Lecture 2 - Business Application of Fintech

LECTURE-2: BUSINESS APPLICATION OF FINTECH 1
1. Business Application of Fintech

We will look at business applications of FinTech or the Fin of FinTech from the viewpoint of how does it
affect finance markets. There are many business applications of Fintech, however most common are in the
following six areas. Our discussion will lead by several case studies followed by analysis.
i) Lending and Personal Finance
An important area of finance and market opportunity for FinTech firms is lending and personal finance.
It deals with the idea of making loans to individuals or small businesses as an opportunity. A couple of
startups are famous in this space, such as, Lending Club, a P2P financing company; Kabbage, a B2B
financing company or a financing of small business; Credit Karma, offering credit services, credit finance
information, as well as, connections for loans; and E-Loan, an early pioneer in this business.
a) Lending Club was initially one of the first applications on Facebook. It was an early app in an
unsecured lending platform. It allowed borrowers to borrow money and lender to invest in such loans. So,
it was a peer to peer lending platform. The nice thing about this lending platform and one of the selling
points of Lending Club are you don't have to loan money to me. You can loan money to a portfolio
of people who are like me. If I were to go to a lending club and say I want to borrow some money, I
could find an investor that says, "I'll take one percent of his loan and one percent of somebody else's
loan." Lending Club will then bundle these into loan packages or notes that are multiple borrowers
and multiple investors who are providing capital to provide this financing. Therefore, you get the
diversification risk reduction. So, you end up with a safer investment, a more stable payout, whereas, one person
to one person loans can be highly risky.
Sometimes you get paid off and you might get a lot of interest. Sometimes you don't get paid at all. This can
be a disaster if you're just funding one loan with one investor. Banks wouldn't like to do that. As one
person said, "If you owe a bank $50,000, the bank owns you. If you owe the bank $50 million, you
kind of own the bank." You can tell them. If you want to get paid back, you got to treat me nice. So,
if you're rich and a very large borrower, you got a lot of negotiating ability with banks. If things go
wrong, you may be able to go bankrupt. You have credible alternatives.
However, with small loans and small investors, Lending Club is a way of getting a small investor to be able to
take a piece of a small part loan portfolio with other small borrowers. Banks traditionally were in this
business. They would take money from small investors and they would give money to small
borrowers. Lending Club disintermediates those banks. They provide a platform for lenders and
investors to get together.
How is this doing? Well, they've been making a lot of consumer loans, and they've even gone beyond
their original mission to where now they're saying, "Well, we'll also do other kinds of consumer
loans." Do you want car finance? That's not so good with investors because of the asset-backed
nature. We've got banks that will do that. Just come to us, we're Lending Club. We will end the
money. Some of those funds will go into things we'll package for investors. Some will sell off to
traditional banks because the margins are better and we can do very well with that. And so, they
have a bank that they work with, headquarters in Utah, that provides them with a platform for
packaging loans for other banks. Many loans do go through the banking back in for this Lending
Club now. These are not investor loans but they still do have many peer to peer investor type loans.
You can pick your portfolio of risk, you can pick your products, how much return you want, how
much risk you want, how much variability you want, how many borrowers you want within the note
that you're taking a piece of. They've been a pioneer in FinTech, and they've been very well noticed
Dr. Mohammad Anisur Rahman, Department of Management Information Systems, University of Dhaka
and have a lot of notoriety, but some of that's been negative cause they've had a few problems over
the past couple of years. In terms of the business model, they've done very well, and they're making
good money. They've had some management issues and some challenges, but those don't detract
essentially from the success of what their business model has done as disintermediation of traditional
banking.
b) Kabbage, a company taking away business from banks is looking in the small business space by exploiting
opportunities to raise money to lend to small businesses. They came up with this idea, went out and
nobody was interested. They couldn't raise any money. In the year 2009, their three founders went
out and tried to raise VC money, were unsuccessful. But they were able to get a large investor to put
up a convertible note. They were able to raise $500,000 that way, via convertible note or notes, and
they raised $1.5 million from 45 angel investors. They've raised a lot of capital, and they were able to
make their first 100 loans in 2010.
By the next year 2011, they were able to raise a lot more money. They were able to get venture capitals
involved because they started having very good returns. They also started getting a lot of good press.
Why? Because they were able to make small business loans with reasonable ability to get repaid and be
successful in minutes. This was contrasted with people's experience of borrowing from a traditional
bank whereas one small business owner put it, "I had an idea, I needed a loan to expand my business.
After three weeks of waiting at my local bank, they turned my loan down. Three weeks of being in
limbo, and they say no. This is terrible. A friend of mine said try Kabbage. I went online, and I had a
loan. Six minutes, I got financing." That's fast- very quick funding for your new business idea.
However, the cost is not cheap. For that particular loan, the interest rate was 27 percent a year. For some
loans, it's higher. Kabbage says, in general, you should be looking at about 3-4 percent a month. And
you should be looking at about a six-month repayment cycle. So, these are the short-term, high-interest
rate, high-cost loans, but very, very flexible.
They're willing to look at a lot of things that firms don't look at, normally in banks. Kabbage cooperates
with UPS, or Intuit, or other accounting software, or delivery systems or payment credit card
processing companies. It looks at your whole business model and wants to see how much volume of
transactions are you shipping out every week. How many customers are charging things on their
cards with your business? How is your accounting look? We'll look at all of that, and not just what
you write on a loan application paper that a bank officer may look at. Kabbage analyses lots and lots
of data. As a result, Kabbage has been able to make $4 billion in loans to over 130,000 small business
customers using more than a million data points as part of their loan approval cycle. They're able to
use lots of data like UPS shipping data or like your accounting data to make these decisions for their
130,000 small business customers. More than 10 data points per loan application of different data
sources that Kabbage is able to take advantage of, not just filling out your application with minor
amounts of data.
Kabbage is now a big company, very successful, raised a lot of money. In terms of FinTech, Kabbage
is now number 10 on KPMG's FinTech list or FinTech 100 list. They're also on the top 50 Disruptor
list for CNBC of companies that are disrupting industries, transforming the finance industry. For
several years now at least three years in a row they've been on Inc 500 fastest growing firms in
America. They are now being funded by and receiving credit from, or loans from, or investments
from Credit Suisse, ING, Softbank, and many, many other large financial institutions who are saying,
"Hey, we'd like to participate in some of this great success you have." That's kind of intriguing that
Abridged from the lecture of Prof. Theodore Henry King Clark, Hongkong University of Science and Technology on FinTech Foundation and Overview Course.
the banks who are being dis-intermediated and being threatened by Kabbage are saying, "We love
this idea. We want to participate. We want to be part of this. We want to work with you." Because
Kabbage is generating a lot of profit, they're generating a lot of success.
They're making loans fast. Customers are happy, but they're also paying pretty good interest and
they're paying. So, Kabbage is better at assessing risk than a local bank loan officer and better at
getting the customer in the door. Banks are saying, "We like this and we like putting our capital to
work in your business model." So that's intriguing.
c) Credit Karma is another credit related firm or lending payment system firm. Credit Karma doesn't
provide loans directly to consumers. All they do is help you out with your credit, they provide you
information. So as a consumer, you can go get a free credit report from Credit Karma. You can also get some
other value-added services that will help you improve your credit score, or understand your credit score, or
protest something that's wrong. Credit Karma will also provide you with some consulting or additional value-
added services if you wish to have that.
If your credit is great, your credit score is great, they will also work with you and say, "Would you
like a credit card? Would you like a mortgage loan? Would you like a car finance loan? I assume you
were looking at your credit score for some reason. Would you like some help, or links to good
companies? That might be able to provide you with great rates on loans." And because Credit Karma
has a good reputation, and hasn't charged anything to its customers, and they're feeling good about
it, they're feeling happy with it. When Credit Karma makes these targeted ads or offers of helping
you find financing, it doesn't feel as odd or as commercial in its nature, as do some bank commercials
or ads. You know you get a commercial, "Would you like a mortgage?" You're watching a YouTube
video and you say, "Go away. Skip Ad." With Credit Karma, you're looking at your credit report and
you're now thinking, "I wonder what it would cost me if I wanted to borrow money to buy a car."
Credit Karma says, "Have you been wondering about buying a car? We have some great lenders that
might be able to help you with that." "Oh, yeah. I'll click there. What do you have in mind? What do
you advise? What do you suggest?"
The banks love Credit Karma because they're getting a lot of information and a lot of filtering of the
front end to the customer. The banks are getting better referrals, better leads than they would from
just a general ad. They're getting something much more valuable from Credit Karma, and they're
willing to pay for that. The consumers are getting a more customized advertisement that they're
happier with than a general ad. So, Credit Karma is doing very well at making money. They're doing this
through referral fees and through banks, being willing to pay for leads.
d) E-Loan. The final company I want to talk about is a company that has been a pioneer and a leader in
this industry. They started in 1997 when the internet was young. Now, the Internet itself wasn't
young. I shouldn't say the internet was young. The internet has been around a long time in one
variation or another. But the web was young. The internet, as a visual graphic-based entity rather
than a text-based entity, was young. They were an early e-commerce-like platform, in the early days
of web commerce. In 1997, they started up. They are a very simple value proposition that would give you
loans, easier, faster, simple, particularly for mortgages and, or auto financing, they were very easy to work with
and very large.
They got some funding from Softbank, from Yahoo, from Sequoia Capital, and that helped them get
started. In the first year, they raised $25 million in venture funding. And eventually, by 1998, they
had received an offer from Intuit to buy their company for 130 million. And that's a big increase in
valuation. Now we're talking about four times jump in value in one year, 400 percent a year, that's a
pretty good return. They turned it down. More interesting. They did raise 25 million or 23 million, I
think it was from Yahoo for one-quarter of their company, which was a lower valuation, but it
allowed them to stay independent. Eventually, they did sell the whole company to Popular Inc., a
bank holding company, in 2005, a couple of years later, for 300 million. Mind you, this is after the dot
com crash.
Even though not all companies were now magically valued at big numbers like they might have been
in 1998. By 2005, we're well past the dot com crash, and they're still selling out for huge multiple over
the initial listing of their company and raising of capital, over their private placements. Big gains for
the founders, for the company. This is a success, cash out, for an early pioneer in payment systems,
E-Loan. Now you may be thinking, "But I've never heard of E-Loan." Yeah, they went away in 2009.
They went away before there were very many smartphones out there. Before we have apps, like we
do today of Apple phones, or Samsung phones, or our Google pay, they were gone. Why?
Because Popular Bank, who bought them preferred to move all the direct banking and direct lending
under their own name. Now it was Popular direct, not E-Loan. It's just a bank, a front end for
originating loans, electronically. This bank paid a lot to buy this, but they wanted to buy the
capabilities, the technologies, the ideas, the ability to assess loan risk in an automated way, and they
got it. They got it, they brought it in-house, they turned it into their own brand. The FinTech startup
is gone. That doesn't mean FinTech is gone, that means this particular startup was acquired by a
bank, the founder made money, the early investors made money, the users got great service, and
then it went out of business as a bank took over that business.
Many firms in this space, there are lots of startups in this space, literally hundreds of startups, some are
big. When E-Loan was around, it was more than a quarter of the entire lending space, by the time it was
bought out. We may see FinTech firms getting merged in or purchased by large financial institutions and
becoming part of those firms. Early pioneers in FinTech gone, part of a large bank.
Much like Security First, the world's first Internet banking firm was bought by a large bank to integrate
into and help them get up to speed early on in the idea of an online checking account or virtual banking.
It's not like virtual banking is dead. It's still quite alive and well. But the earliest pioneer in that is no longer
in business because it was successful enough to be bought out for a nice valuation.
But then other firms started up in this space, like our lending club, or like Circle Fund in the UK, or like
Credit Karma, and linking in to sell your bank lead information to financial service firms. That's intriguing.
ii) Crowd Funding and Business Financing
Here we're going to look at crowdfunding and business financing in crowd type of application space or the
idea of financing. But before we get into those particular companies, we want to look at crowdfunding
models. There are basically three different things you can do with crowdfunding.
• Reward-based model. If you fund this, you get to be a part of it, or you get to name something, or
you get to have a character in the movie named after you, or you get to have an early product, that
we're producing. You get to be one of the first people, that own this product. You get some kind of
reward, a product, or service, or you get to be an ability to be part of something in the design or
naming of something.
• Social Welfare Model. We want to we want to fund something because it's good for society, it's
good for the community, it's good for something I believe in. If you fund this, it will help us to save
the planet, we'll be able to clean up the environment, we'll be able to do something with an
endangered species, or we'll be able to fight some political issue or challenge. You could argue by
the way that Bernie Sanders, presidential campaign, in the last election was largely crowdfunding
as a model rather than going and raising money from large institutional investors in a campaign.
He went out to the people and said, how about three bucks, and be part of our revolution.
• Equity-Based Funding Model. Here you would go out to the crowdfunding, let say, if you fund
this business, if you participate in this, you will own a piece of it, and as it becomes more successful,
you will participate in the upside. That could be a traditional equity model, you'll get shares, or it
could be, you'll get a portion of the revenue, or you will get a portion of the profits.
Now, we're going to look at three companies today that are kind of interesting in different twists on this
crowdfunding idea: Kickstarter, Neighborly and Indiegogo.
a) Kickstarter. This is one of the largest crowdfunding platforms, particularly for creative projects.
Their goal is to bring creative projects to life. Whether it's art, or music, or movies, or other creative
projects, and sometimes it's products, that are creative projects. So many things can be funded under
Kickstarter. Not everything, there are some businesses they won't allow under Kickstarter. For
example, if you want to do a biotech startup, they say, we don't want genetically modified organisms.
We just feel philosophically as a socially liberal company. We don't want to play in that space or
game. That might be unfortunate in some ways because, some people from a social platform or an
arts platform are saying," Yeah but we could have vegan alternatives to meat which are plants that
taste like chicken or beef". You can, and there are companies doing that, and that are funding startups
but not through Kickstarter. Kickstarter doesn't want that.
Here you can offer rewards as well as our experiences, be the first to see this movie at a preview of
the Kickstarter, or you get to be in the movie, you get to be one of the extras, if you're kickstarting
founder, or nominate someone else to be, or you get to vote on who some of the co-stars should be.
So, you get some kind of experience or reward for putting up the money. It's similar to kind of the
old model old school 300 years ago, of rulers or rich people being a patron of the arts. As a patron of
the arts, you would pay the cost or salary for Mozart, to be able to create a beautiful symphony. So
Mozart needs to live he needs to have his rent paid to pay for his alcohol, or drugs, or whatever else
he needs, to help him be creative and therefore, he needs a patron. He would rather work on his own,
but he didn't have Kickstarter. So he couldn't raise money in a peer to peer way, he had to find a
patron. Now with Kickstarter, we can have micro-patron, everybody can participate. It's more
democratic and it's more diversified. You can go to the world and say, "I just need 40 people to give
me 1000 dollars. I can get this thing done, or 400 people to give me 100 dollars." Now, they've raised
over nearly two billion in total pledged to fund from almost 10 million backers to fund over a quarter
million creative projects over the past few years. That's a lot of money. That's a lot of funding. That's
a creative alternative.
Some people have said Kickstarter is not that different from being able to go out to your community,
go out to your friends, family, and friends to raise some money, people you know raise some money.
But it is different, because unlike other efforts to raise money to fund a venture which tended to focus
on the financial returns, you now can say, "Help me fund this social project which might have some
benefits to society, it might have some benefits to you to be a participant in it, you may get a product
as well as providing equity funding." It can blend multiple models. Kickstarter can combine therefore
different funding approaches, as well as other companies in this space. That is different from what
we had as options before. It's not categorically completely different, but it feels different in terms of
its user experience.
b) Neighborly is a less commercially oriented site that started out with purely social welfare in mind.
Originally started as a donation-based crowdfunding site for civic projects, It then moved, it
morphed, it changed as a business model into funding microloans or small civic municipal bonds.
Typically, municipal bonds are in fairly large chunks. So, you would have to spend $10,000 to buy a
unit of that municipal bond, and Neighborly is saying, "Well, why don't you let people put in $17
into this park and let the neighbors co-invest." And instead of making it just a donation, you've just
got to give up the money. Give them the same return you would give to a wall street banker who's
putting money into this municipal bond. Give the same interests, give the same return, and say you
get not only a reasonable return like a tax-free interest return, but you also get to fund your
neighborhood project. You can say, "I put up some of the money for this park." Now, over time the
city will pay you back.
This seems to be a compelling value proposition which has worked much better for neighborly over
the past few years. Rather than just say give us money and donate to this out of the altruism of your
heart, they're saying give us money and donate to this project but also get a return as well. So it's
enabled them to raise more money, get more people involved and be more successful, and raising
money for the community. Raising over two and a half million dollars over the past two years for 55
community projects. Not huge. But it's not bad for community service based organization, that's
pretty good.
c) Indiegogo. It started out as Indie Film Development, independent films, creative, artistic films. Hard
to raise money for these, perhaps not surprising because most of them lose money, and so it's hard
to raise money from large investors for projects that don't make money. But sometimes you say, "I
really want to fund this because I believe in it, or because I want the activity to happen."
For example, Star Wars creators and Copyright owners are at least Pre-Disney. Things could be a
little less certain under Disney, but the argument previously was an independent filmmaker can
make a Star Wars spin-off as long as they aren't selling it for any profit. So they would raise money
to do a spin-off or a sequel of Star Wars series for years and would say we can't sell this to you, we
can't sell the films, we can't raise money from profit. But we could ask you to participate in this and
send you some DVDs once we get it done. Without your money, we can't do it because we need
maybe not a ton of money, but we need $40,000 to do this project. If you provide funding, we'll let
you be an extra in the movie as well if you want to. You can do some things like that to solicit funds
for charity or startups.
In some ways, this sounds a lot like Kickstarter, and frankly, the two sides are occasionally compared.
This one does this, this one does that, but they are targeting similar kinds of business models. One of
the biggest distinctions or differences is that Indiegogo allows a company to start taking the money out right
away, and to fund part of a project, but not finish the funding. Kickstarter says, "If you haven't met your goal
or your target, let's say you need $30,000 thousand dollars to do this film. If you don't raise $30,000, none of
the money gets transferred out". That's kind of exciting for investors because you're saying we're almost
there we're almost there, can I put a little more in or can I get somebody else in. It helps you to reach
your target goal. So, that's a plus of Kick-starter. But Indiegogo says we're almost there, but let's get
started with the project and then they allow you to keep raising funds forever. You can keep raising
money even after you've hit your target, even after it's been long gone. You say just help us continue
to support our charitable mission, or our service, or artistic project, with your money we can do more
of something. Indiegogo is more flexible but less target-based. So, Kickstarter you've got targets,
you've got goals, you've got to meet them. That kind of is fun. Indiegogo you got the money right
away. You can raise an unlimited amount of money on an ongoing basis. That's kind of fun too.
Different perspectives, different types of firms.
We've talked about crowd-funding and business financing. Businesses have been doing financing in
alternative ways, or creative ways, for a long time. Is it new? This isn't entirely new, but the scale of it, and the
scope of it is astonishingly new. It feels new from a user experience. It feels different than anything we've had
before. You can reach out to the world and find people to invest in your new business idea, or to lend you
capital from all over the planet.
It feels different from pitches to angel investors, which by and large focus on the upside financial. Consumer
feature of crowdfunding is relatively unusual in financial markets. It opens up a huge opportunity for bundling
ownership in a company with ownership of physical or tangible products or services or social welfare and goods, as
well. Crowdfunding can be both large and small. It is a big opportunity to do new things that we couldn't
have done before.
iii) Payment and Retail Transactions
Retail transactions and payment processing as part of this FinTech revolution. These are firms that are
competing with traditional banks to take away some of the things that banks used to do in their business.
They started up differently and their business focuses are different but they are in the payment and retail
transaction space.
a) PayPal. This is an interesting company because you may say, "Oh man, they've been around a long
time. They're old tech. I don't like PayPal. I don't like their fees or something else." Well, they are
charging large fees because they've been very, very successful and they have a huge number of
customers, and therefore they can start charging fees as banks do. Whereas they didn't start out with
such large fees or certainly not with such a large market share.
PayPal is an interesting company because it was started by Elon Musk. It was the big idea focused to
allow people to make digital payments from one wallet to another, one digital wallet to another using
a virtual currency. This may sound like a cryptocurrency, but there was no crypto and it was not a
separate currency. They were using US dollars and so in this sense, it might be like a tethered
cryptocurrency. This is an earlier threat that was very much real, has very much hit banking retail
transactions and payment processing.
This company started up in the year 1998, merged with Musk's company in 2000, took on the name
of his company, which at the time was X.com and then became PayPal in the next year. Musk was
also fired the next year. You might have thought of it as Musk retiring and somebody else being
brought in as CEO, but Elon says he was fired. So we tend to believe him. At any rate, he then used
the money from the IPO and later acquisition of PayPal after being very successful the next year to
raise a ton of money, and Elon owned a good piece of the business and that helped him get other
businesses started, which he's running today.
In 2002, PayPal went through an IPO. By the end of 2002, they had then been acquired by eBay for a
77 percent increase in valuation over their IPO price. That's 77 percent return in a couple of months.
That's not bad. By 2010, eight years later, PayPal has reportedly said they have over 100 million
accounts in over 190 different markets or geographic areas. So, 190 different markets, not all countries
like Hong Kong isn't really a separate country. Hong Kong is a separate market. It's a separate set of
regulations. It's a separate currency but it's not a separate country from China or a part of China. But
in 190 different markets and in 25 different currencies, Paypal does business. It's been very successful
and is very global. This company also has done a lot of acquisitions.
Braintree, which was acquired by PayPal in 2013. By 2015, eBay announced that they were going to
spin off PayPal. By 2015, also PayPal acquired Xoom. If you're in the US, you probably would use
Venmo. But Xoom is like Venmo. If you're outside the US, maybe you don't know Venmo, but you
might have used Xoom. Xoom tends to be outside the US. Venmo is inside the US but they're similar
in space. PayPal has acquired both, and Xoom is used in many different countries with many
different currencies and fits with PayPal's global focus. So a very successful firm, done a lot of
interesting things.
b) Braintree. Braintree is a merchant payment gateway service. They were started with the name
Braintree rather than an interactive payment processing or finance because the entrepreneurs who
founded it said, "We want to appeal to high-tech people. We want to appeal to Silicon Valley. We
want to raise awareness not with businesses because we'll get the business if we've got the right
application, we want to raise awareness of partners to help us develop this new idea, to get excited
about it."
They launched a service to provide almost an instant signup service for financial services firms to be
able to very quickly and easily be able to accept merchant cards like Visa and Mastercard, or
American Express or to accept PayPal. They also will accept bitcoin, if you prefer Bitcoin and other
cryptocurrencies. So, they're very flexible. They'll let you make payments in many different ways,
and they're very easy to set up. They started in 2007. Today, they are across the world in many
different countries on four continents and have over 500 employees. They acquired Venmo for 26
million in 2011 and two years later, they were acquired by PayPal for 800 million. So, they've been
very successful. Gone from a startup raising a couple millions of VC funding to sell out in 2013, which
is six years after their founding, to a giant in the business. A giant in the business who is also a
disrupter of financial services, and also a new pioneer of a different way of thinking about finance.
c) Venmo is focused like Xoom on peer-to-peer money transfers. Venmo makes it easy to transfer
money in your digital wallet to somebody else's. This sounds a little bit like what PayPal started out
to do, but Venmo does it very, very nicely. PayPal worked, but it's not the same experience as Venmo.
Venmo, to consumers, it feels like a very different product amongst other things. Not only is it very
easy to transfer money from my wallet to your wallet and PayPal is not that hard. You would look
and say, "I could do it with PayPal, but with Venmo, I'm merging a social media type platform of
texting and emojis and saying what the money is for, and hey, send me my portion. You send me the
money for your portion of our lunch bill. I'm going to Venmo you. Hey, thanks for lunch, appreciate
you coming out. Here's your Venmo, your portion of it, pay up." Those short message services with
the emojis can be shared with the world so that other people can see I went to lunch with so and so.
You can't see how much I paid, but you can see that I had lunch with them and you may say, "Hey,
I want to go to lunch with you or I want to do something with you or let's go to the movies together.
I see that you went with John. Why don't we get a group together, and we'll go split the bill.”? So, it
makes it easy to split bills, easy to share information, easy to transfer funds.
It's much easier than using a web platform because we're now using smartphones. Now, you might
say, "What do you mean, easier to use a smartphone than a web." Well, the difference between
something that's good and something that's bad. It makes all the difference in the world. The way
that it feels, the way that it's useful, can make all the difference in the world. A payment processing
system, which is easy to use, may take over.
If you're in China, you know WeChat. You know Alipay. If you visit China or you're from China,
you will find it's hard to find people paying with cash. Everybody is using their smartphones. There
are stores literally that don't take cash anymore. They don't need to. Everybody is paying with AliPay
or WePay. Digital payments have totally disrupted finance in China. You're not using your Visa card.
You're not using your bank card. You're not using your debit card. You're not using a checking
account. The only reason you need a bank account is to link to Alipay or WePay because it's part of
your digital wallet. Your digital currency is your currency. It's literally replacing paper currency.
Now, it's tied to the value of that currency. So, it's not a cryptocurrency. It's not a new currency, but
it's a new payment system and infrastructure and capability.
AliPay is so much bigger, so much broader than Apple Pay because it is really easy to use and what
they had before was not so easy to use. Now, in Hong Kong, where I live and teach at the university,
we're getting some hit from AliPay or WeChat wallets or things like that or Apple Pay or Google Pay.
But they're finding it hard to make much inroads or penetration because on average, 99 percent of
consumers in Hong Kong have an Octopus card.
d) Octopus Card. If you're from Hong Kong or have been to Hong Kong, you will know what an
Octopus card is, and you will use an Octopus card. An Octopus card is just a small card that you'd
use to ride the subway, or buses or use it in vending machines or use it at a 7-Eleven, McDonald's,
and to a nice restaurant. What's beautiful about this? It's wireless. I don't even have to contact with
a reader. I just walk through the subway turnstile, and my Octopus card could even be in my wallet,
or my purse, or in my hand, and then it just scans over, and it's very, very fast. It can process
thousands of transactions in seconds. Crowds of people don't get slowed down at all on public
transit. Now, because it works, because it's so user-friendly, it's really hard to replace it. You wouldn't
need Xoom or Venmo as much if you have Octopus. Although, the sharing feature of Venmo or Xoom
is really nice. There are some alternative payment systems that are coming up with different value
propositions, different business models. There are certainly companies trying to compete with
Octopus or trying to compete with other standard payment cards.
Maybe your life has not turned upside down because of new payment systems. But if you live in China,
and you have looked over the past five years, you will say, we went from a country of most people using
cash over a five-year period where any kind of digital payment or including credit cards, debit cards were
rare. They just weren't used that much, to where 63% of the population are using electronic payments of
some sort. They're using their phone to pay for taxis, groceries, rent, utility bills, many other things. It's just
the normal way to pay for things, just like we would think of a bank account as a normal way to pay for
things. But you would rather have your Bank than to have a traditional bank and not have electronic
payment systems. And so, these retail transactions are being facilitated by this, and the cost is also declining
a lot, these new digital wallets.
Some of them are expensive and some people say, I don't like PayPal, a dominant payer because they're
too expensive. Well, I don't know if you remember what your traditional bank might have charged you to
change currency or your traditional bank might have charged you for something. Maybe you're critical of
PayPal because you think their fees are too high. But that’s just because you are excited about some other
payment systems that have lower fees, try going back to where you were five or ten years ago and look
how much you would pay to do anything in transferring funds. Now, there is something to be said for
large transfers, maybe cheaper to do with a funds transfer, a wire transfer between banks than using PayPal.
But you could also argue that using a crypto-currency might be a whole lot cheaper than a wire transfer for
a large funds transfer. So, at any rate, payments and retail transactions being facilitated by a whole lot of
new service providers, and some of them have very, very good credibility with consumers. People trust
Apple more than they trust their bank. Apple Pay is gaining traction, gaining popularity, and people say,
I like this!
These services like PayPal or companies owned by PayPal or competitors to these companies are huge in
the effect they're having on banking services. They are really making strong inroads into merchant services
for small business. They aren't yet at the big, big companies. They're not replacing traditional Visa,
Mastercard processing services in America for Wal-Mart yet, but they are beginning to be accepted by
Starbucks. They are beginning to have an impact in medium-sized firms.
It doesn't take long before the large companies say, "Hey, this disruption also might have some value to
me, also might have some benefit to me." Then, the banks have lost their bread and butter. Though they
can acquire PayPal. It's independent now. It's available to be purchased. Maybe a bank will buy PayPal.
They can acquire other companies, and they will. But this is a new way of doing financial services and that's
part of FinTech is innovation in products and services which might be offered by startup companies or it
might be offered by traditional companies. It's the innovation that makes it FinTech.
iv) Equity, Trading, and Investments
Here, we're going to be talking about FinTech applications or business, and specifically, we're going to talk
about equity, investments, and trading as part of the FinTech world.
a) Robinhood is the B2C space. Robinhood is a trading platform that allows investors to buy and sell
stocks for free. No commission on their smartphones. What's cool about Robinhood is, it is a
smartphone app, and it is very much an app business. It's easy to use. It's really good for consumers
and it's free. If your son wants to buy 100 shares of Apple, Robinhood might be a really good app.
Because you often buy it at commission free. Yes, that's right. It's easy to use, it's easy to buy and sell.
Retail stock probably, yes. But if you’re trying to buy and sell Apple stocks 50 times a day; firstly,
you don't want to use a smartphone app for that and secondly, you may be much more concerned
about the speed of execution, than commission.
It means normally when we use any trading platform as a professional investor, we have to test
whether what we see will get. The price on the market, are we actually getting that price at a low
latency level? Also, the spread of it is considered. Alternatively, let's say if we make a market order
of a particular amount, would there be a lot of spillages? That slippage is it built-in, could be
somebody saying that I claim that I don't collect any commission. But, the spread actually collects
the amount of it. So, that's the full professional traders we are concerned about. So, that could be of
concerned concern about Robinhood as a professional trader or you might say, "Yes, you're not
charging me the commission, but if you're slower, then some other sites you might be charging me
more than what a relatively low commission fee would be with high transaction velocity. Robinhood
says we don't do that. But, we don't know what the backend they're using, thus maybe Robinhood is
perfectly authorized to be wonderful. But maybe the platform they're using is making some profit
off of a spread or off of latency.
The other thing about Robinhood is they do make money on margin. They will take the money that
people leave in their account that isn’t using, Robinhood get to use that for free and they can earn
interest on that. But they can also loan money to people, who are buying on credit and they can make
money that way. So, it's not like Robinhood doesn't make money.
b) eToro. It is a social investment platform that provides you with financial advisers. What are they
doing? Basically, when we look at a trader, we would look at any successful trader, we do find out a
lot of them, they have structure. They have logic. Let's say, for example, you are really a good trader,
you claim that you always could help your clients win money. Then what happens if you could
register with eToro. This platform confirmed that you're not just saying something but you're
actually walking your talk. It ensures the integrity of you as a trader. Investors really know what
you're really, really doing what you say. You really put your money and you really do the trade.
There is a system that is a trust the investors could really monitor your trade, not just you self-claim
that you are a really good trader for the past 10 years.
Investors can have a longer-term perspective and really look at this and say, these people are really,
really good and I want to follow them. Follow them and investors can subscribe to it. Once you
subscribe and follow it and basically copy every action of it because you look at its past record and
doing it in real time and there it's a platform that basically it's like kind of auditing on the trader's
performance real time. eToro allows you to copy the other investor easily so that you could invest
your portfolio the same way this guy is on their network. For example, the trader going to buy 1000
stock of Apple. He clicks it and buys it. You actually see the real actual trade of a successful trader
that he's doing. If you were really following him, you could be doing the same trade at the exact same
moment. Exactly. You could trade real time at the same moment. That's interesting.
Earlier it wasn’t transparent and some people commit fraud and they say, buy this stock because it's
going to go up and then they say to another group of people buy the stock because it's going to go
down, the people. Before long, whether it's stock trading or game sporting picks or something else,
you're just playing a scam. At the end of the day, they only pick those winning selections. Then you
say, I want to charge you because see how good I am.
c) Quantopian. It's something like quantity to finance. Quantopian includes mathematical model, a
statistical model, and the AI model. Which contrives your trading. Also, Quantopian is an open
platform. Quantopian opens the platform for a lot of those graduate students, graduate from
quanfinance, computer finance, math, statistics. They build their model there. Once they build their
quant model, they can upload a source code on it and they do testing with historical data. With
historical data, let us say 10 years, you can run simulations on weekly, daily, hourly, minutely or
even eventually to see the result of your model. It will try to capture all the different patterns in the
past.
For example, As an American, you've never seen a Donald Trump before as president. Is this going
to be good for stocks or bad for stocks? I don't know, but it's different. Assuming that Donald Trump
is not so unique in human history that could be someone that is quite similar to his character or
behavior. Are we talking about Nixon? Okay. Maybe we could find 80 percent, 70 percent. Now,
think about that stock market. I don't have to win every bet. As long as it's more than 50 percent.
Look at all the casinos pay off. This is a good point. That is a good point. I don't have to win all the
time. Yes. Especially if it's high-frequency trading. So, if it's high-frequency trading, every minute
there's hundreds of trade. And I just need to win 51.
It's the law of large numbers, right? This is a principle of business. Because with engineering and
math and science and you like to get all the problems right. There is a right answer to many things
in engineering. But in business, many times we don't know. We don't know what's going to happen.
We don't know who's going to win. We don't know who's going to lose. We make bets. We look at
statistics and the law. We say I'm 70 percent confident this company is going to fail, 30 percent chance
it might win.
Quantopian says if you could do that statistically, significantly, and write it into the code, and
demonstrate over a long period of time that it was successful and then demo it for the next six
months, and show that at least over the next six months, this is working and making money.
Sometimes a lot of people consider that history does repeat itself. We're talking about calculated risk,
if you could really get a better understanding of supply, demand, drivers, and people are trying.
Quantopian says, for example, every week we will give the top 10 models a cash payout of 500 bucks.
What is interesting is you might be able to get a 1,000 young people excited about developing this
model coming up with proposals, and some of them will be good. This is exactly like the open
innovation. You open up and then you join talents from different areas, different walks of line. A
thousand blossoms bloom some of are going to be good. That's going to be powerful, and that's hard
to do with the traditional model.
As an investor, how does an investor use Quantopian? When you called Quantopian, with all these
Algo Traders (Algo is an algorithm), they debut the model. They test the model then you can decide
who you should impress on.
So How big would you say this is in terms of its impact in the finance community or in terms of
FinTech? Is this as big as payment systems or as big as lending or is this much bigger?
At the present moment, there are still regulations regarding giving financial advice. That is a hurdle.
So, RoboTraders or things like that, there are some issues. Exactly, for Robo-Advisor which just in
general, advice how do you need to put the money? What portion of that? Probably, the regulations
aren't that straight, especially for the retail investor. If you are providing financial advice exactly
what stocks etc., they have very stringent research on it. At the current moment, it's a hurdle, it's a
hurdle. But once we involve auditing, we are even more transparent than a bank.
Equity, and trading, and investments, more and more stock trading, more and more retail transactions are
moving into alternative service providers. Some of which, like Robinhood, are charging no fees. They're
making money off the interest you put in the account and they say, that's enough. The cost of ROBO fund
is much cheaper than the cost of human advisor refund. The cost of index trading funds is way down. The
cost of trading, in general, is way down. E-Trade turned brokerage firms on their head and said, holy cow,
those commissions are so light, and they're lighter now than they were then.
Investments, trading, we also see the advent of algotrading or high-velocity computer program directed
trading, which matters. It's not the majority of trades, but it's enough trades to where many computer
trading algorithms or based firms are making money. Some are not. Some have gone by the wayside. But
some are making very good money and mathematics can matter in trading and investments and being
very, very fast can give you a significant advantage. That's a plus of ROBO trader or ROBO executor of
code, can trade thousands of times faster than the fastest of humans. So, you could trade based on your
algorithm, faster than you can even think about whether you should trade, as a human being.
v) Cryptocurrencies
Currently, there are about 1,500 to 2,000 cryptocurrencies in the market. It's a little bit difficult to gauge. It's
still a lot. There are thousands of many different exchanges. Most of them feel a lot like variations of bitcoin.
Quite a few of them are trying to replace fiat currency, but there are other ones that are involved in smart
contracts or tokens. We can classify these thousands of Cryptocurrencies into five types: a) Conventional,
b) Privacy Focused, c) Settlement Networks, d) Smart Contracts and e) Tokens. We're going to talk about
strengths, their weaknesses of the major players in the cryptocurrency in these five types. So, let's get
started.
a) Conventional Stored value Cryptocurrencies. These are basically digital gold you can think of or
something that replaces fiat currency. The biggest of them is Bitcoin(BTC). It has the highest market
cap and if bitcoin goes up, the other cryptos tend to follow; if Bitcoin goes down, while the other
cryptos tend to follow as well.
Not only do we have the Bitcoin but we also have Litecoin(LTC) which is called fork of Bitcoin, and
so, essentially is summative when they're trying to do it. They're trying to be a replacement of fiat
currency, but they use smaller blocks, have lower transaction fees. The transactions happen quicker,
and the fees are much lower.
b) Privacy- Untraceable Transactions. Beyond traditional cryptocurrencies, we also have some that are
focused more on privacy. We have two of them here that we want to talk about. First, we have
Manero (XMR), and it has a one-time address. If I send money to somebody, my sending address
and the receiving address are only used for one transaction. It's impossible to trace the series of
addresses or series of chains. In addition, the wallet balances are not displayed on the ledger, which
is very important for privacy.
The second one that's also very popular is called Dash(DASH). Dash is important because they have
privates send features. What that means is the ledger is hidden from the public's view. Only those
with, they have enough Dash have access to the ledger. You have to be a master node for Dash to
have, to see the ledger basically. So those two can help, help of the privacy issues.
c) Settlement Networks. Currently, the third largest coin Ripple (XRP) was created by banks and
institutions to facilitate fiat transactions. One of the main issues with Ripple is that it is not
decentralized so there are 100 billion coins in existence and 60 percent has already been allocated to
the owners. A lot of people are of a little bit concerned that such a large amount the currency has
been pre-mined and pre-allocated to the owners. That's an issue with Ripple.
We also have Tether (USDT) which is one-to-one with US Dollars and this allows you to be is AS IS
position. Let let's say you're a day trader of crypto and you're about to go to bed, but you don't want
to, but you've heard like a little bit of news and you're bit unsure and you don't want to wake up in
the middle of night and do some crypto trades, you can move your money from let's say Bitcoin into
Tether and then you have your security because it's one-to-one with US Dollars. Now there's been
some issues with the auditing of Tether and there has been a couple of trust issues like they fired
some of the auditors and there's a little bit of, there, there's some sketchiness around it but overall it
appears to be for now relatively stable.
d) Smart Contracts. Here, we have Ethereum and Cardano. Ethereum (ETH) is the number two
cryptocurrency at the moment. It is a smart contract and programmable money. This basically allows
you to do something in the future- to program it and execute it later. This is also used and it enables
other cryptocurrencies. A lot of cryptocurrencies wouldn't exist without Ethereum.
We also have Cardano (ADA) which is basically an evolution of Ethereum, and it's a lot of the
founders of the same and basically is trying to deal with these issues that Ethereum has in terms of
scaling by having layered contracts and the way they manage it's slightly different. You can think of
them as both the key players in smart contracts for cryptocurrencies.
e) Tokens-Services. We will talk about EOS, Tron, and Dorado. Finally, EOS (EOS) trying to be the
most complex smart contract and they're trying to raise money through tokens.
Tron (TRX) which is for the entertainment market. If I make a video and upload it I can get paid in
Traun coins. One alternative to Youtube.
Dorado (Dorado), which is an upcoming delivery service and they've used their ICO, to not only
market their services, but also raise capital through that ICO.
f) Crypto-Collectables. We also have a couple of other oddities, in the Crypto scenes. Back in
November and December of 2017, we had something called Cryptokitties emerge and so this
basically was a virtual game, where you are allowed to collect and breed virtual cats and it was based
on the Ethereum network and it actually caused a lot of congestion on Ethereum network. But the
main point here is that this was for a lot of people their first introduction into crypto, and instead of
holding some crypto in their wallet, they instead had a virtual cat.
• Risk dealing with Cryptocurrencies. First of all, Bitconnect, which was an investment platform.
What they had was- you would send them some money and they would promise about a one percent
return on investment every day, and they would take the money that you sent them and they would
invest them using bots in Bitcoin and play on the volatility and make money that way. A lot of people
bought into that in November- December of 2017. However, in January of 2018, it was discovered
that Bitconnect was basically a large Ponzi scheme and we saw the price of their token collapse from
about $360 down to, like $2 nowadays.
So moving on from that we have Dogecoin (DOGE). Bitconnect started off as something serious but
became a joke and Dogecoin started off as a joke and then became something serious. Dogecoin
basically started around 2014 and basically, it was a joke, in that people would buy anything. Back
then in 2014, people thought Bitcoin was a joke. So Dog-ecoin or Dogecoin came about as kind of like
a parody on Bitcoin. But eventually, it's worth about half a billion dollars right now, so a joke could
be worth a lot of money.
Petro-Coin, which is from basically a coin that originated in Venezuela. They wanted to raise money,
because their economy is in shambles right now and they would say that, we have a cryptocurrency
we're going to back it with our oil reserves. Now, that lasted for about a week and then the
Venezuelan government shut that down pretty quickly. That was basically a form of an ICO.
ICOs (Initial Coin Offering) is risky, in general, and there is a lot of risks, but there's also a lot of
potential rewards if you pick carefully. But in general, I would advise staying away from ICOs in
general, because especially in 2018 there's a lot of people that are preying on those that have some
form of. So that's a little bit of the risks involved with cryptocurrencies.
• Why all of this enthusiasm for replacing a fiat currency? What's wrong with the fiat currency, like
the US dollar?
There's a lot of distrust for the government. That might have been part of the reason. A lot of people
are just kind of looking for something new. I find it astounding that the Venezuelan government,
which has deep trouble with their currency, deep trouble with their exchange, can launch a
cryptocurrency and inside a week raise $500 million. Something that the government then comes
back and says, " It's against the constitution to back any currency or anything with assets that are
underground like oil. So, no you can't do this," or, "You can have a cryptocurrency, you just can't
have any backing for it," which is odd. So, there's a lot of risks here. There's certainly a lot of risk in
the cryptocurrency scene.
• What's driving the value of these currencies up and down so much? Why is there so much
volatility and fluctuation?
There's a lot of people trying to get a quick buck here. A lot of people that have invested for the
fundamentals, and there's also a lot of people that are invested in it just because everybody else is
invested in, and they don't want to miss out or they are trying to make a quick buck.
• Why do you think bitcoin and other cryptocurrencies are largely going to go up?
It all has to do with the fundamental technology behind it. An analogy that you could use here is that
blockchain is kind of like the Internet was in the '90s. It's backing up all of the developments that
we're seeing. The Internet led to e-mail, and instant messaging, and video sharing, and all that,
whereas blockchain will lead to fiat currency replacements, smart contracts, and stuff like that. So,
reasonably smart guy, Jack Ma, founder of Alibaba, has said he doesn't believe in bitcoin. He doesn't
believe in these cryptocurrencies, but he loves blockchain. Yes. The fundamental technology behind
it will carry it through. Whether or not bitcoin makes it in five years is unpredictable. But blockchain
technology is one of the most revolutionary technologies of our generation. Fundamental drivers of
bitcoin, blockchain has some value.
This is one of the criticisms of fiat currencies though, there is no particular limit to how many US
dollars or euros you can print. That's up to central bankers and government policies. Gold is a typical
alternative to a fiat currency because they say, we are printing no more gold. Now, I would counter
that and say, we are mining more gold. Just like we're mining more bitcoins or the currency. One of
the things that limit that downside on gold is, what does it cost to mine? If the price goes below the
cost of mining, then you mine less gold, and therefore, the price will go up because there is some
fundamental demand, there is some fundamental cost of supply, and if the price of gold goes too
high, we'll do more mining. Therefore, supply and demand are in balance.
• The challenge of a cryptocurrency is that we don't have that negative feedback loop that we do with
gold because the cost of mining isn't a driver of the number of things mined. If the cost of mining
goes up, you don't mine more bitcoins, you mine the exact same number. You just have more
expensive mining for each miner. If the cost of mining goes down, like the value of bitcoin goes down,
then you have less expensive mining per value. It is true if bitcoin goes down, there will be fewer
miners, but the same number of coins will be produced. So, we'll have the same supply regardless of
price. So, the price of bitcoin is not regulated by supply like gold is. Well, gold is also regulated by
the demand. But bitcoin is purely a demand function because we've taken out the supply side of the equation.
We've limited supply. That's a good thing in many ways, and that's true.
Your concern is, there's one guy that owns a lot, he could control that. I would say there's one guy
who owns a lot, he could make it stable. But the limited supplies, the unique characteristic of
cryptocurrencies versus fiat currencies or paper currencies and it's more limited than gold. This makes bitcoins
price much more volatile and essentially totally based on demand. It's not supply and demand. That's a different
world economy. We're now demand and demand.
We see that not only do we have large price volatility, but we also have a lot of sensitivity to news way more
than traditional markets. For example, like a tweet, the other day could have caused the Walton coin
to drop by 20 percent. Just one tweet take billions off. It was a very stupid tweet but okay. Any news
can have a big effect. Dogecoin is better. But it has value. Why? Because it has a limited supply.
Anything with limited supply is going to be driven by demand if people like it.
They think it's funny, they think it's cool, for whatever reason, that value could go up. We might want to
collect things. Some of these things are collectible such as CryptoKitties, some of those have sold for
over $110,000 for a specialized kitty. That's a hell of a lot to pay for a virtual digital product, but
people like collectibles of various types. It's a blockchain virtual kitty, blockchain pet rock if you like.
That's kind of cool. Modern day. Kind of crazy too. I am skeptic whether a crypto kitty is worth
$110,000, and in fact, the price is down now. My skeptic in me is saying I'm nervous about bitcoin
and bitcoin valuations. However, let me just say something. I'm going to draw an analogy to the.com
boom because during the.com boom and leading up to it, I was very involved in e-commerce and
teaching e-commerce, and we had incredible valuations which were nuts. They were not sustainable.
They were highly questionable. Everything.com was booming just like everything crypto now is
booming. So, I see some real parallels here. What I also see is that I was skeptical about valuations.
However, if we fast forward today, Amazon is worth more than it was at that time. So, some e-
commerce firms clearly have justified their valuation. Some companies are big winners and big
successes. I don't know who that will be, but I think it's way too early to now say cryptocurrencies
are going to go to zero. I don't believe that, and I may be skeptical, but I'm just skeptical that the
value feels like a bubble to me. But that doesn't mean there won't be winners out of these. I think the
price of bitcoin has many fundamentals underneath it as does gold.
vi) Banking Infrastructure, Tools and Logistics, other capabilities.

There’re many things enabled by FinTech technologies. Many things that are touching upon the FinTech
market space, or many tools for enabling better banking or better infrastructure, some of them by the
startup, some of them by large institutions. They're related to or part of the application space of FinTech
as broadly perceived. They're not consumer oriented, they're not small business oriented, but they are
going to enable. Fundamental changes in our society and fundamental changes in how we deliver
financial services into the future.
FinTech was about a revolution in consumer feeling or convenience partly; partly, it's about technology
and partly, it's about changing industry structure. These are infrastructure capabilities or tools, or
logistics that are leveraging the technologies of FinTech, the capabilities of FinTech, and have the
potential to change our world. Some of the companies involved think of themselves as FinTech
companies and investors think they are FinTech companies, and they have the power to transform
markets the way FinTech companies do. Let us see some examples.
a) Spout. Spout integrates more than 700 financial institutions via an API (Application Programmer
Interface) that allows secure development across different platforms, iOS, and Android, and Web,
with highly secure bank-level encryption. This enables banks to share data, share apps, share
information about users. Allows users to have portability for data so that you can take your data
from your bank to your mortgage company and share detailed financial information in ways that
wouldn't have been possible before.
Now, some banks may say, "Why on earth would I want to share my customer data?" Well, you
wouldn't if you're the dominant player. You wouldn't if you're the biggest bank. But if you are the
third or fourth largest bank, you may say that would give me an advantage. Maybe I'm not as
integrated as another bank, but I can integrate with a mortgage company, insurance company, and
other FinTech companies, a payroll processing company, or other things. I can be virtually bigger
than I am by integrating with others in a large network.
This is a shared economy way of interconnecting financial institutions in a secure way, that's
backend, that's infrastructure, and it's clearly FinTech.
b) DemystData. This company in the FinTech world is looking at integrating across different
institutions and platforms. DemystData as the company is looking at demystifying your data.
They're looking at integrating your company data with social media, with other online databases,
with other information, so that with this integrative approach. They've been able to process more
than 30 million profiles for peer-to-peer lenders in the U.K. and the US or banks in Asia, where there
may not be as much credit sharing or database and you're trying to get some sense of, should I be
loaning?
If you are a huge company like Alibaba, maybe you have all that data internally, maybe you have
enough, or you're Tencent/WeChat. Maybe you have enough data where you don't need a demist
data. You can do all of that yourself. But for many companies, they want to reach out to the world
and find out more of what's out there. Demyst is saying, "We can do that for you. We can make your
data match with other databases or other sources of data to help you with data mining and analysis
and prediction of risk, profiles, profitability, and do things with data that you couldn't necessarily
do on your own as well." A FinTech tool.
c) Gusto. They started out in human resources and sort of payroll processing. They started out as
ZenPayroll, and they've changed their name to Gusto in 2015 after they added on a variety of human
resources and benefit additions where they are doing insurance and other HR type, benefits, leave,
other accounting. They're providing a lot of these functions for payroll, and HR, and other benefits
for employees as a service selling essentially a platform as a service, PAAS. They're integrating
financial and accounting into a lot of other services which are on the personnel or HR side. This
makes them an interesting company and clearly, a company that many people view as being in the
FinTech space even though you could argue, is this really Fin? Or is this just kind of Tech? But they're
also looking for ways to integrate more tightly into your accounting systems, your finance systems,
and so provide a better interface, better capability, better services. It's an interesting tool,
infrastructure, or capability.
d) Ant Financial. It is one of the largest FinTech companies in the world. Actually, as of January 2018,
was the largest valuation FinTech company in the world. You may not recognize the name, but Ant
Financial is owned by Alibaba and/or at least a large portion of it is owned by Alibaba. It operates
Alipay, which is Alibaba's payment system, and also operates Sesame Credit which looks at credit
scoring and credit valuations and many factors not just a traditional credit database, but all of your
transactions in E-commerce that goes over the Alibaba network as well. The largest money market
fund in the world is also under Ant Financial.
Opening it up just a short period of time ago, they quickly generate a lot of enthusiasm and activity
from investors, and raised a huge pool of capital from across many small investors in the nation of
China, all moving money from banks into this E-commerce company into Ant Financial which has
become a regulated and approved financial services firm in the nation of China. So, it is a bank but
started as a tech. It started out of E-commerce. It started with Alibaba, not in traditional banking.
They've done some nontraditional things like Ant Financial, now has 230 million-plus AntForest
account users. AntForest allows you to plant a virtual tree, and it will track your carbon footprint, it
will look at what have you bought, what do you do, how do you commute to work, you can put in
information and you can say "what is your impact of you as a person on the carbon level of the planet
Earth", and you can say "wow, because I bought this new iPhone and that has some manufacturing
costs and has some electricity usage or something else, I'm negatively carbon now, I'm putting more
carbon into the atmosphere than I've taken out, I guess I better plant another tree, and that will reduce
my carbon footprint." Now, these are virtual trees, and you might say, what's a virtual tree?
This actually leads to a real tree as Alibaba gets a lot of virtual trees. They take these and use that
capital contributor to buy virtual trees, to buy real trees, and they planted 10.25 million trees thus far
in developing economies in parts of the world, where Alibaba or Ant Financial subsidiary of Alibaba
is funding for reforestation or increasing investments in green space across the planet that has
reduced the carbon emissions of the planet Earth in a very positive way. That's intriguing, is it
FinTech?
It certainly involves some finance in your raising capital. It's certainly technology, but it's also
planting trees which is not exactly high tech. But it certainly is a social transformative different
business model. Is it huge for Alibaba or Ant Financial? No, but it's very interesting, and it has
potential beyond what you might normally recognize which is an aspect of FinTech, which is it may
touch our lives in many ways, and if you are clearly helping people see that their carbon footprint as
of the certain nature, and they can improve that they can do things to be better for planet earth.
People may like that, and they may like you, and they may like your brand. Being carbon neutral or
carbon negative, maybe a very positive thing for your brand and your company. People like Alibaba
in China, they like Ant Financial in China, they like Alipay.
These are good things this company is doing, and they're building loyalty far beyond what most
banks have with their customers. This is powerful. It's going to be really hard for a bank to get that
customer loyalty back. Once they've moved their money to Alibaba, they've moved their finances,
they've moved their credit, their payment systems, and even their trees to Alibaba. This is their yard.
This is kind of cool. One other thing about Ant Financial is they have announced using Blockchain
for logistics. One of the largest Blockchain applications thus far because Alibaba does have a huge
amount of logistics to support Alibaba's transactions and retail space.
FinTech is more than just a Financial Services. We've got a FinTech application using Blockchain. We've
got a social application with FinTech using virtual trees like a virtual currency or virtual benefit of your
carbon emissions. We've got the largest money market fund in the world owned by an E-commerce
company, we've got one of the largest payment networks in the world. Across the nation of China, we've
got 63 percent of users in 2018 using some form of FinTech for transactions or savings, or for something in
their lives that is double what the United States or the United Kingdom, or Germany or Switzerland have.
This is a huge penetration of the market, 63 percent in China less than half of that in most of the rest of the
world. So, China is leading the world in digital penetration followed by the second largest FinTech
penetration in the world, India. China at 63 percent according to a recent report, India at 52 percent. This
is intriguing. This is an explosion of FinTech, it's not just cryptocurrencies, it's not just payment systems,
there's much more behind these, and that over time will support these.

Lecture 2 - Business Application of Fintech

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LECTURE-2: BUSINESS APPLICATION OF FINTECH 1

1. Business Application of Fintech

ii) Crowd Funding and Business Financing

iii) Payment and Retail Transactions

iv) Equity, Trading, and Investments

vi) Banking Infrastructure, Tools and Logistics, other capabilities.

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