguments and justifications are examined.
The war on cash 117
Propaganda, which is used for the purpose of making people think in

a certain way, is the dissemination of information (facts, arguments, rumours,
half-truths or lies) to influence public opinion. Essentially, it represents
systematic effort to manipulate other people’s beliefs, attitudes or actions.
Propagandists have a specified objective or set of objectives, which they
try to accomplish by deliberately selecting facts, half-facts and arguments,
and present them in ways that are conducive to the maximisation of effect.
They may also omit or distort relevant facts and figures or simply lie, while
attempting to divert the attention of the people they are trying to sway from
everything but their own propaganda. Winston Churchill is known to have
said the following: “In wartime, truth is so precious that she should always be
attended by a bodyguard of lies” (Khurana, 2019). Propaganda (taking mostly
the form of lying about the possession of WMDs) played a major role in the
Bush–Blair attack on the people of Iraq. George Bush Junior had his own set
of lies (transmitted to him by God, of course): Saddam Hussein trained and
harboured terrorists, including operatives of Al-Qaeda, who would go on to
“kill hundreds of thousands of innocent people in our country” (Taibbi, 2019).
Let us return to the war cash to see how propaganda has been and is still
being used to encourage and justify the move to a cashless society. Credit card
companies and their allies are running large global marketing campaigns to tell
us that the use of cash is old-fashioned. Scott (2016) refers to some propaganda
used to justify the war on cash by describing how Visa has been joined by
“other propagandists”, including Penny for London, which arrived in 2014.
This is an apparently altruistic group set up by the Mayor’s Fund for London
and (not surprisingly) Barclaycard, using charity as a hook to switch people to
contactless cards on the London Underground. PayPal has spent a fortune on
billboards claiming, “New money doesn’t need a wallet”.
Astroturfing campaigns (such as No Cash Day) are designed to create
an impression of widespread grassroots support for the war on cash (or any
other cause) when little such support exists. These campaigns are backed
(not surprisingly) by American Express, highlighting the environmental
impact of banknotes. Naturally, the propaganda machine works on instilling
fear by making the claims that criminals use cash, that cash fuels the shadow
economy, that cash is unsafe, that it facilitates tax evasion, and that it provides
five-star accommodation for Omicron.
Individual propagandists include Cochrane (2019), who claims that “phys-
ical forms of currency—cash and personal checks—are losing favor among
global consumers to alternative forms of payment, including debit and credit
cards, digital wallets, mobile commerce platforms, and, in some circles, even
cryptocurrencies.” He goes on to say that “online banking applications and
automatic bill-pay options are making writing checks, using cash for high-cost
transactions, and other traditional financial services less and less attractive”.
118 Fintech
Contrary to what Cochrane claims, this phenomenon is not universal, in

the sense that not every consumer everywhere (which is what is implied by
“global”) wants to abandon cash. Tell that to the people of India who do not
have bank accounts. Tell that to the people who do not have mobile phones.
Tell that to the people who have mobile phones but use them only to make
emergency phone calls. Tell that to a group of friends who want to split a res-
taurant bill after a happy dinner. Tell that to people who are afraid of clicking
a mouse to conclude a transaction. In the absence of a global survey, this claim
cannot be substantiated. But even if the majority of consumers want to pay
electronically, is it not only ethical to protect the minority from the tyranny
of the majority? As for cryptocurrencies becoming means of payment, that is
yet to be proven—most likely it will not be proven because cryptocurrencies
are not currencies. How many businesses around the world accept payments
in cryptocurrencies when they cannot perform the basic function of a medium
of exchange? How many people in the world hold cryptocurrencies and how
many of them use cryptos to make payments? A very small number in both
cases, I would imagine. A serious survey of Eurozone currency use finds, “in
Italy, Spain and Austria … almost one‐third of the interviewees always or
often use cash for purchases between €200 and €1,000” (ECB, 2011).
Some outrageous lies are used in the propaganda against cash, most notably
the lie that poor people will become rich when they abandon cash. Larry
Summers, a beneficiary of the banking establishment, argues that “illicit
activities are facilitated when a million dollars weigh 2.2 pounds as with the
500 euro note rather than more than 50 pounds as would be the case if the
$20 bill was the high denomination note” (Summers, 2016). He concludes
that “a moratorium on printing new high denomination notes would make the
world a better place” (Summers, 2016). Forbes (2016) replies to Summers by
saying that “the real reason for this war on cash … is an ugly power grab by
Big Government”. Koping (2016) describes Summers’ moratorium as an “odd
remedy”. India did not become a “better place” following the abolition of high
denomination notes—in fact, it became much worse for most people.
In his book The Curse of Cash, Ken Rogoff (2016a) recommends the
elimination of large-denomination notes because cash is widely used in under-
ground economic activity and that this would help endeavours to curtail crime
and tax evasion, which would consequently boost tax revenue. He also believes
that phasing out most cash would enhance macroeconomic stability by giving
central banks an unconstrained ability to impose negative interest rates. He
would phase out (over a decade or more) all large-denomination notes ($100,
$50 and $20 bills, and perhaps $10 bills too). Eventually, Rogoff would con-
sider replacing even small denomination notes with “equivalent-denomination
coins of substantial weight” to make it “burdensome to carry around and
conceal large amounts”. Rogoff (2016b) argues that paper currency facilitates
The war on cash 119
crime, including racketeering, extortion, money laundering, drug and human

trafficking, corruption of public officials, and terrorism. He explains why cash
is king in terms of absolute anonymity, portability, liquidity and near-universal
acceptance, and admitting that substitutes for cash (such as cryptocurrencies,
uncut diamonds, gold coins and prepaid cards) are not as convenient for crim-
inal transactions as cash. He also criticises cash for enabling tax evasion. The
fact of the matter is that contemporary big criminals have already shifted from
cash to bitcoin—if anything, the war on cash should be the war on bitcoin.
The arguments put forward by Rogoff in favour of abolishing bank notes
and replacing them with heavy coins are challenged by Hummel (2017), who
argues that Rogoff offers no genuine welfare analysis of the underground
economy, that he does not demonstrate any increased revenue for the US
government from phasing out cash, and that he is unable to make a strong case
for negative interest rates (actually, no one can make such a case for a destruc-
tive policy). Rogoff’s analysis, Hummel argues, “ignores the public-choice
implications of his proposal and exhibits naïve reliance upon the benevolence
and foresightedness of policy-makers”. In short, Rogoff’s case for confining
currency to small denominations is, when not entirely mistaken, extremely
weak. In short, Rogoff “oversells any advantages from his scheme and ignores
or understates the extensive disadvantages”. White (2018) points out that
Rogoff does not consider the word “war” as an exaggeration—rather, he is
more concerned about the use of the word “cash” without qualification because
he advocates only “a war on big bills” and not a fully “cashless society”. White
thinks that this is ironic, coming from the author of a book entitled The Curse
of Cash, not The Disadvantages of High‐Denomination Bills. Hummel (2019)
goes further by arguing that, even if phasing out all but small-denomination
notes would accomplish what the abolitionists claim (a marked reduction in
crime), this would not necessarily be desirable because political-economy
considerations may tip the scales into negative territory.
Rogoff’s arguments do not need sophisticated economics to be dismantled.
In a review of Rogoff’s work, Grant (2016) concludes as follows: “Strip away
the technical pretense and what you have is politics”. Rogoff, according to
Grant, “wants the government to control your money”. Criminals use cash, but
they also (like most of us) drive cars, eat steak and drink wine. Should we pro-
hibit the driving of cars, the eating of steak and the drinking of wine to deprive
criminals from enjoyment and convenience while they indulge in criminal
activity? White (2018) argues that the main indictments of large‐denomination
currency are built on guilt by association: criminals use large notes, so anyone
who uses them might be a criminal. Criminals use bitcoin also, but the
law-and-order evangelists, like Rogoff, do not call for criminalising the use of
bitcoin, which is cooked in the shadows. While banning high‐denomination
notes would make life harder for criminals, it would also make life harder
120 Fintech
for everyone else, for law-abiding people who find high‐denomination notes
convenient now and again for completely legal and non-controversial purposes
and for carrying vacation cash compactly.
As for boosting tax revenue, Rogoff should also consider other avenues of
tax reform, including the plugging of loopholes in the tax code that allow cor-
porations and the super-rich to avoid taxes (or pay a small fraction of what they
owe the community). Defending the war on cash on the basis that it enables
the implementation of negative interest rates is counterproductive because this
policy is useless at best and destructive at worst. Actually, it is even criminal,
as risk-averse pensioners watch their savings evaporate, particularly under
high inflation, which governments denied until recently.
Another critic of Rogoff is Joppich (2016), who notes that, “in reality, cash
represents freedom – a simple freedom that millions of people around the
world don’t enjoy while we take it for granted”. A cash-hater admits that cash
was “no doubt, a brilliant and innovative new technology several thousands
of years ago”, but “today it’s simply been superseded” (Chu, 2016). This
cash-hater argues that “cash is a pain” because we have to look for coins to put
in a parking meter and there’s the very inconvenience of carrying coins. Well,
some people derive utility by collecting coins to give to their grandchildren.
More seriously, however, when Iraq invaded Kuwait in 1990, people were
caught by surprise as all credit cards issued in Kuwait were suspended and
bank accounts became inaccessible. The people who suffered less were those
who had stacks of cash. Kuwaitis who were abroad at the time suffered, since
their credit cards were no longer valid. Chu likens the invention of contactless
payments (which is a mere extravaganza) to the great invention of indoor
plumbing. This reminds me of a story about an eminent economist, Robert
Gordon, who would show a picture of a mobile phone (which is used for
contactless payments) and another picture of a flush toilet and ask the simple
question: which one are you willing to give up if you have to? I am sure that
Mr Chu would give up his mobile phone and choose to pay by cash rather than
give up his toilet, which is not contactless.
Arguing on the same lines as Rogoff is Sands (2016). He talks about
tax evasion that undercuts the financing of public services and distorts the
economy, as if tax evasion is exclusive to those who use cash, but not to those
who stash their money in tax havens. He talks about “criminal activities from
drug trafficking and human smuggling to theft and fraud”, when criminals have
started using cryptocurrencies that will presumably replace cash. He talks about
corruption, which corrodes public institutions and warps decision-making, as
if corruption will disappear in a cashless society. A corrupt politician is not
necessarily rewarded with cash but with a lucrative private-sector job after
leaving public service, a big cheque in return for a lousy speech (probably on
the beauty of removing cash) or for “consultancy”. The available evidence
The war on cash 121
does not support the proposition that bribery is linked to cash. For example,
the ratio of currency to GDP of Japan in 2017 was 20.44%, yet it is less corrupt
than India. In Nigeria, it was 1.85% in 2016, which is much more corrupt than
India (Drishti, 2019).
Sands also talks about “terrorist finance”, which “sustains organisations that
spread death and fear”. However, if criminals can use cryptos or diamonds or
gold, so can terrorists. Sands claims credit for a “different approach” to make
life like hell for the “bad guys”, which is “to eliminate high denomination,
high value currency notes, such as the €500 note, the $100 bill, the CHF1,000
note and the £50 note”. I am not sure what is “new” about this “approach”.
Taylor (2016) responds to Sands by suggesting that “the case against big bills
isn’t an easy one to prove with ironclad systematic evidence, because no one
really knows where the big bills are”. Taylor suggests that “it’s easy enough
to come up with reasons why some law-abiding people, whether in the US
or in countries beset by economic or political instability, might want to hold
a stash of $100 or €500 notes” and “it’s also easy to suggest ways that if the
large-denomination bills were phased out, other stores of value like diamonds
or gold or anonymous electronic money like Bitcoin might take its place”.
A specific argument against the removal of the $100 note is put forward by
Koping (2016), who looks at the international status of the dollar. He argues
that removing the $100 note reduces the effectiveness of the “universal backup
monetary system” provided by the US. The phenomenon of currency substi-
tution, whereby the dollar is used instead of or alongside the local currency,
is observed clearly in countries experiencing turmoil and/or rampant inflation.
Whether the objective of the war on cash is to remove large-denomination
banknotes or circulating currency altogether depends on whether, overall, the
benefits of doing so exceed the costs. This is why Lastrapes (2018) believes
that the matter should be considered in terms of costs and benefits, whether
or not it leads to a net improvement in social welfare. He presents a general
equilibrium model to calculate the costs and benefits and finds that a currency
ban might affect overall welfare negatively, which is consistent with the con-
jectured cautions of Camera (2001).
6.5 ARGUMENTS AGAINST CASH AND FOR

CASHLESS TRANSACTIONS
In the previous section we considered the propaganda used in the war on

cash. The propagandists present arguments against the use of cash, which are
rejected by those who defend the opportunity to use cash. In this section we
examine an itemised list of the arguments against cash with some responses
from who oppose the abolition of cash. These arguments are considered in
turn.
122 Fintech
Security of Non-Cash Payments for Consumers
Credit cards and other forms of digital payments provide security because once
cash is stolen it has gone for ever. With credit cards, consumers are given much
greater legal protection and can only be held liable for a minimal amount if
they have been victims of fraud or theft. Scott (2016) comments on the safety
argument by saying that “having your wallet cash stolen pales in comparison
to having your savings obliterated in a digital account hack”. Dowd (2017)
argues that cash involves state-of-the-art anti-counterfeiting technology, which
makes it more difficult to replicate or corrupt than digital currency. Consumers
are given protection against credit card fraud only if they can prove that they
have fallen victims to fraud without any negligence on their part. Banks and
credit card companies do a good job of finding loopholes in the statements of
the victims and detecting negligence, in which case the victims bear the losses.
Convenience of Non-Cash Payments for Consumers
Credit cards allow people to pay for what they could actually afford, but not
with the money they had on hand. The problem is that, unlike cash, credit
cards make it easier to spend beyond affordability and end up in a situation
of financial distress. The inventor of the Diners Club card, Frank McNamara,
was embarrassed because he had forgotten his wallet (and the cash therein) in
another suit, which gave him the idea of credit card. Well, anyone could easily
forget the credit card in another suit. After all, cash and cards are typically kept
in the same wallet.
Security of Non-Cash Payments for Businesses
There are costs to keeping money safe, such as on-site safes and secure trans-
portation from the business location to the bank. Cash exposes businesses to
the possibility of embezzlement, theft and robberies. That is right, but it could
be worse when the whole bank account is hacked.
Cash as a Conduit to Criminal Activity
The proponents of the war on cash use this argument quite often, as we have
seen. The underlying argument is that catching the bad guys and obstructing
criminal transactions would be easier if cash was not available and thus
financial surveillance was more complete. A counter-argument put forward by
Häring (2018) is that this also means confiscating citizens’ rights for privacy
and other freedoms—actually, the very right to store wealth as cash. In this
case, making life difficult for criminals may imply doing away with freedom
The war on cash 123
and even democracy. He also argues that criminal activity will not be stopped
in the absence of cash, suggesting that “the mafia, the ultra-rich and large
corporations employ banks and specialized law firms to transfer digital money
into tax havens in a way that ownership is concealed”. Criminals already use
forged documents and other tricks to insert dirty money in large volumes into
the legal banking system, sometimes aided by banks.
Scott (2016) debunks the argument that “criminals use cash, it fuels the
shadow economy, it is unsafe, and it facilitates tax evasion” by suggesting
that “criminals use many things that we keep – like cars – and fighting crime
doesn’t take priority over maintaining other social goods like civil liberties”.
He describes the “shadow economy” as a “derogatory term used by elites to
describe the economic activities of people they neither understand nor care
about”. As for tax evasion, he says the following: “if you care about tax justice,
start with the mass corporate tax avoidance facilitated by the formal banking
sector”. Sarcastically, Forbes (2016) gives examples of the “criminal activity”
that will be stopped by banning the use of cash, including “purchasing salt,
sugar, big bottles of soda and Big Macs”. In a comment on Desjardins (2017),
Ronald West disputes the claim that the war on cash is against criminals,
arguing that “anyone who believes that this project is to rein in the terrorists
and drug dealers, is truly and duly duped”. The criminals will always find ways
to launder their money, such as using gold and silver or other valuables, barter,
or creating their own script or currency or their own bank.
Monetary Policy
Central banks can use ultra-low or negative interest rate policies to encourage
spending and boost economic activity. These policies cannot be implemented
when people have the option of withdrawing and storing cash. It is strange that
the war on cash can be justified in terms of destructive monetary policy that is
pursued primarily for the benefit of depository institutions. White (2018) sees
a negative interest rate policy as “unlegislated tax on money‐holders, without
any means to escape into untaxed media of exchange”.
It is ludicrous to suggest that monetary policy will be enhanced in the
absence of cash, unless we are talking about the reckless policy of ultra-low/
negative interest rates. In the absence of cash, the currency and reserve ratios
as instruments of monetary policy will disappear, and so will the monetary
base. As a result, the central bank will lose its ability to control the money
supply. Costa and De Grauwe (2001) examine monetary policy in a cashless
society and conclude that “the central bank will lose its traditional instruments
of monetary policy” because “standing facilities and open market operations
will become ineffective as instruments to control the interest rate and the
money stock”. This is problematic because “in a cashless society where all the
124 Fintech
money is privately supplied, there is no clear and reliable mechanism that ties
down the price level”. In a cashless society, monetary policy will be lost as an
economic stabilisation tool.
Benefits for Banks
Banks can reduce operating costs by not having to handle cash. They can make
more money when people pay with credit cards, particularly if they fail to pay
on time. However, the interest of banks should not be put above the interest
of the whole society. The proponents of the war on cash tell us that banknotes
make it easy for people to withdraw large sums of money from their banks,
which can be a cause of bank runs in a fractional reserve banking system.
What has happened to freedom, the freedom of holding one’s own cash under
the mattress? Why are banks allowed to run a Ponzi scheme called “fractional
reserve banking”, then complain when people exercise their legitimate right to
access their own money? I wonder who is running the show, but I am inclined
to think that it is the financial oligarchy.
Banks will have more power in creating money out of thin air because in
a cashless society, the imposition of cash and reserve requirements will no
longer be feasible, and the money supply will consist entirely of bank accounts.
Banks will be able to create deposits and give loans as they wish without being
subject to policy requirements as the central bank will be impotent. Yes, killing
cash provides an enormous benefit for banks, but it is not so for the economy.
Banks typically have procyclical behaviour, which will be augmented in
a cashless society. One should expect more inflation and frequent boom–bust
cycles in a cashless society.
Transmission of Contagious Disease: The Coronavirus as a Weapon
The Covid-19 pandemic has provided an opportunity to promote the war on

cash by spreading the rumour that using cash is a conduit to catching Covid.
The Coronavirus, it is claimed by the proponents of the war on cash, loves
travelling on banknotes. According to Grass (2020), “the corona crisis has
introduced a whole new direction for anti-cash rhetoric and fresh arguments in
favor of a digital economy”. He goes on to say that “even in the early stages
of the pandemic, when essentially nothing was concretely known about the
virus or its transmission, the seeds of new fears were already being planted
by sensational media reports and fear-mongering political and institutional
figures.” Another factor that concretely helped the shift away from physical
cash was an entirely practical one—the inability to use cash under lockdown.
When physical stores are forced to shut down, they are replaced with online
shops offering contactless delivery. Under these conditions, cash gives way to
The war on cash 125
digital means of payment. Due to the pandemic, cash is portrayed not just as
a danger to society and to national security, but also as a direct health hazard
with potentially fatal consequences.
The International Currency Association (ICA, 2020) expressed its concern
about the rise of misinformation regarding the use of cash. To counter misin-
formation about the risk posed by cash, the ICA published a list of statements
that show otherwise. A study of the Bank for International Settlements quotes
scientists as saying that the probability of transmission via banknotes is low
when compared with other frequently touched objects (Auer et al., 2020).
The authors of the report make it explicit that “to date, there are no known
cases of COVID-19 transmission via banknotes or coins” and “it is unclear if
such transmission is material compared with person-to-person transmission
or transmission through other objects or physical proximity”. The Bank of
England has noted that “the risk posed by handling a polymer note is no greater
than touching any other common surfaces such as handrails, doorknobs or
credit cards” (Brignall et al., 2020).
While there has been a decline in the use of cash as a means of payment
during the pandemic, we have witnessed unprecedented growth in the overall
demand for cash. On 9 April 2020 the Sydney Morning Herald reported that
“Australians did not just hoard loo paper and tinned tomatoes as the coronavi-
rus pandemic spread through the country last month – they started stockpiling
cash” (Wright, 2020). During the pandemic, Lepecq (2020) points out, con-
sumers paid more with digital instruments, but they stored more in cash. This
is a global phenomenon that debunks the myth of the death of cash.
6.6 ARGUMENTS FOR CASH AND AGAINST

CASHLESS TRANSACTIONS
In this section we consider the arguments for cash and against cashless trans-
actions as put forward by the opponents of the war on cash.
Accessibility and Cost Efficiency
Physical cash is readily available and does not incur any additional charges for
customers. For households and small businesses, cash is the most cost-efficient
payment method, because paying by cash does not involve additional charges
by banks and payment service providers. Dowd (2017) lists the benefits of cash
as, (i) it is a very efficient way of handling small transactions; (ii) it is costless
and easy to use; and (iii) it does not need a password.
126 Fintech
Inclusion and Discrimination
For many people, cash is the only viable payment method. This means that
businesses that refrain from accepting cash exclude and risk losing customers.
Cashless transactions can be problematic for people who rely on cash such as
the poor, disabled and elderly. Electronic transactions require a bank account
and familiarity with payment technology at a time when most people in
impoverished regions and countries are underbanked or unbanked. Refusing to
accept cash is a form of discrimination against the least well-off economically.
Häring (2018) argues that “cash is also a very inclusive payment technology”.
Dowd (2017) warns that banning cash threatens to cause widespread economic
damage, with a devastating impact on the most vulnerable in our society.
According to White (2018), policies that limit cash use (or otherwise compel
people instead to pay through banks or credit card companies) harm the
livelihood of small business people who rely on cash sales (particularly those
serving the unbanked or operating in outdoor markets) and reduce the welfare
of their (mostly poor) customers by raising transaction costs. Desjardins
(2017) suggests that “rapid demonetization has violated people’s rights to life
and food” and refers to the case of India where the removal of the 500 and
1,000 rupee notes caused human tragedies, including death, denial of medical
treatment, and inability to access food. Demonetisation also hurts people and
small businesses that make their livelihoods in the informal sectors of the
economy.
Following the decision of some New York City restaurants, such as
Sweetgreen and Dig Inn, to stop accepting cash for payment, legislation was
introduced to penalise such behaviour with fines, on the premise that it dis-
criminated against the city’s financially underserved. According to New York
City Council-man Richie Torres, “we should not be stigmatizing how poor
people purchase goods and services” (Cochrane, 2019). In 2014, the US Office
of the Inspector General stated that about one quarter of the country’s adult
population lived outside the “financial mainstream”, which the report defines
as either not having a bank account or having to use expensive services such as
payday lenders (Cochrane, 2019).
Trust
No third parties are involved in cash transactions. Häring (2018) describes

cash transactions as follows: “With cash, neither the buyer, nor the seller needs
to give up something in advance and trust that the other side will stick to their
promises”. Consider a wire transfer, as opposed to cash, from the buyer to the
seller. The buyer wants the goods to be delivered before making the transfer,
The war on cash 127
whereas the seller wants to receive the money before delivering the goods.
This problem does not arise in cash transactions.
Security
Financial cyber-attacks and digital crime become more serious in a cashless

society. Desjardins (2017) argues that, with all wealth stored digitally, the
potential risk and impact of cyber-crime increases and that hacking or iden-
tity theft could destroy people’s entire life savings. Attacks on or accidental
outages of telecommunication infrastructure prevent the settlement of elec-
tronic payments, unlike cash transactions, which will be unaffected because
they do not need infrastructure (apart from an ATM or a safe). Dowd (2017)
argues that the usefulness of cash is not dependent on sophisticated technology
that might break down. Some credit card lovers have switched to cash follow-
ing mishaps such as the loss incurred as a result of producing a credit card in
a crowded bar late at night, or the other mishap of finding oneself unable to
pay a hotel bill in a foreign country because the credit card does not work or
because it has been suspended temporarily by the issuing bank.
Privacy and Confidentiality
Cash is direct, in the sense that the payer does not have to hand over personal
information, and what is bought remains confidential. The seller does not need
to know the name of the buyer. Nobody can see what someone has bought
when and from whom. In cashless transactions, as Häring (2018) puts it, every-
one knows what someone has just bought, including “intelligence services, the
police, a social credit authority, bank employees, credit card companies, rating
agencies, spouses and parents”.
In an age where data breaches are virtually an everyday occurrence and big
tech companies know us better than we know ourselves, it is easy to see why
concerns about privacy are paramount. Digital transactions allow businesses
a way to build a consumer’s personal profiles based on their spending patterns.
Cashless transactions leave a record in the database of the company as one
makes a payment, and this information is used to predict future events. This is
why White (2018) argues that the war on cash is a “war on financial privacy”,
intended to “welcome us to a financial panopticon”. And it is why Dowd
(2017) suggests that “the abolition of cash threatens to destroy what is left of
our privacy and our freedom” and that “we wouldn’t be able to buy a stick of
gum without the government knowing about it and giving its approval”.
128 Fintech
Budgeting
It is easier to keep track of spending when cash is used, particularly for those
living on tight budgets. With cash, users can only spend what they have as
opposed to the temptation to “buy now and pay later” (with interest that is not
subject to the low interest rate policy). With electronic payments, on the other
hand, visual control of the wallet is lost as the person will be so swamped with
receipts that effective control is lost. According to Häring (2018) “those who
want to sell as much as they can to us, or want to give us as much credit as they
prudently can, dislike that cash helps us control our spending”.
Robustness and Reliability
Cash is not reliant on electronic infrastructure, and therefore is not subject to

any outages causing non-availability of the service. It is a highly robust means
of payment because it does not require any technological infrastructure. Unlike
means of electronic payment, cash can be used during major disruptions of the
energy supply or the mobile network. Häring (2018) points out that the civil
protection strategies of countries like Germany explicitly recommend that
people keep a decent supply of cash around for technical emergencies. If the
only option is digital payments (as in a cashless society), a breakdown of the
internet or the mobile network will paralyse large sections of the economy.
A traveller in a foreign country will find themselves in deep trouble if their
credit card is denied, which happens quite often for one reason or another. The
same happens when accounts are blocked for one reason or another. Nothing
like this happens with cash.
Protection
Bank runs occur when people flee to cash as they no longer trust banks. When
people anticipate a crisis, they hoard cash. Digital money, on the other hand,
is nothing but a claim on a bank, which means that, if the bank goes down,
the money will vanish, unless a deposit insurance scheme exists. However,
a deposit insurance scheme only provides partial protection up to a limit,
either by design or because the scheme is not well capitalised. Cash provides
protection against the losses incurred when a failed bank is bailed in, thus
confiscating deposits. Cash also provides protection against another form
of deposit confiscation: negative interest rates. Even though gold and silver
provide protection, they cannot be used as a means of payment unless they are
converted into cash first.
The war on cash 129
Civil Liberties
Edward Snowden has told us that governments do spy on people. Covid-19

has made spying on people justifiable under the pretext of public health. Many
believe that enhancing the ability of the government and its police apparatus to
spy on people is the real reason behind government attempts to restrict the use
of cash. Forbes (2016) believes that “the real reason for this war on cash … is
an ugly power grab by Big Government”. White (2018) makes a comparison
between the war on cash and the war on drugs, arguing that in both cases
“traditional civil liberties are shunted aside in the criminalization, surveillance,
and prosecution of victimless private activities”. The war on cash, according
to him, might be more accurately labelled the “war on people who use cash”.
Coercive anti‐cash policies abridge the freedom and reduce the welfare of
peaceful individuals who prefer to use cash. Non-cash transactions are conven-
ient for a police state that indulges in mass surveillance.
6.7 CASHLESS SOCIETY AS A NATURAL

OUTCOME OF PROGRESS
The propaganda machine used in the war on cash keeps telling us that the move
to a cashless society is inevitable and a sign of progress similar in spirit to the
move from the slide rule to the electronic calculator or from the typewriter to
the PC. Cash, which in itself is a great invention, has so many attributes as
a means of payment that the demand for it will be maintained (after all, it is
the only legal tender). The usefulness of cash is felt by anyone stuck in a petrol
station after failing to pay with a credit card, a debit card or any other form
of e-money because the system is down or the card has been declined. This
person will not be able to drive on, no matter how much money he or she has
in the bank. The only way to be able to drive on is to pay with cash, which
means that this person will deposit his or her Rolex, drive to the nearest ATM,
withdraw cash, and eventually retrieve the watch by paying in cash. This may
prove problematical for someone who does not wear a Rolex. Perhaps fintechs
can attract customers by giving them a Rolex each, just in case they get stuck
in a petrol station.
Häring (2018) argues that “the stubborn preference for cash is a major
stumbling block on the way to the pay-as-you-go-world of total surveillance”,
which is “why they tell us that cash is outdated, dirty, fishy and inconvenient”.
He attributes preference for cash to “some real and strong advantages of this
payment technology, which has served us well for thousands of years”. In
a comment on Desjardins (2017), Ronald West wonders why they want to take
cash away from us if it is worthless. In 2018, the CEO of the London-based
security company G4S, Jesus Rosano, summed up the attractive qualities of
130 Fintech
cash as follows: “People trust cash; it’s free to use and readily available for
consumers, it’s confidential, it can’t be hacked and it doesn’t run out of battery
power – these unique qualities continue to hold significant value to people
living on all continents” (Kelly, 2018). A complete abandonment of cash will
not occur naturally—it will be made possible only by government coercion.
We are told that the use of cash is declining because of e-commerce, mobile
payments, online banking, intermediaries (such as PayPal and Square), and
cryptocurrencies. In 2018, G4S published a Global Cash Report, in which
a very strong case was put for the continuation of cash (G4S, 2018). The
report states that, “wherever people are in the world, they value a range of
payment options”, that “there is no region where everyone chooses the same
way to pay”, and that, “despite the rise of electronic and mobile payments,
cash remains hugely important all over the world”. The report tells us that the
demand for cash continues to rise globally, despite the increase in electronic
payment options.
Figure 6.1 Proportion of cash payments (%)
While the propaganda machine is telling us that cash is going the way of the
dinosaurs, the G4 report shows that cash payments are still dominant except
in a few countries. The report shows that cash is used to settle over 50% of
transactions in three quarters of the 24 countries examined. It also tells us that
cash is still used worldwide for over 50% of small-value transactions under
The war on cash 131
$25. Figure 6.1 displays the percentage of cash payments in the 24 countries
covered by the report, which reveals that two billion people worldwide do
not have access to bank accounts. This means that the war on cash is a war
on these people and that non-cash payments lead to their financial exclusion
rather than inclusion. In many countries in Asia and the Middle East, three out
of four online purchases are paid for by cash on delivery, which means that the
increase in online purchases has not taken cash out of the equation.
The report also shows that companies that do not typically accept cash
payments have seen growth when they introduced a cash option. For example,
Uber, whose biggest selling point is the electronic payment system, saw
exponential growth when they introduced a cash option in Asia, Africa and
South America. The report concludes that cash remains the cornerstone for
conducting day-to-day transactions. For many people around the world, cash
is the only viable payment method that allows them to conduct daily business,
including buying life-essentials.
The move away from cash is supposed to be made possible by voluntary
choice as traditional and new fintech is providing more attractive means of
payment. For example, paying by credit card is supposed to be more advanta-
geous than paying by cash for a number of reasons, including the ability to earn
rewards that may take the form of cash back or travel rewards that can be used
to get free flights or class upgrades. True, but how does this compare with the
card’s annual fees, foreign exchange transaction fees and the charges imposed
on retailers and passed on to consumers? It is unlikely that the two billion
people who do not have bank accounts and those who have bank accounts
and live on a pay-cheque by pay-cheque basis would want to earn points to
upgrade to business class on an international flight because they do not have
enough money to buy the economy class ticket. We are also told that another
advantage of paying with credit cards is to build and maintain credit rating. For
most people, enhancing the ability to accumulate debt is not worthy of the fees
and charges associated with it. And we have already dealt with the question of
security in this age where credit card fraud is rampant.
Fintech has provided means of payment as alternatives to both cash and
credit cards. Instead of paying with cash, cheque or credit cards, a consumer
can use a mobile phone to pay for a wide range of goods and services. In what
way are the new means of payment superior to cash, and are they superior
to cash in terms of costs and benefits? An attempt is made in the G4S report
to answer these questions by comparing means of payment according to 11
attributes or criteria: legal tender, convenience, direct settlement, anonymity,
availability, reliability, safe haven, tangibility, security, efficiency and remote
payment. These are the features that consumers most value in a payment
instrument, but no single one provides all of them. Efficiency is measured in
terms of cost effectiveness, which (according to the report) is not straightfor-
132 Fintech
ward to determine, as both the cost and the number of transactions for cash are
difficult to establish. Availability to the general public depends on the infra-
structure requirements. Reliability is measured in terms of the up-time of the
end-to-end infrastructure supporting completion of the payment transaction
(100% for cash).
Figure 6.2 High scores of means of payment on 11 criteria (smiley face)
The payment instruments considered by the report include, in addition to

cash, debit card, credit card, prepaid card, credit transfer, direct debit, cheque,
mobile, internet, cryptocurrencies and instant payment. None of these means
of payment scores highly on all criteria, but cash is the only legal tender and it
scores highly on 8 out of the 11 criteria, as shown in Figure 6.2 by the shaded
cells containing smiley faces. Cash is legal tender, the medium of payment
recognised by a legal system to be valid for meeting financial obligations. The
use of cash is simple, convenient and straightforward. It offers an immediate
transfer of value. It is anonymous. It provides a safe haven in the case of
a crisis. It is tangible and helps with budgeting. Cash may be insecure in the
sense that it can be counterfeited and fairly easy to steal, but none of the other
means of payment provides a better level of security. Despite what is said
about the security of payment by cryptocurrencies, which are not currencies to
start with, cryptos went through a massive sell-off in early June 2021 because
The war on cash 133
of “concerns over security of the cryptocurrency after U.S. officials managed

to recover most of the ransom paid to hackers that targeted Colonial Pipeline”
(see, for example, Stevens et al., 2021).
Even though the G4S report defends the use of cash, it does not advocate
the abandonment of other means of payment. The report makes it explicit that
“each payment instrument seems to have its own value” and that “both cash
and non-cash payment instruments fulfil unique needs”, which means that
“both types of payment instruments are required to meet the full spectrum of
user’s needs”. The report also concludes that, “from a user’s perspective, one
could argue there shouldn’t be any competition between cash versus non-cash,
nor should it be an either/or proposition” and that “there is simply a need to
make payments in all circumstances and this need is fully fulfilled by both cash
and non-cash payment instruments”. This is the difference between the propo-
nents of the war on cash, who want to see cash disappear from the face of the
planet, and the opponents of the war, who want to see cash co-exist with other
means of payment, so that people are not coerced to do something they do not
like to do (such as paying by using a mobile phone or a chip under the skin).
The advent of Covid-19 forced people under lockdown to buy things online
and pay for them electronically, but these electronic payments are not the result
of a change in preferences—rather, they are imposed by necessity. Cash is still
used extensively, and it is unlikely that the effect of Covid will persist. People
do not like to find themselves in a lockdown, staying at home, ordering online
and waiting for the delivery van. Instead, they like to go to shopping centres
and try clothes on before paying for them, while taking the opportunity to grab
lunch in a food court.
6.8 AN ELABORATE CONSPIRACY

The issue discussed in this section is not a conspiracy theory but rather a con-
spiracy fact. It is a fact because we can see the various components of the
conspiracy at work simultaneously. It is just a matter of connecting the dots,
by showing that the three components of the conspiracy are not unrelated and
that they complement each other to form a scheme that benefits the financial
oligarchy in particular and the corporate oligarchy in general. We have repeat-
edly seen that governments look after the oligarchy, because of political and
regulatory capture and because politicians and government officials in charge
of public policy know that they will be rewarded, one way or another, once
they leave public service. This is the government–financial–corporate complex
at work.
A discussion of the war on cash involves some reference to the policies of
ultra-low and negative interest rates, but only in as far as these policies are
made possible in the absence of cash. Alternatively, low interest rates are men-
134 Fintech
tioned as a reason for the war on cash. For example, Karinja (2015) argues that
governments and bankers are losing grip on “the failing monetary system”,
which is “surviving only on the back of record low interest rates and excessive
money printing”. As a result, he argues, the war on cash has been escalating
around the world. However, the discussion does not refer to the bail-in legis-
lation that has become a fact of life in most “democratic” countries, allowing
banks to confiscate deposits when they are in trouble. The fact of the matter is
that the war on cash, extreme interest rate policies and bail-in legislation are
three components of an elaborate scheme representing a conspiracy of govern-
ments and bankers (financiers) against ordinary people.
The policy of ultra-low interest rates is pursued for the benefit of banks
and the corporate sector, helping them to finance parasitic activities, such as
stock buy-backs and venture capital. The minority who hold stocks, including
billionaires, benefit because low interest rates boost the stock market by ena-
bling these parasitic activities. Banks benefit from low deposit rates because
they can still charge 20% on credit cards. Loan sharks benefit because they
can borrow at 2% and lend at 5000%. Ultra-low interest rates are supposed to
boost the economy when it is contracting, which happens allegedly because
companies borrow to expand productive capacity and employ people, because
households borrow to buy consumer durables, and because savings on mort-
gage payments will be spent on goods and services. This is nonsense, which
has been made very clear during the Covid-19 pandemic. Business investment
in capital formation is not interest elastic but rather profit elastic. No household
will borrow to buy consumer durables because of an actual or anticipated job
loss. The money saved on mortgage payments will not be spent but rather
saved, because of a potential job loss. What matters for consumption decisions
is not the ability to borrow or the cost of borrowing, but rather the economic
outlook. On the other hand, a policy of ultra-low interest rates is devastating
for prudent savers and retirees, it discourages saving (which is required
to finance capital formation and therefore long-term economic growth), it
encourages the accumulation of debt, and it creates and/or maintains bubbles
in financial and property markets.
Negative interest rates represent the most dangerous and reckless monetary
experiment ever devised by the monetary authorities in “Western” countries.
They destroy the entire risk–return system that has been the basis of investing
for the last several centuries. The biggest beneficiaries of negative interest
rates are banks, which would tax depositors while still charging interest on
loans. Some banks even advertise negative interest mortgages, which is a scam
whereby borrowers are ripped off through fees and commissions. Effectively,
a negative interest rate policy amounts to a transfer of wealth from ordinary
people to the financial oligarchy.
The war on cash 135
Bail-in legislation allows failed banks to confiscate deposits to replenish

their capital on the grounds that a bank customer is effectively an unse-
cured creditor of the bank. In Australia, for example, the Financial Sector
Legislation Amendment (Crisis Resolution Powers and Other Measures
Act) of 2018 determines the provisions under which a bail-in occurs when
“investors (shareholders and others) provide the capital to save a distressed
bank” (Rickard, 2020). At its core, this piece of legislation brought Australia
in line with the bail-in agenda of the Bank for International Settlements (BIS),
which was agreed upon at the 2014 G20 Summit held in Brisbane, Australia.
Effectively, they rubber-stamped the Financial Stability Board’s “Adequacy
of Loss-Absorbing Capacity of Global Systemically Important Banks in
Resolution”, which completely changes the rules of banking. They did that as
they became emboldened by the 2013 financial crisis of Cyprus. Brown (2017)
refers to 16 November 2014 as “the day money died”. It is interesting that the
bill led to anti-bail-in advertisements. For example, Private Vaults Australia
(PVA) offered “secure storage completely separate to the banking system”—
their advertisement ran as follows: “How a Private Vault Secures Your Assets
from the Bank Bail-In Law”.
When confronted with low or negative interest rates, bank customers find
themselves better off by keeping cash at home under the mattress, in a hole in
the ground, in a rice sack or in a safe. This will deprive banks from the ability
to rip off customers by charging them for looking after their money (negative
interest rates) and the opportunity to confiscate the deposits, should the need
arise. To force people to keep money with banks, governments resort to the
war on cash. They can threaten to cancel notes with certain serial numbers at
random, as suggested by Greg Mankiw (2009). Dowd (2017) makes a sarcastic
comment in response to this draconian proposal: “Well, Greg, I can’t exactly
see people being ‘delighted’ at having to lend at minus 3 percent, when the
alternative imposed on them is to hold cash under the mattress and expect to
lose 10 percent.” Instead, Dowd argues, “I can see them holding the minimum
possible amounts of working cash, and putting their money elsewhere where
their wealth is safer – into foreign bank accounts, into gold, silver, commod-
ities, shares, cryptocurrencies or whatever”. Otherwise, governments can
do a lot of things to make the holding of currency risky and cash payments
cumbersome. In the extreme, of course, a total ban on cash will do the job.
Thus, the war on cash, low/negative interest rates and bail-in legislation are
the three components of a conspiracy against ordinary people for the benefit of
the financial oligarchy.
136 Fintech
Although the war on cash started, or at least was planned, before the fintech
industry acquired the momentum it has now, fintech would be a beneficiary of
a triumph over cash and the people who want to hold cash. The involvement
of PayPal, a major fintech firm, goes a long way back even though credit card
companies were active campaigners and conspirators. It is ironic that, while
the war on cash has been launched in the name of technology (in the sense
that technology has provided better means of payment than cash), banks are
increasingly dismantling a major piece of technological innovation in the
pursuit of the war on cash, which is the ATM. As a matter of fact, cash itself
was a major technological innovation of its time. Naturally, this can be justi-
fied on the grounds that a better technology forces out dated technology, but in
this instance the new technology is not a perfect substitute for the old technol-
ogy. Cash has attributes that cannot be matched by a credit card, an electronic
wallet or a chip under the skin. At best, the new technology is not such a major
improvement on the old technology when it comes to the means of payment. In
the event of war, civil strife or a natural disaster, those who have cash manage
the situation much better than those holding credit cards, electronic wallets,
chips under the skin and bitcoin.
The option to use cash should never be eliminated, just like the alternative
options of paying by a credit card, a mobile phone or a chip under the skin.
Cash-bashers, such as Chu (2016), dismiss the civil liberties argument for cash,
suggesting that the right to anonymity argument is overblown, and heralding
good news for libertarians, in that they can use cryptos to preserve anonymity.
But cryptos, which are fintech products, are not currencies and cannot replace
cash. An eminent libertarian, Ron Paul, is unlikely to see good news in using
cryptos rather than cash. He once said the following: “The cashless society is
the IRS’s dream: total knowledge of, and control over, the finances of every
single American” (Karinja, 2015).
The proponents of the war on cash tell us that moving away from cash can
be justified on practical grounds, let alone the “macroeconomic benefits”,
which arise from such destructive policies as negative interest rates whereby
banks, backed by governments, rob people. The fact of the matter, as Quijones
(2016) puts it, is that “the war on cash is being waged for the exclusive benefit
of those who already wield an inordinate amount of power and control over
the economy and the people that are struggling in it.” He points out that, by
killing cash slowly and quietly, those in power “seek to seize the last remaining
thing that offers people a small semblance of privacy, anonymity, and personal
freedom in their increasingly controlled and surveyed lives.”
The war on cash 137
What will a world without cash look like? If cash is to go the way of the
dinosaurs, something else must arise. Scott (2020) thinks that, in the case of
victory over cash, we will not live in a cashless society, but rather in a “bankful
society”. This is a society in which banks (or platforms built on top of them,
such as PayPal) “intermediate between even the smallest of payments, seeping
between buyers and sellers like a payments chaperone”. The conditions will be
ripe for the financial oligarchy to consolidate and expand its power by having
enormous amounts of data, which “enables them to enter into mega-deals with
mega-tech platforms, who also rely on a turn away from cash to facilitate the
mega-automation they seek”. Thus, Scott implicitly refers to fintech as a ben-
eficiary of the war on cash.
The propagandists claim that the war on cash is not a war because what
is happening is a peaceful and organic bottom-up move towards a cashless
society driven by ordinary people. This cannot be further from the truth,
because the war on cash is a war on ordinary people who commit the crime
of buying burgers with cash. Fintech has a dark side, at least because it is an
active participant in this illegal war of aggression.
7. Cryptocurrencies: a revolutionary
innovation or a scam?
7.1 INTRODUCTION
In March 2018, the word “cryptocurrency” was added to the Merriam-Webster

Dictionary, where it is defined as follows: “any form of currency that only
exists digitally, that usually has no central issuing or regulating authority but
instead uses a decentralized system to record transactions and manage the
issuance of new units, and that relies on cryptography to prevent counterfeiting
and fraudulent transactions”. In short, a cryptocurrency is a digital or virtual
currency that is secured by cryptography, which makes it nearly impossible to
counterfeit or double-spend. The underlying idea has been met with enthusi-
asm because it promises to replace trust in long-standing institutions, such as
commercial and central banks, with trust in a new, fully decentralised system
founded on the blockchain and related distributed ledger technology. In theory
at least, cryptocurrencies are immune to government interference or manipula-
tion, providing a means of payment that does not require a third party.
According to the Annual Report of the Bank for International Settlements,
“cryptocurrencies aspire to be a new form of currency and promise to maintain
trust in the stability of their value through the use of technology” (BIS, 2018).
Despite continued enthusiasm for cryptocurrencies, scepticism has arisen
about the ability of cryptos to deliver what was promised by the promoters,
as cryptocurrency scams become widespread and hundreds of new ones go
the way of the dinosaurs. In fact, the very idea of cryptocurrencies being cur-
rencies has been questioned on the grounds that a prerequisite for an asset to
serve as a currency (or money) is the stability of its value. Not even the queen
of cryptos, bitcoin, has demonstrated this desirable property for an asset to be
a currency. Some questions have been raised about the very intrinsic value of
cryptos and their popularity with organised crime. Cryptos can be problemati-
cal for law enforcement and regulatory authorities.
Take, for example, Nassim Taleb, the author of best-seller The Black
Swan, who was at one time enthusiastic about bitcoin, believing that it was
a “promising new currency” because it was not controlled by government.
In an interview, he told CNBC that he was “fooled by it initially” because he
138
Cryptocurrencies: a revolutionary innovation or a scam? 139
thought it could develop into a currency to be used in transactions, but he had

changed his mind since (Stankiewicz, 2021). In August 2021, the President
of the Minneapolis Federal Reserve, Neel Kashkari, said that crypto is “95%
fraud, hype, noise, and confusion”, adding that he had not seen “any use case
other than funding illicit activities like drugs and prostitution” (Helms, 2021).
This declaration was made at the Pacific Northwest Economic Regional
Annual Summit in Big Sky, Montana, where he also noted that he was “more
optimistic about crypto or bitcoin about five or six years ago”. He warned of
the hazard of dealing in the “thousands of these garbage coins that have been
created” because “some of them are complete fraud, Ponzi schemes, where
they pump it up, they dupe people to invest money and then the founders
rip them off”. Earlier, Kashkari said that bitcoin and other cryptocurrencies
were “like a giant garbage dumpster”. Likewise, US Treasury Secretary Janet
Yellen said that “cryptocurrencies are a particular concern”, emphasising that
“many are used, at least in a transactions sense, mainly for illicit financing”
(Helms, 2021).
In February 2021, The New York Times published a story saying that, while
bitcoin has lost steam, criminals still love it (Popper, 2020). In this chapter, we
concentrate on a discussion of bitcoin as the first and most expensive crypto-
currency. The ups and downs of bitcoin are analysed, and the use of bitcoin
and other cryptos as a vehicle for fraud is examined. Another important issue
is whether cryptos are currencies or investment assets, which brings about the
issue of how to determine the intrinsic value of these “assets”. We start by
distinguishing among virtual, digital and crypto currencies because these terms
are sometimes used interchangeably and can be confused with one another.
7.2 VIRTUAL, DIGITAL AND CRYPTO

CURRENCIES
Currencies are distinguished according to the issuer, the form they take, the
degree of accessibility, and the payment transfer mechanism. The issuer can be
a central bank, a commercial bank or nobody (nature), as is (or was) the case
with commodity money. The form it takes can be physical (such as notes and
coins) or digital. It can be widely accessible (such as deposits with commercial
banks) or narrowly accessible (such as central bank reserves). The transfer
mechanism can be either peer to peer, or through a central intermediary (such
as deposits). Recall the example given at the very beginning of this book
about the difference between transfer by using intermediaries (commercial and
central banks) and the peer-to-peer mechanism provided by Ripple.
The terms “crypto”, “digital” and “virtual” are often used interchangeably,
but they mean different things. A virtual currency is an electronic representa-
tion of monetary value that may be issued, managed and controlled by private
140 Fintech
entities, deriving its value from the underlying mechanism (mining in case of
cryptocurrencies, or backing by some underlying asset). The term was coined
in 2012 by the European Central Bank (ECB), which defined virtual curren-
cies as types of “digital money in an unregulated environment, issued and
controlled by its developers and used as a payment method among members of
a specific virtual community”. The term has since undergone some changes to
imply “a medium of exchange operating like a currency in some environments
but without having all of the true attributes of a currency” (Buntinx, 2015). For
example, frequent flyer points represent a virtual currency. Other examples are
PokéCoin, which is used for in-game purchases in the Pokémon Go game, and
the virtual currencies used in online games such as World of Warcraft.
A digital currency, on the other hand, is an internet-based form of cur-
rency or medium of exchange that allows for instantaneous transactions and
borderless transfer of ownership. It exhibits various properties of a physical
currency. Digital currencies include virtual currencies, which in turn include
cryptocurrencies. Compared with a virtual currency, a digital currency covers
a larger group that represents monetary assets in digital form. Digital curren-
cies may be regulated or unregulated. In the former case, it can be a sovereign
currency—when a central bank issues a digital form of its fiat currency notes.
On the other hand, a virtual currency often remains unregulated and hence
constitutes a type of digital currency. Cryptocurrencies are considered to be
part of the virtual currency group. A cryptocurrency is characterised by the use
of cryptography to ensure that transactions are secure and authentic, and also
to manage and control the creation of new currency units.
According to Lansky (2018), a cryptocurrency is a system that meets six
conditions. The first is that the system does not require a central authority—
instead, its state is maintained through distributed consensus. The second is
that the system keeps an overview of cryptocurrency units and their ownership.
The third is that the system stipulates whether or not new units can be created,
in which case the system determines the ownership of the new units. Number
four is that ownership of cryptocurrency units can be proved cryptographi-
cally. Number five is that the system allows transactions to be executed and
ownership to be changed. The last condition is that, if two different instruc-
tions for changing ownership of the same cryptographic units are simultane-
ously entered, the system performs at most one of them.
The operational mechanism governing cryptocurrencies consists of three
elements. The first is the “protocol”, which is a set of rules governing the
process whereby participants conduct transactions. The second is a ledger that
contains detailed history of transactions. The third is a decentralised network
of participants that follows the rules of the protocol to update, store and read
the ledger of transactions. These elements, according to crypto-enthusiasts,
ensure that cryptocurrencies are not subject to potential abuse by commercial
banks or the monetary authority. This is why the idea has been appealing, at
least for libertarians. Cryptocurrencies are digital, but they are not anyone’s
liability, in the sense that they cannot be redeemed. Their value derives only
from the expectation that they will continue to be accepted by others.
The first blockchain-based cryptocurrency was bitcoin, which is the most
popular and most highly priced. It was launched in 2009 by an individual or
a group known by the pseudonym “Satoshi Nakamoto”. According to Buntinx
(2015), the main reason why bitcoin is both a digital and virtual currency is
that it does not exist in the “real physical world”, yet it also facilitates payment
for goods and services in the real world (which is controversial). While virtual
currencies are not intended to be used to settle real-life transactions, bitcoin
(according to the enthusiasts) “has transcended that border, and managed to
gain a foothold in the real world as an alternative means of payment”. Buntinx
(2015) goes on to argue that, if someone wants to label bitcoin in its truest
form, they would have to call it a “digital cryptocurrency”. Hence, bitcoin may
be viewed as having a hybrid nature, a combination of digital and virtual.
Thousands of cryptocurrencies have since been created to emulate the
success of bitcoin, but most of them have failed. In mid-July 2020, there
were 1665 “dead” cryptocurrencies as listed on 99Bitcoins (https://99bitcoins
.com/deadcoins/#nnbitcoins-deadcoins-list). These include Abulaba, Adcoin,
Badgercoin, Zengold and Ziber. The “signs of death” include inactive devel-
opment (the repository has not been updated for a long time), inactive Twitter
account, and low trading volume. It is also indicated by failure to get indexed
or listed on an exchange and by the closure of the website.
7.3 THE PROS AND CONS OF CRYPTOCURRENCIES
Now that we have seen some of the properties and distinguishing characteris-
tics of cryptocurrencies, we will examine their pros and cons. The advocates of
cryptocurrencies tell us that the records are transparent and instantly accessible
because the transactions are stored within an accessible, open ledger (known as
the blockchain). For the same reason, trading is easy and can be done any time.
Compared with physical currency, large quantities can be easily transported
without detection. This actually sounds more like a property that is convenient
for criminals, which is hardly a desirable property.
Cryptocurrencies are self-governed and managed. Privacy and security
are guaranteed because the blockchain ledger is hard to decode. This level of
difficult security makes a cryptocurrency more secure than the other curren-
cies used to complete electronic transactions. Another advantage is that, since
a cryptocurrency can be bought with many global currencies, it can be con-
verted into other currencies with minimal fees. Cryptocurrency transactions,
142 Fintech
whether international or domestic, are lightning-fast because the verification

requires no time to process as there are few barriers to cross.
Bitcoin enthusiasts claim various advantages and attributes that are disputed
by Hanley (2013). These include the following: (i) bitcoin is one of the most
important inventions in human history because it solves the “double spending
problem”; (ii) saving bitcoins leads to increased wealth as the bitcoin economy
grows; (iii) like gold, bitcoin is easily divisible and of a limited supply, which
makes it ideal as a currency; and (iv) it can be expanded almost indefinitely by
splitting bitcoins into fractional coins. Hanley demolishes these arguments and
identifies serious problems “from fallacious reasoning to fundamental miscon-
ceptions”. He concludes with a quote from one banker, who said the following
about bitcoin: “a very clever practical joke by someone who is having enor-
mous fun exposing in the most sophisticated way imaginable the naivety of
clever mathematicians, economists and/or rich speculators”. The same banker
describes the bitcoin scheme as “the cleverest con trick ever conceived, and
probably one of the most rewarding”.
The propositions put forward to glorify bitcoin are preposterous. The
claim that it is one of the most important inventions in human history is
outrageous. Suggesting that saving bitcoin is a means of wealth creation is
Alice in Wonderland. And how can bitcoin be in limited supply when it can
be expanded almost indefinitely? Like bitcoin, no one can spend a dollar note
twice—once it has been used to pay for something, it is gone as far as this
spender is concerned.
On similarity to gold, which is ludicrous, Taleb (2021) argues that
a big difference between bitcoin and gold is that precious metals are largely
maintenance-free, do not degrade over an historical horizon, and do not require
maintenance to refresh their physical properties over time whereas bitcoin (and
other cryptocurrencies) require a sustained amount of interest in them. Taleb
also disputes some alleged advantages of bitcoin, by arguing that it cannot
be an inflation hedge, it is not a libertarian’s dream, it is not a safe haven (in
the sense that it cannot be used as a tail hedge against systemic risk), it does
not provide protection against tyrannical regimes (because its transactions
are open for all to see), and it does not solve the agency problem of reliance
on intermediaries. Stankiewicz (2021) quotes Taleb as saying that initially he
“bought into it”, as an alternative to the fiat currency issued by central banks
and as a currency without a government.
One of the proclaimed advantages of cryptocurrencies is that they are
inflation-proof because of limited supply. For example, the supply of bitcoin
is restricted by design to 21 million units, whereas fiat currencies are produced
without limits, which is exactly what is happening now as central banks
over-indulge in quantitative easing in response to the Covid-19 pandemic.
Furthermore, banks can expand the money supply without limits under frac-
tional reserve banking, particularly in the absence of strict cash and liquidity
requirements. This alleged advantage of bitcoin in particular is based on the
definition of inflation as too much money chasing too few goods, which
means rising prices and equivalently falling value (that is, purchasing power)
of money. Since a limit is imposed on the supply of bitcoin, the situation of
too many bitcoins chasing too few goods will not arise. This proposition is
problematical for a number of reasons.
To start with, in what sense is the limit binding, given that it is not a rule of
God or a rule of nature? It is ludicrous to compare the limit on the supply of
gold with the limit on the supply of bitcoin, as bitcoin enthusiasts love to do.
The supply of bitcoin is governed by a stipulation, set forth in its source code,
that only 21 million bitcoins will ever be produced. On average, bitcoins are
produced at a fixed rate of one block every 10 minutes. In addition, the number
of bitcoins released in each of these blocks is reduced by 50% every four years,
which means that the last bitcoin will be produced (mined) in 2140. However,
there is no reason why the limit cannot be changed because it is human-made.
Hayes (2021) suggests that “it’s possible that bitcoin’s protocol will be
changed to allow for a larger supply”. Surely, Satoshi Nakamoto (reportedly
worth $60 billion) will not go to prison for exceeding the limit that he set to
convince naïve people that bitcoin is as good as gold. Nakamoto set the limit
of 21 million bitcoins, but he (or she or they) can change it with the click of
a mouse.
One reason for changing the limit is highlighted by Kim (2021), who argues
that, even though the last bitcoin is expected to be mined in 2140, “outsiders
foresee a day when the 21 million cap might, gasp, come up for debate”. She
suggests that, when no more bitcoins are left to mint, miners will rely solely
on transaction fees, which are paid by users to settle transactions through the
blockchain. This change gives cause for concern to some who view bitcoin’s
block subsidies as integral to bitcoin’s incentive system. She quotes some
experts as saying the following: “stop assuming that everything will still
work well once everything goes to a pure transaction-fees system as opposed
to block subsidy”. To the sceptics, this could undermine the structure that
motivates miners to record validated transactions in the ledger. Furthermore,
“bitcoin’s limited supply could limit the cryptocurrency’s utility as a global
reserve currency”. Hence, Kim states, “both Walch and Brody [two bitcoin
experts] suggested that bitcoin’s 21 million supply cap might one day be
subject to change”.
Consider a situation in which bitcoin is used as a medium of exchange
alongside the dollar. This is not an imaginary world, because a situation where
both are legal tender exists in El Salvador following a June 2021 decision to
do just that (Aleman, 2021). This system works on the stipulation that the
exchange rate between the two currencies is determined by the market and that
144 Fintech
all prices are expressed in bitcoin, even though the dollar continues to be the
currency of reference for accounting purposes. This means that prices in terms
of bitcoin will not be stable (zero inflation) but rather fluctuate with the dollar/
bitcoin exchange rate.
Suppose now that bitcoin replaces the dollar and other national currencies
and becomes the only medium of exchange. If the supply limit is maintained
in a growing economy, deflation will emerge, which can be devastating for the
economy. If deflation is exacerbated, it can throw an economy into a deflation-
ary spiral. This happens when a declining general price level leads to lower
output levels, lower wages, and shrinking demand by firms and consumers,
which all lead to a further decline in prices. Under deflation, debt burden
causes bankruptcies because the real value of debt repayments rises with time.
Even if we assume that deflation does not materialise, a fixed supply of
bitcoin does not guarantee zero inflation unless we ignore cost push factors.
A bad harvest, a natural disaster or a pandemic leads to higher input prices
(such as raw materials and intermediate goods). The result will be a rising
general price level, irrespective of the supply of the medium of exchange.
Under any set of circumstances, bitcoin will not provide an inflation-free
environment. After all, the three certainties of life are death, tax and inflation.
We have so far established that some of the pros of cryptocurrencies are
questionable, more likely propaganda than statement of actual and verifiable
merits. Now, we turn to a consideration of the cons. To start with, crypto-
currencies are complex, particularly for those who are not familiar with the
technology. A cryptocurrency may be impenetrable and virtually unhackable,
in which case it is safer than a bank account. However, if the user loses the
private key to their wallet, it cannot be recovered, and it will remain locked.
This is a huge disadvantage compared with a physical safe full of cash, which
can be opened with the help of a safecracker if the keys are lost or the combi-
nation is forgotten.
A definite disadvantage of cryptocurrencies is that it is easy for scammers
to indulge in business as usual and steal from anyone who lacks experience
and knowledge of the underlying technology, making it quite a risky invest-
ment. As cryptocurrency transactions cannot be traced, they become the
perfect tool for online criminals who can easily make and receive payments
with cryptocurrency without being traced. Cryptocurrencies have been used
to settle illegal transactions on the dark web. They have also been used to
launder money while hiding the source of the funds more efficiently. Although
cryptocurrencies are highly secure, the exchanges are not that secure. Since
exchanges store the wallet data of users to process transactions, the data can
be stolen by hackers, giving them access to the users’ accounts. Furthermore,
if a dispute arises between two parties, or if someone mistakenly sends funds
to a wrong wallet address, the cryptocurrency cannot be retrieved or cancelled
by the sender, and the recipient can keep it (this is easy money in a true sense).
The police and justice system cannot do anything about it, which means that
the law of the jungle prevails.
Cryptocurrencies are not really currencies, in the sense that they can be
used as a means of payment. The number of businesses that accept cryptos
as a form of payment are few, simply because of the lack of trust but perhaps
more importantly because of conversion risk, as the prices of cryptos in terms
of national fiat currencies are highly volatile. This is a limitation to (the few)
people who want to use bitcoins to settle their day-to-day transactions. Any
business wishing to accept bitcoin as a means of payment should first educate
employees about the concept. As an asset, a cryptocurrency does not have
any intrinsic value—it has a market value only because people want to buy it,
thinking that the price will keep on rising.
The crypto-mining industry is criticised for the enormous amount of elec-
tricity it consumes and the consequent CO2 footprint. Criddle (2021) quotes
researchers at Cambridge University as saying, “bitcoin uses more electricity
annually than the whole of Argentina” and “if bitcoin were a country, it would
be in the top 30 energy users worldwide”. The Cambridge researchers also say
that the energy used for bitcoin mining could power all kettles used in the UK
for 27 years. This staggering amount of electricity is used because huge com-
puters are constantly working to solve puzzles. Criddle quotes David Gerard,
author of Attack of the 50 Foot Blockchain, as saying that “bitcoin energy use,
and hence its CO2 production, only spirals outwards” and “it’s very bad that all
this energy is being literally wasted in a lottery”. As we are going to see later,
the amount of electricity used to mine bitcoin is taken to represent the intrinsic
value of the crypto when in fact the intrinsic value is zero.
Three of the disadvantages will be elaborated on in the following sections.
The first is that cryptos are not currencies. The second is that cryptos do not
have any intrinsic value, in which case they are highly risky as investment
outlets because it is difficult to estimate the extent of overvaluation or under-
valuation. The third is that cryptos are the perfect vehicle for scammers.
7.4 CRYPTO-BUBBLES
A bubble is a self-reinforcing rise in the price of an asset that is unrelated to

fundamental factors, which makes the asset overvalued relative to its intrinsic
value. Investors buy an overvalued asset that is going through a bubble only
because they think that the price will rise even more. Those who take their
profit at the right time by selling the asset emerge as winners, but those who
stay until the bubble bursts will be hurt financially.
Economists find the definition of a bubble problematic because the proper
identification of a bubble requires some metrics on which there is little
146 Fintech
agreement. Tomfort (2017) argues that “a first problem analysing asset price
bubbles is that there is no commonly accepted view what an asset price bubble
really is”. The popular press often uses the term “bubble” to describe a situ-
ation in which the price of an asset has risen significantly over such a short
period of time, such that the price is likely to reverse direction. Kindleberger
and Aliber (1996) define a bubble as “an upward price movement over an
extended range that then implodes”. Shiller (2000) defines a bubble as “a situa-
tion in which news of price increases spurs investor enthusiasm, which spreads
by psychological contagion from person to person, in the process amplifying
stories that might justify the price increases and bringing in a larger and larger
class of investors … despite doubts about the real value of an investment”.
The word “real” is not meant to imply “inflation-adjusted”, which is why the
word “intrinsic” is more indicative of what Shiller means. A bubble may be
defined on the basis of the extent of the deviation from the intrinsic value as
determined by fundamental factors. For example, Adalid and Detken (2007)
define a bubble as a 10% deviation from a long-term price trend. The choice
of the number (10%) seems arbitrary, which is why it may be better to identify
a bubble in terms of the characteristics of the bubble formation process. Typical
characteristics include the following: (i) rampant speculative activity, (ii) the
intrinsic value of the underlying asset is ignored by investors, at least partially;
(iii) strong market correction has to be expected once the bubble bursts; (iv)
the process of bubble formation tends to be explosive and nonlinear; and (v)
the market is characterised by excessive risk-taking and leveraging. Bubbles
may also be associated with Ponzi schemes and hypes.
Figure 7.1 exhibits the dollar price of bitcoin over the period between 19
August 2016 and 19 August 2021, which shows clearly the peaks and troughs
associated with bubbles and crashes. Table 7.1 identifies the peaks and troughs
that define the bubble followed by crash behaviour. Let us consider the bubble
of 2017, when the price peaked at $17,706, and the bubble of 2021, when the
price peaked at $63,109. When the 2017 bubble burst, the price went down to
$3,486, and when the 2021 bubble burst, the price went down to $30,187.
The phenomenal rise of the price of bitcoin in 2017 was reversed in early
2018, which triggered (or perhaps was caused by) headlines such as the follow-
ing: “European Central Bank wakes up to digital currency concern”; “Bitcoin,
Ethereum and all other top 100 digital currencies tumble”; “Bitcoin value
plunges dramatically amid global financial market drop”; “Cryptocurrency
value slumps amid fears ‘bitcoin mania’ is over”; and “Bitcoin price plunge:
falling cryptocurrency value highlights new fears around digital money”
(Moosa, 2019). Some observers believe that it was a bubble, triggered by
intense speculative activity. For example, Turanova (2017) makes a compari-
son with other well-known bubbles by saying that “the situation in the bitcoin
market resembles the tulip fever in 17th-century Europe, a rally in the Japanese
markets of the late 1980s, or the internet mania of 1999”. She also quotes Janet
Yellen, the former Fed chair and current Treasury Secretary, as saying that
bitcoin is a “highly speculative asset” based on the conventional wisdom of
traditional finance. Thompson (2017) describes the 2017 rise of bitcoin as an
“astronomical trajectory”, arguing, “bitcoin’s behavior more resembles that
of a collectible frenzy, like Beanie Babies in the late 1990s”. Robert Shiller is
quoted by Detrixhe (2017) as saying that “the best example [of a bubble] right
now is bitcoin”.
Figure 7.1 The dollar price of bitcoin (daily observations, 0 =

19/08/2016)
On the other hand, bubble deniers do not agree with the characterisation of
a bubble followed by a crash. For example, Turanova (2017) describes the
bitcoin as “an asset class in search of an equilibrium price”, suggesting that
“this price discovery process is unlikely to proceed without the market price
getting excessive”. Likewise, Volpicelli (2017) rejects the description of the
2017 surge as a bubble, suggesting it is “just another bizarre episode in the
cryptocurrency’s odd saga”. He quotes William Derringer, an MIT historian
who has researched financial bubbles extensively, as saying that “bubbles are
not called as they happen”, they “get identified in retrospect”, and “if we knew
with absolute certainty that Bitcoin’s was a bubble, it would have already
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Table 7.1 Peaks and troughs in the dollar price of bitcoin
Date Price Absolute change % change

04/05/2017 1,537
15/12/2017 17,706 (p) 16,169 1052
12/12/2018 3,486 (t) -14,220 -80
25/06/2019 11,790 (p) 8,304 238
12/03/2020 4,970 (t) -6,820 -58
14/04/2021 63,109 (p) 30,540 1170
19/07/2021 30,817 (t) -32,292 -51
popped”. Likewise, Suberg (2017) quotes an investment analyst rejecting the

proposition of a bitcoin bubble and suggesting that “bitcoin was kind of its own
thing and hard to predict due to its independence”, “bitcoin has defied recent
doom-mongering from mainstream news” and “despite bubble-like behavior
remaining a common narrative among analysts discussing bitcoin, bitcoin was
more of an unknown, unique phenomenon”. Suberg quotes another investment
analyst as saying that “those who assume pure speculation is responsible for
bitcoin’s price rise haven’t done their work”.
In 2021, renewed interest emerged in the question of whether or not the
bitcoin was in a bubble. Williams (2021) observes “enthusiasts who believe
digital currencies are the greatest thing since sliced bread”, but he argues that
“the crypto market is imploding for 10 very good reasons”. The first reason
is that one of the biggest drawbacks of digital currency is that it is virtually
useless outside a cryptocurrency exchange. Another reason is that govern-
ments are unlikely to allow cryptocurrencies to undermine their own central
bank-backed currencies. In June 2021, the price of bitcoin dropped to its lowest
level since January following an announcement by the Chinese government of
a crackdown on cryptocurrency mining. Support for the bubble proposition
comes from Cox (2021), who reports that 74% of those who responded to the
Bank of America survey of fund managers said that bitcoin was a bubble.
The bubble is sustained by frenzied buying, motivated by the fear of missing
out on the opportunity of a lifetime to get rich quickly. Interest rate cuts and
rising property prices led investors to seek high-return investments and found
that in bitcoin and other cryptocurrencies. Bitcoin bulls are undeterred. Bavin
(2021) argues that volatility in the cryptocurrency market is often enough to
scare off new investors, but she quotes Matt Harry, a fund manager at DigitalX,
expressing bullish views on bitcoin. For example, he believes that “crypto will
crash and it will rise several times over in coming years, as it has done in the
past, until it reaches a point at which the technology becomes globally ubiqui-
tous and volatility and valuation fall more in line with something more sustain-
able over the long term.” He also suggests, “volatility is not only expected, but
it will happen again – but that shouldn’t worry investors”. It remains to say that
this fund manager works for a company that “offers investors access to Bitcoin
through a traditional fund structure”.
Let us see if the rise of bitcoin ticks the boxes for being a bubble, which
is useful because if it walks like a duck and quacks like a duck, it must be
a duck. Moosa (2019) lists 12 characteristics of bubbles that bitcoin exhibits.
Take, for example, the media frenzy: in November 2017 alone, 2.6 million
news stories were published by the media (Gannon, 2017). People have indeed
been mortgaging their homes to buy bitcoin (Morris, 2017; Shah, 2017), and
it has been suggested that “leverage has been used to fund bitcoin investments
through time” (Jacobs, 2018). Bubbles are sometimes triggered by new
technology—in this case it is the blockchain technology. Everyone is talking
about bitcoin—hence the stories of “when the shoeshine boys talk stocks it
was a great sell signal in 1929” (Rothchild, 1996) and “when your cab driver
starts talking about bitcoin, it’s time to sell” (Ratner, 2017). On this point,
Reynolds (2017) says the following: “In just a few months, bitcoin’s public
perception has gone from that of an untraceable currency loved by dark web
drug dealers to a potential get-rich-quick investment opportunity that everyone
has an opinion on.”
Despite the very large volume of commentary, academic work on bubbles
in bitcoin and other cryptocurrencies is sparse. Garcia et al. (2014) and
Kristoufek (2015) pre-suppose the presence of a bubble along the lines sug-
gested by Shiller et al. (1984). More formal testing based on economic funda-
mentals is provided by Alabi (2017), who uses ideas from network theory to
find periodically collapsing bubbles. Cheah and Fry (2015) test for evidence of
speculative bubbles in bitcoin returns and find evidence to suggest that bitcoin
prices are prone to substantial bubbles. Blau (2017) argues that the high price
volatility of bitcoin is not related to heightened speculative activity. Baek
and Elbeck (2015) find evidence to suggest that bitcoin returns are driven by
buyers and sellers internally, and not by fundamental economic factors. By
using detrended ratios, they find that bitcoin returns are 26 times more volatile
than those of the S&P 500 index, suggesting that it is a speculative investment
vehicle. Cheung et al. (2015) detect a number of short-lived bubbles, and three
large bubbles (2011–2013) lasting from 66 to 106 days. Corbet et al. (2018)
identify periods of clear bubble behaviour and conclude that bitcoin now is
almost certainly in a bubble phase.
Based on price and volume data up to the end of November 2017, Moosa
(2019) provides formal empirical evidence by using procedures that do not
require the estimation of a fundamental value for bitcoin. The empirical evi-
dence shows that, (i) the volume of trading can be explained predominantly in
terms of price dynamics; (ii) trading in bitcoin is based exclusively on tech-
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nical considerations pertaining to past price movements, particularly positive

price changes; and (iii) the price of bitcoin is an explosive process. These
findings are interpreted to imply a price bubble. By fitting linear, exponential
and polynomial trends with orders ranging between 2 and 6, it is demonstrated
that the price behaviour is explosive and nonlinear.
The question that we must answer is the following: in a rational world, why
would anyone buy an asset that has no intrinsic value and cannot be used as
a currency? The only reason is the potential capital gains to be realised as the
price rises further. This is a description of a state of affairs that is consistent
with a financial bubble. In the following section, two arguments are presented:
(i) bitcoin is not a currency, and (ii) it is an asset without any intrinsic value.
7.5 CRYPTOS AS CURRENCIES AND ASSETS
On its introduction in 2009, bitcoin was intended to serve as a currency with

special emphasis on the function of medium of exchange, arguably the most
important function of money. Satoshi Nakamoto, the mysterious inventor
of bitcoin, described the new invention in his introductory document as a
“peer-to-peer electronic cash system which allows online payments to be sent
directly from one party to another without going through a financial institu-
tion” (Nakatomo, 2008). Baur et al. (2018) interpret this definition to imply
that bitcoin is intended to be used as an “alternative currency”. The possibility
of serving as an alternative currency ignited interest in bitcoin, particularly
from those who believe that the current system of fiat money is corrupt and
gives too much power to banks, and from libertarians who think that the gov-
ernment should not have any say in what people do with their money.
However, the predominant view, which can be found in the sparse academic
literature and public discussions online, is that bitcoin is more of an asset than
a currency. The discussion centres on the ability of bitcoin to perform the
functions of a currency and whether or not it exhibits the characteristics of
a currency. The views are mixed—for example, the view that bitcoin shares
some characteristics of money and some of investment assets. Another view
is that bitcoin is not yet a currency, but it will be the dominant currency in the
future. For example, Seetharaman et al. (2017) suggest that the rise of bitcoin
may pose a serious threat to the US dollar, as it is an alternative to existing
currencies. Yet another view is that bitcoin is not a currency under normal con-
ditions, but it is a currency under hyperinflation. The debate has also triggered
some legal issues in so far as whether a business exchanging bitcoin should be
subject to VAT, which depends on whether bitcoin is regarded as a currency
or a commodity.
Several legal issues and views have emerged with respect to the characteri-
sation of bitcoin as a currency or otherwise. Taleb (2021) argues that “there is
a mistaken conflation between success for a digital currency, which requires

some stability and usability, and speculative price appreciation”. He also sug-
gests that “bitcoin has failed to become a currency because bitcoin transactions
are too expensive and too slow” and that “bitcoin’s price is too volatile for it
to be used as a currency”.
The view that bitcoin is a speculative investment is expressed by Yermack
(2013), who argues that it is similar to the internet stocks of the late 1990s.
This distinction has a policy implication, as Baur et al. (2018) suggest: if
bitcoin is used mainly as a currency, it has implications for monetary policy,
but if it is used for investment purposes it will compete with other assets (such
as bonds and stocks), in which case we have an issue of financial stability. In
other words, if bitcoin is used as a currency, the underlying issue becomes one
of currency substitution, but if it is viewed as an investment, the underlying
issue becomes one of asset substitution.
Bitcoin is described as a hybrid currency/commodity, the currency of tomor-
row (but not the currency of today) and the currency of hyperinflation. A view
expressed by Salmon (2013) is that bitcoin is an “uncomfortable combination
of commodity and currency”, such that the commodity value is rooted in the
currency value. He argues that the more of a commodity it becomes, the less
useful it is as a currency. In contrast, Baur et al. (2018) note that bitcoin is
neither a precious commodity nor a fiat currency backed by the monetary
authorities. But then they describe bitcoin as a “hybrid” of commodity and fiat
currency, suggesting that it is mainly used for investment purposes at present
and not as an alternative currency. Seth (2018) quotes Aswath Damodran,
of the NYU Stern School of Business, as saying that “cryptocurrencies have
become more of a tool for speculative investments, and less of a medium of
value exchange”. In truth, bitcoin is neither a currency, nor a commodity. It
is, as Harris (2018) puts it, a “colossal pump-and-dump scheme, the likes of
which the world has never seen”.
Cryptocurrency enthusiasts are classified by Taplin (2018) into two groups:
those who see cryptocurrencies as a means to buy and sell things, and those who
use them for investment purposes. For now, he argues, “the investment crowd
is winning out” because “bitcoin remains a cumbersome way to purchase most
goods”. For Taplin, bitcoin is an investment that most closely resembles gold,
in the sense that “both are stores of value that provide some built-in protection
against inflation”. On the other hand, it has been suggested that “the crazy
surge in value has convinced Bitcoin backers that it makes Bitcoin a credible
currency” (Destinationbitcoin, 2017). It is truly heroic (perhaps dishonest) to
claim that bitcoin is an anti-inflationary store of value. Satoshi Nakamoto can
never find better cheer leaders than the likes of Taplin.
Three scenarios can be envisaged with respect to the trajectory of bitcoin,
as suggested by Smith (2018). The first scenario is that of “bitcoin triumph”
152 Fintech
whereby it replaces the dollar (and probably other fiat currencies) as the “main
unit of exchange”. The second scenario is that of “bitcoin as gold”, whereby
fiat currency remains the main unit of exchange everywhere except in a few
extremely dysfunctional economies. The third scenario is that of “bitcoin
bust”, whereby bitcoin is abandoned, crashing relative to the dollar and never
being useful as a means of payment for daily necessities. Dickson (2018)
believes that bitcoin still has a long way to go to fulfil the vision of becoming
a mainstream method of payment and a major currency, referring to “inherent
challenges, technical and legal” that have become more pronounced.
Some empirical work has been done to determine whether bitcoin is a cur-
rency or an investment asset by looking at correlation between bitcoin returns
and returns on currencies and assets, but the results of this kind of work have
not resolved the debate. For example, Baur et al. (2018) try to answer the
question of whether bitcoin is a currency or investment by analysing the value
and characteristics of bitcoin relative to a large number of different assets
(including equity, precious metals, currencies, energy and bonds). They find
the properties of bitcoin return to be very different from return on traditional
investments, implying that bitcoin has diversification benefits, and conclude
that it is more like an asset than a currency. Yermack (2013) argues that bitcoin
daily exchange rates exhibit virtually zero correlation with widely used curren-
cies and gold, making it useless for risk management and exceedingly difficult
for owners to hedge. While both agree on the proposition that bitcoin returns
are decoupled from returns on other currencies and assets, they disagree on the
interpretation of the implication of this result for hedging.
If bitcoin is a currency, it should perform the functions, and possess the
characteristics, of money. Starting with functions, a successful currency serves
the functions of medium of exchange, unit of account, and store of value.
According to Yermack (2013), “bitcoin faces challenges in meeting all three
of these criteria”. This is perhaps an understatement because bitcoin fails
miserably on all counts.
As far as the first function of medium of exchange is concerned, Yermack
(2013) notes that most bitcoin transactions involve transfers between specu-
lative investors, and only in a minority of cases are bitcoins used to purchase
goods and services. He describes evidence of bitcoin’s footprint in daily com-
merce as being mostly anecdotal, consisting of newspaper stories about people
living only by spending bitcoin or estimates of large numbers of businesses
that are willing to accept bitcoin. Raviv (2018) identifies transaction speed (or
lack thereof) as an obstacle. It takes time to process a bitcoin transaction as it
is added to the ledger of the blockchain and pending approval.
On the second function of unit of account, Yermack (2013) suggests that
bitcoin faces a number of obstacles in becoming useful for this purpose. He
attributes the poor performance of bitcoin as a unit of account to the require-
ment of quoting the prices of goods and services to four or five decimal places
with leading zeros. For example, the bitcoin price of an item costing $10 is
quoted as 0.00553 bitcoins (just imagine customers being told that the price
of an item they wish to purchase is 5.53×10-3 bitcoins). This practice, which
is rarely seen in retail marketing, is likely to confuse both sellers and buyers.
Bitcoin has a high value compared with the prices of most ordinary products
and services, a problem that according to Yermack (2013) is often overlooked
or trivialised by bitcoin enthusiasts.
The third function is that of store of value, which is not performed well by
bitcoin. Yermack (2013) argues that, as a store of value, “bitcoin faces great
challenges due to rampant hacking attacks, thefts, and other security-related
problems”. When a currency functions as a store of value, the owner obtains
the currency at a certain point in time and exchanges it for goods and services,
subsequently expecting to receive the same economic value that the currency
was worth when the owner acquired it. Then there is the problem of managing
the risk arising from the price volatility of bitcoin. Seth (2018) argues that
volatility over short periods is not a characteristic of a stable currency, but of
speculative investment products such as derivatives.
To perform the functions of money, the asset must have the characteristics
of divisibility, portability, acceptability, durability and scarcity. Bitcoin is
divisible to 100,000,000 units, which is highly unusual for fiat currencies that
are typically decimalised (divisible to 100 units). Money must be portable in
the sense that people can carry it around easily, but bitcoin enthusiasts may
argue that, in a cashless society, this will not be a problem as a virtual elec-
tronic currency will do the job. A currency must be acceptable regardless of its
intrinsic value, which is not necessarily a characteristic of bitcoin. A currency
must be durable so that it preserves its value over time—arguably an electronic
currency is durable. For a currency to be of value, it must be scarce, which is
a characteristic of bitcoin, at least as things stand (even though the supply of
bitcoin is not governed by a law of physics).
If bitcoin is used as a currency when the dollar is still the reference currency
for pricing and invoicing, the bitcoin prices of goods and services become so
volatile that it renders it useless as a medium of exchange, a unit of account
and a store of value. This is because prices in terms of bitcoin depend on the
exchange rate against the dollar, which is highly volatile as we have seen. In
Figure 7.2, we can see the bitcoin price of a hypothetical commodity that has
a stable dollar price. Currently, this problem is experienced in El Salvador
where bitcoin is used alongside the dollar as a medium of exchange, just
because the president happens to be a bitcoin enthusiast. This is why Taleb
(2021) refers to conflation between “accepting bitcoin for payments” and
pricing goods in bitcoin, arguing that, to price in bitcoin, the price must be
fixed, with a conversion into fiat floating, rather than the reverse. This price
154 Fintech
volatility does not allow bitcoin to serve the functions of money because, as
the BIS (2018) puts it, “money needs to have the same value in different places
and to keep a stable value over time”. This is far from what we can see in
Figure 7.2.
Figure 7.2 Index of the bitcoin price of a commodity
Bitcoin is an investment asset without any intrinsic value. Bonds have intrinsic
value because they produce cash flows in the form of coupon payments and
the redemption of the face value. Stocks have intrinsic value because they pay
dividends and represent ownership of companies with physical and financial
assets. Gold and diamonds have intrinsic value because they are used in jew-
ellery and have some industrial applications. What intrinsic value does bitcoin
and other cryptos have? Well, nothing. Turanova (2017) believes that bitcoin is
like gold because both are scarce. However, the scarcity of gold is determined
by nature, which no one has control over, whereas the scarcity of bitcoin is due
to (flexible and non-binding) rules determined by the bitcoin establishment.
Furthermore, Wasik (2017) argues that “scarcity is strong selling point” and
that “whenever the phrase ‘limited quantities’ is uttered, people go crazy”.
However, scarcity on its own is no reason for a buying frenzy—otherwise, we
would observe a similar phenomenon in the trading of endangered species.
Thompson (2017) suggests that bitcoin has no intrinsic value because it “has
no profits” and that “it’s not even a company”—rather, it is a “digital encrypted
currency running on a decentralized network of computers around the world”.
Ordinary currencies, he argues, do not double in value by the month; neither,

one may add, do the prices of gold, diamond and other scarce elements.
Some attempts have been made to estimate an intrinsic value for bitcoin,
which is a measure of what an asset is worth as opposed to the current market
price of that asset. For example, FundStrat cofounder, Tom Lee, suggests
(based on Metcalfe’s law) that the value of bitcoin is the square of the number
of users multiplied by the average transaction value (Silverstein, 2017).
However, this is essentially the volume of trading, which cannot be a measure
of value. The volume of trading rises in a bubble as profit seekers scramble
to buy the asset on the assumption that the price will keep on rising. Damien
Boey, an analyst at Credit Suisse, argues that the price leads the number of
users rather than the other way around (Jacobs, 2018). Gandal et al. (2018)
find that, by driving up transaction volume, one or two traders managed to
manipulate the price of bitcoin, pushing it up by some 700% in 2013. This
kind of increase in volume cannot be considered a rise in the value of bitcoin.
As an alternative, Boey suggests that the price of bitcoin is negatively cor-
related with the BBB credit spread, which is why a 1% widening of the spread
causes a 100 logarithmic point decline in “bitcoin value”. This is observed
correlation (not causation) between credit spread and price, which does not
represent value. There is no explanation for the underlying mechanism, and
it may well be spurious correlation in the sense that the price (not value) of
bitcoin is sensitive to the drivers of BBB credit spread such as leverage and
quantitative easing. Neither the volume of trading, as suggested by Lee, nor
the BBB credit spread, as suggested by Boey, can be used to measure the value
of bitcoin.
In December 2020, JPMorgan strategists predicted that the intrinsic value
of bitcoin would “rise significantly over the coming months as mining activity
improves” and as a result of “the adoption of bitcoin by institutional investors”
(Graffeo, 2020). Obviously, this is in reference to the price, not the intrinsic
value. Hayes (2018), on the other hand, suggests that bitcoin does have a quan-
tifiable intrinsic value and formalises a pricing model based on its marginal
cost of production (the cost of electricity used in mining). However, the cost of
production does not reflect value—for example, the cost of producing a $100
note is about 3 cents, but the value of the note in terms of purchasing power
is $100. It generates a flow of goods and services worth $100. Cheah and Fry
(2015), among others, assert that the fundamental value of bitcoin is indeed
zero, and that the entire pursuit is a fool’s errand, or worse a fraud. Mackintosh
(2017) has opined that bitcoin is “probably worth zero”. Taleb (2021) suggests
that “if any non-dividend yielding asset has the tiniest constant probability of
hitting an absorbing barrier (causing its value to become 0), then its present
value must be 0”. On another occasion, Taleb said that bitcoin is “a beautifully
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set up cryptographic system”, but “there’s absolutely no reason it should be

linked to anything economic” (Stankiewicz, 2021).
7.6 CRYPTOS AS A CONDUIT TO FRAUD
A widely held view is that bitcoin is a Ponzi and/or a pyramid scheme, which
are typically associated with bubbles. For example, Byrne (2017) refers to
“a class of fraud which uses technology, rather than a scheme operator, to
mediate the interactions between an investment scam’s beneficiaries and
its dupes”. He also describes what he calls the “Nakamoto Scheme” as “an
automated hybrid of a Ponzi scheme and a pyramid scheme which has, from
the perspective of operating a criminal enterprise, the strengths of both and
(currently) the weaknesses of neither”. Gandal et al. (2018) identify the impact
of suspicious trading activity on the Mt. Gox Bitcoin currency exchange, in
which approximately 600,000 bitcoins valued at $188 million were acquired
fraudulently. They find that the price of bitcoin rose by an average of 4% on
days when suspicious trades took place, compared with a slight decline on
days without suspicious activity. They reach the plausible conclusion that
suspicious trading activity likely caused the unprecedented spike in the price
of bitcoin in late 2013, when the price jumped from around $150 to more than
$1,000 in two months.
In general, cryptos are associated with fraud in a number of ways. The
whole scheme is a scam because they have no intrinsic values, which makes
them no different from selling horse meat labelled beef (which has happened
in reality). The scheme makes it possible for tech-savvy fraudsters to steal
cryptos from naïve market participants hoping to be rich overnight. Cryptos are
used extensively in criminal activity. They can be used to run Ponzi Schemes.
ICOs, the selling of newly created cryptos, are simply selling bad apples to
unsuspected customers. Harris (2018) refers to a study conducted by Ernst &
Young showing that 10% of the money raised for ICOs has been stolen. One
reason for the proliferation of cryptos is that when a fraudster strikes it lucky
and becomes wealthy as a result, others try to emulate his or her success.
Scammers exploit the fact that so many people are still fairly unfamiliar with
cryptos, except for the supposed “get rich quick” potential. Scams include fake
token sales, blackmail scams and fake services that promise to “mix” a user’s
coins with those of others in order to make transactions harder to trace—only
for the perpetrator to run off with the money instead. Scammers like to use
bitcoin and other cryptocurrencies because transactions are irreversible and
do not require disclosure of personal details. Sergeenkov (2021) describes
a crypto Ponzi scheme as follows: the fraudsters set up imaginary crypto
enterprises and lure investors with various stories and pseudo-statistics. With
cryptos, it is somewhat easier to market unrealistic profits to an audience that
does not understand how they work, an audience that is otherwise dazzled by
the potential of cryptos to generate ultra-high returns.
Another classification of bitcoin scams is suggested by Liebkind (2020).
The scams include exchange and wallet hacks, social media scams, social engi-
neering scams, ICO scams and DeFi rug pulls. Social engineering scams occur
when hackers use psychological manipulation and deceit to gain control of
vital information relating to user accounts. Phishing, for example, is a widely
used social engineering scam to target information pertaining to online wallets.
Another popular social engineering method used by hackers is to send bitcoin
blackmail emails. ICO scams proliferated at the height of cryptocurrency
mania in 2017 and 2018. After an intense SEC crackdown, the frequency of
such scams has diminished. Decentralised finance, or DeFi rug pulls, are the
latest type of scams to hit the cryptocurrency business. Smart contracts that
lock in funds for a specified period of time are the most popular method for
programmers to steal funds.
Examples of how cryptos have been used in scams and Ponzi schemes
are plentiful. Take, for example, the PlusToken fiasco involving a company
(PlusToken) that was supposedly a cryptocurrency wallet service that promised
users high returns if they used bitcoin or ethereum to buy the fake company’s
own token, called “plus”. An elaborate marketing campaign convinced more
than three million people—the majority of whom were in China, Korea and
Japan—to invest by reaching them through the popular messaging platform
WeChat, holding in-person meetings, and posting ads in supermarkets. After
a year of fleecing investors of their funds, the PlusToken team closed down the
scheme in 2019 and exited with cryptocurrencies worth over $3 billion.
PlusToken is one of the “biggest crypto Ponzi schemes”, as Sergeenkov
(2021) calls them. He describes OneCoin as “perhaps the longest-running
Ponzi scheme ever witnessed in the crypto industry”. OneCoin managed to
lure investors in their numbers during the period 2014 to 2019, when the Ponzi
scheme was said to have defrauded investors of $5.8 billion by marketing
OneCoin as a “bitcoin killer” and the next hottest innovation in the crypto
industry. Beneath this “business venture” was a multi-level marketing scheme
that compensated members with cash and OneCoin each time they recruited
new investors. The problem was not the marketing strategy per se, but the fact
that OneCoin had no blockchain of its own. Whenever investors received or
bought OneCoin, they held a worthless coin that was not backed by accepted
digital asset technology. And even that backing does not make a crypto an
asset of value.
Another major crypto Ponzi scheme, Bitconnect, was launched in 2016
as a bitcoin lending solution promising monthly returns of 40%. In 2018,
the US authorities declared Bitconnect a Ponzi scheme and demanded that
it halt its operations. In 2016, GainBitcoin emerged as an India-based cloud
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mining solution with the promise of generating monthly returns of 10% for 18
months. The project attracted no less than $300 million from Indian investors.
In 2017, it became clear that there was neither physical mining equipment
nor any mining operations backing the elaborate scheme. Fortunately, the
scheme’s mastermind was arrested in 2018 and charged for defrauding more
than 8,000 investors. Like GainBitcoin, Mining Max used an ostensible cloud
mining venture to mask the true nature of its illegal operations. Mining Max
pitched the idea of participating in a multi-crypto-mining ecosystem, which
had the potential of generating high returns. However, just like every other
crypto Ponzi scheme, much of the business model relied on heavy marketing
campaigns geared at attracting new investments from individuals seeking to be
rich overnight, or those watching their real wealth evaporate as a result of zero
or negative interest rates.
Wright (2021) tells an Australian story of a crypto-fraud victim, Jonathan,
who stumbled on an Instagram account flaunting huge profits from cryptocur-
rencies. The strategy, he was told, could produce eye-watering returns of 50%
per month. Jonathan and his friends (who no longer talk to him) lost more than
$20,000 to the scam. When he went to the police, he was told the following:
“You’ve only lost $20,000. We know people who have lost millions”. On
25 June 2021, the Australian regulator, ASIC (2021) issued a scam alert,
declaring a rise in crypto-scams. According to ASIC, investors who have been
scammed are typically called or e-mailed by scammers with an investment
opportunity, or approached by their friends, family members, or online roman-
tic partners who tell them how they have made money online and suggest that
they try it too. Investors typically sign up to these fraudulent schemes online
and deposit funds into a trading account, via either a crypto-wallet or a bank
account. When an investor logs into their account, it may look as though they
are making profit initially (due to fake data), but eventually they see “trading
losses”, even though no actual trading has taken place. When the investor
asks to withdraw their funds, the scammers either cease all contact or demand
further payment before funds can be released.
Likewise, the SEC (2021) warns of “Ponzi schemes using virtual cur-
rencies” by fraudsters who “lure investors into Ponzi and other schemes”.
According to the SEC, fraudsters may also be attracted to using virtual cur-
rencies to perpetrate their frauds because transactions in virtual currencies
have greater privacy benefits and less regulatory oversight than transactions
in conventional currencies. In a recent case, SEC v. Shavers, the organiser of
an alleged Ponzi scheme advertised a bitcoin “investment opportunity” in an
online bitcoin forum. Investors were promised up to 7% interest per week and
that the invested funds would be used for bitcoin arbitrage activities (what-
ever that means) in order to generate the promised returns. Instead, invested
bitcoins were allegedly used to pay existing investors and exchanged into US
dollars to pay the organizer’s personal expenses (SEC, 2013).
Crypto-scams are beyond the reach of regulators in South Africa (and else-
where). Henderson and Prinsloo (2021) tell a story about the alleged bitcoin
fraud at Africrypt because cryptocurrency is not yet a regulated product there.
While describing the investment platform as a Ponzi scheme, the Financial
Sector Conduct Authority said that all it could do was review complaints
because “crypto assets are not regulated in terms of any financial sector law
in South Africa and consequently the FSCA is not in a position to take any
regulatory action.” Johannesburg-based Africrypt, launched in 2019, was run
by two brothers who promised a minimum return of five times the amount
invested, according to a police statement made by one investor. In the end,
he invested close to 1.8 million rand ($126,000), the statement said. Lawyers
acting on behalf of a group of clients say that the brothers and bitcoin worth as
much as $3.6 billion have just vanished.
Warnings of and stories about crypto-scams keep coming. Bambrough
(2020) quotes Dave Portnoy, a stock market day trader, as saying that he
thinks the cryptocurrency market is nothing more than a Ponzi scheme. Popper
(2020) identifies various forms of criminal activity using bitcoin, including
the sale of illegal drugs, shopping on the dark net markets, and ransomware
attacks, in which hackers steal or encrypt computer files and refuse to give
them back unless a bitcoin payment is made. Foley et al. (2019) refer to the
use of cryptocurrencies in illegal trade (drugs, hacks and thefts, illegal por-
nography, even murder-for-hire), terrorism funding, money laundering, and
the avoidance of capital controls. They reveal that illegal activity accounts for
a substantial proportion of the users and trading activity in bitcoin. So much for
“one of the most important inventions in human history”.
Interest in bitcoin (and cryptos in general) can be traced back to the finan-
cial crisis in Cyprus, which led to proposals to raid domestic bank accounts
(Eichenwald, 2013). Those who were worried about the possibility of having
their deposits confiscated to salvage failed banks (the so-called “bail-in”)
found it sensible to put their savings in bitcoin. There are also those who like
bitcoin because it frees them from what they see as a scandalous fractional
reserve banking system or the “Big Brother” element resulting from the
involvement of central banks in private money transfers. The buying frenzy
that has taken the price of bitcoin to ridiculously high levels is triggered by the
belief that the price will keep on rising even though, unlike gold, bitcoin has no
intrinsic value. Bitcoin is not like any national currency, which commands pur-
chasing power over goods and services and backed by the power of the state. In
160 Fintech
the case of cryptos, there is no central bank and no country, and nothing stands
behind them other than enthusiastic and perhaps disillusioned investors.
We have witnessed how the market can be manipulated by tweets from
Tesla CEO Elon Musk. At first, Musk was all aboard the bitcoin train. He pur-
chased $1.5 billion worth of bitcoin in February 2020 and announced that his
company would begin accepting bitcoin for electric vehicle purchases a month
later. Some 49 days later, he tweeted that Tesla would no longer accept bitcoin
because of the adverse environmental impact of mining. Subsequently, Musk
turned his attention to Dogecoin, but he has kept on tweeting about bitcoin.
In July 2021, bitcoin jumped past $30,000 as Musk said that Tesla was
“most likely” to start accepting it as payment again (BBC, 2021). When he
was confronted with the allegation that he had helped to boost the prices of
cryptocurrencies before selling them, he said (as expected): “I might pump,
but I don’t dump… I definitely do not believe in getting the price high and
selling… I would like to see Bitcoin succeed”. I suppose that he is concerned
about the success of bitcoin because of its contribution to human welfare. It
sounds odd that someone who is trying to save the planet by accelerating the
shift to electric vehicles supports something that is produced by using massive
amounts of electricity generated from fossil fuel.
As Cassidy (2021) puts it, “the individual most clearly associated with
bitcoin’s travails is Elon Musk”. However, Cassidy believes that the issues
facing the crypto-market go well beyond one individual, pointing out that the
bitcoin boom faces two existential threats: a tightening of monetary policy by
the Federal Reserve and a legal crackdown by the Chinese and other govern-
ments intent on protecting their own currencies. The fact of the matter is that
cryptos are not currencies and do not have any intrinsic value. The hype may
last for a long time to come, but reason will prevail eventually as with what
happened with previous hypes. Cryptocurrencies look more like a scam than
a revolutionary innovation.
Perhaps nothing can serve as well as a closing remark of this chapter than
what Nouriel Roubini, who describes cryptos as “the mother or father of all
scams and bubbles”, said about the scam. In a prepared testimony to the US
Senate Committee on Banking, Housing and Community Affairs, Roubini
(2018) referred to “scammers, swindlers, criminals, charlatans, insider whales
and carnival barkers (all conflicted insiders)” who tapped into “clueless retail
investors’ FOMO (‘fear of missing out’)” and then took them for a ride with
pump-and-dump schemes for “scammy crappy assets at the peak that then
went into a bust and crash—in a matter of months—like you have not seen
in any history of financial bubbles”. He went further by referring to altcoin,
cryptocurrencies that were developed after bitcoin became popular, as “s**t-
coin”, and he qualified his statement by saying the following: “Actually calling
this useless vaporware garbage a ‘s**tcoin’ is a grave insult to manure that
is a most useful, precious and productive good as a fertilizer in agriculture”.

I think he was right.
8. The implications of fintech for
financial stability and inclusion
8.1 INTRODUCING THE CONCEPTS
Fintech enthusiasts tell us that fintech makes a positive contribution to finan-

cial stability (making the financial system more stable) and financial inclusion
(bringing the unbanked and under-banked into the world of finance). The
implications of fintech for financial stability and inclusion are important for
assessing the costs and benefits of fintech and for the question of how far and
in what ways the fintech industry should be regulated. In this sense, the fintech
industry is the new firms using state-of-the-art technology to provide financial
services and compete with traditional financial institutions. The starting point
should be a description of financial stability and inclusion.
A stable financial system is a system where financial institutions, markets
and market infrastructures facilitate the smooth flow of funds between savers
and investors, which is conducive to economic growth. Financial stability is
paramount for economic growth, as most transactions in the real economy
are made through the financial system, which provides credit and means of
payment. On the other hand, financial instability means that the financial
system cannot perform its functions of providing payment mechanisms,
insurance against risk, the management of savings, and the provision of credit
facilities. Rosengren (2011) defines financial stability as follows: “financial
stability reflects the ability of the financial system to consistently supply the
credit intermediation and payment services that are needed in the real economy
if it is to continue on its growth path.” On the other hand, he notes that “finan-
cial instability occurs when problems (or concerns about potential problems)
within institutions, markets, payments systems, or the financial system in
general significantly impair the supply of credit intermediation services – so as
to substantially impact the expected path of real economic activity”.
A stable and sound financial system reinforces trust in the system and
prevents phenomena such as bank runs, which can destabilise an economy.
Financial instability can be observed vividly during financial crises, such as
stock market crashes, credit crunches, the bursting of financial bubbles, sov-
ereign defaults, and currency crises. In times of financial instability, banks are
162
The implications of fintech for financial stability and inclusion 163
reluctant to finance profitable projects, asset prices deviate excessively from

their intrinsic values, and payments may not arrive on time. Major instability
can lead to bank runs, hyperinflation, or a stock market crash. It can severely
shake confidence in the financial and economic system.
Financial stability is important because the volatility of financial prices may
bring about corporate bankruptcies and reduce the efficiency of resource allo-
cation. Safeguarding financial stability is essentially a forward-looking task
involving the identification of vulnerabilities within the financial system, so
that corrective action can be taken. Financial vulnerabilities may pertain to the
condition of household and corporate sector balance sheets (for example, the
level of debt) and the state of financial markets (for example, the availability of
liquidity). Vulnerabilities may also pertain to the way in which financial insti-
tutions and market participants perform the task of pricing and managing risk.
Financial stability pertains to the stability of the three components of the
financial system: financial institutions, financial markets and financial infra-
structure. Financial institutions are stable when they are in a position to carry
out the intermediation function adequately, without assistance from external
bodies, including the government. Financial markets are stable in the absence
of major disruption of market transactions, with no significant deviation of
financial prices from intrinsic values, which enables market participants to
raise and utilise funds with confidence. The financial infrastructure is stable
when the payment and settlement mechanisms operate smoothly. When the
three components are sound, the system is capable of performing its basic
functions: intermediation of financial funds, management of risks and arrange-
ment of payments.
Now, we turn to financial inclusion, which is intended to make financial
products and services accessible and affordable to all individuals, regardless
of their personal net worth, and businesses, regardless of size. According to
Lochy (2020), financial exclusion in developing countries usually means that
people do not have access to a bank or a bank account (the unbanked). This lack
of access can be caused by inadequate knowledge (banking services are not
simple enough) or general distrust in the financial system (the banking system
is not considered safe and sustainable). It can also be caused by banks charging
high fees or being located too far away from their customers. Other factors
include limited branch networks of banks and other financial institutions,
limited availability of ATMs, relatively high costs of servicing small deposits
and loans, limitations on satisfactory personal identification, and limitations on
assets that can be used as collateral. In developed countries, underbanking can
be attributed to the following factors: (i) financial services are unaffordable or
provide inadequate value for money; (ii) they are not granted to people, due to
risk considerations; (iii) complex and inadequate products marketed by using
164 Fintech
misleading practices and biased financial advice; and (iv) inability of people to
understand banking products and services.
Measures designed to safeguard financial inclusion are identified by
Imboden (2020) to include liquidity support for financial institutions that
target unserved and underserved customers, credit facilities to support lending
to small and medium-sized enterprises, continued expansion of digital finan-
cial services and their delivery, a risk-based approach to customer due dili-
gence, rapid opening of accounts for social assistance payments, enhancement
of cross-border remittances and payments, and customer-centric financial
consumer protection. These measures also promote financial stability by con-
tributing to the prudent functioning and diversification of financial institutions.
On the other hand, if fewer people or enterprises are able to access, use or
trust financial services, even greater economic repercussions would, in turn,
exacerbate stability risks.
8.2 CAUSES OF FINANCIAL INSTABILITY
Several causes of financial instability can be identified, including rapid lib-

eralisation of the financial sector, inadequate economic policy, inappropriate
exchange rate mechanism, inefficient resource allocation, weak supervision,
and insufficient accounting and audit regulation. Free marketeers also like to
add poor market discipline, except that the market does not inspire discipline.
The rapid liberalisation of financial markets and capital accounts in Asian
countries contributed to the advent of the Asian financial crisis of the 1990s.
Wang (2007) argues that “both the theoretical and empirical studies have
established that premature capital account liberalization was the direct cause
of various financial crises, including the 1997–98 Asian Crisis” and suggests
that “countries delay capital account liberalization or maintain capital controls
before they put into place effective domestic regulatory framework and finan-
cial infrastructure”.
An inadequate monetary policy was a major cause of the global financial
crisis, as interest rates were kept low for a very long period of time. More
recently, the destructive policy of quantitative easing and the consequent
ultra-low and negative interest rates are creating bubbles in financial and prop-
erty markets, which will eventually bring about a financial crisis. However,
policy failure is not only about monetary policy, because tax policy is also
a failure. The tax code gives preference to debt financing and encourages
excessive leverage. The absence of a financial transaction tax is conducive
to short-term speculation (harming the resiliency of the financial system) and
at the margin discourages long-term investment. Fullerton (2011) argues that
“we need to eliminate the subsidy on debt based financing, encouraging more
debt when we have too much already”.
An inappropriate exchange rate mechanism was also a cause of the Asian

financial crisis. For example, Rana (1998) notes that, although inappropriate
exchange rate policies are not a root cause of the Asian crisis, they contributed
to the materialisation of the crisis. Speculative attacks against particular cur-
rencies are closely linked to the exchange rate regime. In 1992, George Soros
engineered a speculative attack against the pound and Italian lira because
their exchange rates were not properly aligned within the European Monetary
System, forcing the authorities in those countries to push interest rates to
extremely high levels while losing almost all of their reserves. Frankel (1999)
argues that “the recent financial crises in many emerging market economies
have raised anew questions about the appropriate exchange-rate regime and
the use of capital controls as policy instruments”.
As far as the inefficient resource allocation is concerned, Hachem (2014)
attempts to find out whether banks are efficient at allocating resources across
intermediation activities, arguing that imperfect information between lenders
and borrowers means that too many resources are spent on getting rather than
vetting borrowers but, once properly vetted, not enough matches are retained.
In this case, uninformed lending is inefficiently high while informed lending
is inefficiently low. Matvos and Seru (2018) suggest that, when intermedia-
tion is impaired, shocks can be transmitted to the broader economy because
funds may not flow to the highest value use without incurring significant
costs. Inefficient resource allocation was a driving force behind the global
financial crisis as banks granted credit to anyone who wanted to buy a house,
irrespective of the ability to repay the loan. They (banks) were emboldened by
protection from credit risk, made possible by the removal of loans from their
books and subsequently converted into asset-backed securities. This means
that financial engineering, the source of fancy financial products, allowed this
misallocation of financial resources and contributed to the advent of the global
financial crisis. However, this is not the only way whereby financial engineer-
ing contributed to the advent of the GFC, as those products led to mispricing
of risk, simply because it was difficult to judge the degree of risk embodied
in them.
Contrary to what free marketeers profess, weak regulation creates financial
instability. Allen and Gu (2018) suggest that the global financial crisis demon-
strated that microprudential regulation (unlike macroprudential regulation)
focuses on the risks taken by individual banks, and ignores systemic risk, which
makes it inadequate for the purpose of averting crises. The Bank of England
(2021) identifies three regulatory requirements that contribute to financial
stability. The first is a reliable mechanism with a strong and well-designed
structure, so that financial institutions are expected to meet very high standards
of resilience. The second is that financial institutions must be able to adapt
their level of resilience to new risks that might be developing, and this is why
166 Fintech
banks go through stress testing every year. The third is that shocks must be
dampened and contained when they occur, so that they do not get worse. On
the other hand, Dowd (2009) puts forward good economic-theoretical reasons
to cast a shadow of doubt on the feasibility of using financial regulation to
promote financial stability.
Insufficient accounting and audit regulation leads to scandals and possi-
bly financial crises. In the recent past, accounting scandals were typically
produced by the excessive greed of a few individuals whose actions led to
disastrous consequences that brought down whole companies and affected
millions of people. The most high-profile scandals involved companies like
Waste Management (1998), Enron (2001), WorldCom (2002), Tyco (2002),
HealthSouth (2003), Freddie Mac (2003), American International Group (AIG)
(2005) and Lehman Brothers (2008). The Bernie Madoff Scandal of 2008 was
perpetrated by one individual who ran a “brilliant” Ponzi scheme (perhaps
the biggest Ponzi scheme in history). In 2002, the US regulatory authorities
responded by implementing the Sarbanes–Oxley Act, which stipulates that top
management must individually certify the accuracy of financial information
and make penalties for fraudulent financial activity much more severe.
Market discipline means that financial institutions and market participants
conduct business while considering risks to their stakeholders. Crockett (2001)
defines market discipline as internal and external governance mechanisms in
a free-market economy without direct government intervention. So defined,
the question of whether market discipline can, by itself, secure financial sta-
bility comes pretty close to asking whether the financial system, left to its own
devices, is inherently stable. Crockett identifies pre-requisites for market dis-
cipline to be fully effective in ensuring financial stability, including the avail-
ability of information (and the ability to process the information correctly),
the right incentives, and the mechanisms required to exercise discipline. The
problem, of course, is moral hazard, which is defined by Dowd (2009) as
a situation “where one party is responsible for the interests of another, but has
an incentive to put his or her own interests first”. The fact of the matter is that
market discipline cannot ensure financial stability in the absence of regulation.
Allowing financial institutions to regulate themselves through market disci-
pline is like allowing the inmates to run the asylum.
Excessive leverage, which is related to financial innovation, is described by
Fullerton (2011) as being “at the center of all banking crises, by definition”.
Leverage is particularly dangerous because, as Fullerton puts it, it is embedded
in structured securities in the absence of transparent accounting for leverage.
Under these conditions, “limiting it [leverage] is complex and beyond the skill
of legislators to efficiently write into law, and beyond the ability of regulators
to manage”. The Financial Crisis Inquiry Commission concludes that a combi-
nation of excessive borrowing and risky investments “put the financial system
on a collision course with [the] crisis” (FCIC, 2011). Chan (2011) argues that
“both the Global Financial Crisis in 2008 and the current European sovereign
debt crisis have been driven by excessive leverage in private and public sectors
alike in the major industrial economies, resulting in dangerously high levels
of debt”. He attributes the rapidly rising levels of debt to several factors,
including financial innovation, declining real interest rates, and the illusion
of the “great moderation” (which nurtured the view that everything would be
fine and that asset prices would continue to rise). Chan, however, attributes
over-leveraging mostly to market failure, in the sense that the market has been
sending the wrong signal that rising indebtedness is nothing to worry about.
Similar views have been expressed by Singh (2008), D’Hulster (2009), the
Financial Stability Board (2009) and the Financial Services Authority (2009).
A related factor is liquidity, which is affected by maturity transformation.
Fullerton (2011) gives an example: “Lehman was funding real estate holdings
in the Repo and commercial paper markets was sheer folly, apparently under-
stood as a joke even inside the firm”. The global financial crisis was charac-
terised by a rapid breakdown of the financial markets that provide liquidity
for financial institutions. Kowalik (2013) argues that “the distress in funding
markets was amplified by preceding changes in the liquidity management
practices of financial institutions, changes that had accelerated in the decade
leading up to the crisis”. These changes occurred on the assets side because
financial institutions relied increasingly on securities that were liquid in good
times but could become illiquid under market-wide stress. They occurred
on the liabilities side because financial institutions relied increasingly on
short-term money market funding, such as overnight repurchase agreements
(repos), to fund long-term assets. The practice, according to Goldstein (2008),
has been “just-in-time” borrowed liquidity for major players instead of an
adequate reserve of own liquidity. A similar view is put forward by Kaufman
(2009), who points out that the public perception of liquidity has changed from
one based on assets (what one could sell) to one based on liabilities (ease of
borrowing). These practices made financial institutions extremely vulnerable
to liquidity risk.
Other factors that cause financial instability are shadow banking and
financial innovation. Landau (2019) describes shadow banking as a “major
source of debates and concerns for financial stability”. New financial products,
such as securitised assets, were believed to have tremendous potential for the
diversification and efficient management of risk (Merton, 1992; Mendoza et
al., 2009; Trichet, 2009). The global financial crisis changed those beliefs, as
excessive risk-taking in some “innovative” products brought down the finan-
cial system and produced a great recession. Haliassos (2015) suggests that, to
strike a balance between innovation and safety, financial product transparency
and guidelines for assessing a financial innovation’s potential impact on finan-
168 Fintech
cial stability should be developed. Furthermore, greed and weak corporate

governance allow the assumption of excessive risk and played a big role in
the advent of the global financial crisis. They are also implicit in the work
of Hyman Minsky on financial stability, who disputed the proposition that
a modern market economy is fundamentally stable, arguing instead that the
system itself could generate shocks through its own internal dynamics.
Financial stability is weakened by exposure to systemic risk, which is
defined as the possibility that an event at the firm level could trigger severe
instability or the collapse of an entire industry or economy. In finance, sys-
temic risk (which is not the same as systematic risk) is the risk of collapse of an
entire financial system or entire market, as opposed to the risk associated with
any one individual financial institution, a group of institutions or a component
of the system (for example, Dwyer, 2009). Judge (2012) presents a case study
to demonstrate how complexity arising from financial innovation can boost
systemic risk, concentrating on the securitisation of home loans.
In relation to financial instability, Daula (2006) defines systemic risk as
“financial system instability, potentially catastrophic, caused or exacerbated
by idiosyncratic events or conditions in financial intermediaries”. Allen and
Gu (2018) identify six types of systemic risk: panics (banking crises due to
multiple equilibria), banking crises due to asset price falls, contagion, finan-
cial architecture, foreign exchange mismatches in the banking system, and
behavioural effects produced by Knightian uncertainty, which is a lack of any
quantifiable knowledge about some possible occurrence, as opposed to the
presence of quantifiable risk.
Financial systemic risk is classified by Borio (2011) into two dimensions:
time and cross-sectional. The first involves dealing with how aggregate risk in
the financial system evolves over time. This is known as the tendency towards
procyclicality of the financial system as a result of positive feedback between
the economy and the financial system. The feedback loops are produced by
connections between bank capital and lending, between asset value and bank
lending, between the exchange rate and balance sheet (currency mismatches),
between liquidity and other money markets (maturity mismatches), and
between interest rate and credit risk. The cross-sectional dimension is about
the allocation of risk within the financial system at a point in time as a result
of common exposures and interlinkages in the financial system (for example,
common exposures to similar asset classes, indirect exposures through coun-
terparty risks, and exposure to SIFIs).
8.3 THE EFFECT OF FINTECH ON FINANCIAL

STABILITY
Out of the 15 or so factors that cause financial instability, as identified in the

previous section, some are relevant to fintech. Inefficient resource allocation
may be relevant if fintechs expand credit and aggravate counterparty risk
through peer-to-peer lending. Weak regulation and supervision and insuffi-
cient accounting standards may be relevant because it is not clear yet how
fintechs should be regulated (even whether or not they should be regulated).
Other relevant factors include poor market discipline, moral hazard, excessive
leverage, extreme maturity transformation, liquidity problems, too much
risk-taking, greed and corruption, and weak corporate governance.
We have seen that financial stability can be affected adversely by shadow
banking and financial innovation, both of which contributed to the advent of
the global financial crisis. If, as argued in Chapter 3, similarities exist between
fintech on the one hand, and shadow banking and financial innovation on the
other, then it is likely that fintech may have an adverse effect on financial
stability. Dabrowski (2017) refers implicitly to fintech as “the recent wave
of financial innovation, particularly innovation related to the application of
information and communication technologies”, suggesting it “poses a serious
challenge to the financial industry’s business model in both its banking and
non-banking components”. He warns that “if not responded to adequately and
timely by regulators, it [fintech] may create new risks to financial stability,
as occurred before the global financial crisis of 2007–2009”. For Dabrowski
(2017), therefore, fintech pertains to financial innovation in the same sense as
the products of financial engineering represent financial innovation. However,
Gray and Leibrock (2017) suggest that the impact of fintech developments
on financial stability must be considered on a case-by-case basis, taking into
account how each individual application may affect the various dimensions of
systemic risk.
Interconnectedness risk, as a key dimension of systemic risk, is of particular
importance. The collapse of Lehman Brothers in September 2008 affected
market participants around the world through a complex web of direct and
indirect links. Gray and Leibrock (2015) define financial interconnectedness
as “relationships among economic agents that are created through financial
transactions and supporting arrangements”. More specifically, they suggest,
“the term interconnectedness refers to linkages between and across: (i) finan-
cial institutions (banks and non-banks); (ii) providers of financial market
infrastructure services; and (iii) vendors and third parties supporting these
entities”. For example, banks that lend to and borrow from each other become
interconnected through interbank credit exposures. Contractual obligations
170 Fintech
among financial institutions (such as ownership, loans, derivatives and many

other types of contracts) give rise to interconnectedness. When firms invest
in the same asset, they become interconnected as a result of having common
exposures to that asset. In a highly interconnected financial system, distress in
one entity is likely to be transmitted to other entities.
Gray and Leibrock (2017) believe that fintech is likely to have a greater
systemic impact through key transformational mechanisms, such as the
disintermediation of incumbents, disaggregation of financial services and
decentralisation of networks. These effects (along with fintech’s potential
to alter competitive forces, market dynamics, financial inclusion, consumer
rights and many other areas) could strengthen or weaken overall financial
stability. The effect depends on nine key factors that need to be considered in
order to gauge how a specific fintech offering may impact financial stability.
These factors include the provision of core banking functions by fintechs, the
level of fintech-related fragmentation, the impact of fintech on concentration
risk, the substitutability of fintech services, the effect of fintech on financial
interconnectedness, competition versus co-operation between fintech firms
and traditional financial service providers, the degree of reliance on automated
decision-making processes, sustained growth and adoption of fintech services,
and evolution of the regulatory environment. For example, the provision of
core banking functions by fintechs may enhance financial stability by diversi-
fying credit and liquidity risk, but a negative effect may materialise as a result
of a short track record and lack of banking experience. The last three factors
have unambiguous positive or negative effects on financial stability.
8.4 FINANCIAL INCLUSION, LITERACY AND

STABILITY
To understand how fintech is likely to affect financial inclusion, we need to
identify barriers to inclusion, which can be classified as supply side and demand
side barriers. Supply side barriers restrict the ability of financial institutions to
provide financial products and services to households and businesses. These
can be market-driven, regulatory, and infrastructure related barriers. Examples
of market-driven barriers are the relatively high cost of maintaining small
deposits and loans, the costs associated with the provision of financial services
in small towns and rural areas, lack of information on the creditworthiness of
loan applicants, unavailability of suitable collateral, and the lack of convenient
access points to financial services. An example of regulatory barriers is the
strict requirements for opening branches and ATMs. Infrastructure barriers,
which are more common in developing countries, include the lack of reliable
payment and settlement system, limited access to phones, lack of convenient
transport to ATMs, and the unavailability of reliable internet connection. On
the other hand, demand side barriers are the factors that can restrict demand for
financial services. These factors include low income levels, lack of customer
awareness of the availability of certain services and products (which may be
caused by low levels of financial literacy), and the absence of trust in financial
institutions.
Financial inclusion is related to financial literacy and has implications for
financial stability. Financial literacy is the possession of skills and knowledge
that allow an individual to make informed and effective financial decisions.
Financial education, which leads to financial literacy, is the process of building
knowledge, skills and attitudes. Financial literacy is considered as a major
demand side factor for inclusion because a well-educated individual makes
better financial decisions (Fischer, 2011; Rastogi and Ragabiruntha, 2018).
Rai et al. (2019) establish financial literacy as one of the basic necessities for
a high level of financial inclusion. In fact, financial literacy is a pre-requisite
for achieving inclusion, and the promotion of greater inclusion goes hand in
hand with the level of financial literacy. Klühs et al. (2018) find that financial
literacy is always strongly and causally related to financial inclusion and that
the marginal effect of financial literacy on financial inclusion tends to be
largest in countries with lower income, a less developed financial sector, and
fewer bank branches.
Financial inclusion is related to financial stability in a number of ways.
By reaching out to more customers, banks attract cheap retail deposits,
thereby reducing reliance on volatile wholesale funding (Demirgüç-Kunt and
Huizinga, 2010). Rahman (2019) suggests that financial inclusion supports
financial stability by providing banks with more diversified sources of funding
and loan base. They note that individual financial institutions are more resilient
when they draw their funds from a large number of small savers, rather than
just a few big firms or entities, and when they lend to a large number of small
borrowers rather than a few big corporate clients. Khan (2011) points out
that diversification of bank assets (as a result of increased lending to smaller
firms) reduces the overall riskiness of the loan portfolio because of a smaller
relative size of any single borrower in the overall portfolio and a lower level of
volatility. It would also reduce interconnectedness risk. Moreover, Khan sees
the reduction in banks’ dependence on “non-core” financing, which tends to be
more volatile during a crisis, as a factor that reduces procyclicality risk.
Hannig and Jansen (2010) argue that low-income groups are relatively
immune to economic cycles, which means that including them in the finan-
cial sector boosts the stability of deposits and loans. It is also envisaged that
the availability of formal financial services reduces the appeal of unreliable
savings channels, such as local money lenders and the Ponzi schemes that
inevitably crop up in less regulated markets with less sophisticated and
inexperienced investors. Furthermore, the effectiveness of monetary policy is
172 Fintech
enhanced when a large group of potential small borrowers is enticed to take out
loans in response to a policy rate cut, rather than depending on the investment
whims of a small group of large borrowers.
Empirical evidence on the effect of inclusion on stability is provided by
Ahamed and Mallick (2019), who find that financial inclusion contributes to
financial stability and that the positive association is particularly pronounced
in the case of banks that have a higher customer deposit funding share and
lower marginal costs of providing banking services. However, it seems
far-fetched to suggest that financial inclusion can promote income equality at
the household level, thereby reducing the likelihood of system-wide decline in
consumption that could cause unexpected withdrawals from bank accounts or
increased incidence of non-performing bank loans. It is, however, plausible to
suggest that financial stability can lead to greater financial inclusion because
profitable, liquid and well-capitalised banks are in a better position than weak
banks to shoulder the upfront costs of reaching out to previously underserved
markets, taking chances with new products and services to grow new clienteles.
A number of studies suggest both positive and negative ways in which
financial inclusion could affect financial stability, which is why Morgan and
Pontines (2014) raise the question of whether financial stability and financial
inclusion are substitutes or complements. They examine the effects of various
measures of financial inclusion on some measures of financial stability,
including bank non-performing loans and bank Z-scores. They find evidence
indicating that a bigger share of lending to small and medium-sized enterprises
(SMEs) boosts financial stability, mainly by reducing non-performing loans
and the probability of default.
It has been observed that expanding access to credit without strong super-
vision poses risks for both financial institutions and their customers. Certain
policies associated with financial inclusion efforts, such as credit quotas and
interest rate caps, can have destabilising effects in some contexts. This can
happen when policies distort incentives for lenders and borrowers, thereby
reducing asset quality or providing weak incentives for new banks to enter
the market. Imboden (2020), who talks about synergies in the presence of
trade-offs, suggests that reinforcement of synergies between stability and
inclusion and mitigation of the associated risks can be achieved by apply-
ing policy and regulatory enablers of digital financial inclusion, loosening
constraints on financial inclusion with stability in mind, and by applying
a risk-based approach to regulation. Likewise, Melecky et al. (2016) talk
about synergies while suggesting that a rapid increase in financial inclusion
in credit can impair financial stability, because not everyone is creditworthy
or can handle credit responsibly. They point out that trade-offs between inclu-
sion and stability could arise as an unintended consequence of bad or badly
implemented polices. Cihak et al. (2016) examine a wide array of measures of
household and firm inclusion to estimate an overall trade-off between financial

inclusion and stability and find that synergies between inclusion and stability
are almost equally probable as trade-offs.
A summary of the literature on the inclusion–stability nexus is presented by
Roa (2014), who concludes that, “although additional research and analysis
is [sic] required, it is shown that greater access to and use of formal financial
intermediaries might reduce financial instability”. The following six reasons
are suggested as to why inclusion might (only might) reduce instability (or
boost stability): (i) more diversified funding for financial institutions; (ii)
more extensive and efficient savings intermediation; (iii) improved capacity
of households to manage vulnerabilities and shocks; (iv) a more stable base of
retail deposits; (v) restricting the presence of a large informal sector; and (vi)
facilitating the reduction of income inequality, thereby allowing for greater
political and social stability. It is a myth that income inequality can be reduced
through financial inclusion because inclusion is not the same as, neither is it
conducive to, income redistribution in one way or another.
8.5 THE EFFECT OF FINTECH ON FINANCIAL

INCLUSION
The literature identifies three aspects of the contribution of fintech to financial

inclusion. The first is that SMEs, and not only giants like Amazon, are reaping
the benefits of electronic payments, which also provide information about the
creditworthiness of customers. The second is what Vogit (2019) refers to as a
“democratisation of financial services”, by enabling non-traditional players to
enter the market and compete with already established firms. The third is the
inclusion of the unbanked and underbanked (particularly in developing coun-
tries), which is what we are interested in here. According to Tse et al. (2020),
fintech has always been paired with terms such as “financial inclusion”,
“unbanked” and “underbanked” (like bread and butter, as they put it).
Financial inclusion is a term that precedes fintech. According to Triodos
Investment Management (2019), fintech is associated with financial inclusion
3.0, which means that we have already witnessed financial inclusion 1.0 and
2.0. Financial inclusion 1.0 was a phenomenon of the late 1970s, when the
microcredit business showed that poor and low-income households are “bank-
able”. Financial inclusion 2.0 was witnessed in the 1990s, when microfinance
institutions became commercially viable through information technology and
back-office automation. Financial inclusion 3.0 is associated with the role
played by fintech in providing sophisticated financial services for unbanked or
underbanked households as well as SMEs.
The contribution of fintechs to financial inclusion is arguably realised by
offering technology-based financial services and products. Traditional finan-
174 Fintech
cial institutions may view the underbanked and unbanked as being too costly
to be served profitably, which is where fintechs come in. With respect to their
contribution to financial inclusion, Tse et al. (2020) classify fintechs into
five categories: game changers, snipers, atomisers, amplifiers and educators.
The game changers offer traditional banking products and services (such as
money transfers) at considerably lower fees and commissions. The atomisers
provide incumbent banks’ products with minimum price thresholds that are
too high for many to access. Examples are micro-credit, micro-insurance,
micro-savings, micro-pensions, micro-investments (also called fractional
trading) and low-cost “robo-advising”. The snipers offer products addressing
specific customer needs, including loan advances, specific mobile payments
and partial salary-taking. The amplifiers expand access to existing financial
products to a larger audience via more advanced risk calculation techniques.
The educators simplify the understanding of existing financial products.
Fintech enthusiasts reject any proposition that it is likely to aggravate insta-

bility and inclusion and exaggerate the benefits of fintech in this respect.
Fintech comes with risks and adverse “side-effects”, including system failure,
personal data mining, hacking, identity theft, aggressive digital credit offers,
cyber-security, data privacy, overpricing, over-lending and fraud. These
adverse consequences affect not only the rich, who are already included, but
also the poor, the subject of inclusion. This is so much the case because the
unbanked and underbanked typically have a low level of financial literacy.
Borrowers who miss a one-dollar repayment on time can quickly end up being
blacklisted, which can be costly and time-consuming for borrowers to turn
around. It follows that financial inclusion turns out to be financial exclusion as
a result of the operations of fintechs.
As for exaggeration, it is claimed that as financial exclusion has been iden-
tified by policy-makers as a key barrier to development, expanding banking
services to all has been prioritised by governments to make financial inclusion
a reality (Demirgüç-Kunt et al., 2015). This is an exaggerated claim because
there are more serious economic problems than financial exclusion, particu-
larly in developing countries, and because there is no evidence that exclusion is
a serious barrier to economic development. For 2000 years the world economy
did not grow and people lived in poverty, until the advent of the industrial rev-
olution when growth started to pick up. The reason was not finance but rather
technology and the accumulation of capital that made labour more productive.
Parasitic financial operations impede growth rather than boost it.
We are supposed to believe that greater access to finance has both social and
economic benefits, but what is the benefit of access to financial services for
someone living below the poverty line and suffering from food insecurity? It
is unlikely that this person will be better off because, thanks to fintech, he or
she can pay with a mobile phone, which they do not have anyway. We are sup-
posed to believe that financial inclusion, which is facilitated by fintech, boosts
savings (Aportela, 1999; Allen et al., 2016), reduces income inequality and
poverty (Burgess and Pande, 2005; Beck et al., 2007; Bruhn and Love, 2009),
enhances employment (Prasad, 2010), improves mental well-being (Karlan
and Zinman, 2010; Angelucci et al., 2013), encourages education (Flug et al.,
1998), helps with making better decisions (Mani et al., 2013), and enhances
new firm creation (Guiso et al., 2004; Klapper et al., 2006; Banerjee et al.,
2015). With propaganda like this, there is no wonder that the financial sector
has become the jewel in the crown, even though it involves mostly parasitic
activities, and that fintech is hyped on a continuous basis.
9. The regulation of fintech
9.1 THE NEED FOR FINANCIAL REGULATION
Fintech firms are financial institutions that use technology intensively; nev-
ertheless, they are still financial institutions. If financial regulation, the regu-
lation of financial institutions and markets, can be justified on some grounds,
then fintech firms must be regulated on the same grounds. However, different
financial institutions are regulated in different ways, with varying degrees
of stringency. If fintechs are different from traditional financial institutions,
they should be regulated differently. Again, it must be emphasised here that
“fintech” as used in this chapter refers to the new firms utilising technology to
provide financial services.
A current debate focuses on whether fintechs are similar to the unregulated
or lightly regulated shadow banking institutions. Irrespective of whether they
are similar to shadow banking institutions, they should not be exempt from
regulation, even though some would argue that the regulation of shadow
banking is undesirable. Fintechs should not be exempt from regulation on
the grounds that they are revolutionising finance and contributing to human
welfare. We have already seen that fintech is allegedly conducive to welfare
and prosperity because fintechs boost financial stability and inclusion and
help with the alleviation of poverty and reduction of inequality. These dubious
claims should not be used as a justification for exempting fintechs from regula-
tion or regulating them lightly. Naturally, there are those who believe that any
regulation of anything is bad and should not be resorted to.
An important justification for financial regulation is to prevent or reduce the
extent of malpractices and fraudulent behaviour in the financial sector, which
can contribute to financial stability. Consumer protection is another motive for
combatting fraud. Sherter (2010) quotes James Galbraith as saying that fraud
is the best theory to explain what caused the global financial crisis. He goes on
to suggest, “fraud was, is and will continue to be a central feature of financial
crashes, as recent history attests”. The GFC, according to Reurink (2016),
“revealed rampant fraud in the mortgage industry, Ponzi schemes perpetrated
in major investment funds, illegal manipulation of key benchmark rates, and
widespread mis-selling of complex financial derivatives instruments to both
176
The regulation of fintech 177
unknowledgeable and naive investors.” In essence, excessive risk-taking with

other people’s money is fraud.
Fraud is more rampant in the financial sector than in other sectors of the
economy because the commodity traded in the financial sector is money; this
makes it tantalising for fraudsters to commit fraud. Moreover, fraud in the
financial sector can be very difficult to detect, given that “financial innova-
tion” has created a high level of complexity that, together with the so-called
“creative accounting”, makes the detection of fraud a difficult task (perhaps
the same can be said about technology). Hutton (2010) argues that London
and New York have become the centre of an international financial system in
which the purpose of banking is to make money out of money (preferably by
illegal or dubious means)—and where the complexity of “innovation” allows
extensive fraud and deception.
An international taskforce has found that scams, misinformation and aggres-
sive marketing of risky financial products proliferated during the pandemic,
adding to a climate of “extreme volatility” for investors (Vickovich, 2020).
The International Organisation of Securities Commissions (IOSCO) observed
a “notable surge in new retail investors participating in markets for the first
time”, which “also sparked an influx of new corporate criminals and scam-
mers”. In its report, the IOSCO said, “common types of harmful behaviour
during stress times include mis-selling, mis-labelling and misleading disclo-
sure, and other such investment advice”. In particular reference to the fintech
industry, the report notes that “misconduct relating to complex and leveraged
products … remains ‘prevalent’ in markets around the world, spurred by the
‘increase in online general share trading’ on low-cost digital platforms, which
has come to be known as the Robinhood phenomenon” (that is, retail investors
utilising commission-free brokerage platforms such as Robinhood).
It follows that financial regulation can be justified on the grounds of two
inter-related issues: financial stability and consumer protection from fraud and
excessive risk-taking (the moral hazard problem). If fintechs are in a position
to contribute to financial instability and indulge in fraud, they should be regu-
lated. However, fintechs come in various shapes and forms and provide differ-
ent kinds of products and services, which means that they cannot be regulated
in the same manner across the board. As stated earlier, the question whether
fintechs are similar to the unregulated or lightly regulated shadow banking
institutions may determine how they should be regulated. The problem is
that there is no consensus on the necessity and means of regulating shadow
banking.
178 Fintech
9.2 FINANCIAL FRAUD: PONZI SCHEMES AND

ALL THAT
While the term “financial innovation” means innovative design of financial

products for the benefit of consumers, the financial sector is also home to inno-
vative scams, cons, swindles, and fraud involving mis-selling and other means.
Reurink (2016) defines financial scams, cons and swindles as “deceptive and
fully fraudulent schemes in which fraudsters, often assuming a false identity
or exhibiting a misplaced aura of trustworthiness, convince, mislead, or induce
people to voluntarily interact with the fraudster and, ultimately, to willingly
hand over money or sensitive information related to their personal finances.”
Once the fraudster has succeeded in inducing the victim to surrender personal
information (which may include account numbers, credit card details, pass-
words, user IDs, etc.) the fraudster uses this information to indulge in fraudu-
lent money transfers. Thus, the scheme involves two stages: (i) obtaining the
victim’s identifying information, and (ii) the subsequent use of the information
for fraudulent financial gain. In advance-fee frauds, victims are promised
large sums of money if they provide upfront an initial financial payment to the
scammer. These payments are typically portrayed as funds needed to cover
initial costs, such as delivery charges and levies. Under the pretext of “unfore-
seen problems”, the victim is lured into an endless series of fees that continue
until the victim runs out of money or they come to their senses.
Fraudulent financial mis-selling, which is common and more relevant to
fintechs, involves “deceptive and manipulative marketing, selling, or advising
of a financial product or service to an end user, in the knowledge that the
product or service is unsuitable for that specific end user’s needs” (Reurink,
2016). In this case, the seller of a financial product or the financial adviser
promoting the product makes misleading and highly speculative statements
about the future performance of the product or fails to describe accurately the
suitability of the product for a specific customer. For example, the mis-selling
of interest rate derivatives is common because of their complexity and opaque-
ness. Another example is predatory lending, involving the mis-selling of loans
and mortgages. The mis-selling of mortgages in particular involves a wide
range of practices that include charging excessive fees, convincing borrowers
to accept bad deals, offering unaffordable loans that do not match the borrow-
er’s ability to repay, and inducing a borrower to refinance a loan repeatedly
in order to charge fees each time the loan is refinanced. The latest mortgage
scam is negative interest mortgages, where the bank allegedly pays customers
for taking mortgages or reducing the outstanding amount by more than the
payment made by the borrower. In reality, borrowers receive 0.5% (in terms of
additional payments towards the mortgage) while required to pay 3% in fees

and commissions, or something like that.
Mis-selling may also involve life insurance and pension schemes, as well
as interest rate and foreign exchange hedging products. A successful business
approaching a bank to finance business expansion may be persuaded to buy
inappropriate hedging products that result in significant additional costs, even
forcing some into insolvency. Foreign exchange hedging products are sold to
unsophisticated clients (such as travel agencies), who are persuaded to enter
some very speculative and complex derivatives that involve triggers and
knock-out rates (exotic options). Last, but not least, mis-selling may involve
synthetic CDOs, a useless and toxic product of financial engineering with an
obscure risk profile.
In recent years, the case that has attracted by far the most intense media
attention and scrutiny is the multi-billion Ponzi scheme perpetrated by Bernard
Madoff. This particular Ponzi scheme fits the description of Povel et al. (2007)
that financial fraud tends to occur during bubbles and gets exposed when the
bubble bursts. The scheme flourished in the 1990s and 2000s and collapsed
in late 2008 as the demand for cash by investors intensified during the global
financial crisis. For a long time, Bernie Madoff was widely considered to
have a magical touch as a money manager, which made his hedge fund, Ascot
Partners, a magnate for investors, including celebrities. Ascot’s monthly
reports were voluminous, showing numerous (fictional) transactions in and out
of the market every day. Madoff was supposed to have a “black box” model
that generated buy and sell signals, giving the impression that the fund was
one of the most active traders in the market. In reality, however, Madoff was
running a Ponzi scheme whereby he would distribute dividends to old clients
from the fresh money received from new clients while syphoning millions and
billions of dollars to the unknown. We have to bear in mind that fintech com-
panies that provide portfolio management services use sophisticated models
that generate buy and sell signals.
Those committing financial crime are not all like Madoff. The perpetrators
of financial crime tend to range from petty thieves to heavy-hitting global
crime syndicates. They include organised criminals conducting large-scale
operations and individual criminals, such as hackers with no connection to the
institution, customers, suppliers and contractors who have some knowledge
of the business. They also include business leaders, such as executives and
board members stealing from the company or misrepresenting performance
(for example, by manipulating financial data to exaggerate profits and earn
undeserved bonuses accordingly). Last, but not least, employees may indulge
in stealing funds in some way and taking steps to cover their tracks. Outside
criminals often target employees as partners to help carry out these activities.
180 Fintech
For the purposes of detection, interdiction and prevention, institutions tend

to distinguish between fraud and financial crime (Hasham et al., 2019). This
distinction is not based on law, as regulators sometimes view it as a product of
organisational silos. Nevertheless, financial crime has generally meant money
laundering and a few other forms of criminal activity, including bribery and
tax evasion and involving the use of financial services in support of criminal
enterprises. It is most often addressed as a compliance issue, as when financial
institutions avert fines with anti-money laundering activities. Fraud, on the
other hand, generally designates a host of crimes, such as forgery, credit scams
and insider threats, involving deception of financial personnel or services to
commit theft. Financial institutions have generally approached fraud as a loss
problem, lately applying advanced analytics for detection and even real-time
interdiction.
9.3 TECHNOLOGY-ENABLED FRAUD
The World Economic Forum notes that fraud and financial crime constitute
a trillion-dollar industry, in which the participants commit forgery, credit
scams and insider threats, involving deception of financial personnel or
services to commit theft. Technology plays a big role in enabling this kind
of criminal activity, as the Forum asserts that financial crime is inherent in
automation and digitisation (Hasham et al., 2019). The use of technology
is a double-edged sword as far as fraud is concerned. On the one hand, it is
arguable that technology can be used to detect and prevent (or at least reduce)
financial fraud. On the other hand, technology enables fraud. A technolog-
ically inept criminal may use a gun or a knife to rob someone who has just
got some cash from an ATM. A tech-savvy criminal hacks the victim’s bank
account and wipes out the balance with a click of a mouse.
While technology serves investigators and prosecutors in their fight against
crime, it has also given criminals an easy way to indulge in fraudulent prac-
tices. The question is whether technology leads to more or less fraud and
financial crime. Choudhary (2020) reflects this mixed feeling about the effect
of technology while Zasarsky (2019) uses the expression “double-edged
sword”, suggesting, “whether they originate internally or from third-party
partners or external sources, a common element in many financial crimes is
technology”. As technology evolves, criminals become increasingly sophis-
ticated in committing crime. In some cases, they plant malware that remains
dormant for months while it learns about a company’s network before activat-
ing itself. Blockchain is one area where both criminals and law enforcement
see opportunity.
While financial crime has existed since people first exchanged currency for
goods and services, technology is a game changer as far as financial criminals
and fraudsters are concerned. It is widely believed that technology (like finan-
cial engineering) is conducive to financial fraud. In response to the inaugural
KPMG global banking fraud survey, 61% of the participating banks reported
an increase in external fraud in value and volume over the period 2016–18
(Faulkner et al., 2019). Banks across the world said that cyber-related fraud,
often leveraging information obtained from data breaches, were their most sig-
nificant fraud challenge, particularly because an increasing proportion of bank
customer interactions are conducted through digital channels (the essence of
fintech). They reported an increase in cyber-attacks, scams, identity theft and
“cardholder not present” fraud. Fraudsters are finding new ways to steal from
banks and their customers, increasingly switching from account takeover to
scams by manipulating and coercing customers into providing access to their
bank accounts or into making payments to the fraudsters.
The accelerated shift to online banking and mobile transactions has forced
financial institutions to re-evaluate the resilience of their fraud management
strategies. Choudhary (2020) argues that technology itself is the best tool for
beating the new techniques used by fraudsters because “it can directly under-
mine some of the efforts of financial criminals”. She suggests that technology
enables financial investigations by digging through mountains of data to find
links that criminals tend to overlook. Artificial Intelligence, for example,
can be used to monitor communications and data that indicate misconduct
or criminal activity. Lochy (2019) suggests that technology enables the use
of risk-based authentication, whereby a fraud-detection engine is used to
formulate a risk profile that is used to determine the required level of security
(authentication). Customer analytics can be used to identify irregularities in
behaviour.
As we saw in Chapter 4, the technologies that enable intelligence to be
gathered from a vast amount of information go beyond artificial intelligence
to include machine learning, cloud computing, robotics and the Internet of
Things. Cotter (2019) argues that these technologies “are transforming the
approach to compliance, streamlining processes such as Know Your Customer
(KYC) and helping to uncover previously hidden patterns and networks
of potential financial crime activity”. In a worldwide survey conducted by
Refinitive (2019), 97% of the respondents expressed the view that technology
can contribute significantly to the prevention or alleviation of financial crime,
with cloud-based data and technology being the top choice, followed by AI
and ML tools. However, the same survey shows that financial institutions are
struggling to win the fight against financial crime, as 73% of the respondents
said that they focus on “box ticking” to be compliant with regulatory require-
ments rather than trying to prevent fraud.
A more specific list of the kinds of technology used to fight financial crime
is presented by Burns (2018), where the top five are AI, blockchain, biom-
182 Fintech
etrics, predictive analytics, and application programming interface. AI and

machine learning are used to identify patterns of behaviour from large data
sets, which can be used to detect financial crime. Blockchain provides a high
level of security that makes it difficult to commit financial crime. Biometric
identification is used for authentication to enhance security. Predictive models
allow financial institutions to respond to new attacks rapidly. API can be used
to formulate risk-based financial crime strategies that allow for quick reactions
to crime scenarios. On the other hand, Marria (2019) suggests that criminals
are targeting institutions with new, and potentially less secure, technology,
wondering whether technology is helping or hindering the fight against finan-
cial crime.
9.4 SCAMS, SCANDALS AND CORPORATE

FAILURE IN FINTECH
We have seen that technology is both conducive to and the means to fighting
financial crime. Several questions arise as a result of the advent of the fintech
industry and the new, technology-driven modes of providing financial ser-
vices. Will the spread of fintech lead to more fraud and financial crime? Do
fintechs commit fraud? What is the incidence of corporate failure in the fintech
industry? The answers to these questions are relevant to the issue of how and
how far the fintech industry should be regulated.
Starting with the first question of whether the spread of fintech will lead
to more financial crime, the answer seems to be in the affirmative according
to the views of observers and commentators. Harrington (2017) argues that
fintech start-ups aim to disrupt current practices and do it fast, but disruption
can also create new opportunities for fraud. He also suggests that the lack of
experience in the provision of financial services may be related to increased
vulnerability to financial crime. Likewise, Sharma (2021) argues, “technology
has made financial transactions ridiculously easy”, as hundreds of millions
are transferring billions with a few taps on a screen. Not surprisingly, he adds,
“fraud and illegal activity has picked up in the fintech space, too”.
The best way to answer the second question, whether fintechs commit
fraud, is to tell some real-life stories. The first is that of the German fintech
“unicorn” Wirecard, which is described by Birch (2020) as “one of the biggest
corporate frauds in history”. The company offered its customers electronic
payment transaction services and risk management, as well as the issuing
and processing of physical cards. The Wirecard fiasco consists of a series of
accounting scandals that resulted in the insolvency of the company. On 25
June 2020, Wirecard filed for insolvency after revelations that €1.9 billion was
“missing”, and the termination and arrest of its CEO. Since then, questions
have been raised with regards to the regulatory failure on the part of German
regulator, Federal Financial Supervisory Authority (BaFin). Questions have

also been raised on possible malpractices of the company’s external auditor.
Birch (2020) describes the event as “pretty scandalous and clearly evidence of
systemic failure in regulation and auditing”.
Another example is an event that took place on 20 April 2021, when the US
Attorney for the Southern District of New York (Audrey Strauss) announced
that Justin Cheng (also known as Justin Jung) has pled guilty to major fraud
against the US government, bank fraud, securities fraud and wire fraud in
connection with the multiple schemes that he perpetrated (U.S. Attorney’s
Office, 2021). Specifically, he engaged in a fraudulent scheme to obtain over
$7 million in government-guaranteed loans designed to provide relief to small
businesses during the pandemic. He obtained due diligence fees from various
start-up companies as part of an advance fee scheme. Cheng allegedly lied
about ownership of his companies, the number of people employed, and how
any loan proceeds would be applied, using forged documents for this purpose.
In addition, Cheng committed securities fraud, by lying to investors, in his
blockchain-based peer-to-peer lending platform, and wire fraud by engaging
in an advance fee scheme.
A tragic example is that of the story of Alex Kearns and the fintech firm
Robinhood, which has become a popular entry point to the stock market for
first-time investors. It has grown from having one million users in 2016 to
more than thirteen million in 2020. According to Fitzgerald (2021), Robinhood
has come under scrutiny for its “gamification” of investing, for alleged
predatory marketing practices, and for the access it gives its clients without
proper investing education. In 2020, Massachusetts regulators filed a com-
plaint against Robinhood, accusing the fintech firm of predatory marketing
on inexperienced investors. In December 2020, the Securities and Exchange
Commission charged Robinhood with misleading customers about how the
stock-trading app makes money and failing to deliver the promised best exe-
cution of trades. On 8 February 2021, Robinhood was sued by the family of a
20-year-old trader, Alex Kearns, who killed himself in June 2020 following the
realisation that he had accumulated huge losses, with a negative cash balance
of $730,165. The complaint filed by his parents “centers on Robinhood’s
aggressive tactics and strategy to lure inexperienced and unsophisticated
investors, including Alex, to take big risks with the lure of tantalizing profits”
(Fitzgerald, 2021). Robinhood’s “reckless conduct directly and proximately
caused the death of one of its victims”, the complaint said. Well, this is an
example of how fintech is conducive to financial inclusion by encouraging
the young and vulnerable to trade stocks and even derivatives. I am sure that
Alex’s parents wish that their late son had remained excluded from trading.
In March 2021, it was announced that the Criminal Investigation Division
of the US Internal Revenue Service was collaborating with the tax authorities
184 Fintech
in other countries to extract signs of tax fraud, targeting financial technology

and cryptocurrency companies. Cohn (2021) believes that fintech companies
may get swept up in such investigations and quotes Ryan Korner, executive
special agent in charge of the Los Angeles field office of the IRS Criminal
Investigation, as saying, “one of these fintech companies could potentially be
the target of an investigation if we find any conspiracy type elements where it
looks like they were either not following regulations or in some way conspir-
ing with a taxpayer or a criminal to commit criminal activity”. Korner also said
the following: “coming out of the 2019 challenge, we had 17 fully developed
leads and approximately a dozen operations that are ongoing”.
As we have seen, cryptocurrencies provide the most conspicuous avenues
for scams in the whole of the fintech industry. Since crypto-related scams are
countless, it would not hurt to mention some more, on top of the stories told in
Chapter 7. Jenkinson (2018) suggests, “cryptocurrencies have revolutionized
the way the world looks at transactions – but they’ve also facilitated some
monumental scams over the past nine years”. He also argues, “while the smart-
est minds have created some game-changing companies backed by the power
of Blockchain and cryptocurrencies, nefarious minds have also jumped on the
bandwagon, fleecing unwitting investors in elaborate scams.”
A list of the biggest ICO scams has been compiled by Jenkinson (2018).
One example is that of Pincoin and iFan, both of which have been classified as
“multi-level marketing scams”. iFan was advertised on a social media platform
for celebrities to promote their content to fans, while Pincoin was promising
40% monthly returns on investment. All of a sudden, the issuing company
disappeared. Another example is Bitconnect, a Ponzi scheme that discontinued
operations in the wake of a cease-and-desist order from two American finan-
cial regulators. OneCoin was another venture labelled a “clear Ponzi scheme”.
Plexcoin was labelled a “typical return on investment Ponzi scheme”, as the
issuing company was promising investors over 1300% return on investment
per month before the US Securities and Exchange Commission (SEC) ordered
the company to stop operations. And there is more where these came from
(Jenkinson’s list).
Now, we consider the third question pertaining to corporate failure in the
fintech industry, which occurs as a result of fraud and for other reasons.
Hundreds of fintech start-ups fail every year for a variety of reasons, from
last-minute funding falling through to legal action or just a failure to generate
revenue. Many manage to wind their businesses up quietly, while others
explode, suddenly leaving staff out of pocket and investors angry (and most
likely bankrupt).
Five reasons for the failure of fintechs are identified by Boyd (2021):
underfunding (which is the most common reason for failure), wrong choice
of investment partners, compliance problems, fierce competition (ease of
entry coupled with the difficulty of establishing a foothold), and economic

downturn, which makes it difficult to raise capital in a timely manner. Shevlin
(2019) adds two more reasons. The first is thinking that a fintech start-up
is the same as any other tech start-up, which implies failure to understand
psychological behaviour around financial affairs. The second is competing
solely on cost by providing cheap services, overlooking the fact that banks and
other traditional financial institutions have massive scale advantages. Bouvier
(2016) makes the same point by identifying as a cause of failure “thinking that
competing on cost will win the day”. He also emphasises legal and regulatory
reasons, such as failure to understand regulatory rules and disregarding com-
pliance as a nuisance.
The lack of funding, as a reason for the failure of fintech start-ups, is
emphasised by Murthy et al. (2019), who attribute this problem to “too many
models”, “too little clarity”, “a crowded space with many ideas” and “few
metrics for success”, which discourage potential funders from engaging with
fintechs. Even if the underlying idea is good, it is difficult to assess the opera-
tional performance of early-stage fintechs, which makes it difficult for funders
(such as prospective investors and established financial institutions) to deter-
mine whether a start-up has adequate skills, knowledge and execution capabil-
ities to bring its ideas to market successfully. They refer to the “funding gap”
between the development of a working prototype and a marketable product,
which is likely to determine the success or failure of the project. Murthy et al.
(2019) also suggest that in the absence of metrics that can be used to determine
a firm’s capabilities and risks, regulators struggle to regulate and supervise
new kinds of fintech services.
Some reasons for the failure of fintechs, even before they start, have been
identified as mistakes. Agrawal (2021) argues “startups always kick off on
a wave of optimism, often with the desire to change the world”, but they soon
“hit rough water”, particularly when they want to change the world overnight.
Fintech start-ups seem to overlook considerations such as uniqueness of the
product (doing something better than anyone else), the existence of a market
for the product, whether the product serves any meaningful purpose, the
formulation of a marketing plan, and the continuity of demand. It is not clear
in what way paying by using a mobile phone, as opposed to cash, amounts to
“changing the world”.
All of these considerations and reasons for failure have been observed in
reality. Boyd (2021) gives examples of real fintech firms that failed for one
reason or another. Table 9.1 reports some examples of failed fintechs and
the reason for failure, which include funding difficulties, fraud, inadequate
demand, strategic factors and takeovers. Wonga is an interesting case, because
the reason for failure was that the company’s AI system lent money to people
who could not afford to pay back (so much for making the right lending
186 Fintech
decisions by utilising AI). Irrespective of the reason, failure means losses for
funders and customers, with negative consequences for inclusion and stability.
This is where regulation comes in.
Table 9.1 Examples of failed fintechs
Company Year Activity Reasons for failure

established
Wirecard 1999 Payment processing and risk Fraud
management, issuance of credit and
prepaid cards, relationship management
services for corporate customers
Pay By Touch 2002 A biometric payment service Bankruptcy
Wonga 2006 Short-term online cash loans The company’s AI was
lending out funds to people
who could not afford to
repay loans
Simple 2012 Online banking and lending Strategic factors
ScaleFactor 2013 Software for automating and The pandemic wiped out
streamlining back-office tasks demand
GoBear 2014 A search engine for insurance and Inability to raise funds due
financial products to the pandemic
Oranj 2014 Providing advice on portfolio No explanation given
management, client portal, rebalancing
and financial trading
Clarity Money 2016 Expense-tracking and bill negotiation Acquired in 2018 by
app Goldman Sachs
Xinja 2017 Money transfers, deposit accounts, bill Increasingly difficult
payments, debit cards capital-raising environment
Bó 2019 Digital banking Pandemic
9.5 FINTECH RISKS FROM A REGULATORY

PERSPECTIVE
The advent of fintech has brought with it increasing reliance on technology as

well as closer interconnectedness and complexity. These, as well as economies
of scale in IT applications, have led to the emergence of new risks for consum-
ers, firms and financial stability. According to KPMG (2019), the risks posed
by the advent of fintech can be classified according to who is exposed to these
risks: (i) risks to consumers and investors, (ii) risks to financial services firms,
and (iii) risks to financial stability.
At least five kinds of risk to consumers are associated with fintech. The
first is the lack of understanding, as a typical consumer is unlikely to have full
knowledge of the underlying products. The second is the risk of mis-selling
of products as technology may inadvertently (or intentionally) provide new
means for misleading consumers, exposing them to fraudulent activities. The
third is the risk of financial exclusion, as increasing digitisation may exclude
the old, the vulnerable, and those with computer illiteracy. The fourth pertains
to data, as consumers are vulnerable to the loss of data, and they may not
understand how and for what purpose their data are used. The fifth is reduced
competition as markets get dominated by a small number of large firms
because of economies of scale in technology and data handling.
Risks to firms arise because the development of fintech has led to intensi-
fication of competitive pressures, which means that most firms will struggle
to survive. Then there is the risk of governance, as board members and senior
management may not have sufficient understanding of fintech and related
risks, which means that they may be unable to identify, measure, manage and
control the risks arising from intensive use of technology. Technology risk,
which arises from increased reliance on technology, affects operational resil-
ience. Also problematical is the increasing use of outsourcing to third-party
providers of technology and data. Fintech may prove to be yet another example
of the familiar story of business developments running ahead of the ability of
some firms to put in place the systems and controls necessary to manage the
underlying risks.
Firms are exposed to the risk of data handling. While they are expected to
meet existing data protection requirements, they also need to take a proactive
approach to the possibility that regulators entertain the idea of a fundamental
re-thinking of data privacy, security and protection. The potential for misuse
and concerns about data privacy and protection intensify as customer data
become more valuable and sought after. Furthermore, data limitations may
make it difficult for firms to validate outcomes, particularly when artificial
intelligence is used to analyse data sets for the purpose of generating solutions.
Further risks pertain to compliance with anti-money laundering require-
ments. Some fintech applications raise difficult legal questions, particularly
when cross-border operations extend across different national legal and regu-
latory frameworks. As far as business model viability is concerned, regulatory
requirements may have an impact on a firm’s strategy and business model
because some business opportunities may be constrained by regulators (for
example, restrictions on sales of some products to more vulnerable and less
sophisticated consumers and retail investors). Firms may also need to adjust
their products in response to regulatory requirements.
The fintech industry is still small relative to the size of the traditional finan-
cial system, and no new fintech firm is big enough to be too big to fail or qualify
188 Fintech
as a systemically important financial institution. At present, therefore, the risk

posed by fintech to financial stability is fairly small. However, potential risks
to financial stability may arise from a number of fintech-related developments,
whose magnitude and precise nature may not be accurately trackable, owing
to the unavailability of sufficient information. These developments pertain
to concentration, alternative channels of financial intermediation, herd-like
behaviour, the use of crypto-assets, and system-wide vulnerabilities. As far
as concentration is concerned, a high concentration of fintech firms as the
dominant players in the market may lead to the rise of a systemically important
entity. Alternative channels of financial intermediation pertain to non-bank
providers of credit, payment systems and other financial services, which may
grow rapidly without proper regulation. Herd-like behaviour, which is a source
of concern, may arise from the widespread use of similar machine learning and
other techniques to guide lending and trading. Although the use of cryptos is
relatively low, there are concerns that increasing use could lead to financial
instability as a result of price volatility and the potential impact of cryptos on
payment systems. Regulators are also concerned about system-wide vulnera-
bilities arising from the increasing levels of operational risk and cyber risk in
the financial system.
The Basel Committee on Banking Supervision has identified a “wide variety
of risks” associated with fintech, such that these risks “cut across various
sectors and often blend both tactical and strategic risk elements”, particularly
with reference to the banking sector (BCBS, 2018). Strategic risk is the risk to
the profitability of individual banks arising from a rapid unbundling of bank
services to fintech firms. Potential losses could be incurred by existing finan-
cial institutions as a result of declining market share or profit margin if new
entrants are able to use technology more efficiently to deliver less expensive
services that meet customer expectations more effectively. Operational risk
is seen as having two dimensions: a systemic dimension and an idiosyncratic
dimension. The systemic dimension of operational risk is that the rise of
fintech leads to more IT interdependence between incumbent financial institu-
tions and fintech firms. The idiosyncratic dimension, on the other hand, is that
individual firms may find it difficult to manage and control operational risk as
a result of increasing complexity of the system. Compliance risk arises because
banks will need appropriate AML monitoring processes if they process trans-
actions on behalf of fintech companies’ customers. Fintech brings with it
outsourcing risk, the possibility that ambiguity could arise with respect to the
responsibilities of various participants in the value chain when more parties
are involved in the offering of a financial product. Naturally, new technologies
and business models can lead to a rise in cyber risk if controls do not keep pace
with changes. Last, but not least, the use of new technology and the emergence
of new financial service providers can aggravate the volatility of existing bank
funding sources, leading to a higher level of liquidity risk.
Figure 9.1 depicts the regulatory response to the fintech risks affecting
consumers, firms and financial stability. Regulators respond to the risks to
which consumers and firms are exposed by adjusting the regulatory perimeter.
Specific responses to risks to consumers include measures of consumer and
data protection. Specific responses to the risks facing firms include govern-
ance, risk management and operation resilience. As far as risks to financial sta-
bility are concerned, the response takes the form of data analysis and emerging
regulatory interventions. Perhaps it is appropriate here to shed some light on
some of the underlying concepts.
Figure 9.1 Regulatory response to fintech risks
The regulatory perimeter is used to determine which activities require author-

isation and what level of protection consumers can expect for the financial
products they purchase. This is why it is relevant to the risks facing consumers
and firms. The response to these risks requires continuous adjustment of the
regulatory perimeter to cover new products that emerge as a result of the
adoption of new technologies. The perimeter, which is specified through
legislation, is basically the legal boundary determining what is regulated and
not regulated. In its first annual report on the perimeter, the Financial Conduct
190 Fintech
Authority (the UK financial regulator) describes the perimeter as “what we

do and don’t regulate” (FCA, 2019). A number of areas are either entirely
or partly outside the perimeter, including (i) unregulated firms that contact
consumers with offers of free pension reviews, (ii) investment consultants
that advise pension fund trustees on matters such as asset manager selection,
(iii) proxy advisors that issue voting advice and recommendations, (iv) online
cross-border services, (v) crypto-assets, and (vi) mini-bond issuers. Indicative
of how the perimeter is relevant to both customers and firms is that the FCA
raises the following points as challenges to the perimeter: confusion over how
customers are protected, firm activity outside the perimeter affecting public
interest objectives, and rapidly evolving markets and business models.
The meaning of “governance” with respect to the regulatory response is that
the boards and senior management of firms should be in a position to under-
stand and manage fintech-related risks effectively. There should be active
board-level engagement on operational resilience more generally and clarity
of senior management responsibilities and accountabilities for fintech applica-
tions. In other words, board members and senior management must know what
they are doing when it comes to the implementation of new technologies rather
than using the usual excuses in the event of a mishap: “we didn’t know” and
“they told me it would be OK”.
Operational resilience refers to the ability of a firm to adapt rapidly to
changing conditions, including the resilience of systems and processes and
more generally the ability of the firm to continue operating following disrup-
tive events. The two words “systems” and “processes” are both in the BCBS’s
definition of operational risk. The BCBS (2020) defines operational resilience
as “an outcome that benefits from the effective management of operational
risk”. Operational disruptions can be minimised through risk identification and
assessment, risk mitigation (including the implementation of controls), and
ongoing monitoring. In this sense, an operationally resilient financial institu-
tion is less likely to incur operational losses from disruptions. While it may not
be possible to avoid certain operational risks, such as a pandemic, it is possible
to improve the resilience of operations to such events.
A risk governance framework is required for an adequate execution of
the function of risk management. Regulators are concerned about core risk
governance competencies of identifying, managing, measuring and controlling
risks and having the appropriate resources, skills and expertise to deliver an
effective risk management function. Depending on the business activities and
fintech applications adopted by a firm, this is likely to cover at least the devel-
opment of new products and services, outsourcing, the use of artificial intelli-
gence and the automation of both front- and back-office tasks, technology risk,
cyber-security, operational resilience, anti-money laundering and conduct risk.
9.6 THE REGULATION OF FINTECH: GENERAL

CONSIDERATIONS
As is the case with other segments of the financial sector, the fintech industry
must be subject to regulation for the purpose of consumer protection and the
maintenance of financial stability. According to KPMG (2019), the regulatory
response to fintech has evolved through three stages. In the first stage, the
focus was on the benefits of fintech and the desire to support the adoption
of financial technology. Accordingly, regulatory intervention took the form
of fine-tuning to deal with the impact of fintech on the provision of financial
services. The second stage came with the progress of fintech, as regulators
began to worry increasingly about the risks faced by customers, as well as
risks to financial services firms and financial stability. In the third stage, which
is ongoing, regulators have been taking specific actions in response to these
risks. These actions have led to the development of international standards,
which have predominantly taken the form of high-level principles, while
national implementation varies across jurisdictions. The third stage is also
characterised by the implementation of prescriptive national rules and shifts in
supervisory priorities.
The list of regulatory responses to fintech-related risks has been growing
as the adoption of technology continues, leading to the evolution of associ-
ated risks. While it started as a collection of high-level principles or reliance
on existing regulatory requirements, legislation and rules, the response has
evolved into a more detailed application of new rules and guidance to specific
fintech-related activities. However, regulators have not yet come up with
a one-for-one mapping of regulatory responses to each identified risk, even
though a mapping like this is on the agenda.
An example of the general principles is the “ten considerations” for banks
and their supervisors set out by the Basel Committee on Banking Supervision
(BCBS, 2018). These principles pertain to the need to ensure safety and
soundness and high compliance standards without inhibiting beneficial inno-
vation in the banking sector, the key fintech-related risks, the implications for
banks of the use of innovative enabling technologies and the growing use of
third parties, cross-sectoral co-operation between bank supervisors and other
authorities, international co-operation between bank supervisors, and adapta-
tion of the supervisory skill set. They are also about potential opportunities
for supervisors to use innovative technologies (“suptech”), the relevance of
existing regulatory frameworks for new innovative business models, and key
features of regulatory initiatives set up to facilitate fintech innovation.
As in Basel I, II and III, these are general principles that guide bank regula-
tors. The emerging regulatory problem, however, does not lie with traditional
192 Fintech
banks but rather with emerging fintech firms. Despite the growing number of
sets of fintech-related international principles and standards, the implementa-
tion of these principles and standards remains very uneven and inconsistent
at a national level, while some countries have introduced very detailed reg-
ulations in some specific areas. Figure 9.2 shows a mapping of regulatory
responses to some fintech activities. The following is a brief description of
regulatory responses.
Figure 9.2 Mapping of regulatory responses to fintech activities
Fintech developments raise questions about where the regulatory perimeter

should be drawn—that is, deciding on what is and is not to be regulated. This
response is particularly relevant to crypto-assets, crowdfunding and payment
systems. In general terms, the perimeter is moving outwards, which means that
some firms and activities currently outside the perimeter may find themselves
subject to regulation in the future. As the perimeter moves outwards, regulation
becomes more intensive. For example, the regulatory requirement concerning
the provisions governing crowdfunding, which emphasise clear communi-
cations and risk warnings, has expanded to focus on holding capital-type
resources to protect funders in some circumstances, putting in place adequate
procedures for credit risk assessment, governance, systems and controls, and
how to handle complaints. Fintech credit licence applications approval focuses

on governance, internal controls, operations, capital and liquidity.
Consumer protection covers disclosure to customers and limits on retail
investor access, as well as data protection. Regulatory requirements with
respect to consumer protection include (i) transparency and disclosure to
boost consumer awareness of the nature and risks of fintech products, (ii)
the prohibition or imposition of limits on the sale of some products to retail
customers, and (iii) re-writing the rules of business conduct to govern fintech
activity. As far as data protection is concerned, refined regulatory measures
may be required to match the evolution of this industry even though existing
data protection legislation already covers some of the data protection issues
arising from fintech. New data-related developments pertain to the use of arti-
ficial intelligence and distributed ledger technology, and to the general trend
towards the gathering of an ever-broader range of financial and non-financial
data. The regulatory objective in this respect is to come up with an appropriate
framework that governs the gathering, storing, sharing and use of data, both
domestically and cross-border.
With respect to governance and risk management, regulators are working on
guidelines to ensure that boards and senior management have sufficient under-
standing of the fintech applications used by their firms, which is a pre-requisite
for effective risk management. Firms are also required to identify clear
individual senior manager responsibilities and accountabilities for managing
fintech-related risks, such as algorithmic trading, cyber-security, outsourcing
to third-party service providers, and operational resilience.
Some fintech developments have generated regulatory responses calling for
dealing with emerging fintech-related risks within the overall risk manage-
ment framework. These risks pertain to money laundering and market abuse,
particularly in relation to the use of cryptos. Also included are the risks arising
from the use of distributed ledger technology in payment, clearing and settle-
ment systems—more generally, in the storing and validation of transactions
data. Further risks requiring regulatory response arise from the application of
outsourcing principles to specific fintech applications such as cloud computing
and artificial intelligence.
9.7 INTERNATIONAL ACTION AND

CO-ORDINATION
Regulators and policy-makers worldwide are working on a variety of initiatives

to understand and manage the potential risks associated with fintech while
supporting an environment that fosters innovation. However, these initiatives
must be co-ordinated closely across jurisdictions to avoid regulatory arbitrage
and other undesirable outcomes, including the emergence of a shadow finan-
194 Fintech
cial sector. Regulatory arbitrage is the utilisation by financial institutions of

more favourable laws in one jurisdiction (lax regulation) to circumvent less
favourable (tight) regulation elsewhere. By indulging in regulatory arbitrage,
financial institutions take advantage of loopholes in one jurisdiction compared
with another, which is legal but perhaps unethical.
In June 2017, the Financial Stability Board (FSB) published a report that
analyses the potential financial stability implications of fintech with a view
towards identifying regulatory issues that require the attention of authorities.
The report identifies ten areas, three of which are considered priorities for
international collaboration in order to safeguard financial stability while fos-
tering more inclusive and sustainable finance (FSB, 2017a). The three areas
are: (i) the need to manage operational risk from third-party service providers,
(ii) mitigating cyber risks, and (iii) monitoring macro-financial risks that could
emerge as fintech activities grow. The report suggests that international bodies
and national authorities should consider fintech in their risk assessments and
regulatory frameworks. In another report, the FSB (2017b) examines growth
in fintech credit, aiming to “help policymakers understand the functioning and
evolution of these activities”. Both of these reports emphasise the point that
official data on fintech activities are limited at this point, and conclude that
data availability and quality may warrant increased attention from the author-
ities as this sector develops progressively. In February 2016, FSB Chairman
(Mark Carney) presented an assessment of systemic risks and other implica-
tions of fintech innovations as one of five top priorities for the upcoming year
(Carney, 2016).
Following Ehrentraud et al. (2020), Restoy (2019) classifies fintech-related
regulatory measures into three categories. The first category is direct regula-
tion of fintech activities such as digital banking, peer-to-peer (P2P) lending,
equity raising, robo-advice and payment services. The second category com-
prises measures taken to deal with the use of new technologies in the provision
of financial services, including guidelines on the use of technologies such as
cloud computing, biometrics and artificial intelligence. The third category of
measures is intended to promote digital financial services, covering enabling
policy initiatives such as those related to digital identities, data-sharing, and
the establishment of innovation hubs and sandboxes (a sandbox is a mecha-
nism used for developing regulation that keeps up with the fast pace of innova-
tion). Over the last few years, most jurisdictions have applied policy measures
in some or all of these three areas.
Countries differ in the emphasis placed on promoting the development of
fintech as opposed to regulating it. While some regulators prioritise traditional
prudential and conduct objectives, others pay more attention to innovation,
inclusion, competition and development. International co-ordination takes
various forms as the arrangements range from bilateral agreements and initia-
tives to multilateral ones co-ordinated by the standard-setting bodies. In addi-

tion, a new multilateral network, the Global Financial Innovation Network,
has recently been set up to exchange learnings, develop a common sandbox
and help firms navigate between different jurisdictions as they aim for scale
internationally (for details, see Taylor et al., 2019).
Let us now look at regulatory measures in specific countries and regions,
starting with the UK, where the Financial Conduct Authority (FCA) has
assisted over 300 fintech companies in navigating the regulatory system as
part of Project Innovate, an initiative launched in 2014 (Giancarlo, 2017). The
Bank of England runs a fintech accelerator, a partnership that supports innova-
tive firms while helping the Bank’s understanding of how fintech could impact
financial stability and other policy objectives.
Asian regulators have introduced several initiatives (Asia Securities
Industry & Financial Markets Association, 2017). The Japanese Financial
Services Agency has established a fintech support desk and a panel of experts
on fintech-related matters. The Hong Kong Monetary Authority (HKMA)
and the Securities and Future Commission have set up a Fintech Facilitation
Office, as well as a Fintech Contact Point and a Fintech Advisory Group. The
Monetary Authority of Singapore (MAS) has created a Fintech Office to serve
as a “one-stop virtual entity”, in addition to a Fintech & Innovation Group that
develops regulatory policies and strategies to promote the use of innovative
technology. The Australian Securities and Investments Commission (ASIC)
has established an innovation hub to assist fintech companies.
In the US, several regulatory bodies have taken steps to promote fintech
developments while safeguarding financial stability. In October 2016, the
Office of the Comptroller of the Currency (OCC) announced the establishment
of an Office of Innovation to “ensure that institutions with federal charters
have a regulatory framework that is receptive to responsible innovation and
the supervision that supports it” (Office of the Comptroller of the Currency,
2016b). In December 2016, the OCC announced that it was considering
granting special purpose national bank (SPNB) charters to fintech compa-
nies (Office of the Comptroller of the Currency, 2016a). In May 2017, the
Commodity Futures Trading Commission (CFTC) launched its own fintech
initiative, LabCFTC, to provide greater regulatory certainty that encour-
ages responsible fintech innovation and accelerates the adoption of fintech
and regtech solutions that may enable the CFTC to carry out its mission
more effectively and efficiently (Giancarlo, 2017). The Consumer Financial
Protection Bureau (CFPB) engages with fintech companies, regulators and
other stakeholders through Project Catalyst, an initiative launched in 2012 to
understand and monitor innovative technologies in the financial sector (CFPB,
2016).
196 Fintech
While the advent of fintech opens up new opportunities, it comes with potential
risks to consumers and investors and, more broadly, to financial stability and
integrity, which financial regulation seeks to mitigate. As for opportunities, it
is widely believed that fintech strengthens financial development, inclusion
and efficiency. Based on this belief, regulatory authorities are adjusting their
policy frameworks and providing guidance based on their assessments of the
implications of emerging technologies for the financial sector. Policy-makers
seek to maximise the benefits of fintech while minimising potential risks for
the financial system. However, this is easier said than done as regulators face
several challenges. Fintech developments present issues that are beyond the
traditional scope of the regulatory authorities, and the speed of innovation
makes it difficult for regulators to respond appropriately and in a timely
manner. Complications arise because of trade-offs between different policy
objectives.
It is not difficult to understand why the fintech industry must be regulated.
After all, the global financial crisis saw a number of major financial institu-
tions go bankrupt and millions of people lose a substantial amount of wealth.
Furthermore, fintech companies are entrusted with sensitive data and even
people’s wealth. It follows that regulation makes sense. However, it should
not be about how much regulation, but rather about the quality of regulation.
10. The fintech hype
10.1 IS FINTECH A TRANSITORY HYPE?
This book is about whether fintech is a great innovation or a transitory hype.

The Free Dictionary lists several definitions of “hype”. One definition is that
a hype is “excessive publicity and the ensuing commotion”. Another definition
is that it is “exaggerated or extravagant claims made especially in advertising
or promotional material”. It is also “an advertising or promotional ploy” and
“something deliberately misleading”. Investment hype is a period of height-
ened investor focus on a specific investment topic or theme. Typically, such
hypes are linked to increasing investor optimism about the future prospects of
an investment, irrespective of whether or not optimism can be justified.
The fintech hype is no different from the dot-com hype that ended with
a bursting of a bubble caused by the hype. From 1994 to 1996, technology
stocks were becoming increasingly popular as innovation triggers, such as the
World Wide Web and the spread of online retailing, captured the imagination
of investors. As optimism about future growth became widespread, investors
chased the stocks of technology-based companies and pushed their prices into
bubble territories. Once investors realised that inflated expectations could
not be sustained, the bubble burst and stock prices declined sharply. Out of
7,000 new dot-com companies launched in the late 1990s, 5,000 of them had
disappeared by 2003.
The hype cycle is a graphical presentation developed and used by the
American research, advisory and information technology firm Gartner to
represent the maturity, adoption and social application of specific technologies
(see, for example, Nelson, 2021). A hype cycle consists of five key phases of
a technology’s life cycle. The first phase is the innovation trigger when a new
technology attracts media interest and significant publicity. At this stage, new
companies are established, investors pour money into those new companies,
and a small wave of early adopters use the new technology. The second phase
is the peak of inflated expectations, when early publicity produces a number
of success stories and scores of failures. At this stage, mass media coverage
begins, and the emergence of new companies accelerates as entrepreneurs
strive to capitalise on the trend. The technology is hyped up as “the next big
thing”. The trough of disillusionment is phase three, where interest wanes as
197
198 Fintech
experiments and implementations fail to deliver. At this phase, new companies

start to fail, and those failures are publicised by the media.
The fourth phase is the slope of enlightenment, where instances of how
the technology can benefit the enterprise start to crystallise and become more
widely understood. The new technology is ignored by the mainstream media,
but the companies that remain work to fine-tune the technology and develop
second- and third-generation products. The last phase is the plateau of produc-
tivity where mainstream adoption starts to take off. The remaining companies
enter a prolonged period of durable growth. During the last two phases, the
wheat is separated from the chaff in a game of the survival of the fittest.
Let us see how the hype cycle is applied to a fintech invention, cryptocurren-
cies, a task that has been attempted by Lango (2021), who believes that cryptos
are currently in the initial stages of the peak of inflated expectations phase. He
predicts that cryptos will enter the trough of disillusionment, where “thousands
of cryptos will fail and several hundreds of billions of dollars of value will be
wiped out” and where “investors who aren’t smart here will get crushed”. The
hype cycle of fintech in general is described by Darcey (2016), who does not
see the wave of fintech bankruptcies as the end of a bubble after all, but that
“fintech has simply moved down from the dizzying heights of the hype curve”,
which is “the natural progression of maturing technologies and sectors”.
Hence, he argues, “fintech is moving from wild, pie-in-the-sky fantasizing to
actual application with customers”.
The answer to the question raised by the title of this book is that fintech is
a transitory hype, in the same sense the dot-com “revolution” was a hype. In
the following sections, the extravagant and inflated (even dishonest) claims
used to pump up fintech are discussed with respect to the ability of fintech to
disrupt the status quo, claims about the importance of fintech in our lives and
some general but ludicrous claims, such as the claim that fintech is conducive
to the eradication of poverty and inequality.
10.2 EXTRAVAGANT AND INFLATED CLAIMS:

DISRUPTION
Fintech is hyped because it is publicised or promoted by extravagant, inflated

or misleading claims. This section is devoted to a discussion of the claim that
fintech is disruptive, in the sense that it is changing the status quo. In his 1997
best-selling book, The Innovator’s Dilemma, Clayton Christensen coined the
term “disruptive technology” to refer to new ground-breaking technologies
that shake up, and in some cases eliminate, the status quo (Christensen, 1997).
He has also coined the term “disruptive innovation”, a related concept that
refers to the use of that new technology. Disruptive innovation, according
to Christensen, is a process whereby a product takes root initially in simple
The fintech hype 199
applications at the bottom of a market and then relentlessly moves up market,

eventually displacing established competitors. Disruptive firms, therefore, are
those that use disruptive technology to come up with disruptive innovations.
Fintech is all about the introduction of disruptive technology by start-ups,
in which case one has to ask the question whether or not the technology intro-
duced by fintechs is truly disruptive, which makes fintechs disruptive. Moore
(2019) argues, “not all companies that are commonly known as disrupters
actually fit the traditional definition of disruptive innovation”. He examines
what he calls “true disruptive innovations from past and present”, explaining
why “Uber and Tesla are mislabelled as disrupters”. Moore’s interpretation of
Christensen is that, even though innovations are constantly occurring in every
industry, a “truly disruptive innovation” must transform entirely a product or
solution that was so complicated, only a few people with a lot of money and
skills had access to it. It follows that “a disruptive innovation is often a much
simpler, low-grade solution that’s more affordable and accessible to a larger
population, which opens it to an entirely new market”. This often upturns
established industries and overthrows existing market leaders.
Disrupting firms have the following characteristics: (i) they are low cost
and highly accessible; (ii) they have lower gross margins than their contem-
poraries or the incumbent firms; (iii) they serve a smaller low-end target
market at first, before expanding to a vast market due to their accessibility;
and (iv) they are hard to see coming and not taken seriously. According to
Moore, disrupting firms “quietly, slowly ‘climb the ladder’ and can take years
or decades to gain traction before they dramatically upend competitors”. On
his website, Christensen (2021) gives examples of disruptors and disruptees:
the disruptors are personal computers, mini mills, mobile phones, community
colleges, discount retailers and retail medical clinics. The corresponding dis-
ruptees are respectively mainframe and mini computers, integrated steel mills,
fixed-line telephones, four-year colleges, full-service department stores, and
traditional doctors’ offices. Moore (2019) lists 11 examples of “true disruptive
innovations”, including steel mini mills, video streaming, transistor radios,
online encyclopaedias (such as Wikipedia), smartphones, personal computers,
retail medical clinics, digital cameras, lightbulbs, P2P accommodation, and
personal copiers. He also lists as “potential disruptors” 3D printing and online
education.
Determining whether an innovation is disruptive depends on the criteria
identified by Christensen. For example, mini steel mills disrupted the steel
industry once dominated by integrated steel mills, eventually driving them out
of the rebar market (a rebar, also known as reinforcement steel and reinforcing
steel, is a steel bar or mesh of steel wires used in reinforced concrete and
masonry structures to strengthen and hold the concrete in tension). They found
a way to melt down scrap metal recycled from cars and manufacturing waste,
200 Fintech
which was up to 20% cheaper than what was produced by integrated mills.
Likewise, video streaming companies such as Netflix drove out video rental
companies (such as Blockbusters). Wikipedia is arguably a disruptor because
it has put Encyclopaedia Britannica out of business.
Some of these claims are questionable. For example, Wikipedia has not
put Encyclopaedia Britannica out of business—it is just that Britannica is no
longer produced in a print form. The comparison between the two products is
ludicrous, as Britannica is written by experts in their fields whereas Wikipedia
is written by anyone in a style that makes each piece a disjointed collection
of citations taken from various places. This is why each line in any piece in
Wikipedia contains three references or more. In Britannica, articles are written
by experts on the topic; in Wikipedia it can vary from an expert to someone
who once read a mediocre book about the underlying topic. The joke goes
that, if you write a piece for Wikipedia, make sure you reference statements
such as “the sun rises in the east” and that water has the chemical formula
H2O. Another joke goes that, if someone starts talking nonsense, they will be
accused of getting their information from Wikipedia. Students are often told
not to cite Wikipedia or not to consult Wikipedia as a background source. The
same can be said about online education: it is a lucrative business, but it can
never replace face-to-face education because of the importance of the human
touch. God help us all if doctors and engineers were to get their qualifications
by studying online. The Covid-19 pandemic has demonstrated vividly the peril
of online education.
Disruptive innovations include the electronic calculator, which replaced the
slide rule, and the diesel internal combustion engine, which replaced the steam
(external combustion) engine. Is fintech as disruptive as the electronic calcula-
tor and the diesel engine? In what way is fintech disruptive? Schindler (2017)
implies that it is disruptive in the sense that it has the potential to transform the
financial system, which (according to him) explains why there is so much hype
around it, and why people are excited about it. Iyer (2018) lists eight ways
in which fintech is disrupting financial services (or the traditional financial
ecosystem) for the better. Let us consider these ways.
Number one on the list is that online cashless transaction systems facilitate
online shopping. The fact of the matter is that online shopping has become
common as a result of lockdown. Most people would prefer to do shopping in
a physical store, and most people are apprehensive about putting their credit
cards on a website they have not dealt with before. The second on Iyer’s list
is that corporate online payment systems enable firms to collect payments on
services rendered and make payments on services utilised. This, however, is
far from being universal, as thousands of small businesses deal in cash. This is
why the coercive power of the government is needed to get rid of cash. Number
three is that trading platforms do a better job than human traders by collecting
and analysing data to uncover trends, provide aggregated market views, and
generate forecasts, thereby boosting potential profit. No one, however, has
produced any evidence to show that automated trading is more profitable.
Number four is that online and mobile banking/money transfer solutions speed
up transactions, reduce the need for paper-based currency (cash, cheques),
and improve financial traceability. This sounds like the propaganda against
cash that is spread by the fintech evangelists. Number five, which sounds like
number three, is that automated, algorithm-driven wealth management and
personal finance systems provide accurate transactional and contextual data
to enable users to take appropriate financial decisions with little or no human
supervision. Again, no evidence is available to show that algorithms are better
than human judgment when it comes to investment decisions (George Soros
and Warren Buffett are living examples of the quality of human judgment with
respect to trading).
The list goes on. Number six is that fintech is challenging traditional insur-
ance companies’ positions in the value chain by enabling the creation of prod-
ucts tailored to customers’ specific needs. It is not obvious why something like
this needs artificial intelligence or another fancy technology. Number seven
is that P2P lending platforms enable individuals to borrow and lend money
without the involvement of intermediary financial institutions. That is right,
but it means that lenders get exposed to significant counterparty risk. Number
eight is that new cutting-edge technologies are strengthening cyber-security
and national financial security. That is right, but these cutting-edge technol-
ogies also help fraudsters and cyber-criminals. Nothing whatsoever in these
claims indicates any disruptive power in the same sense as in the examples
presented by Christensen (2021) and Moore (2019).
Claims of the demise of traditional banking are grossly exaggerated. Joly
and Frachon (2018) suggest, “much fuss has been made in recent years about
the disruptive impact of financial technology (fintech) upon our industry”.
They argue, “there is more to modern banking than just fin and tech and
transactions”. Likewise, Myers (2016) argues, while “the hype is now reaching
a fevered pitch”, he agrees with the view, “some of the more cutting-edge tech-
nologies in the market could fall short of their goal of disrupting banking due
to acquisitions and partnerships with the very organizations they’re looking to
change”. He goes on to suggest, “the U.S. banking sector is so entrenched and
protected that challenging it from the outside is an exercise in futility” and “it’s
highly unlikely that a startup will come around and pose a real threat to the
likes of Bank of America or Chase anytime soon”. Van Loo (2018) notes that
fintechs face two entry barriers: the ability of incumbent banks to block market
access and the difficulty of obtaining a bank licence. Banks, he concludes,
hold the cards. The alleged disruptors are in a much weaker position than the
alleged disruptees.
202 Fintech
10.3 FINTECH-RELATED INVENTIONS
It is not clear why the finance industry claims monopoly over the inventions
used for the provision of financial services the modern way. In Chapter 4
we saw that all the technologies that come under fintech have applications
in other fields. Yet, we hear about fintech but not med-tech, space-tech or
anything-else-tech. If anything, the use of technology for medical diagnosis is
much more useful for humanity than using the same technology to pay without
using cash, which in itself (cash) is a great invention. Even if the internet is
claimed as an exclusive fintech-related invention, it does not match, in terms of
contribution to human welfare, some of humanity’s great inventions.
Table 10.1 presents three different rankings of inventions according to
Gormley (2020), Constable and Somerville (2021), and Fallows (2013).
While any ranking is debatable, similarities can be observed. Out of the three
rankings, only Fallows (2013) lists the internet as one of the top 10 inventions,
alongside electricity, running water and refrigeration. It is interesting to see
that, while the telephone appears as one of the greatest inventions, the mobile
phone does not. Robert Gordon, an eminent American economist, is known to
have shown two pictures in one of his presentations: one picture was a mobile
phone and the other was a toilet. He then asked the question, “Which one are
you willing to give up?” For Gordon, indoor plumbing changed how people
live, but mobile phones are “just a handier form of what already exists”
(Aeppel, 2014).
Let us now discuss the views on how the internet compares with other great
inventions. Ratner (2016) sees the invention of the internet as responsible
for transforming communication, commerce, entertainment and politics. The
internet is perceived to be a great invention because life without the internet
is unimaginable for most people. That is true, but for most people life without
a mobile phone would be unimaginable even though no one would give up
their toilet just to keep the mobile phone. One advantage of the internet is that
people get access to a wide range of information, but one disadvantage is that
the internet allows children to access pornography. It is also used by scammers
and sexual predators to lure their victims. The internet is supposed to be useful
because it allows social media, but what is the contribution to human welfare
of someone telling his friends that he is having a drink in a particular bar in
Bangkok, even though that is fun? This, of course, does not alter the fact that
an enormous advantage of the internet is telecommunication. The internet is
useful and fun, but it is by no means more useful than penicillin.
The view that the internet is “certainly not the greatest invention of the past
millennium” is expressed by Gormley (2020), who suggests, “it might not
even make the top ten”. Gordon (2000) expresses a similar view by arguing
Table 10.1 Ranking of top inventions
Rank Gormley (2020) Constable and Somerville Fallows (2013)

(2021)
1 Printing press Electricity Printing press
2 Electric light Car Electricity
3 Car Airplane Penicillin
4 Telephone Water supply Semiconductors
5 Radio and television Electronics Optical lenses
6 Vaccination Radio and television Paper
7 Computer Agricultural mechanisation Internal combustion engine
8 Airplane Computer Vaccination
9 Tractor Telephone Internet
10 Anesthesia Refrigeration Steam engine
11 Highway Nitrogen fixation
12 Spacecraft Sanitation
13 Internet Refrigeration
14 Imaging Gunpowder
15 Household appliances Airplane
16 Health technologies Personal computer
17 Petroleum Compass
18 Laser optics Car
19 Nuclear technologies Steel
20 High-performance materials Pill
that surfing the internet may be fun, but it represents a far smaller increment
in the standard of living than what has been achieved with the help of other
inventions, such as the electric light, the electric motor, cars and airplanes, new
materials, the telephone, radio and television, and indoor plumbing. Gordon
disputes the claim that the “new economy” (the internet and the accompanying
acceleration of technical change in computers and telecommunications) is an
Industrial Revolution that is equal in importance to, or even more important
than, the Second Industrial Revolution of 1860–1900, which gave us electric-
ity, motor and air transport, motion pictures, radio and indoor plumbing, and
made the golden age of productivity growth possible. He raises doubts about
the validity of comparing the internet with the great inventions of the past.
Gordon argues that the internet fails the hurdle test as a great invention on
several counts. First, the invention of the internet has not boosted growth in the
demand for computers; all of that growth can be interpreted simply as the same
unit-elastic response to the decline in computer prices as was prevalent prior
204 Fintech
to 1995. Second, the internet provides information and entertainment more

cheaply and conveniently than before, but much of its use involves substitution
of existing activities from one medium to another. Third, much internet invest-
ment involves defence of market share by existing companies like Borders
Books faced with the rise of Amazon. Fourth, much internet activity duplicates
existing activity like mail order catalogues, but the latter have not faded away.
Finally, much internet activity, like daytime e-trading, involves an increase in
the fraction of work time involving consumption on the job.
One of the most outrageous claims is that the blockchain technology is one
of history’s greatest inventions. Reiff (2021) argues that blockchain does have
some things in common with ground-breaking innovations like the radio, elec-
tricity and the internet. He compares blockchain with inventions that improve
human health and lifespans, such as penicillin and vaccines, because the tech-
nology can be integrated into the healthcare system to “improve the lives and
treatment plans for patients of all kinds”. When someone has tonsillitis, a shot
of penicillin provides relief, irrespective of how it is paid for (cash, mobile
phone or a chip) and irrespective of whether this event is entered in the health
history on a blockchain, an excel sheet or a physical file.
Reiff (2021) examines the claim that blockchain could come to rank along-
side radical inventions like the steam engine and the railroad, by cutting the
cost of freight transportation because companies are using distributed ledgers
to track perishable goods. No evidence is provided to indicate that freight
transportation companies are using this technology. He suggests that unlike
electricity or radios, the rate of adoption of blockchain is very low (so far it
has been used only to enable a scam called “cryptocurrencies”). He also refers
to “serious concerns about the efficiency of blockchain technology, compared
with other types of databases” as blockchain is “notoriously inefficient and
power-hungry”. He concludes, “it’s likely that it will take some time before
anyone can convincingly argue that it has earned a place among the most
important innovations in history”.
In reality, not even time will make blockchain comparable with great inven-
tions. Taleb (2021) argues that blockchain technology is not much different
from a mathematical technique introduced by John von Neumann 70 years ago
and now applied by hundreds of thousands of programmers and practitioners
who use Monte Carlo simulation. Roubini (2018) goes even further by describ-
ing blockchain as “the most over-hyped technology ever”, adding that it is “no
better than a spreadsheet/database”.
10.4 OTHER EXTRAVAGANT AND INFLATED

STATEMENTS
We are supposed to celebrate the contribution of fintech to our lives, give

up cash and pay with a mobile phone or a chip planted under the skin as
a sign of affluence. By using state-of-the-art technology, fintechs are alleg-
edly contributing to human welfare by providing fund transfers and online
remittance tools, mobile wallets, online payment platforms for shopping and
entity-to-entity, insurance aggregators, automated investment management
advisors, P2P lending, crowdfunding tools, and financial assets trading
tools. According to Iyer (2018), these products and services “broaden the
digital ecosystem, and thus, make finance more inclusive, democratic and
customer-focused”. Furthermore, he argues that “the FinTech industry’s
innovation and technology-oriented belief system are ushering in a new era
of transparency, efficiency and inclusivity in the area of financial services”
and that “it is also reshaping customer expectations and setting new, higher
standards for user experience and satisfaction”.
In Chapter 5, the advantages and disadvantages of fintech were discussed
in detail. Based on that discussion, the claims made in favour of fintech
can be classified into seven categories, as can be seen in Table 10.2, which
provides examples rather than an exhaustive list of the claimed attributes.
Some of the claims in favour of fintech are straightforward. There is no doubt
that technology as used in finance has led to faster processing of transactions
and acceleration of payment. Fintech has played a role in improving and
simplifying standard operational procedures and in addressing issues inherent
in other essential processes. However, some of the proclaimed contribu-
tions of fintech are questionable or exaggerated. These include the alleged
contribution to financial inclusion and financial stability and a “significant
transformation” of the financial sector. These issues were discussed in detail
in Chapter 5. However, it may be worthwhile adding some more on the issue
of financial inclusion, which may be threatened by the advent of the risks of
exclusion (unequal access to technology, which may aggravate the digital
divide); discrimination against minority borrowers; consumer protection risks
(transparency, electronic disclosure, product suitability, over-indebtedness,
data privacy, safety of funds, cybersecurity and digital illiteracy); and
data-protection related risks (compromise of privacy, identity theft and fraud).
Another exaggerated claim is that fintech enhances social distancing in
a time of pandemic. Allegedly, the Covid-19 pandemic and the need for social
distancing have put a spotlight on digital financial services. For example, it is
claimed that digital financial services allow governments to disburse funds to
those in need quickly and effectively and make it possible for many house-
206 Fintech
holds and firms to access online payments and financing. Well, let us hope
that the pandemic will not last for ever and that this alleged contribution to
fintech will not be sought after. The fact of the matter is that the pandemic has
provided a boost for fintech.
Some of the alleged contributions of fintech to human welfare are trivial.
While it may be “cool” to pay with a mobile phone or an implanted chip,
most people could not care less about that because it is not a life changer, just
extravaganza. Some proclaimed contributions are fictitious, such as the alleged
contribution of fintech to economic growth and public finance. There are better
ways to boost public finance than fintech, which are intentionally overlooked,
most notably overhauling the tax code, which favours capital over labour and
the super-rich over the poor and middle class. Some alleged contributions of
fintech are unrealistic or counterintuitive, even dishonest. The most outrageous
example in this respect is that fintech is conducive to the reduction of poverty
and inequality. In reality, the exact opposite is true, as technology in general
favours capital over labour—look no further than inequality in the Silicon
Valley. Wipf (2021) shows that income inequality in the Silicon Valley has
grown twice as quickly as the rest of the state (California) and nation over
the past 10 years. The top 16% of Silicon Valley households hold 81% of the
region’s wealth, while the bottom 53% hold 2% only. Nearly one out of five
Silicon Valley households have no savings, which has made it more difficult
to buy food or care for family members during the pandemic.
Technology creates unemployment, and this is why fintech will not reduce
inequality and poverty, which are related. This is an example of some pro-
claimed benefits of fintech that are not worthwhile in terms of costs and
benefits. Fintech is arguably conducive to efficiency and cost cutting, because
fintechs do not need employees or infrastructure. If fintechs take over the busi-
ness of traditional banks, thousands of people will lose their jobs (bank tellers,
for one category). Yes, operating costs will be reduced, boosting profitability
and making executives and shareholders rich. This is the benefit, but the cost
is unemployment, which leads to poverty and inequality. Efficiency gains in
a fintech world are not worthwhile in terms of costs and benefits, the benefits
of shareholders and executives, and the social costs of unemployment.
Last, but not least, fintech has a sinister side, because fintechs promote
and participate actively in the war on cash, allegedly a sign of progress. Just
like predicting the end of banking as we know it, some pundits predict that
cash will disappear, thanks mainly to the wonderful cash substitutes created
by fintech such as mobile payments and digital wallets (in addition to credit
cards). In truth, cash is the best friend of the underprivileged, who have been
increasing in number in the US, let alone in the third world. According to Edin
and Shaefer (2016), the number of US residents who are struggling to survive
on just $2 per day has more than doubled since 1996 to 1.5 million households.
Table 10.2 Classification of claims in favour of fintech
Claim of attribute Examples

Straightforward Faster processing of transactions
Questionable/ Financial inclusion, financial stability, significantly transformed financial services,
exaggerated democratisation of finance, contribution to social distancing
Trivial Product quality and diversity
Fictitious Economic growth and public finance, enhancing liquidity, supporting sustainable
development
Unrealistic/ Aiding regulation and compliance, reducing poverty, reducing inequality, positive
counterintuitive effect on health and education, transparency
Costs vs. benefits Efficiency (employment)
Bad Enhancing mass surveillance and enabling the war on cash
Similarly, the number of people in America who either do not have a bank
account (unbanked) or use cheque cashers and pawn shops to meet their
banking needs (underbanked) went up from 31 million households in 2009 to
35 million in 2013. The underprivileged and poor rely on cash, as other modes
of payment may not be available or accessible.
A large-scale move to digital financial services could create concerns about
a “surveillance state”. This could happen if, for example, the government
has access to payment data. If data access is instead restricted to companies,
concerns about privacy (as well as data monopolies) could arise. While issues
related to government or private company use of payment data are always rele-
vant, there is a risk that the checks and balances provided by either democratic
oversight or business regulation could be short-circuited during crises. Fintech
enables the war on cash and enhances mass surveillance.
The dark side of fintech is exposed by Buckley et al. (2019), who refer to
a “long-term process of digitization and datafication” aided by new technolo-
gies. This process, according to them, has led to the rise of cyber-security and
technological risks, which are evolving into “major threats to financial stability
and national security”. They identify two issues arising from the entry of
major technology firms into finance: (i) new forms of potentially systemically
important infrastructure (such as data and cloud services providers), and (ii)
monopolistic or oligopolistic outcomes associated with the economies of scope
and scale and network effects. As a result, they see a potential rise in systemic
risk, leading to new forms of the “too big to fail” and “too connected to fail”
phenomena. As a result, they propose basic principles about how such risks
can be monitored and addressed. The moral of the story is that fintech will not
bring only milk and honey.
208 Fintech
10.5 CLOSING REMARKS
Finance is the industry that “manufactures” money, but it is also the industry of
fraud and parasitic activities. When finance is combined with state-of-the-art
technology, more fraud and parasitic activities are enabled. Take, for example,
the following comic but realistic description of what happens in the financial
sector using the two-cow analogy (for example, https://www.sadanduseless
.com/a-tale-of-two-cows-funny/):
You have two cows. You sell three of them to your publicly listed companies, using
letters of credit opened by your brother-in-law at the bank, then execute a debt/
equity swap with an associated general offer, so that you get all four cows back,
with a tax exemption for five cows. The milk rights of the six cows are transferred
via an intermediary to a Cayman Island Company secretly owned by the majority
shareholder, who sells the rights to all seven cows back to your listed company. The
annual report says the company owns the eight cows, with an option on one more.
Fintech assists this kind of parasitic activity and enables fraudsters. However,
the most worrying aspect of fintech is the war on cash, as a cashless society
will boost the profitability of financial institutions in general and fintechs
in particular at the expense of ordinary people. This is why fintechs such as
PayPal are active participants in the war on cash and providers and financiers
of propaganda against the use of cash, one of humanity’s great inventions.
Fintech is grossly hyped. Crosman (2015) refers to other descriptions of
fintech, such as “frothy” and “immature”. Contagious enthusiasm has led
to the pouring of money into fintech firms, but this is starting to look like
a fad. On this occasion, however, investment in fintechs has not matched
the excesses of the late 1990s, when a company name with a dot-com suffix
“conferred instant mystique and capital”, as Crosman puts it. As the market
cools, only the fittest will survive. We have to bear in mind the dot-com fiasco
witnessed the survival of the fittest and the end of a transitory hype. Fintech
will eventually be used to describe a historical period of irrational exuberance,
just like the dot-com episode.
As a matter of fact, the term “fintech” is redundant. If it refers to the
technology used in the provision of financial services, such as artificial intel-
ligence, this is a misrepresentation of the facts on the ground. The term gives
the wrong impression that the technology was invented either by the financial
sector (such as cash and the products of financial engineering) or exclusively
for it (such as the ATM and cash-counting machines). In reality, the use of
the same technology in fields other than finance makes some contribution to
human welfare whereas it is no more than extravaganza in finance. This is the
difference between using some technology for medical diagnosis and using
the same technology to enable someone to pay for a burger by waving a hand.
One may say that blockchain and cryptos are finance inventions, but the fact of
the matter is that Mr (or Ms) Satoshi is a brilliant computer scientist who used
blockchain to manufacture bitcoin, which (as it turned out) proved to be the
most profitable application. Remember, however, that blockchain is hyped on
the promise that it will change our lives because it can be used in other human
endeavours.
If “fintech” refers to the industry in a broad sense, there is nothing special
because financial institutions have always used technology. The ATM was
a better technology than mobile payments, and cash itself was a great inven-
tion. It is the finance service industry, not fintech. If “fintech” refers to the
industry in a narrow sense (the new technology-based financial services
providers), there is no reason why traditional financial institutions cannot use
the same technology as the start-ups, which are not disruptors in any shape or
form. Thus, the word fintech is redundant—with the passage of time, it will
pale into insignificance.
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Index
accessibility 125 artificial neural network (ANN) 59
account takeover 97 artificial superintelligence (ASI) 56
Adalid, R. 146 Ashton, K. 67
Adams, J. 108 ASI See artificial superintelligence (ASI)
Adil, M. 83 Asian financial crisis 164, 165
advance-fee frauds 178 Asian regulators 195
Africrypt 159 Astroturfing campaigns 117
Agamben, G. 72 audit regulation 166
aggregators 68 Azulay, D. 58
AGI See artificial general intelligence
(AGI) Baek, C. 149
Agrawal, A.J. 185 bail-in legislation 134, 135
Aguayo, F.Z. 95 balance sheet lenders 33
Agur, I. 20 Bali Fintech Agenda (BFA) 13
Ahamed, M.M. 172 Bambrough, B. 159
AI See artificial intelligence (AI) Banga, A. 110
Alabi, K. 149 Bank for International Settlements (BIS)
alchemists 107 125, 135
Aliber, R.Z. 146 banking 34, 36
Allen, F. 165, 168 shadow 49–52
Allen, R. 31 Bank of England 125, 165
Ally 34 banks, benefits for 124, 134
alternative finance 8, 11 Bank Secrecy Act 116
Alt, R. 27 Basel Committee on Banking
AML see anti-money laundering (AML) Supervision (BCBS) 13, 29, 87–9,
Andjelic, J. 19, 47 188, 190, 191
Andriotis, A.M. 107 Baur, D.G. 150–52
ANI See artificial narrow intelligence Bavin, E. 148
(ANI) B2B See business-to-business (B2B)
ANN see artificial neural network (ANN) B2C See business-to-consumer (B2C)
anti-counterfeiting technology 122 BCBS See Basel Committee on Banking
anti-money laundering (AML) 73, 115, Supervision (BCBS)
180, 187 Bentestuen, T. 114
API See Application Programming Bernanke, B. 49
Interface (API) Bernie Madoff 166, 179
Apple Pay 7 Better Than Cash Alliance (BTCA) 109,
Application Programming Interface 110
(API) 46, 55 Bettinger, A.L. 3
Arner, D.W. 7, 24–7 BFA See Bali Fintech Agenda (BFA)
artificial general intelligence (AGI) 56 big data 63–5
artificial intelligence (AI) 55–8, 181 biological identifiers 71
artificial narrow intelligence (ANI) 56
227
228 Fintech
biometric authentication 71 cash transactions 121–9

biometric identification 70–72, 182 Cassidy, J. 160
BioTech 16 C2C business model see
Birch, D.G.W. 182, 183 consumer-to-consumer (C2C)
BIS see Bank for International business model
Settlements (BIS) CFD see contracts for difference (CFD)
bitcoin 28, 60, 138, 139, 141, 143, 144, CFPB see Consumer Financial Protection
147–52, 159 Bureau (CFPB)
Bitconnect 157, 184 CFTC see Commodity Futures Trading
Black Monday 26 Commission (CFTC)
Blakstad, S. 31 CFTRA see Currency and Foreign
Blau, B.M. 149 Transaction Reporting Act
blockchain technology 38, 55, 74–8, 138, (CFTRA)
141, 149, 182, 204 challenger bank 34
Boey, D. 155 Chandy, L. 83
Borio, C. 168 Chan, N.T.L. 167
Bouvier, P. 185 Cheah, E.T. 149, 155
Bouwman, H. 16 Cheng, J. 183
Boyd, A. 184, 185 Chen, M. 64, 87
Breckenridge, K. 72 Cheung, A.W.K. 149
Breiman, L. 59 Cheung, K.C. 61
Brown, E. 135 Choudhary, A. 180, 181
Brown, M.S. 64 Chris, C. 96
BTCA see Better Than Cash Alliance Christensen, C. 198, 199, 201
(BTCA) Chu, B. 136
bubble 197, 198 Churchill, W. 117
crypto- 145–50 Cihak, M. 172
dot-com 197, 198, 208 civil liberties 129
fintech 100 Claessens, S. 51
Buchak, G. 51 cloud computing 69–70, 72
Buckley, R. 207 Cochrane, M. 117–18
budgeting 128 Cohn, M. 184
apps 41 Commodity Futures Trading
Buffett, W. 52 Commission (CFTC) 195
Buntinx, J.P. 141 competition 87–8
Burns, E. 181 compliance
Bush, G. Jr. 117 process 89
business-to-business (B2B) 42, 45 regulations 70
business-to-consumer (B2C) 42–3 risk 188
Byrne, P. 156 computational intelligence see artificial
intelligence (AI)
Caicedo, D. 34, 46 computer algorithms 97
Camera, G. 121 computer literacy 94
capitalism 28 confidentiality 127
Card, J. 31 conspiracy theory 133–5
Carney, M. 194 Constable, G. 202
cash 128 Consumer Financial Protection Bureau
as conduit to criminal activity 122–3 (CFPB) 195
cashless society 105, 107, 119, 129–33 consumers
cashless transactions 121–9 protection 176, 177, 189, 191, 193
Index 229
risk to 187, 189 Currency and Foreign Transaction

consumer-to-consumer (C2C) business Reporting Act (CFTRA) 116
model 45 currency holding 135
contracts for difference (CFD) 39 Currency Transaction Report (CTR) 116
copy-trading 39 customer relationship management
Corbet, S. 149 (CRM) software 41
Costa, C. 123 customer trust 98–100
cost efficiency 125 cyber-attacks 127
Cotter, P. 181
Covid-19 pandemic 20–22, 124–5 Dabrowski, M. 169
Cox, J. 148 Damodran, A. 151
creative accounting 177 Darcey, P. 198
credit cards 122 data
Credit Karma 40, 41 science 59
credit reporting 39–40 and security privacy 70
Credit Suisse 115 data handling risk 187
Criddle, C. 145 data-sharing technologies 64
criminal activity 119, 156, 159 Daula, T. 168
cash as conduit to 122–3 decentralisation 76
Criminal Investigation Division of the deflation 144
US Internal Revenue Service 183 De Grauwe, P. 123
CRM software see customer relationship democratisation of financial services 173
management (CRM) software demonetization 126
Crockett, A. 166 de Nogales, X.E. 101
Crosman, P. 208 Derringer, W. 147
cross-border payments 1 Derviş, K. 83
crowdfunding Desjardins, J. 106, 123, 126, 127, 129
platforms 34, 36–7, 92 Detken, C. 146
system 192 Detrixhe, J. 147
crowdsourcing platforms 36–7 D’Hulster, K. 167
crypto-assets 188, 190, 192 Dickson, B. 152
crypto-bubbles 145–50 digital
cryptocurrency 117–18, 138, 140–41, crime 127
160, 204 cryptocurrency 141
advantages 141–4 currency 138, 140, 151
disadvantages 144–5 divide 94
exchanges 28 economy 83
technology 38 finance 3
see also bitcoin finance fraud 96–7
cryptographic networks 78 financial services 3
cryptography 138, 140 literacy 94
crypto-mining industry 145 money 128
crypto Ponzi scheme 156–9 operational risk 96
cryptos 138, 139 payments 91, 103
as conduit to fraud 156–9 revolution 108
as currencies and assets 150–56, 159 technologies 27
crypto-scams 156–9, 184 transactions 96, 100, 101, 108, 127
CTR see Currency Transaction Report wallets 37
(CTR) digitisation of banking services 95–6
Discover 34
230 Fintech
discrimination 126 feedback loops 60, 168

disruption 198–201 Fein, M. 50
disruptive innovation 198–200 fiat currency 142, 151, 152
disruptive technology 198–201 Fidelity National Information Services
disruptors 46–9 21
distributed ledger 74, 76 Financial Conduct Authority (FCA)
distributed settlement 2 189–90, 195
Dixon, M.F. 62 financial crime 179–82
donation crowdfunding 36–7 Financial Crisis Inquiry Commission
dot-com bubble 197, 198, 208 (FCIC) 52, 166
Doubleday, K. 77 financial engineering 52, 53
Dowd, K. 100, 122, 125–7, 135, 166 financial fraud 178–80
financial inclusion 89, 93–4, 110, 163,
Eastman Kodak 53 170–73
ECB see European Central Bank (ECB) financial infrastructure 33, 163, 164
econometrics 91 financial innovation 24, 52–3, 166,
economic growth 89–90 177–8
Edin, K.J. 206 financial instability 162–3, 167
Ehrentraud, J. 194 causes of 164–8
e-KYC see electronic financial institutions 163, 165, 166, 176
know-your-customer (e-KYC) financial lifeline 21
Elbeck, M. 149 financial literacy 93, 170–73
electronic know-your-customer (e-KYC) financial markets 163
20 financial regulation 176–7
electronic money (e-money) license 36 Financial Sector Conduct Authority
electronic transactions 126 (FSCA) 159
emergent fintech 47 Financial Sector Legislation Amendment
employment 101–2 135
encryption 78 financial stability 93, 162, 163, 168,
Encyclopaedia Britannica 200 170–73, 177, 191
equity crowdfunding 36 effect of fintech on 169–70
Erel, I. 21 risks to 188, 189
ethical behaviour 101 Financial Stability Board (FSB) 13, 33,
e-trading 39 194
European Central Bank (ECB) 113, 140, financial technology 2–4, 8, 13, 27, 30,
146 51, 79
European Monetary System 165 financial vulnerabilities 163
European sovereign debt crisis 167 fintech 33, 42–3, 45, 131, 209
evolutionary fintech 23–9, 31, 32 advantages of
excessive leverage 166 aiding regulation and
extravagant and inflated claims 198–201 compliance 89
extravagant and inflated statements boosting competition 87–8
205–7 cheaper and personalised
services 87
Fallows, J. 202 economic growth and public
FCA see Financial Conduct Authority finance 89–90
(FCA) enhancing liquidity 91–2
FCIC See Financial Crisis Inquiry faster processing of transactions
Commission (FCIC) 86–7
financial inclusion 89
Index 231
informal economy 91 regulators 46, 195

innovation and new business revolution 18, 28–31
formation 92 Ripple system 1–2
positive effect on health and risks 186–91
education 90–91 scams, scandals and corporate
product quality and diversity 88 failure in 182–6
reducing poverty 90 service providers 42–3, 45
sustainable development 92 and shadow banking 49–52
benefits and costs of 84–6 start-ups 46–9, 85
bubble 100 technology 45–6
cash advance 40 three episodes or eras of 26–7
characteristics of 14, 16 unicorn 47
Covid-19 pandemic effect on 20–22 Fintech 1.0 26
definition of 5–8, 11 Fintech 2.0 26
international organisations Fintech 3.0 26–7
11–13 Fintech 3.5 27
disadvantages of fintech companies functions 34
adverse effect on employment banking 34, 36
101–2 budgeting 41
adverse effect on financial crowdfunding platforms 36–7
inclusion 93–4 cryptocurrency and blockchain
adverse effect on financial technologies 38
stability 93 insurance 40–41
customer and investor trust investment and savings 38–9
98–100 lending and credit reporting 39–40
loss of high-touch customer mobile payments and money
service 100–101 transfer 37–8
operational risk 95–8 price comparison marketplaces 41–2
transparency and ethical trading and robo-advising 39
behaviour 101 Fintech & Innovation Group 195
war on cash 100 Fitzgerald, M. 183
ecosystem 42–6 flash crash 97
effect on financial inclusion 173–4 Foley, S. 159
effect on financial stability 169–70 Forbes, S. 118, 123, 129
enablers 46 Foreman, D. 21, 22
evangelists 106 Frachon, E. 201
evolution 18, 31, 32 fractional trading 174
timeline of 23–8 Frankel, J.A. 165
extravagant and inflated claims fraud 177–80
198–201 financial 178–80
extravagant and inflated statements pandemic 96
205–7 technology-enabled 180–82
extravaganza 28 fraudsters 181
and financial innovation 52–3 fraudulent financial mis-selling 178
firms 40–42, 107, 136, 176 French Revolution 28
growth rates of start-ups 20 Frydenberg, J. 114
hype 197–209 Fry, J. 149, 155
inventions 202–4 FSB See Financial Stability Board (FSB)
media and 11 FSCA see Financial Sector Conduct
regulation of 191–5 Authority (FSCA)
232 Fintech
Fullerton, J. 164, 166, 167 Hong Kong Monetary Authority

funding gap 185 (HKMA) 195
human capital 91
GainBitcoin 157–8 Hummel, J.R. 119
Galarza, M. 99 Hussein, S. 117
Galbraith, J. 176 Hutton, W. 177
Gandal, N. 155, 156 hype 197–209
Garcia, D. 149 cycle 197
GDP 89, 110, 121 definitions of 197
Gelis, P. 51
Gerard, D. 145 IaaS see infrastructure-as-a-service
GFC see global financial crisis (GFC) (IaaS)
Ghosh, S. 51 ICA see International Currency
Global Cash Report 130 Association (ICA)
global financial crisis (GFC) 165, 167 ICO see initial coin offering (ICO)
Global Financial Innovation Network Imboden, K. 164, 172
195 IMF see International Monetary Fund
gold 142 (IMF)
Goldstein, M. 167 immutable cryptographic signature 75
Google search 3–4, 8 inclusion 126
Gordon, R. 107, 120, 202–3 inclusion–stability nexus 173
Gormley, L. 202 incubators 48, 49
governance 190 Industrial Revolution 28, 174, 203
Grant, J. 119 informal economy 91
Grass, C. 124 information technology (IT) 7
Gray, A. 6, 169, 170 infrastructure-as-a-service (IaaS) 69
grid computing 69 initial coin offering (ICO) 28
Grimes, R.A. 71 innovation 92
Gross, B. 49 disruptive 198–200
G4S report 133 and technology-oriented belief
Gu, X. 165, 168 system 205
innovative market support services 29,
Hachem, K. 165 30
Haliassos, M. 167 innovative technology 19, 24, 29
Hanley, B.P. 142 insurance 40–41
Hannig, A. 171 insurtech revolution 31
Hanson, P. 114 interconnectedness risk 169
Häring, N. 108–13, 122, 126–9 Internal Revenue Service (IRS) 115
Harrington, C. 182 Criminal Investigation Division of
Harris, B. 151, 156 183
Harry, M. 148 international co-ordination, fintech
Hayes, A.S. 143, 155 regulation 193–5
health 90–91 International Currency Association
Henderson, R. 159 (ICA) 125
high frequency trading 39, 79, 97 International Monetary Fund (IMF) 109
high-touch customer service 100–101 International Organisation of Securities
HKMA see Hong Kong Monetary Commissions (IOSCO) 177
Authority (HKMA) internet finance 11
Internet of Things (IoT) 66–8
Index 233
intrinsic value 138, 139, 145, 146, 150, Lauer, K. 86

153–6, 159, 160, 163 Laurent, L. 99
investment app 38–9 Lawson, D. 52
investment hype 197 learning apps 46
investor trust 98–100 Lee, T. 155
IOSCO see International Organisation of Leibrock, M. 6, 169, 170
Securities Commissions (IOSCO) lending 39–40
IoT see Internet of Things Leong, K. 5, 6, 17
IRS see Internal Revenue Service (IRS) Lepecq, G. 125
IT See information technology (IT) LIBOR manipulation scandal 99–100
Iyer, S. 200, 205 Liebersohn, J. 21
Liebkind, J. 157
Jansen, S. 171 liquidity 91–2
Jaumotte, F. 83 Lochy, J. 163, 181
J.D. Power 22 long-term capital management 79
Jenkinson, G. 184 Lyman, T. 86
Joly, A. 201
Joppich, D. 120 McCullough, B. 100
Josse, J. 52 machine learning (ML) 39, 58–62
Judge, K. 168 McKinsey & Company 108, 109
Jung, J. 183 Mackintosh, J. 155
McRee, D. 107
Kabbage 40 macroeconomic benefits 136
Karinja, F. 134 Madoff, B. 179
Kashkari, N. 139 Mallick, S.K. 172
Kaufman, D. 167 Mankiw, G. 135
Kearns, A. 183 Manyika, J. 89–92, 103, 108
keystroke dynamics 55 market discipline 166
Khadem, N. 114 Marous, J. 72
Khan, F. 23, 26, 27 Marr, B. 58
Khan, H.R. 171 Marria, V. 182
Kim, C. 143 MAS see Monetary Authority of
Kindleberger, C. 146 Singapore (MAS)
Klühs, T. 171 mass surveillance 105–7, 129, 207
Knightian uncertainty 168 MasterCard 108–11
Know Your Customer (KYC) 181 Matvos, G. 165
Koping, J.P. 118, 121 Maule, C. 30
Korner, R. 184 measure of value 155
Korolov, M. 71 media 11
Kowalik, M. 167 fintech in 11
Kristoufek, L. 149 medium of exchange 140, 143, 144, 150,
KYC see Know Your Customer (KYC) 152, 153
see also cryptocurrency
Labak, A. 108 Melecky, M. 172
Lagarde, C. 13 Mersch, Y. 107
Landau, J.P. 167 Mestchian, P. 95
Lango, L. 198 mid-prime fintech loan 40
Lansky, J. 140 Mining Max 158
Lastrapes, W.D. 121 mis-selling 176–9, 187
ML See machine learning (ML)
234 Fintech
mobile pay-as-you-go schemes 103 operational risk 95–8

mobile payments 37–8 Organisation for Economic Co-operation
mobile wallets 37 and Development (OECD) 63, 87
Modi, N. 113 Orús, R. 66
Mohan, R. 26 Oscar Health 41
Monetary Authority of Singapore (MAS) Ozili, P.K. 89, 90
115, 195
monetary policy 123–4, 164, 171–2 Paas see platform-as-a-service (Paas)
money laundering 180, 193 Palmer-Derrien, S. 27
money transfer 37–8 Partnoy, F. 53
Moore, R. 199, 201 Paul, R. 136
Moosa, I.A. 95, 149 Paycheck Protection Program (PPP) 21
Morgan, P.J. 172 Payment Card Industry Data Security
morphological identifiers 71 Standards 38
Morrison, S. 114 PayPal 7, 107, 117, 136, 208
Murphy, D. 67 peer-to-peer (P2P)
Murthy, G. 185 electronic cash system 150
Musk, E. 160 lending 7, 8, 33, 40, 169, 194
Myers, C. 201 platforms 183, 201
regulation 51
Nakamoto Scheme 156 transactions 20, 87
National Consultative Ethics Committee transfer services 37
for Health and Life Sciences 72 people risk 95
natural language processing (NLP) 59 Phillips, K. 52
natural language understanding (NLU) phishing 97, 157
59 physical cash 125
negative interest rates 133–4, 164 physiological biometrics 71
neobank 34–5 platform-as-a-service (Paas) 69
neural network 59–60 Plexcoin 184
NLP see natural language processing PlusToken 157
(NLP) PokéCoin 140
NLU see natural language understanding Policygenius 41
(NLU) Pontines, V. 172
No Cash Day 117 Ponzi schemes 38, 124, 139, 156–9, 166,
non-cash 171, 176, 178–80, 184
payments 122 Popper, N. 159
transactions 129 Porteous, D. 86
Norwegian Hospitality Association 115 Portnoy, D. 159
Noya, E. 87 Povel, P. 179
poverty 90, 103, 110, 174–6, 206
OECD see Organisation for Economic P2P see peer-to-peer (P2P)
Co-operation and Development PPP see Paycheck Protection Program
(OECD) (PPP)
Office of the Comptroller of the predictive analytics 62
Currency (OCC) 195 Prinsloo, L. 159
Omidyar, P. 109 privacy 127
OneCoin 157, 184 Private Vaults Australia (PVA) 135
online cashless transaction systems 200 product quality and diversity 88
operational resilience 190 protection, cash 128
public finance 90
Index 235
Pugliese, J. 72 SaaS see software-as-a-service (SaaS)

PVA see Private Vaults Australia (PVA) Sahay, R. 89, 93, 98
pyramid scheme 156 Salerno, J.T. 115
Salmon, F. 151
quantitative trading 79 sandbox 194, 195
quantum computing 65–6 Sands, P. 120–21
quantum cryptography 66 Sarbanes–Oxley Act 166
Quijones, D. 136 Satoshi Nakamoto 141, 143, 150, 151
savings app 38–9
Rahman, A. 171 SBA loan see small business
Rai, K. 171 administration (SBA) loan
Rainey, J. 108 scalability 78
Rakoff, J.S. 99 Schindler, J. 200
Rana, P. 165 Schmidt, E. 64
Ratner, J. 202 Schueffel, P. 3, 6, 17, 30
Raviv, P. 152 Schulman, D. 108
Regtech 72–4, 89 Scott, B. 106, 107, 117, 122, 123, 137
regulation sectoral innovations 13, 24, 29
audit 166 Securities and Exchange Commission
and compliance 89 (SEC) 184
financial 176–7 Securities and Future Commission, Hong
of fintech 191–5 Kong 195
peer-to-peer (P2P) lending 51 security 127
regulators 46 of non-cash payments 122
regulatory arbitrage 194 Seetharaman, A. 150
regulatory barriers 170 Sentner, F. 31
regulatory perimeter 189–90, 192 Sergeenkov, A. 156, 157
Reiff, N. 204 Seru, A. 51, 165
reliability 128 Seth, S. 151, 153
Restoy, F. 194 shadow banking 49–52
Reurink, A. 176, 178 Shaefer, H.L. 206
revolutionary fintech 18, 28–31 Sharma, P. 182
reward crowdfunding 36 Sherter, A. 176
Reynolds, M. 149 Shevlin, R. 185
Ripple system 1–2 Shiller, R.J. 146, 147, 149
risks 186–91 SIFIs see systemically important
Roa, M.J. 173 financial institutions (SIFIs)
Robinhood 177, 183 Singh, S. 167
robo-advising 39 skilled labour 83
robustness 128 Skinner, C. 70
Rogoff, K. 118–20 Slusarczyk, B. 95
Rooney, K. 99 small and medium-sized enterprises
Root Insurance 41 (SMEs) 45, 172, 173
Rosano, J. 129 small business administration (SBA)
Rosengren, E.S. 162 loan 40
Rose-Palan, B.M. 101 smart contract 77–8
Roubini, N. 78, 160, 204 SMEs See small and medium-sized
Ryan, T. 48 enterprises (SMEs)
Smith, N. 151
Snowden, E. 129
236 Fintech
software-as-a-service (SaaS) 45, 69, 72 technology-induced operational

Solow, R. 52 efficiency 7
Somerville, R. 202 terrorist finance 121
Sood, S. 72 Tett, G. 52
Soros, G. 52 Thompson, D. 147, 154
Spooner, L. 106 Tikam, J. 7, 18, 47–8
Stankiewicz, K. 142 Tomfort, A. 146
start-ups 46–9 Torres, R. 126
statistical algorithms 71 trading 39
statistical learning 59 high frequency 39, 79, 97
stock-trading apps 39 quantitative 79
store of value 151–3 traditional fintech 18, 47
Strauss, A. 183 TransferWise 22
Suberg, W. 148 transitory hype, fintech as 197–8
Summers, L. 118 transmission of contagious disease 124–5
Sung, A. 5, 6, 17 transparency 101
superintelligence see artificial trantech 17
superintelligence (ASI) trust 126–7
suptech 191 customer and investor 98–100
Suspicious Activity Report 116 gaps 98
sustainable development 92, 103 Tse, T. 173, 174
Sweden, role of government 115 Turanova, G. 146, 147, 154
systemically important financial
institutions (SIFIs) 86 ultra-high-frequency trading 79
systemic risk 95, 168 ultra-low/negative interest rates 133–4,
164
Taleb, N.N. 53, 138, 142, 150, 153, 155, UNCDF see United Nations Capital
204 Development Fund (UNCDF)
Taplin, N. 151 underground economy 119
tap to pay technology 22 United Nations Capital Development
tax code 164 Fund (UNCDF) 109
Taylor, C. 13 un-skilled labour 83
Taylor, T. 121 UN’s sustainable development goals 92,
Teather, D. 52 103
technological innovations 18 utility computing 69
technology 33, 45–6, 55–6
aggregators 68 Vamraak, T. 115
artificial intelligence (AI) 56–8 Van Loo, R. 201
benefits and costs of 81–4 Varga, D. 6, 7, 24, 25
big data 63–5 Venmo 37
biometric identification 70–72 virtual currency 138–40
blockchain technology 74–8 Visa Card 108, 111
cloud computing 69–70 Vogit, L. 173
fraud 180–82 Volpicelli, G. 147
Internet of Things (IoT) 66–8 von Neumann, J. 204
machine learning (ML) 58–62
quantum computing 65–6 Wagner, R. 31
regulation technology (Regtech) Walden, S. 21, 22
72–4 Wallison, P.W. 50, 51
risk 84, 95
Index 237
Wang, J. 164 West, R. 106, 129

war on cash 100, 106, 110, 120, 129, 136 Whitehead, J.W. 105, 106
cash and cashless transactions 121–9 White, L.H. 106, 110, 112–13, 116, 119,
cashless society 105, 107, 119, 123, 126, 127, 129
129–33 Wikipedia 200
coalition of willing 106–11 Wilde, A. 98
conspiracy theory 133–5 Williams, S. 148
declaration of war 105–6 Wipf, C. 206
role of governments 112 Wirth, J. 85
Australia 114 World Economic Forum (WEF) 11, 13,
Europe 113 180
Greece 114 World Wide Web 197
India 113 Wright, P. 158
Norway 114–15
Singapore 115 Xie, P. 11
Sweden 115
US 115–16 Yellen, J. 139, 147
war on drugs 106 Yermack, D. 151–3
war on financial privacy 127
war propaganda 116–21
Wasik, J. 154 Zasarsky, I. 180
WEF See World Economic Forum Zavolokina, L. 6, 11, 30
(WEF) zero lower bound (ZLB) 107

Imad A. Moosa - Fintech - A Revolution or A Transitory Hype - Edward Elgar Publishing (2022)

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Fintech

To Nisreen, Danny, Ryan and Ivy

Cheltenham, UK • Northampton, MA, USA

All rights reserved. No part of this publication may be reproduced, stored in a

Edward Elgar Publishing, Inc.

A catalogue record for this book

Library of Congress Control Number: 2022938901

This book is available electronically in the

ISBN 978 1 80220 633 3 (cased)

1 Fintech: what is in a definition? 1

2 The evolution and revolution of fintech 18

3 Functions and market structure 33

5 The benefits and costs of fintech 81

6 The war on cash 105

7 Cryptocurrencies: a revolutionary innovation or a scam? 138

8 The implications of fintech for financial stability and inclusion 162

9 The regulation of fintech 176

10 The fintech hype 197

1.1 The frequency of Google search (Index 0–100, monthly

1.2 The frequency of Google search (Index 0–100, annual

2.1 Fintech evolution milestones 1830–1999 23

2.2 Fintech evolution milestones 2000–2020 24

2.3 Fintech sectoral innovations 29

2.4 Innovative market support services 30

3.1 Line of business of world’s top 50 fintech companies 42

3.2 B2B and B2C products and services 43

4.1 Technology and output in finance 55

4.2 Feed-forward ANN 60

4.3 The components of artificial intelligence 62

4.4 Regtech applications 73

4.5 Recording of a new transaction on a blockchain 75

4.6 Centralised vs. decentralised databases 76

5.1 Technology in the production function 82

5.2 Capital-deepening technology 102

6.1 Proportion of cash payments (%) 130

6.2 High scores of means of payment on 11 criteria (smiley face) 132

7.1 The dollar price of bitcoin (daily observations, 0 = 19/08/2016) 147

7.2 Index of the bitcoin price of a commodity 154

9.1 Regulatory response to fintech risks 189

9.2 Mapping of regulatory responses to fintech activities 192

1.1 The frequency of Google search (Index 0–100) 4

1.2 Selective definitions of fintech obtained from a Google search 9

1.3 Definition/description of fintech in popular media 12

1.4 Reference of definitions to fintech characteristics 15

2.1 Growth rates of Fintech start-ups 21

3.1 Examples of the activities of fintech companies 35

3.2 A brief description of the terms associated with products

4.2 The use of big data 65

4.3 Examples of Regtech companies 74

4.4 Potential applications of blockchain technology 77

5.1 Challenges and benefits of fintech start-ups 85

5.2 Operational loss events relevant to fintech 96

5.3 Sources of operational risk relevant to fintech 97

7.1 Peaks and troughs in the dollar price of bitcoin 148

9.1 Examples of failed fintechs 186

10.1 Ranking of top inventions 203

10.2 Classification of claims in favour of fintech 207

CEN Crimes Enforcement Network

1.1 INTRODUCING FINTECH THROUGH RIPPLE

1 Fintech: what is in a definition? 1

2 The evolution and revolution of fintech 18

3 Functions and market structure 33

5 The benefits and costs of fintech 81

6 The war on cash 105

7 Cryptocurrencies: a revolutionary innovation or a scam? 138

8 The implications of fintech for financial stability and inclusion 162

9 The regulation of fintech 176

10 The fintech hype 197

2.1 Fintech evolution milestones 1830–1999 23

2.2 Fintech evolution milestones 2000–2020 24

2.3 Fintech sectoral innovations 29

2.4 Innovative market support services 30

3.1 Line of business of world’s top 50 fintech companies 42

3.2 B2B and B2C products and services 43

4.1 Technology and output in finance 55

4.2 Feed-forward ANN 60

4.3 The components of artificial intelligence 62

4.4 Regtech applications 73

4.5 Recording of a new transaction on a blockchain 75

4.6 Centralised vs. decentralised databases 76

5.1 Technology in the production function 82

5.2 Capital-deepening technology 102

6.1 Proportion of cash payments (%) 130

6.2 High scores of means of payment on 11 criteria (smiley face) 132

7.1 The dollar price of bitcoin (daily observations, 0 = 19/08/2016) 147

7.2 Index of the bitcoin price of a commodity 154

9.1 Regulatory response to fintech risks 189

9.2 Mapping of regulatory responses to fintech activities 192

1.1 The frequency of Google search (Index 0–100) 4

1.2 Selective definitions of fintech obtained from a Google search 9

1.3 Definition/description of fintech in popular media 12

1.4 Reference of definitions to fintech characteristics 15

2.1 Growth rates of Fintech start-ups 21

3.1 Examples of the activities of fintech companies 35

4.2 The use of big data 65

4.3 Examples of Regtech companies 74

4.4 Potential applications of blockchain technology 77

5.1 Challenges and benefits of fintech start-ups 85

5.2 Operational loss events relevant to fintech 96

5.3 Sources of operational risk relevant to fintech 97

7.1 Peaks and troughs in the dollar price of bitcoin 148

9.1 Examples of failed fintechs 186

10.1 Ranking of top inventions 203

10.2 Classification of claims in favour of fintech 207

technology-enabled financial service companies and traditional banking insti-