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FinTech and the future of financial services: What are the research gaps?

New financial technologies (FinTech) have erupted around the world. Consequently, there has been a considerable increase in academic literature on FinTech over the last five years. Research tends to be scantily connected with no coherent research agenda. Significant research gaps and important questions remain. There is much work to be done before this area becomes an established academic discipline. This paper offers coherent research themes formulated through focus group meetings with policymakers and academics, and also based on a critical assessment of the literature. We outline seven key research gaps with questions that could form the basis of academic study. If these are addressed it would help this area become an established academic discipline.

FinTech has risen dramatically with cumulative investment of $100bn by newcomers since 2010 (Accenture 2018). Incumbents has also spent dramatically at $450bn annually. Consequently, over the last five years, there has a considerable increase in academic literature on the subject. However, it is not an established area of research. Furthermore, the literature is loosely connected with no overall research. The goal of this paper is to provide a critical assessment of the literature, highlight research gaps and structure coherent research agendas to provide a foundation for future scholarly work and policy decisions. We have located and reviewed over one hundred articles, book chapters and working papers on financial technology (FinTech). This paper has analysed research within nearly all fields including economics, business and other social science disciplines, applied engineering and computer science. In addition, we have consulted with academics, practitioners and policymakers in formulating our research agendas and gaps. This paper is organised around seven research gaps which are 1) changing industrial structure and organisation of financial services, 2) new forms of financial intermediation (alternative finance) such as loan-based and equity-based crowdfunding, 3) changing payments mechanisms including central bank digital currencies and the shift to a cashless society, 4) reaching vulnerable and excluded customers in both developed and developing countries, 5) computation, artificial intelligence and large-scale data processing in finance, 6) the relationship between the new financial technologies and financial regulation, 7) identity, security, data privacy and their regulation in financial services.‘The relationship between the new financial technologies and financial regulation’ includes a number of themes. Consequently, we categorise it into three critical areas i) FinTech and financial stability; ii) policy and the role of government iii) RegTech. This paper also provides a review of ‘cryptofinance-radical technology-based alternatives to conventional regulated financial services’. This area is separated from FinTech for two main reasons. Firstly, research has covered this area extensively unlike the other seven areas. Secondly, it is a form of finance that uses pseudo-anonymity and cryptographic security to operate outside of the regulated industry. The research in the other categories is in relation to the application of new technologies in regulated financial services. The rest of paper is structured as follows. In the next section, we provide a selection of descriptive papers. Although these are mainly consulting reports, they offer an informative overview of the FinTech market. After which the research gaps are highlighted in sections 3 through 9. Section 10 includes research on cryptofinance. Section 11 concludes.

There are numerous descriptive papers, predominately undertaken by consulting reports. These emphasis the substantial growth in the FinTech market. PWC is a global FinTech report produced by PWC in 2017. It draws on their global survey of 1) 1,308 financial services and FinTech executives, and 2) their proprietary data from PwCs DeNovo platform. Some useful points are raised. For instance, participants expect 20 % ROI annually on FinTech related projects globally (in Asia 25 %, North America 23%, Latin America 22%, Africa 18%, Oceania 16% and Europe 14%). Insurers are more conservative than financial institutions with a 13% expected return. In addition participants believe the following are regulatory barrier to innovation (brackets are % of participants) 1) data storage (54%), 2) digital identity authentication (50%), 3) AML/KYC (48%), 4) new business models-crowdfunding, P2P (40%), 5) E-money/cryptocurrency (30%). 82% of responded expect to increase partnerships with FinTech companies over the next three to five years. Jonsdottir et al. (2017) is a Deloitte study focusing on the significant growth of FinTech in the Nordic countries. It highlights that Sweden has led the way in the market of the Nordics in terms of investments with 50 individual investments made from January 2014 until time of the Deloitte study. Other Nordics are picking up pace. The dominance of Sweden is explained by available finance and easy access to education. The development of the Nordic FinTech market is based on four key drivers; regulation, talent, capital and collaboration. Deloitte (2017) is another consulting report but focuses on managing conduct risk. A section of the report consider how FinTech and RegTech could be used to address the drivers of poor conduct, assist to manage conduct risk and provide consumer benefits. The innovative solutions for managing conduct risk include technology 1) that tests cultural values, 2) that automates monitoring, 3) that streamlines procedures, 4) that helps to integrate teams, 5) that strengthen accountability, 6) that proactively identify and manage conflicts. The report highlights examples of recent disruptive technologies including 1) robotic process automation is allowing software robots to perform routine business processes, 2) advanced analytic techniques allow meaningful insights to be gleaned from huge pools of data etc. Dorfleitner et al. (2017) provides another regional study with an analysis of German FinTech industry. Dorfleitner et al. (2017) calculates that in 2015 the total market volume of FinTech businesses in Germany in the financing and wealth management segments was 2.2 billion EUR. A major part of crowdfunding (270 million EUR), and wealth management is dominated by social trading and robo-advice platforms (360 million EUR). The paper suggests that the FinTech industry does not currently represent a systemic risk to the German economy. Note that after the UK, Germany is the second largest FinTech market in Europe. The study points out that FinTechs can help to reduce the funding gaps of small and medium-sized enterprises (SMEs) in Europe. Banks differ in supply of products offered by FinTech firms. Most banks have as of yet scarcely explored crowdfunding solutions. They point out that as a general rule only SME make use of rewards-based crowdfunding. Those that have high R&D investment is particularly suitable, which is 2 % of the market. The market is estimated at 4.6 Billion EUR. Before we begin the research gaps in the next section, it is informative to highlight that several quantitative studies offer statistical evidence on the reasons for the emergence of FinTech (Haddad and Hornuf 2016; Buchak et al. 2017; Shim and Shin 2016). Haddad and Hornuf (2016) and Buchak et al. (2017) are economic regression analysis. For instance, Buchak et al. (2017)’s empirical analysis suggests that regulatory burden faced by traditional banks accounted for 70 % of shadow bank growth with financial technology accounted for 30 %. Shim and Shin (2016) use an actor-network theory based on the science and technology literature to investigate the factors contributing to the growth of Chinas FinTech industry. Cumming and Schwienbacher (2016) examine determinants of FinTech venture capital (VC) investment finding (somewhat surprisingly) that FinTech venture capital (VC) investments are more prominent in countries without a financial centre.

Gap one: Changing industrial structure and organisation of financial services The first research agenda is to investigate the process and structure of change in the financial industry arising from new technologies. Studies that formulate analytical frameworks for understanding these changes and empirical work is lacking. In addition, most current studies focus on the short run without any detailed analysis in the medium and long run. There is a clear gap in adopting interviews, empirical analysis and comparison case studies-historical and international. Dhar and Stein (2016) is a good base as they investigate the impacts of FinTech innovation on the incumbent and new business models. They provide a framework for understanding the value created through various types of platforms in financial services. The framework provides a way to understand the winners and losers in the industry. They offer a number of platforms with only complete platforms containing the 3 attributes of 1) openness of access, 2) functionality embedded in an IT system, and 3) implementation of standardized domain-specific business processes. The framework provides a way to understand which businesses are vulnerable due to their incompleteness. FinTech platform completion strategies can potentially disrupt any of the incomplete platform models. Gomber et al. (2018) goes down a different angle and develop a FinTech innovation mapping approach to determine the extent to which there are changes and transformations in areas of the financial service industry. The main conclusions are 1) incumbents will find it difficult to compete with small entrepreneurial start-ups, hence better to outsource applications, 2) FinTech sector is likely to experience significant adjustment, 3) research agenda can deliver important insights. They highlight a number of questions that could be addressed in future research. These include, 1) what will be the drivers of success among FinTech start-ups?, 2) will knowledge spill over into other areas of business involving technology?, 3) will there be globalization or agglomeration of the FinTech industry?, 4) How will the business models, operations, and microstructure of leading financial markets be affected?, 5) how will RegTech innovations come into the industry? Although Van Alstyne, Parker, and Choudary (2016) is not specifically on FinTech, the paper is relevant. Van Alstyne, Parker, and Choudary (2016) investigate the changing rule of strategy. They highlight the success of iPhone in dismantling the power of the five major mobile-phone manufacturers. They suggest change is need from pipeline to platform, from internal optimization to external interaction, from a focus on customer value to a focus on ecosystem value for success. The paper highlight that network effects are the driving force behind every successful platform. They finally discuss that platforms change due to forces exerted by ecosystems, business focus, governance and harnessing spillovers among others. Kazan et al. (2018) investigates platform competition using the UK mobile payment market as an empirical case study.They use a comparative analysis of mobile payment services to determine attributes along the dimensions of value creation and delivery through which these FinTechs innovate. Mobile payment platforms could be defined 1) whether they are integrative or integratable on their value creation and 2) whether they have direct, indirect, or open access on their value delivery architecture. Using these attributes, they characterise mobile payment services into six platform profiles. These aided the development of a competitive strategy associated with each profile. The three types of platform competitive strategies are 1) Germination Strategy, 2) Orchestration Strategy, 3) Transformation Strategy. Lacasse et al. (2016) look at business models. The paper investigates the elements of successful FinTech business models. Qualitative data (i.e., classical ethnography to state and governmental studies, documentary evidence, local case studies, participant observation, semistructured interviews etc.,) provides the conceptual representation for their business models. FinTech utilises the new digital technologies offering convenient banking products that cost less. They also go around regulatory compliance and focus on a user-friendly single-purpose solution. The papers end with a number of research agendas including How does FinTech create value? How will smarter and faster machines transform capital markets? What is the social return on investment (SROI) of the FinTech industry? Regarding impact, Elliott et al. (2016) suggests that distributed ledger technologies, blockchains and cryptographically enabled contracts are more than just disruptive technology for the financial sector but are ‘hyper-disruptive’ technology that transforms the economic foundation of organizations. Gozman, Liebenau, and Mangan (2018) classify the characteristics of the global FinTech landscape. They use a cluster analysis to group 402 FinTech start-ups that participated in SWIFT’s Innotribe competition. The clusters are FinTech’s core services, business infrastructures and the FinTech’s foundational component technologies. In addition, they analyse how FinTech’s synthesize technologies and strategies for value creation. In summary, although these papers are a good basis, this section has revealed numerous gaps that has yet to be addressed. For instance, 1) what products and services can be competitively provided by FinTech companies?, 2) will this dismantle the competitive advantage of incumbents? Furthermore, there is an opportunity to develop detailed analytical frameworks and undertake empirical work to understand the changing structure and organisation of financial services resulting from FinTech.

Crowdfunding are financial platforms that support direct holding of small investments in equity and debt, as an alternative to intermediation through banks and investment intermediaries. There is much research that uses the data from loan-based and equity-based crowdfunding to undertake a specific study. The range of topics studied is extremely large. However, there is no detailed work on how alternative finance is transforming business models. Our focus group revealed that this is major gap that need to be addressed. In this section, we categorise the research into 4.1 equity-based crowdfunding and 4.2 loan-based crowdfunding. Before we begin, it is informative to provide an overview of the market. Wardrop et al. (2015) provides a relevant discussion by using their own created database. The University of Cambridge partnered with EY and 14 leading national/regional industry associations to collect industry data from 255 leading platforms in Europe through a web-based questionnaire. This captures an estimated 85-90% of the European online alternative finance market. Wardrop et al. (2015) investigate online alternative finance across Europe (France, Germany, Netherlands, Spain, Nordic countries, UK ). The report highlights the considerable variation in how alternative finance is developing across Europe. Important facts highlighted in the document include 1) European alternative finance market, excluding the UK, is estimated to have provided 10,000 European start-ups and SMEs an aggregate of 385m euros in the last 3 years (the book is written in 2015). 201.43m euros was funded in 2014 alone.

A significant amount of work has been on investors’ decisions to invest (Cholakova and Clarysse 2015; Hornuf and Schwienbacher 2017; Babich and Hilary 2018; Vismara 2016) and/or reasons for borrowers’ success in obtaining funds( Colombo, Franzoni, and Rossi-Lamastra 2015; Moss, Neubaum, and Meyskens 2015; Ahlers et al. 2015). Cholakova and Clarysse (2015) investigate the financial and nonfinancial motivations that determine the decision to invest for equity or to pledge on crowdfunding platforms. The paper surveyed all registered investors (454) on the largest equity crowdfunding platform in the Netherlands, Symbid. The number of respondents was 155. They found that nonfinancial motivations do not play a significant role. In addition, individuals having invested for equity is a positive predictor of pledge. Hornuf and Schwienbacher (2017) argue too strong investor protection in equity financing may harm small firms. They discuss regulatory reforms in various countries (USA, Italy, Austria, UK, France, Belgium and Germany) and their potential impact on equity crowdfunding. Using a theoretical framework that is based on managerial rent diversion they show that optimal regulation depends on the availability of an alternative early-stage financing. The evidence is provided in Germany. Babich and Hilary (2018) explore the impact of provision points in crowdfunding. The research tackles the following questions 1) Does the use of a provision-point mechanism amplify or attenuate the effects of prior capital accumulation on visitor conversion and contribution decisions? 2) How do these effects vary over the fundraising lifecycle? They use a sample of 250,000 campaign URL visits collected over a 3 month period at the end of 2012 and beginning of 2013. The study finds that provision points weaken the association between prior capital accumulation and visitor contribution. Consequently, this implies a reduction in herd behaviour. Vismara (2016) investigates the impact of equity retention and social capital as a signal to investors. The data is of 271 projects listed on the UK platforms Crowdcube and Seedrs from 2011 to 2014. The paper finds that entrepreneurs had higher success probabilities when they 1) sold a smaller fraction of their companies and 2) had more social capital. Colombo, Franzoni, and Rossi-Lamastra (2015) investigate whether social capital helps to attract contributions in the very early days under conditions of maximum uncertainty. The paper shows that crowdfunding platforms allow users to highlight their external social capital and stock of social capital built within the crowdfunding platform. Econometric analysis of a sample of 669 Kickstarter projects shows a self-reinforcing success mechanism. Ahlers et al. (2015) empirically investigate the effectiveness of signals that induce investors to provide financial resources in equity crowdfunding. The data is obtained from ASSOB, the Australian platform ( in business since 2006). The time period is between October 2006 and October 2011 and includes 104 equity crowdfunding offerings. Impact of human capital, social capital, intellectual capital and uncertainty on fundraising success is investigated. Social capital and intellectual capital has a limited impact on funding success. Retaining equity and providing more information on risks strongly influence funding success probability. Moss, Neubaum, and Meyskens (2015) argue that narratives of microenterprises on microfinancing platforms are an important way to signal characteristics and behavioural intentions to lenders. The sample is of 400,000 loans made to entrepreneurs who use the microfinance crowdfunding platform Kiva to access capital for their ventures from 2006 to 2012. Kiva lenders are more likely to fund ventures that signal autonomy, competitive aggressiveness, and risk-taking. In contrast conscientiousness, courage, empathy, and warmth are less likely to obtain funding (note that rhetorical signalling of these are negatively associated with loan payment). The topics outside investors’ decisions to invest and/or reasons for borrowers’ success are wide. For instance, Rau (2017) investigates the determinants of crowdfunding. He uses a hand-collected sample of crowdfunding volume obtained by a worldwide survey of over 1,300 crowdfunding platforms. The data is of only one year, 2015. He models transaction volume as a function of three economic factors: barriers to entry, the financial profitability of incumbents, and financial potential. He also includes regulatory climate and country propensity. For each factor, he uses various indicators. For example, he argues potential financial depth is individuals access to the market, which he measures with a Global Competitiveness Report and another report from the GFDI database. He finds that barriers to entry and potential financial depth is important in explaining financing volume. Rule of law is also important. However, there is no support for type of legal regime, civil and common law in explaining the volume or type of crowdfunding patterns. Extant intermediaries financial profitability and the extant financial depth are not significant. Schwienbacher and Larralde (2010) is an early paper on crowdfunding. They highlight various business models based on the different type of rewards that are offered to the participating crowd. The rewards offered include donations, passive investments by the crowd and active investments by the crowd. They then investigate a case study, Media No Mad to discuss their analysis. Belleflamme, Lambert, and Schwienbacher (2014) compare two forms of crowdfunding 1) entrepreneurs solicit individuals to pre-order the product, 2) to advance a fixed amount of money in exchange for a share of future profits (or equity). In both cases, crowdfunders obtain community benefits that increase their utility. The paper shows that the entrepreneur prefers pre-ordering if the initial capital requirement is small compared with the market size and prefers profit sharing if not. Chemla and Tinn (2017) examine why crowdfunding is particularly attractive for innovative projects. The develop a theoretical model where crowdfunding enables firms to learn about total demand from a sample of target consumers pre-ordering a new product. Learning creates a valuable real option particularly for firms facing a high level of consumer preferences uncertainty. They argue crowdfunding play important role in allowing firms to test out markets. Johnson, Stevenson, and Letwin (2018) argue that previous research shows that female entrepreneurs are disadvantaged when compared to male entrepreneurs by banking financing, private equity financing and institutional capital. However, this study’s empirical analysis shows that in crowd financing there is a funding advantage for women. To understand the reasons for the empirical results they use stereotype content theory and test a dual path moderatedmediation model. They find that amateur investors perceive female entrepreneurs as more trustworthy than male entrepreneurs. Wonglimpiyarat (2018) examines FinTech crowdfunding in the Thai financial innovation system under the policy direction of ‘Thailand 4.0’. The paper uses the national innovation system (NIS) to undertake the qualitative analysis. The paper draws on 30 interviews and documentary evidence. Crowdfunding is not popular in Thailand. Potential fraud is an issue. They argue that most interviewees suggest that the Ministry of Digital Economy and Society should devise policies to support crowdfunding, protect start-ups and reduce obstacles to SME. Agrawal, Catalini, and Goldfarb (2011) investigate crowdfunding for financing musical projects. The average distance between artist-entrepreneur and investor is 3,000 miles. They demonstrate that the geography effect is reduced. Any effect is likely to be due to a personal connection between the investor and the artist-entrepreneur. Online platform reduce majority of distancerelated economic frictions, but not social-related frictions. Agrawal, Catalini, and Goldfarb (2014) is a discussion paper based on economic theory. The paper uses concepts of transaction costs, reputation, and market design to explain nonequity crowdfunding. Their framework can be used to understand the success and outcomes of equitybased crowdfunding. The analysis includes discussion of incentives and disincentives of three primary actors in crowdfunding 1) creators, 2) funders, and 3) platforms.

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