Master Thesis Digital Banking & Financial Technology

participants in the FinTech ecosystem include entrepreneurs, government and 
financial institutions, while Lee and Shin (2018) identify five elements of the FinTech 
ecosystem: (i) FinTech start-ups, which are active in payments, wealth management, 
lending, capital markets and insurance, among others; (ii) developers of technology 

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solutions, such as big data analytics, cloud computing, cryptocurrencies, etc.; (iii) 
government, as represented by financial industry regulators and legislation; (iv) 
financial industry customers, whether individuals or institutions; and (v) traditional 
financial institutions These are elements that symbiotically contribute to innovation, 
stimulate the economy, facilitate cooperation and competition in the financial industry 
and ultimately benefit consumers in the financial industry. 
Image 4 Fintech ecosystem (https://www.gatewayhouse.in/big-fintech-is-here/) 
At the centre of the ecosystem are FinTech start-ups, which are 
predominantly entrepreneurial and which are bringing significant innovations in the 
areas of payments, wealth management, lending, capital markets and insurance 
through reducing operating costs, targeting niche markets and providing more 
personalised services than traditional financial firms (Lee and Shin, 2018). The 
aforementioned firms are driving the phenomenon of financial services 
decentralization, which has been particularly disruptive for banking institutions 
(Walchek, 2015). The ability to decentralize services is one of the main growth 
drivers for the FinTech industry, as traditional financial institutions are disadvantaged 
in this context. Consumers no longer rely on a single financial institution to meet their 
needs, but instead choose the services they want from a range of FinTech firms. At 

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the same time, venture capital and private equity managers are contributing to the 
growth of FinTech firms, resulting in a significant increase in the level of investment 
over time (Lee and Shin, 2018). 
On the other hand, technology solution developers provide digital platforms 
for social media, big data analytics, cloud computing, artificial intelligence, mobile 
devices and smart phones. Technology solution developers create an enabling 
environment for FinTech firms to quickly introduce innovative services to the market 
(Lee and Shin, 2018). Big data analytics can be used to provide unique personalized 
services to customers, and cloud computing can be used to enable FinTech firms to 
develop web-based services at much lower costs than those required to develop in-
house infrastructure. Algorithmic trading strategies can be used as the basis of 
wealth management services, while social media facilitates the development of 
communities in the case of crowdfunding and person-to-person lending services (Lee 
and Shin, 2018). Finally, the universal presence of mobile devices substitutes for the 
advantages of physical tending, while mobile network operators also provide low-cost 
infrastructure for FinTech firms to develop services. In the same context as above, 
the FinTech industry generates income for technology solution developers. 
As for governments, they have provided a favourable regulatory environment 
for FinTech companies since the financial crisis of 2008 (Nash et al., 2015). Based 
on national economic development plans and national economic policies, different 
governments provide different levels of regulation (financial services licensing, 
relaxation of capital requirements, tax incentives, etc.) for FinTech companies in 
order to push them to innovate and facilitate global financial competition. To illustrate, 
in Singapore, the government has made changes to the regulatory framework for 
online payments in order to make it friendlier to online payment solution providers 
and to boost the growth of payment technology (Reuters, 2016). On the other hand, 
since 2008, traditional financial institutions have been subject to stricter regulations, 
capital requirements and reporting requirements, by the regulators of the respective 
government. The looser regulatory requirements imposed on FinTech companies 
allow the latter to provide more personalised, less expensive and more accessible 
financial services to consumers. However, while certain regulations are favourable to 
FinTech companies, the latter need to understand how these regulations affect their 
service delivery. The example of FinTech company LendUp, which was fined $3.63 
million for violating consumer financial protection laws, is a case in point (Consumer 
Financial Protection Bureau, 2016). 
Financial customers are the source of income for FinTech companies. In fact, 
while large institutions are important sources of income, the dominant source of 

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income for FinTech companies is individual customers and small and medium-sized 
businesses. Moreover, it is found that the use of FinTech services is more prevalent 
among younger age and better-off consumers (Nash et al., 2015). Early adopters of 
FinTech services are mainly individual consumers, technology-savvy, young, residing 
in urban areas and characterized by relatively high income. Today, consumers aged 
18 to 34 years old represent a significant share of FinTech service consumption in 
most countries, and future demographics are also favourable for FinTech companies 
as it is expected that in the coming decades, young age consumers who are 
technology-savvy will represent the largest share of the population and will drive 
developments in the FinTech services industry (Lee and Shin, 2018). 
The last element of the FinTech ecosystem is traditional financial institutions. 
After realizing the disruptive power of the FinTech industry and the diminishing 
opportunities to mitigate the FinTech industry's impact on the market, traditional 
financial institutions have rethought their existing business models and developed 
strategies that will enable them to embrace the innovation of FinTech firms (Lee and 
Shin, 2018). Traditional financial institutions are characterized by competitive 
advantages over FinTech firms in terms of economies of scale and financial 
resources. However, traditional financial institutions tend to focus on bundled 
services, providing understandable financial products and services to consumers, 
rather than decentralized but personalized products and services (Lee and Shin, 
2018). Moreover, although initially, traditional financial institutions viewed fast-
growing FinTech firms as threats, they are now focusing on partnering with them 
through various financing providers. In return for providing funding, traditional 
financial institutions can leverage the knowledge of FinTech companies to stay at the 
forefront of technology (Yang, 2015). 
3.4. The importance of financial technology companies 
3.4.1. Financial Inclusion
Many people in the United States and throughout the world lack access to the 
fundamental financial services that others take for granted. Numerous individuals 
lack access to bank accounts and debit cards due to their location, movement, and 
financial circumstances. According to the Federal Reserve, 13% of American adults 
are underbanked, meaning that they have a bank account but rely on expensive 
services such as check cashing and payday loans instead. 6% of the population is 

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unbanked, meaning they have no bank account and rely only on these services. 
Access to banking is closely connected with income, education, and race. Unbanked 
and underbanked individuals suffer a number of financial obstacles, such as lack of 
access to credit, difficulty to develop savings, and the risk of losing money to 
predatory financial service providers. However, fintech has the potential to expand 
financial services to these groups, which is the essence of financial inclusion 
(Sullivan, 2022). 
Financial inclusion signifies that all individuals and enterprises in a society 
have inexpensive access to the financial services they require. Checking accounts, 
credit cards, insurance, and other essential financial instruments are accessible to all, 
including low-income and underserved regions. Due to the significant number of 
unbanked and underbanked individuals in the United States, it is evident that we do 
not live in a financially inclusive society. Nevertheless, numerous fintechs are 
attempting to remedy the situation. Plaid, for instance, has collaborated with Green 
Dot's GO2bank, which provides mobile-first banking with no fees and early paycheck 
access. These banking services are accessible to individuals for whom standard 
financial services have been inaccessible. Joining the Plaid network provides 
GO2bank's customers with access to over 6,000 fintech applications, thereby 
enhancing their financial freedom and well-being (Sullivan, 2022). 
Financial inclusion is crucial because it provides low-income and excluded 
populations with reasonable and convenient access to fundamental financial services, 
which were historically less accessible. When access to financial services, which is 
frequently facilitated by fintech, is increased for these groups, financial empowerment 
increases. Globally, the emergence of fintech has occurred together with the 
expansion of financial inclusion. Globally, 76% of individuals have a bank or mobile 
account in 2021, up from 51% in 2011. This has resulted in billions more bank 
account holders over the past decade, primarily in poorer nations. This growth is 
attributable to fintech's contribution to financial access and is building a more 
financially inclusive global community (Sullivan, 2022). 

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Image 5 Percentage of adults with a bank or mobile depository account worldwide 
(https://plaid.com/resources/fintech/financial-inclusion/) 
3.4.2. Cost-Effective Option 
Fintechs are improving the quality of payment services by leveraging 
advanced technologies. Fintechs' transparency has attracted a substantial market 
share. Fintechs give solutions that are simple, clear, and unified, in addition to being 
inexpensive. Fintechs connect major client bases with banks in order to facilitate 
quick payments via wallets, payment applications, or online banking. The flexibility, 
speed, and affordability of Fintech transactions are made possible by cutting-edge 
technology. FinTechs are able to attract clients with lower prices because to their 
virtual operations, flexibility, and lack of regulation as a deposit institution or source of 
venture financing. Not only have fintechs improved the user experience, but they 
have also assisted banks in offering consumers with buy-now-pay-later purchasing 
options. Covid-19 halted global economies, making it twice as difficult for individuals 
to meet their fundamental needs. Due to the introduction of the buy-now-pay-later 
(BNPL) option, individuals have been able to resolve their financial troubles. In 
contrast to the time-consuming process of acquiring a loan, customers without a 
credit card can use BNPL in a matter of seconds. The BNPL option applies to a 
variety of products and services, including appliances, autos, travel, and other 
comparable items, making them relatively affordable to consumers. Banks benefit 
from Fintechs in a variety of ways, including establishing a massive customer base 
and winning customers' trust. Banks such as RBL have worked with over 90 start-ups 
in India and the United Kingdom, acquiring 30% of its total 2.8 million customers. Yes 
Bank is another example of a bank that has partnered with FinTechs and garnered 
20% of its client base (Anand, 2021). 

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3.4.3. Fintech is Safe and Secure 
Although individuals and organizations are generally concerned about 
cybersecurity, financial institutions take the matter more seriously. According to the 
findings of a recent survey, banks spend over 70 percent of their budgets on devising 
and implementing security methods to prevent cybercrime. Other areas of concern 
for banks include mobile updates, cloud technologies, and system upgrades. These 
data demonstrate that cybercrime is the most significant threat facing organizations 
in the financial sector. In addition, the organizations stand to lose a substantial 
amount if a cybersecurity threat materializes because they hold a substantial amount 
of customer funds. When hackers gain access to bank networks, the institutions incur 
two types of damages. First, they lose crucial client information and, with it, their 
reputation. In addition, regulators around the world are enacting stringent rules to 
compel businesses to handle client data responsibly. If banks fall victim to 
cyberattacks, regulatory authorities are likely to investigate them (FSBT.TECH, 2018). 
The issue with conventional banks stems from their business model and 
approach to client service. Large banks are typically inefficient when it comes to 
serving consumers and adjusting to new trends. Millennials are abandoning 
traditional banks in droves in favor of challenger banks due to the dreary nature of 
conventional banks' offerings and the attractiveness of Fintech's innovative banking 
approaches. Similarly, incumbent banks are slower than challenger banks when it 
comes to implementing cybersecurity safeguards. Fintech is founded on technology, 
whereas traditional banking institutions view technology as a necessary addition to 
their tried-and-true models. In contrast, nothing could be further from the truth. 
According to credible evidence, huge conventional banks lose more money to 
hackers than Fintech companies. Cybercriminals are able to easily breach the 
networks of major and traditional banks since these institutions do not prioritize 
Fintech. Although Fintech also has risks, their focus on leveraging technology to 
improve the banking process places them in a better position than their conventional 
counterparts to address cybersecurity challenges (FSBT.TECH, 2018). 
Numerous instances in which huge traditional banks have failed to protect 
their customers' data do not indicate that Fintech is superior to other financial 
institutions. There have been a modest number of data breach events involving 
Fintech companies because there are fewer Fintech companies than traditional 
banks. However, Fintech is superior to traditional financial institutions since 
challenger banks prioritize the technological protection of client data. Fintech 

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companies offer their services via the internet and mobile phones. According to a 
report by PWC, Fintech can rapidly adapt to market changes and implement stringent 
cybersecurity procedures to combat new threats. Thus, it is simpler for new banks to 
prioritize the security of client activity on their systems than for large conventional 
banks (FSBT.TECH, 2018). 
One of the defining characteristics of challenger banks is their use of open 
banking to service their consumers. In practice, the usage of open banking entails 
that financial services organizations choose to employ open source technology rather 
than the highly closed and proprietary ones utilized by conventional banks. Fintech 
employs open source technology to guarantee that its APIs are accessible. Thus, 
third-party developers can rapidly create new applications that operate on Fintech's 
platform. By doing so, challenger banks encourage the creation of an ecosystem of 
highly sophisticated applications that enhance service delivery overall. In addition, 
Fintech's use of open technologies revolutionizes how organizations handle 
customer data. It is typical for Fintech companies to share information with their 
consumers whenever the customers require access. In the case of conventional 
banking institutions, it has been the usual for banks to be unable to readily grant 
clients access to all the data they maintain. Therefore, the open banking 
methodology aids Fintech in enhancing their services and handling client data in a 
more transparent manner. Some commentators have argued that the usage of open 
APIs, for instance, makes new institutions more vulnerable in general. Current trends 
indicate, however, that while the usage of the open banking model exposes Fintech 
to new cybersecurity vulnerabilities, the same model is a useful weapon for banks to 
utilize against attacks. Therefore, banks can use open banking techniques to 
increase their security and enhance client service (FSBT.TECH, 2018). 

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References 
Anand, R. (2021).