Master Thesis Digital Banking & Financial Technology

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Chapter 3: FinTech companies 
3.1. Financial technology 
The term FinTech is an abbreviation of the term "financial technology", which 
in Greek is translated as "financial technology" and is a combination of financial 
services and information technology. The term "FinTech" was first used in the early 
1990s, in the title of a Citigroup project aimed at enhancing technological cooperation 
(Hochstein, 2015).
Academic and business literature defines the term FinTech differently.
Generally, the term FinTech refers to innovative and personalized financial services 
and products (Dany, 2016). On the other hand, authors such as McKinsey (2016) 
and Gulamhuseinwala, Bull and Lewis (2015) associate the term FinTech with 
business models, while Kim et al. (2016) perceive it as an entire sector of economic 
activity. At the same time, Zavolokina, Dolata and Schwabe (2016) summarize that 
either new services, products and processes or new business models emerge from 
the FinTech industry, while Dany et al. (2016) point out that a characteristic of 
FinTech services is that they put the customer at the centre. The Financial Stability 
Board describes the term FinTech as financial innovation driven by technology and 
argues that the revolution and innovation of the FinTech industry lies not only in the 
products used directly by the end consumer, but also in the technology used behind 
the system in question (Ogunode and Akintoye, 2023). FinTech promotes financial 
innovation through technological means and develops business models, 
technological applications, processes and products that have a significant impact on 
financial markets, financial institutions and financial services, breathing new life into 
economic growth and posing new challenges (Ogunode and Akintoye, 2023). 
In any case, all sources agree that the FinTech industry is leveraging digital 
technologies, such as the internet, and social media (McKinsey, 2016; Dany et al., 
2016; Gulamhuseinwala et al., 2015), while several sources also refer to the use of 
data analytics and artificial intelligence (Dany et al., 2016). By leveraging emerging 
digital technologies, the FinTech industry is enabling, innovating and disrupting the 
financial services market. Zavolokina et al. (2016) argue that, in addition to 
technology, the FinTech industry represents an evolution between start-ups and 
established firms that receive adequate monetary investments. Overall, the term 
FinTech refers to the integration of technology and finance and the use of emerging 

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online information technologies to transform and innovate financial products and 
service business models (Ogunode and Akintoye, 2023). The FinTech industry is 
characterized by low margins, high rates of innovation and growth, and plays an 
innovative role in investment and finance, risk management, payments, information 
security and user experience (Ogunode and Akintoye, 2023). 
From an industry perspective, FinTech firms are typically non-financial firms, 
such as technology-oriented firms and internet-based firms (Gulamhuseinwala et al., 
2015). Although some of them hold a full banking license (N26 company is typically 
cited), most firms in the industry do not hold a similar license. In order to offer 
services that require a full banking license or to leverage the regulatory and risk 
management expertise of traditional banking institutions, some FinTech firms are 
partnering with traditional financial institutions (Gulamhuseinwala et al., 2015). Today, 
FinTech firms, whether start-ups or established firms in the IT industry, are entering 
the financial market and attracting customers who traditionally serve This is attributed 
to three causes (Gomber et al., 2017). First, FinTech firms offer new products and 
solutions that meet customer needs that were not fully met by financial service 
providers. In addition, FinTech firms have created new opportunities to sell products 
and services through the development and implementation of innovative technologies 
and concepts. Finally, firms with a technological background are relatively better 
suited to provide services in a particularly innovative environment (Gomber et al., 
2017). Since changes and developments in the field of communication and 
information technologies are taking place at a rapid and dynamic pace, firms 
operating in this field need to be flexible and innovative. Consequently, such IT 
companies are usually characterized by a culture that is distinctly different from 
established financial service providers, with the result that the former put the latter 
under pressure (Gomber et al., 2017). FinTech firms focus on cost-effective, internet-
based business models to attack established financial service providers. In fact, 
some industry professionals argue that in the future, banking institutions will be used 
exclusively for deposits, while any other transaction will be carried out through the 
use of FinTech firms' services. 
With numerous venture capital investments over the past few years, FinTech 
firms have shown impressive growth globally, demonstrating their full potential 
through rapid growth (Gulamhuseinwala et al., 2015). In 2014, more than 75% of 
global FinTech investments were made in the U.S., between 10% and 15% were 
invested in the European market, and between 5% and 10% were invested in Asia 
(Dietz and Khanna, 2016). Due to the limited bureaucratic barriers, substantial 
understanding of customer needs and dynamic teams with high technological 

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capabilities, FinTech firms were distinguished for their short turnaround cycles and 
short time to market for their products. Although the majority of them adopt customer-
centric strategies, their long-term success rates are not yet available and their profits 
remain uncertain. However, FinTech firms are particularly attractive to traditional 
financial institutions, which are already investing in FinTech partnerships, 
acquisitions and internal incubator development to expand their service portfolio, 
target new market segments and enrich the customer experience (Dany et al., 2016). 
3.2. The industry's development 
According to Arner, Barberis and Buckley (2015), the evolution of the financial 
technology industry took place in three stages. The first stage, under the title FinTech 
1.0, lasted from 1866 to 1967 and involved the transition from analogue to digital 
technology. In the late 19th century, the combination of finance and technology led to 
the first period of financial globalisation, which lasted until the beginning of World 
War I. During this period, technologies such as the telegraph, railways and 
steamships strengthened financial links across borders, enabling the rapid 
transmission of financial information, transactions and payments around the world. At 
the same time, the financial sector provided the resources needed for the 
development of these technologies. In the post-war period, when financial 
globalisation was limited for several decades, technological developments, 
particularly those that emerged during the war, developed rapidly, particularly in the 
field of communication and information technology. In detail, firms such as IBM 
commercially developed the first computers, while Texas Instruments developed the 
first financial computer in 1967 (Arner et al., 2015). In the 1950s, the first credit cards 
appeared in the United States, and by 1966 the first global telex network had been 
developed, which provided the fundamental communications necessary for the 
development of the next stage of financial technology. In 1964, the Xerox company 
introduced the first fax machine to the market and in 1967, the Barclays company 
developed the first ATM (Arner et al., 2015). 
The second stage in the evolution of the FinTech industry, called FinTech 2.0, 
lasted from 1967 to 2008 and involved the development of traditional digital financial 
services. During the period from 1967 to 1987, financial services evolved from an 
analogue to a digital industry. Key developments set the stage for the second period 
of financial globalization, which was marked by the global reaction to the 1987 U.S. 

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stock market crash (Arner et al., 2015). Reflecting the need to interconnect domestic 
payment systems across borders, SWIFT (Society of Worldwide Interbank Financial 
Telecommunications) was developed in 1973, and the Herstatt Bank collapsed in 
1974, highlighting the risks of increasing international financial linkages, particularly 
through new payment system technology. 
The aforementioned crisis triggered the first regulatory controls on the 
FinTech industry, in the form of a series of soft international law agreements to 
develop robust payment systems and related regulations (Arner et al., 2015). At the 
consumer level, 1980 saw the first introduction, in the US market, of electronic 
banking. During this period, financial institutions increased the use of IT in their 
internal processes, gradually replacing most forms of written mechanisms until the 
1980s, when computerization further evolved and risk management technology was 
developed to manage internal risks. However, it was the development of the internet 
that set the stage for the next level of development (Arner et al., 2015).
By 2001, eight U.S. banks had at least one million customers online, with 
major financial institutions worldwide developing similar systems and related 
regulatory frameworks to address risk. By the beginning of the 21st century, banking 
institutions' internal processes, their interactions with external parties, and their ever-
increasing number of interactions with retail customers became fully digital, which 
underscored the importance of IT investment by the financial services industry (Arner 
et al., 2015). 
The third stage of the FinTech industry's evolution, under the title FinTech 3.0, 
started in 2008, lasts until today and concerns the democratisation of digital financial 
services (Arner et al., 2015). With the global economy emerging from the financial 
crisis, it became clear that many customers, especially the younger generation, had 
lost trust in banking institutions, while they had developed different consumption 
patterns from those of older consumers, as they had become accustomed to having 
access to personalised and personalised financial services (Arner et al., 2015). The 
aforementioned trend was accompanied by a steady growth in global FinTech 
investment, particularly through venture capital and private equity. In the period 
2013-2014, in just one year, FinTech investment in the US nearly tripled, with London, 
Silicon Valley and New York emerging as the main centres of financial innovation, 
with additional financial centres developing in the following years in Amsterdam, 
Paris, Berlin and Dublin (Anyfantaki, 2016). 
Today, the new opportunities that are emerging are having a very strong 
impact on the economies of emerging markets, particularly those characterised by 
rapid growth in the middle-income population. In particular, there is an increased 

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demand for financial services from people who previously had no access to the 
banking industry, as mobile-based technology now allows access to financial 
solutions without the need for a physical banking infrastructure (Anyfantaki, 2016).
In developing countries, the FinTech industry includes, among others, (i) a 
young population characterized by digital literacy and equipped with mobile devices; 
(ii) a rapidly growing middle class, with 60% of the global middle class to be located 
in Asia by 2030; (iii) inefficient financial markets that allow informal alternatives; (iv) 
lack of physical banking infrastructure; and (v) under-regulated frameworks for data 
protection and competition. The aforementioned characteristics are further enhanced 
by the interaction between a dynamic private sector seeking to expand to the 
provision of financial services and a public sector seeking to reshape the market to 
achieve economic growth (Anyfantaki, 2016). 
As for the Asian and African markets, the recent growth of the FinTech 
industry is mainly driven by economic developments. Typically, in Hong Kong and 
Singapore, business development programmes for innovative companies have been 
developed in less than a year, which act as innovation incubators, providing space, 
support and every possible form of assistance to young researchers, entrepreneurs 
and start-ups to develop new ideas and technology-driven solutions in the financial 
services industry (Anyfantaki, 2016). The emergence of the FinTech industry in Asia 
is the result of a combination of a number of business and regulatory factors. In 
particular, IT spending by traditional banks in Asia and Africa is lower than in Europe 
and the US. This can be attributed to a slightly less competitive market, which is 
largely controlled and subject to state-owned banks (Anyfantaki, 2016). The lack of 
trust in the state banking system, due to corruption and inefficiency, implies that 
users are inclined to adopt alternatives offered by non-banking institutions. As a 
result, mobile financial services and mobile products are becoming comparatively 
more attractive (Anyfantaki, 2016). 
3.3. The FinTech business ecosystem 
The existence of a stable, symbiotic ecosystem plays a fundamental role in 
the development of the FinTech industry. Diemers et al. (2015) suggest that