• CFRED CUHK Law

Recent Developments in the FinTech Industry

Thomas Chemmanur - Boston College, Carroll School of Management;

Michael Imerman - the Drucker School of Management, Claremont Graduate University;

Harshit Rajaiya - Boston College, Carroll School of Management;

Qianqian Yu – College of Business, Lehigh University

-- Over the past decade, since the financial crisis brought the global economy to its knees, financial technology (FinTech) startups have swooped in and offered more innovative solutions to problems in the traditional banking, insurance, and asset management areas. FinTech, as the name suggests, refers to the use of latest technology in solving problems in financial services (often relating to customer experience and insight). In our article "Recent Developments in the FinTech Industry," forthcoming in the Journal of Financial Management, Markets and Institutions, we restrict our definition of FinTech firms to startup firms (including software developers, hardware manufacturers, data analytics firms, mobile technology, and e-commerce platforms) that have entered into the space traditionally occupied by intermediaries like banks and other financial institutions. Of course, traditional financial institutions, or the “incumbents” in the financial service industry, are also increasingly using technology to serve their customers: banks provide the option of online lending to their customers and venture capitalists (VCs) may use artificial intelligence to identify start-ups in which to invest.

The FinTech Ecosystem can broadly be divided into following eight industry segments (see, e.g., Imerman and Fabozzi (2020)): (i) Payments and Money Transfers; (ii) Digital Banking; (iii) Digital Wealth Managers, including robo-advisors; (iv) Capital Markets Innovations, including algorithmic trading, high-frequency traders, and market analytics; (v) FinTech Lending, including P2P and Marketplace Lenders; (vi) Equity Crowdfunding; (vii) InsureTech, which refers to innovations in the insurance industry; and (viii) PropTech, which refers to innovations in the property and real estate industry. The emerging technologies that are being used across the above industry segments in FinTech include blockchain and distributed ledger technology (DLT), biometrics, quantum computing, cloud computing, open-source computing and application programming interfaces (APIs), Big Data Analytics, machine learning (ML) and artificial intelligence (AI), Internet-of-Things (IoT) technology, and cybersecurity, among others (Figure 1).

Figure 1: FinTech sector map

After the Financial Crisis, there has been significant growth in the number of new FinTech firms springing up in the U.S. as well as globally. Many of these FinTech firms have the potential to displace traditional intermediaries by exploiting the economies of scale in data analytics and providing lower cost financial services to their customers compared to the incumbents. Furthermore, the increased penetration of smartphones and improvement in internet speed enabled continuous real-time provision of financial services in the hands of customers through such mobile devices.


The largest amount of investment in FinTech companies was made in consumer payment, consumer lending, and payment infrastructure. Prominent FinTech firms in these sectors include Prosper, Lending Club, Venmo, and Square among others. This had a direct implication on banks as these small business lending and peer-to-peer lending firms competed directly with banks in some cases, while also addressing the needs of previously underserved consumer segments. Incumbent banks responded to the increased competition from FinTech firms by investing in FinTech innovation and in some cases acquiring FinTech firms. A representative example of the latter case is Capital One’s acquisition of Wikibuy in 2018. Similarly, several start-ups made forays in the wealth management space leading to growth in robo-advisors in recent years. Again, the incumbents responded with their own robo-advising services. For example, Vanguard, Schwab, and Fidelity now offer robo-advising services to their clients.

We also conducted an analysis of the innovation (patenting) activities of FinTech firms by analyzing a sample of 1,309 U.S.-based FinTech firms over the period of 1983 – 2018 obtained from the Venture Scanner database. We find that 191 FinTech firms (14.6% of 1,309 firms in our sample) have at least one patent. Further, all of these patents were filed after 1990. As shown in the Figure 2, we find an upward trend on patenting by FinTech firms over the years with a sudden jump in patenting after 2010.

Figure 2: The number of patent applications filed by FinTech firms over 1990 – 2015


We also discuss potential sources of value creation by FinTech start-up firms relative to existing incumbent firms. We argued that, in developed economies like the US, an important source of value creation arose from FinTech startups being able to provide a superior customer experience relative to that provided by incumbent firms. We also discussed the regulatory environment facing FinTech firms, in their banking as well as in their financial market activities. Finally we analyzed the buy-versus-build decision facing firms choosing to enter the FinTech sector, and discussed the trade-offs that may drive such decisions in practice.

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