The impact of disruptive technology on the shape of future banking

Maciej Chudziński
Student’s ID No 30161
The impact of disruptive technologies
on the shape of future banking
MSc dissertation
written under the supervision of
PhD Aleksandra Przegalińska-Skierkowska
Warsaw 2016

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Table of contents
Chapter I. Introduction..................................................................................................3
1.1. Definitions / Key concepts................................................................................5
1.2. Main banking activities today...........................................................................7
1.3. Diagram of a bank and recent startup activity ................................................10
1.4. Crisis of 2008– the beginning of fintech boom ..............................................14
1.5. Banking startups – introduction to disruptive technologies............................18
Chapter II. Literature review......................................................................................21
Chapter III. Methodology ............................................................................................23
Chapter IV. Field of possible disruption no. 1 – Foreign exchange .........................25
3.1. Remittances..........................................................................................................27
3.2. Bureau de change / currency exchange................................................................31
3.3. Interview with a practitioner – Forex entrepreneur .............................................34
Chapter V. Field of possible disruption no. 2 – Payments system............................37
4.1. Traditional payment methods ..............................................................................37
4.2. Established Internet based payment methods ......................................................44
4.2.1 PayPal ............................................................................................................44
4.2.2. Peer-to-peer mobile payments ......................................................................45
4.3. Virtual currencies.................................................................................................46
4.3.1. Bitcoin...........................................................................................................48
4.3.2. Blockchain technology – a decentralized ledger ..........................................52
4.4. Interview with a practitioner – Bitcoin entrepreneur...........................................54
Chapter VI. Field of possible disruption no. 3 – Lending.........................................58
5.1. Banks – traditional lenders...................................................................................58
5.2. Online lending......................................................................................................61
5.2.1. Payday loans .................................................................................................61
5.2.2. Peer-to-peer lending.....................................................................................63
5.3. Interview with a practitioner – Lending entrepreneur .........................................70
Chapter VII. Summary ................................................................................................72
Appendix 1. Interview with a practitioner – Forex entrepreneur............................75
Appendix 2. Interview with a practitioner – Bitcoin entrepreneur..........................76
Appendix 3. Interview with a practitioner – Lending entrepreneur........................81
List of figures: ...............................................................................................................83
List of illustrations:.......................................................................................................84
List of tables: .................................................................................................................84
Bibliography:.................................................................................................................84

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Chapter I. Introduction
“This is a time of huge opportunity in finance — as long as you are something other
than a bank." (The Economist, 2012)
The value of all global financial market assets reached nearly $300 trillion in the
beginning of 2015 (Business Insider, 2015), whereas the market capitalization of only the
10 largest banks worldwide currently accounts for an estimated $1.7 trillion, according
to Relbanks (Relbanks, 2016). However, “big banks are far too complicated. All their
branches and products and legacy systems are very inefficient” (Boden, 2015). This means
that banks are responsible for too many activities all at the same time. Moreover, “banks
and financial institutions often centralize things - capital, capabilities, credit,
underwriting, risk assessment” (Weissman, 2013). However, what would happen if those
competences were executed more effectively and in a separate decentralized fashion?
Would products and services improve from a customer perspective? Would these services
take up less time and cost less money to use? Therefore, startups focus on particular
products and/or services to attempt at accomplishing them in a smarter and obviously
more efficient way. To put it differently, they are attempting to re-invent the key
fundamentals that form the foundation of the banking sector.
Presently, the world is witnessing unlimited internet transformations and the pace of that
internet evolution is dumbfounding. What used to take days or even weeks is more simple
and quicker than ever, often resulting in certain services that now only take minutes.
According to eMarketer, the worldwide number of internet users has increased from
almost 1.2 billion in 2008 to more than 3 billion in 2015. Thereby, in these times of the
financial sector crisis, the importance of small financial technology companies has been
continually increasing. It is easy to observe how many new companies are established
each year, a tremendous number, indeed. Nevertheless, it is still problematic to pinpoint
the exact number. According to McKinsey, as of February 2016, the number of startups
offering traditional and new financial services exceeded 2,000, while more than a dozen
of them are valued at over $1 billion. New technologies are continually challenging the
conventional banking systems. “Technology is miraculous because it allows us to do

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more with less, ratcheting up our fundamental capabilities to a higher level” (Thiel, 2014).
Even though new players are often entering the market, with new channels and processes,
the online disruption is appearing at every level of the financial industry, leaving less
opportunities for the major players who very often are slow to adapt to new trends.
This thesis is mainly focused on European and American startup scenes which are
attempting to penetrate, disturb and change the current banking model. Each with diverse
means towards the same end. Today, traditional financial-service companies are not safe
anymore, due to the vast transformations delivered by innovative companies, and they
are growing at an unprecedented rate. Will the banks survive this attack from the startup
industry? Are the banks’ cake going to be fully eaten by new entrants within the next 10
years? In what way are disruptive technologies influencing the traditional banking
system? Those questions will be answered within this paper.
The objective of this dissertation is to show the interplay between banks and companies
serving similarly to them via the Internet as well as the changing role of banks that has
already occurred and will profoundly develop in the future due to technological based
companies. The main theme of the paper is to provide an insight into how new
technologies will shape the future banking system. According to Peter Thiel, the most
important question every entrepreneur should ask themselves is whether their business
will be still around in a decade from now. Therefore, this paper is going to analyze how
the financial industry landscape could look in the future.
The dissertation unfolds as follows:
Chapter I refers to the entire banking system. It defines all terms used, lists the main
banking activities and describes the crisis of 2008/2009. It also mentions the first financial
technology startups (fintech), in particular Number 26 and Simple.
Chapter III relates to the methodology of this paper.
Chapter IV discusses activities that are under threat from disruptive technologies – the
foreign exchange market.
Chapter V denotes payment systems as the next activity which is being destabilized by
fintech startups. Traditional payment methods, as well as already established online
payment methods are expanded upon.

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Chapter VI deliberates upon the core activity of banking– lending. It is mainly focused
on online payday loans and peer-to-peer lending
1.1. Definitions / Key concepts
a) Disruptive technology – in brief, this is a technology that significantly
modifies the system that organizations operate in. For any business,
innovations or disruptive technologies represent not only the capability to
grow but also the opportunity to meaningfully affect the way the industry is
developing. Therefore, disruptive technologies transform the rules of the
whole game. Under those changes, new market leaders are formed and the
traditional players are usually shattered or disappear from the market
completely. (Investopedia, 2016)
Figure 1. What is disruptive technology?
Source: CB Insights, 2015
b) Banking system – A banking system is an autonomous part of the country's
financial system. This term is determined by a set of all banking and financial
institutions in the country as well as by the network of interconnecting
relationships between them. (Patterson, 2015). Its backbone is the arrangement

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between the central bank and commercial banks, which has a fundamental
importance to operations in this market. (Jaworski, Zawadzka, 2003).
c) Fintech – “refers to the technology that is becoming increasingly important in
the world of financial services. This can include everything from mobile
banking to crowdfunding” (Emmerson, 2015)
d) Startup – “A startup is a human institution designed to create a new product
or service under conditions of extreme uncertainty.” (Ries, 2011). It is a young
company, primarily technological (in the sense of this paper), in the early
stages of its development, which was created in order to provide the market
for a new product, service, technology or process under conditions of high
uncertainty.
e) Peer-to-peer lending (social lending) – is an alternative to traditional bank
credit and loans. This term refers to financial transactions between lenders and
borrowers. In other words, people who want to invest and earn money, lend
to those, who suffer from the lack of capital. For investors, peer-to-peer
lending is usually more profitable and less complicated than traditional forms
of investment. For borrowers, it is also more convenient and provides lower
interest rates of loans as well. (Lendico, 2016)
f) Bitcoin – is an innovative Internet currency (cryptocurrency). Bitcoin is
decentralized, which means that there is no central issuing institution, bank or
any other independent institutions. Bitcoin is a currency, which can be
instantly sent to any place worldwide, avoiding the banking system altogether
and intermediaries and thus, costly commissions and limits. (Coindesk, 2016)
g) Big Data – it is one of many management tools. It is the process of collecting
and analyzing huge volumes of data, which cannot be processed in a
traditional manner. Big data analytics enhances decision making as well as
customer analysis. (Bain & Company, 2015).

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h) Venture Capital – is equity capital brought in by external investors to small
and medium enterprises for a limited period of time. (Antkiewicz, 2008)
Usually, those companies are characterized by an innovative product, method
of production or services that have not yet been verified by the market. Thus,
they create a high risk of investment failure, but also for the success of the
project. (Węcławski, 1997)
1.2. Main banking activities today
“Today, banks are under siege. The industry’s underlying economics are weak and
deteriorating. Credit losses are enormous and growing.” (Bryan, 1988). This quote is
almost 30 years old, but not so much has changed, has it? For centuries now, banks have
been responsible mainly for the same activities. Even so, how can the word bank be
defined? “Banks are financial institutions that accept deposits and make loans.” (Mishkin,
2013). They are organizations whose main objective is to offer financial products, banking
services and other financial instruments that are fraught with high risk. Thus, the aim of
banking activities is the purchase and sale of a risk and later managing this risk in order
to generate the bottom line and boost the value of the bank. However, there are only 3
main fields, banks are operating in: (Jaworski, Zawadzka, 2003)
1) participation in money creation – the creation of money by commercial banks is
caused by an increase in volume of loans granted by these banks, as well as by
increasing the purchase of foreign currencies.
2) participation in social division of labor – a bank is a company that operates with
an aim of taking over financial activities of businesses of individuals. They mainly
receive deposits and make loans, which makes it easier for entrepreneurs and
households not to look for an investor or a borrower.
3) allocating and transformation of money – banks fulfill the important role of being
transformational institutions, participating as an intermediary in reconciling of
differing structures of supply and demand. This is particularly relevant, in terms
of the transformation of information, the volume of demanded amount of money
and transformation of risk. The transformation of money is primarily associated

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with an existing lack of compliance between the sum offered by the holder and
the demanded sum of the person seeking capital.
However, moving on now to the main aspect of this chapter, here a few of the main
banking activities will be elaborated on. They are a specialized form of a service activities
carried out by the banks. Banking services and operations in a free market economy can
be defined as a "product". Below, the main banking activities are briefly explained.
1) CASH LOAN – it is a consumer banking product which offers clients a minor
amount of cash which has to be repaid on an instalment basis, typically over a
relatively short period (Patterson, 2015). In brief, this is the type of loan, where
interest is documented as earned when payments are collected.
2) TERM LOANS/INVESTMENT LOANS – loans which are intended to finance
the investment or long term assets. They are always granted for a period exceeding
four years, and the repayments can occur in two ways:
- annuities – fixed installments throughout the period of repaying,
- fixed installments, however reducing the amount of interest along with
decreasing the debt.
3) CURRENCY EXCHANGE – this activity is self-explanatory. Banks simply
provide a possibility to buy and sell in various currencies. They also operate as a
currency exchange for an uncountable number of enterprises (e.g. exporters and
importers).
4) PAYMENT SYSTEM – “Is a core component of the financial system, alongside
markets and institutions.” (The Payment System, 2010). Every transaction requires
a transfer of funds. For example, payment by using cash or deposits held with
banks. Therefore, a payment is a transfer of money which discharges an obligation
between a purchaser and a seller. Payments could also be classified by the quantity
of parties involved in a single transaction. For instance, a credit card transaction
in the US involves a minimum of four parties (the payer, the payee, the acquiring
bank and the issuing bank). “A payment system consists of a set of instruments,

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banking procedures and, typically, interbank funds transfer systems that ensure
the circulation of money.” (Bank for International Settlements, 2003).
5) FOREIGN EXCHANGE MARKET (ForEX) – is the largest international
financial market, distinguished by the highest liquidity and supreme dynamics. At
the origins of the Foreign Exchange Market lay a need to enhance international
trade. The FX Market enables trading by day and night, which means that the
market reacts to new information and events from the world’s economy and
politics. Trading on the Forex market consists essentially of speculation the value
of one currency in relation to the other. The highest volume of currency is traded
in the interbank market. This is the network of international banks carrying out
their operations in financial centers scattered around the world. Those banks carry
out proprietary trading and provide such services to their customers. They
facilitate Forex operations for customers and conduct analytical trades from their
own offices. “When banks act as dealers for clients, the bid-ask spread represents
the bank’s profit.” (Investopedia, 2016). All trades are performed to benefit on
currency fluctuations.

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1.3. Diagram of a bank and recent startup activity
Figure 2: Diagram of a bank
Source: Pease, 2014
Alexander Pease, a former analyst at Union Square Ventures, released a truly interesting
and thought-provoking presentation about banks function presently and modeled what is
happening with them, in terms of startups activities. He called it the disaggregation of
banks and named a few of the existing startups which are undermining and unbundling
these core functions of banks. A few of those activities have already been clarified
previously, and a few of these startups mentioned in his presentation will also be
explained further in the next chapters.
As already said, figure 2. presents how a modern bank is constructed. Big traditional retail
banks propose a miscellaneous portfolio of services and products (also the ones disclosed
in the previous point of the thesis). They try to take advantage of their knowledge of
clients throughout those products, however very little of that data is used to create more
customized and satisfying products. Due to that, a multitude of European and American

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startups are attacking old traditional banking system with disruptive technologies and
innovative products. (see: Figure 3)
Figure 3: Recent startup activity
Source: Pease, 2014
Here are just few examples of companies: Zopa, Funding Circle, Kreditech, Bitbond,
Cinkciarz, PayPal, Kokos, Wonga, Simple, Transferwise, Coinbase, LendingClub, and
Kickstarter. Those startups cover retail banking, payday loans, business lending, money
transfers, payments, social lending, you name it. They all do what a traditional bank
would do and should do, nevertheless in a specified area, focusing mainly on only one
activity, not on a few at the same time (Weissman, 2013). Those companies are
continuously using big data and technology to design and develop superior products

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Figure 4: Expected impact of start-ups on banking
source: The Financial Brand, 2015; based on EFMA report Innovation in Retail Banking, 2015
According to EFMA research (2015), payments, lending and savings and investments are
the sectors where banks expect small companies to have the most impact. “In Payments,
71% of banks believe the impact will be high or very high (EFMA, 2015).” 31% of banks
consider lending as a product with potentially high impact on banking.
Moreover, an important question arises. Do banks presently still need their expensive
branches? “Branch offices consume 30-35% of most banks’ total operational
expenditure”. (Moldow, 2014). Customers need people who can aid them, not necessarily
physically. It does not matter whether those people are on the phone, online or in a
physical branch location. The only thing they have to perform is to aid their customers.

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Of course, branches acquire new customers. However, it is not necessary in many cases
anymore. Moreover, certain banks are even expanding innovative branches, trying to
keep up with new technologies. Within the next 10 years the retail bank branch model
will be obsolete and no longer alive. "Bank branches will most be gone ... this decade.”
(Diamandis, 2015). The real question that needs to be asked is why? How is it possible and
do people believe it? The number of market players which went online and which are
anticipated to come online soon, is the principal reason. "The biggest banks in the world
in 2025 will be technology companies, and banks that grew through branch acquisitions
in the '80s and '90s, that grew by physical bank presence, will have a real problem." (King,
2015).
The main point of this, is that in 10 years, all new banking customers that will enter the
market are not in a global economy today. They do not know how the whole industry
looks like now and how it looked 20-30 years ago. They will enter a financial market,
only with the knowledge about new technologies and the world of the internet. Banks
should really understand that, and soon. “No one can predict future exactly, but we know
two things; it’s going to be different, and it must be rooted in today’s world.” (Thiel, 2014).
It is certain that the primary market players will be huge fintech companies (at that time)
focusing on specified areas of products and services, operating on a huge, international
scale. Banks are going to be more specialized and operating more on a local scale.
Figure 5: Shift in consumer banking behavior
Source: TransferWise, 2016

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According to a report conducted by Transferwise, 68% of the population has never used
a technology provider. However, in the next 5 years this will change, 32% of surveyed
respondents, are expected to use a FinTech provider for more than 50% of their financial
needs. These statistics highlight the importance of the revolution which is being held at
this time. Furthermore, 1 out of 5 individuals worldwide, will trust technology providers
for all of their financial needs within the next 10 years.
1.4. Crisis of 2008– the beginning of fintech boom
“The financial crisis was extremely important in ushering in the current wave of fintech
innovation”. (Harris, Bain Capital Ventures)
The 2008 Global Financial Crisis in the United States of America has outlined a new age
for the financial industry all around the globe. “In 2007-2008 the world faced a huge
financial crisis, which resulted in major losses in wealth and employment which imposed
great burdens on the public finances of developed countries.” (The Future of Finance, 2010)
Let’s call this period the beginning of the fintech boom, because it is credited largely in
part with an unexpected increase in this industry. This uptick in fintech is primarily in the
United States, but it also becoming clearly visible in Europe (see: figure 6).
“From 2008 to 2014, deal flow in the sector has increased at a compound annual growth
rate of 27 percent, with the value of deals having increased by 26 percent.” (Darc Matter,
2015)”. Below is a chart presenting global fintech financing activity.

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Figure 6: Global Fintech Financing Activity
Source: Accenture and CB insights
The crisis has definitely shaken the industry. First and foremost, it has undermined and
weakened the trust and reliance people once had towards the banking status quo. “Without
trust, institutions don’t work, societies falter and people lose faith in their leaders”
(Edelman, 2015). In general, the crisis highlighted the disorganization and inefficiency of
the banking system. The anger of the people at the established banking system has caused
them to start looking for alternatives. At that time, the technology industry understood
that the financial world was offering immense chances and opportunities. Startups began
a battle of being something more than a bank, but at the same time, still fulfilling
responsibilities and activities of this institution. Simply saying, the business models they
started providing tries to avoid the structural formalities of a traditional bank. However,
continuously providing and satisfying customer needs.
After the Great Recession of 2008/2009, lending dropped significantly. Many
conventional banks stopped offering loans. “Two out of every five small and medium
sized enterprises (SMEs) saw their credit lines threatened between 2008-2012. (Moldow,
2014). The volume of commercial loans declined from approximately $200 billion to
roughly $165 billion in 2012. The downslide is significantly noticeable (see: Figure 7).
It was a clear opportunity for nonbanks to enter the market and disaggregate banks.

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Figure 7: The number of sub-$250K loans since 2008
Source: Moldow, 2014
Another reason which allowed the fintech industry to start achieving exponential growth
were the regulations for banks which followed the credit crisis. Banks have encountered
new and numerous regulations. They obviously had to deal with a variety of penalties for
disobedience and non-compliance. Controllers imposed new compensation rules on
banks. Moreover, more liquid assets were required (Forbes, 2015). As a result, the banks
had to spend more funds on compliance and risk management plans. This contributed to
less emphasis and focus on innovation. “This brain drain, lack of innovation by banks
and low cost of technology platform development has resulted in the FinTech startup
boom that is much talked about today.” (Forbes, 2015). These traditional banks are less
willing to take risk and to invest in customer-focused innovations. On the other hand, so
called non-banks are facing only little or even no regulations at all, “further driving down
costs and freeing them to test new products.” (Antonakes, 2015).
Furthermore, internet usage and penetration has been growing constantly. According to
eMarketer, the worldwide number of internet users increased from almost 1.2 billion in
2008 to more than 3 billion in 2015 worldwide. Moreover, they assume that in the next 2

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years (by 2018), the figure will reach more than 3.5 billion, approximately 50% of the
entire world’s population
Figure 8: Internet Users and Penetration Worldwide, 2013-2018
source: eMarketer, 2014
It visibly signifies all of the online opportunities. Financial startups have already taken
advantage of this and have developed finance services built on the growth and evolution
of the internet. The assumption that the internet usage has grown after the crisis is
unquestionably justified. It has caused people to begin expecting possibilities of
performing activities remotely, and in a faster and more convenient way.
Moreover, the banking methods to acquire customers have always been relatively
expensive (already explained in the previous point). Therefore, they have always been
trying to do much toward cross-selling missions. Moreover, most of the banks operate
within their home country and they try to build the brand and scale in their domestic
markets. However, the internet has also changed it, because nowadays banks try to hone
in more on selling one particular service, consequently, increasing the quality.
To sum up, the 2008 crisis has definitely caused a breakdown of trust in the banking
system among people. It almost collapsed the traditional financial system worldwide,

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which gave opportunity to many FinTech startups we see now in the markets. It has also
caused a situation, where banks from all around the world are trying to catch up with the
online industry in terms of technology and products they provide. “Fintechs are setting
the benchmark high” (The Rise of Fintech in Finance, 2014), which means that the
competition is huge and interesting. “They (startups) believe technology can make
inroads into this complex, heavily regulated, and most conservative of industries.”
(Mackenzie, 2015).
1.5. Banking startups – introduction to disruptive technologies
“Banking is necessary; banks are not” (Bill Gates)
People all around the world struggle to manage their money. However, as already
mentioned, we are living in the age of the internet. You cannot deny it. Hence, free access
to information, online communication, exchange of concepts and know-how are the order
of the day. Primarily, it reduces time. Therefore, all startups nowadays want to reduce the
time of its customers and make their services as convenient as possible. The newcomers
improve the whole market as well. This is how it works. The more competitors, the more
innovations occur. Self-explanatory, indeed.
Traditional banks have always been middlemen between borrowers and savers. They are
paying interests for deposits and make loans to private and institutional clients. They have
always played a part in the whole community. Therefore, banks have been always
charging additional cost of borrowing and lending. This is the price a customer needs to
pay for the ability to be on a market. It has been like this for centuries. However,
nowadays “the future of high-street banking is not on the high street at all, but on mobile-
only platforms.” (Boden, 2015). The quote undoubtedly invokes to what is happening.
There are more and more small enterprises which want to create banks from scratch. As
Peter Thiel stated in his book “Zero to One”, those startups want to create new banks by
going from 0 to 1. It is this so-called “vertical progress”, since it forces people and
companies to do things that has never been done before. In a single word, it can be called
Technology. “The financial services industry is one of the biggest spenders on
technology”. (Boden, 2015). Thus, the internet is an appropriate medium for banks and

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other financial services. It has raised more trust among the society after the Financial
Crisis in 2008, due to its full accessibility all over the world and obviously its speed.
According to a Transferwise report, there are five main factors that are encouraging
consumers to use fintech providers for services they usually use their banks for:
• a more secure service than banks,
• a better cost than banks,
• a more convenient service than banks,
• a quicker service than banks,
better customer service than banks
There are already a few companies which try to undermine the function of banks. Let’s
call them mobile banking startups. What are they doing and how are they doing it? Why
are they better than traditional banks? Below, there are 2 examples of those kinds of
startups with a brief explanation of their role.
NUMBER 26
It is a German company aiming to create the bank account of the future. They intend to
transform the traditional banking industry and how people spend, save and transfer their
funds. Their goal is to “offer a borderless banking experience across Europe”. (Number26,
2016). Currently, the company is available for its clients from Germany, Austria, France,
Ireland, Italy, Spain, Slovakia and Greece. Equally with traditional banks, Number26
issues a bank card (MasterCard), which can be used to obtain items or withdraw money
from ATMs globally.
So why is it better than a conventional bank? Nowadays it still takes at least 1-2 days to
make a money transfer with a traditional bank (if international, even more!). You want to
open a bank account? In most cases you still have to make an appointment with a bank’s
local branch. In terms of the discussed mobile banking startups, the whole process is being
held online, without sending any physical documentation. Moreover, it takes only 5
minutes (as they claim). Is this the only reason for being better than a traditional bank?
Yes. Why? Because it is faster, fully accessible, trustworthy and does not require any
bureaucracy.

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SIMPLE
The next virtual bank which is worth mentioning. The first assumption of the company
was to eliminate many of the extreme and unnecessary fees that conventional banks
charge. They have managed to do so, because currently, they do not charge their
customers any fees. However, it is not a pure bank. According to Josh Reich of Simple,
the customers get from the company a Visa Card, they a gain access to the largest ATM
network in America, they put their paychecks into a Simple account, they pay their bills
and they have a really good mobile and web experience among others facilities. However,
the company works with partner banks, which take their customers deposits, and hold
them in FDIC (The Federal Deposit Insurance Corporation) insured accounts (as of
beginning of 2013). Therefore, in the end, the banks are the ones taking care of the money,
and Simple is the one taking care of the people and technology. So, to be honest, the most
important things in today’s world, people. They want to provide the best UX (User
Experience) they can. What is also interesting, and worth mentioning, Simple was
acquired in 2014 by Banco Bilbao Vizcaya Argentaria (BBVA), a Spanish Bank, for
almost $120 Million, which indicates that enormous banks are fearful of the fintech
industry and do not want to become obsolete. As Kartik Ramakrishnan, senior vice-
president at Capgemini, claims: “There is an urgent need for the traditional players to
acknowledge the presence of new digital challengers”. It simply means that banks need
to adjust to the surrounding environment, which BBVA has accomplished. The Spanish
banking giant, has acquired yet the next online banking startup called Holvi, however the
price was undisclosed. If you cannot beat them, buy them.

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Chapter II. Literature review
Due to limited traditional literature sources, mainly online reports, articles and blog posts
have been used to research the topic of disruptive financial technologies more in depth.
Nevertheless, since the main purpose of this dissertation is to present the interplay
between banks and financial technology startups, the topic has been theoretically analyzed
from two perspectives:
• from a banking perspective
• from a startup perspective
The aim behind this approach is to gain more traditional knowledge on how these two
entities operate separately and what their culture of work is. This is useful for the further
research in terms on how they affect each other – which is the main area of concern of
this dissertation.
In terms of banks, mainly interpretive literature, both in Polish and English, was used to
analyze the core competences of traditional financial institutions. “Breaking Up the Bank:
Rethinking Industry Under Siege” (1988) by Lowell Bryan and “The Economics of
Money, Banking & Financial Markets” (2013) by Frederic Mishkin provided
comprehensive insights into the functions of banks. It was helpful in order to notice and
outline the main bank activities which are affected by today’s online companies. Hence,
traditional literature has given a broad overview on how Foreign Exchange, Payments and
Lending are executed by conventional institutions.
Regarding disruptive technologies and new trends on the financial market, many
international journals and scientific literature were used in order to assimilate the broad
outline of the topic which has been elaborated on in the last several years. “A Reflective
Review of Disruptive Innovation Theory” (2010) by Dan Yu and Chang Chief Hang
simplifies the concept behind disruptive technologies. Additionally, the authors evolved
the predictive use of it in the future, which was useful for the foresight study of this
dissertation and subsequently to come to conclusions regarding the outlook of the future
in the financial markets. Furthermore, concerning intermediaries which perform a
significant role in finances worldwide, “Emergence of Financial Intermediaries in
Electronic Markets: The Case of Online P2P Lending” (2014) by Sven Berger was

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uplifting in the analysis of the role of intermediaries in online markets. The key takeaway
of this business research is that online lending marketplaces will replace banks in the
upcoming future.
Additionally, “The Lean Startup” (2011) by Eric Ries and “From Zero to One” (2014) by
Peter Thiel were inspiring in order to profoundly comprehend how small technologies
work and how they perceive the market they operate in. Both of the authors have been
online entrepreneurs for many years and therefore the topic has been approached primarily
based on their experiences and own observations and theories.
However, the main contribution to this research was online articles, reports and blog posts
which are up to date and give truly in-depth industry knowledge which touches the subject
of increasing importance of fintech startups in regards to banks. Therefore, to analyze the
role of financial technology startups in today’s financial world, online sources have been
the most helpful.

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Chapter III. Methodology
The overarching purpose of this study is to discover how disruptive technologies
influence the current banking model and how they are posing threats to specific areas.
The research mainly aims to explore and discuss the financial technology revolution and
to answer the following questions:
• In what way are disruptive technologies influencing the banking system?
• Will the fintech startups make banks obsolete?
• What bank activities are under the greatest threat from startups and why?
The thesis focuses on 3 main banking activities.
1) Foreign exchange
2) Payments
3) Lending
Each of these is elaborated in a separate chapter. Firstly, traditional banking performance
is elaborated, subsequently the fintech disruption is analyzed and in the end interviews
with corresponding entrepreneurs are analyzed.
An interpretive research methodology was used for this study, which means that it is
based on observations, explorations and field work. Financial startups are the main focus
of interest in this study. How are they dealing with the current industry and markets?
What kind of problems and opportunities do they encounter? Due to limited traditional
literature sources, mainly online reports, news and blog posts have been used to discover
this topic more profoundly. This paper also bears feature of the foresight study, since it
is looking at how disruptive technologies can help design the financial future.
To answer all the questions mentioned above, different methods have been used. First
and foremost, three in-depth, partially structured interviews have been conducted.
1) Radoslav Albrecht, CEO & founder of Bitbond – on payment system and lending,
digital banking and fintech industry
2) Sebastian Diemer – former CEO & co-founder of Kreditech, on payday loans,

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3) Michał Czekalski – CEO & co-founder of Currency One, on foreign exchange,
The interviews were used to obtain data about different point of views from the people
who are in touch with this industry on a daily basis. It aids to comprehend how they do
perceive this revolution and which direction it is heading towards.
Moreover, to approach the research better, a multitude of quantitative data has been
analyzed. This data has been gathered from different statistical websites, blog posts,
information news and directly from the websites of selected startups.

25
Chapter IV. Field of possible disruption no. 1 – Foreign
exchange
The foreign exchange market is a general term for a global currency market which is
usually denoted to “Forex” or “FX”. It is the largest financial market, renowned by its
high liquidity and dynamics. The global foreign exchange market volume reached $ 5.5
trillion USD per day in 2014. Moreover, “Aite Group estimates FX volumes to near $8
trillion a day in 2019.” (Finance Magnets, 2016)
Illustration 1: FX volume trading per day
source: Daily FX, 2014
Those numbers point out a clear opportunity for all the FX players. However, who is
creating FX nowadays? The participants of the market can be divided into:
1) interbank market - covers foreign exchange transactions concluded between
central banks, commercial banks and financial institutions.
2) retail market - covers transactions by diminutive speculators and investors. The
transactions are carried out through brokers in the Forex market who act as
mediators between the retail market and the interbank. The participants of the
retail market are Hedge Funds, corporations and individual players.
According to a survey conducted by Greenwich Associates (2015), there are only 5 main
actors on the global FX market – all of them are banks. Citi, Deutsche Bank, UBS,

26
Barclays and J.P. Morgan together capture 50.9% of global top-tier customer trading
volume.
Dealer Market Share Statistical Rank
Citi 11.7 % 1T
Deutsche Bank 11.6 % 1T
UBS 10.2 % 3T
Barclays 10.0 % 3T
J.P. Morgan 7.4 % 5
Table 1: Main actors on the global FX market
Source: Greenwich Associates, 2015
“In the current environment, a less concentrated FX market might actually be welcomed
by some of the world’s biggest FX dealers. These banks have been under intense
regulatory pressure, first from the fallout of the financial crisis and more recently from
the FX rate-rigging scandal”. (Greenwich Associates, 2015)
However, people nowadays are complaining more and more about pricing of the banks
and the transparency. It makes a huge opportunity for small financial technology
companies which are entering the global FX market at many levels. The topic of this
chapter will mainly be focused on money transfers/remittances and on bureaux de
change/currency exchange. These companies are growing at a fast pace due to selling
currencies and providing the same service cheaper than most banks.
According to Michal Czekalski (CEO, Currency One), the trend is clearly
disadvantageous for banks. At a slow pace, of few percent per annum, banks are
constantly losing its FX customers for the benefit of independent providers. These
providers are fintech companies.

27
3.1. Remittances
Figure 9: Global Cross-Border Remittance Volume
Source: Business Insider, 2015
Remittances are primarily money transfers sent by a foreign worker to relatives back to
their home country. It is an enormous global industry that is also being disrupted by
fintech players. Why? Because, according to the World Bank, more than $580 billion was
remitted globally in 2014, and moreover, the number is supposed to increase to more than
$600 billion in 2016. The compounded annual growth rate is estimated at 3.75%, which
evidently means that the international market is expanding. That increasing trend, creates
a lot of opportunities and encourages financial technology startups to enter the market to
become significant players. The first newcomers are already emerging and leveraging
online platforms to compete with financial institutions on scale and fees.

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Figure 10: Top 10 Remittance-Sending Countries
Source: World Bank, 2014
It is easy to notice, that the United States is the top country in terms of sending funds.
People from the US sent around 22% of global remittance volume in 2014. On the other
hand, for example India along with China, received together 23% of this volume (Business
Insider, 2015). In the matter of continents, it is Asia, as the biggest beneficiary in the
remittance market.
What about remittance players? Presently, as almost in every financial sector, banks
actually still dominate the remittance market. Nevertheless, money-transfer operators
(MTOs), for instance Western Union and MoneyGram, take about half of the market
share.
The appearance of new fintech players along with MTOs has already caused a slight
decrease in costs of sending the funds. According to the World Bank, “the average global
cost of sending remittances fell to 7.37% as of December 2015, from 7.52% in the
previous quarter”. (World Bank, 2015). Moreover, “it’s possible to send money for the
average cost of 10% or less in 80% of the world’s country corridors. For comparison, six
years ago, only 50% of the corridors had the cost of 10% or less.” (Let’s Talk Payments,

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2016). As mentioned before, those number are caused by the threat of new, young market
players.
Regarding fees, let’s take an example of sending $200 from Germany to China.
Source: Remittance Prices Worldwide, 2016
The table above, signifies that the cheapest choice is provided, surprisingly, by an online
Postbank service. The remittance cost is barely $2. However, the duration takes from 3
to 5 days which makes it fairly undesirable. Taking into account fintech players, Azimo
and WorldRemit provide the cheapest options and the funds can be delivered within 24
hours. WesternUnion and MoneyGram, the mature players, are also prudent possibilities
and take less than 1 hour to deliver money. As it is clearly noticeable, German banks,
such as Commerzbank AG or Deutsche Bank are not a satisfying preference anymore.
The remittance takes 6 days or more and the cost is genuinely discouraging. The bank
average cost of transferring $200 is nearly $50, whereas the same transfer cost by using
MTOs is on average less than $20.
Firm Availability
Fee
(USD)
Exchange
Rate
Margin (%)
Total Cost
Percent
(%)
Total Cost
(USD)
Transfer Speed
Azimo online $4,27 3,59% 5,73% $11,46 next day
WorldRemit online $8,56 1,58% 5,86% $11,71 next day
WesternUnion online $9,86 1,92% 6,85% $13,70 less than 1 hour
WesternUnion at branch $17,14 1,84% 10,41% $20,81 less than 1 hour
MoneyGram at branch $25,71 0,00% 12,86% $25,71 less than 1 hour
Commerzbank
AG
at branch $41,43 1,29% 22,01% $44,01 6 days or more
Postbank online $2,14 0,00% 1,07% $2,14 3-5 days
Postbank at branch $12,14 0,00% 6,07% $12,14 3-5 days
Deutsche Bank online $50,00 0,00% 25,00% $50,00 6 days or more
Deutsche Bank at branch $54,29 0,00% 27,14% $54,29 6 days or more
Table 2: The cost of sending remittances

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Figure 11: Remittance providers in terms of Market Capitalization or Last Round Valuation
source: own elaboration
The chart shows the market capitalization or last round valuation of main actors of the
remittance market worldwide. The numbers are enormous. Western Union, which went
public in 2006 has reached a valuation of nearly $9.5 billion. The younger startups, such
as TransferWise, Xoom or WorldRemit create together the value of almost $2.5 billion.
According to TransferWise, the monthly turnover is around 200 million Euro and the total
revenue of the company in 2015 was 9 million Euro.
However, it is important to highlight, that there is a fine line between fintech and non-
fintech players. Everything depends on the companies, how they define themselves.
Nevertheless, all of those companies and non-banks organizations which are threating
banks at a large scale.
0
1
2
3
4
5
6
7
8
9
10
Western
Union
TransferWise Xoom WorldRemit MoneyGram Azimo
MarketCaporLastRoundValuation($B)

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Illustration 2: Estimated costs of transferring money
source: World Bank, 2015
The bottom line is that online products are the cheapest ways to send money. It has
already been proven above in this chapter. TransferWise, WorldRemit, Xoom and Azimo
are most promising startups in this industry. The opportunity is huge – roughly $0.6
trillion market which is still growing. Will it make bank remittances obsolete in the next
10 years? There is no doubt that quick and much cheaper online remittances will become
more popular. It is alluring, how the high street money transfer operators, such as banks,
will take up this challenge.
3.2. Bureau de change / currency exchange
Bureau de change or simply currency exchange is a place where people can exchange one
currency for another. Although, while observing the rate of growth of sales services, it is
easy to notice bringing the business models online. Hence, as mentioned already few
times, the internet provides numerous cheaper possibilities to acquire customers.
However, every customer needs to be convinced to use an online service as well.

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Therefore, I would like to cite a few advantages arising out of online currency exchange:
(NF - Nowoczesna Firma, 2016)
1) Convenience – making a transaction without leaving your desk makes it more
easy than going to a stationary bank branch. Simple as it is.
2) Favorable conditions of exchange – equals also to saving.
3) Very competitive, narrow spreads.
4) Security – the same regulations apply to startups as to banks.
5) Internet reach - this topic has already been discussed ad nauseam. No need for
explaining.
In terms of online currency exchange market, Poland is a very good example to focus on.
Why Poland? Poland’s market in terms of online currency exchange is huge. According
to Currency One (the biggest company of Polish online currency exchange sector), 20%
of money which was exchanged in Poland’s stationary currency exchange places is
already taking place online. The turnovers of online currency exchange startups in 2016,
are expected to continuously grow and to increase by roughly 20% in comparison to 2015.
Therefore, the whole online currency exchange sector is expected to be worth 38 billion
zł. (approx. 9 billion euro). Year by year, the turnovers are increasing. The newcomers
are still entering the market; however, the top of the industry is already too strong to be
threatened. Currently, there are around 50 online bureau de change in Poland.
Nevertheless, the online currency exchange market is really competitive. Barriers to entry
are very low, and the concept of high commissions of billions of turnovers is very
appealing. Still, “if there is money to be made, new firms will enter the market, increase
supply, drive prices down, and thereby eliminate the profits that attracted them in the first
place” (Thiel, 2014). This is how a perfect competition works. However, in the end, “all
failed companies are the same: they failed to escape competition.” (Thiel, 2014).
Regarding online currency exchange in Poland, the competition is very often too strong
to survive, and operating costs too small to fold. The other factor is that most of them are
not scalable.
The numbers speak for themselves. In 2010, the first online currency exchange platforms
arose in Poland, and the turnovers already reached almost 1bn zł. The following year, it
significantly increased to more than 3 billion zł. Year by year the number of transactions

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have been constantly growing at a very rapid pace. “In 2014 it was estimated that the
Polish online FX platforms exchanged currency worth a total of ca. PLN 25bn,
approximately 21bn of which can be attributed to non-bank platforms.” (Currency One,
2015). (PLN 25bn is equal roughly to EUR 6bn)
Figure 12: Value of currency exchanged with the use of FX platforms 2010-2014 [PLN bn]
Source: Currency One, 2015
However, why the market is growing so fast and why is it expected to expand even more?
This sectors’ future stability and opportunity is supported by the postponed introduction
of the Euro as an official currency in Poland. It forces Polish people to exchange much
more, than other, more developed countries, like Germany. Moreover, spreads are one of
the most important deciding factors. The difference between the sales price and the
purchase price of a currency. The lower it is; the transaction is more favorable for us.
Regarding spreads, banks earn a lot of money on conversions, using high, individual
margins. Thus, it creates a good opportunity to non-banks to enter the market and try to
narrow the spreads. The next factor, which is driving the market is Polish labor migration.
Since Poland entered European Union (2004), more than 2 million Polish people left the
country for the purpose of employment, which makes 10% of people professionally active
in the whole country. It also creates more opportunities to FX players. The other factors
are increasing balance of trade or cross-border SME activity in Poland.
REACTION OF POLISH BANKS
Due to rapidly growing online currency exchange market, large Polish banks are trying
to defend themselves against losing its customers and offering similar, convenient
exchange currency services. Their profits are decreasing and they are constantly looking

34
for an appropriate way to recover the eroded client base. Few examples will be introduced
and briefly explained below.
1) Bank Zachodni WBK – a Polish universal bank has introduced a new online
service which permits customers to perform transactions at attractive exchange
rates. Additionally, they have conducted a dynamic operation orientated on churn
customers.
2) Alior Bank has created its own online bureau de change – the exchange rates are
good, however, they do not hide, that a cheap FX service is a good opportunity to
acquire new banking clients – both individual and corporate.
3) mBank has followed Alior’s path and opened a new online exchange currency
called mKantor
4) Raiffeisen Bank – the have presented a new online exchange currency but based
on an external company – Rkantor.com. In terms of banks, the decision seems to
be reasonable, because it is a good opportunity to recoup clients to a non-bank
platform.
3.3. Interview with a practitioner – Forex entrepreneur
Michał Czekalski is a co-founder of Currency One – the biggest player on Polish online
currency exchange market. The company’s turnovers in 2015 reached 13 bn. zł (approx.
3 bn. Euro). One of their core platforms is Walutomat, which was created in 2009. It is
the first Polish website which enabled currency exchange using a peer-to-peer
marketplace model. The users exchange currencies with one another and manually agree
on a rate they want to conduct their transaction with. Therefore, the company does not
earn any money on spreads. The source of profits is mainly a diminutive fee, which is
deducted from the exchanged amount, after a transaction is performed. The commission
ranges from 0.06% to 0.2%. As of January 2016, the customers of Walutomat exchanged
a sum of 25bn zł within the website. The number of clients have significantly increased
in 2015 by 34% in comparison to 2014. The same applies to the turnovers, which
increased from 6.2bn zł in 2014 to 8.4bn zł in 2015. I had the pleasure of interviewing
Michal, asking about the financial sector and the FX sector.

35
Illustration 3: Key statistics of Walutomat
Source: Walutomat, 2016
Michał believes that lending fintechs pose the biggest threat to banks, and lending is the
banking activity which can be eaten up really fast, primarily due to lower pricing of online
companies as a predominant aspect. Furthermore, he anticipates peer-to-peer models as a
financial game changer, both in foreign exchange and lending. According to Czekalski, a
key trend within the FX market is that the companies become multinational and customers
gain more trust in the platforms. He also signifies cheaper transfers with friendly user
experiences and safety promises as a main value proposition provided to customers by
FX startups. “That was a blue ocean for currency exchange. Prices on the market were
way too high and people needed that. This sector is huge so it grew up fast.” (Czekalski,
2016)
Regarding the financial market and startup activities, he thinks that some fintech actors
will end up becoming banks, mostly throughout banks’ acquisitions. However, currently,
the trend is clearly harmful for banks. “Banks are afraid of new entrants, however when
they start fighting back, the cost of customer acquisition (CAC) will go up and bank prices
will have to be lower so they will still dominate but with lower margins.” (Czekalski,
2016). They are starting to notice competition, but still do not know how to react to the

36
situation. Therefore, at a slow pace, of a few percent per annum, traditional services are
constantly losing their FX customers because of the benefits from independent, fintech
providers. “The main factor is price. Other than that, I would say also hatred towards
banks, faster transfers and usability.” (Czekalski, 2016). Michal also admits that the
financial market is so differential, that it is very difficult to indicate which fintech area
will register the most growth over the next 5-10 years.

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Chapter V. Field of possible disruption no. 2 – Payments
system
4.1. Traditional payment methods
“A modern market economy depends on an effective and efficient payment system”
(Summers, 1994). Therefore, a payment system is a core component of the financial
system. Therefore, it is clear that banks around the globe need to respond to the challenge
posed by emerging fintech players in terms of the payments market as well. The report
on global payments conducted by McKinsey, shows that in 2014, payment revenues
represented 40% of shares of total banking. Therefore, as presented in the first chapter,
payments are the sector where banks expect start-ups to have the highest impact on
banking. Why? Because the essence of the payment system is efficient and quickly
functioning operational facilities, which fintech players can provide. Since the volume of
payment transactions is enormous, computerized systems using disruptive technologies
are required.
Payments are crucial sources of income regarding banks. The global payment industry
reached revenues of $1.7 trillion in 2014, according to McKinsey. Moreover, the
company expects annual global payments revenues to increase at a fixed rate of 6% within
the next 5 years, surpassing $2 trillion by 2020 (see: Figure 13). Asia & Pacific is
constantly a major player on the market, adding about $70 billion in payment revenues
which represents about 55% of the worldwide revenue growth.

38
Figure 13: Payments revenue 2009-2019
Source: McKinsey, 2015
The traditional payment instruments include cash, checks, credit cards, debit cards and
wire transfers. Figure 14. shows the shares of transactions by payment method.
Nowadays, cash is still a dominant and the most convenient method of payment, followed
by debit cards, credit cards and checks (cashless methods).

39
Figure 14: Shares of transactions by payment instrument
Source: Financial Brand, 2015
CASH
The most conventional and direct means of transferring money is cash. It is “legal tender
that can be used to exchange goods, debt or services”. (Investopedia, 2016). Cash money
refers to the physical form of a currency, thus to coins and banknotes, which are emitted
either by the central bank or government bodies. Cash cannot be exchanged in real time,
however at the moment it still dominates all forms of payments. (see: Figure 14). In
comparison to other methods of payments, consumers choose cash for the following
reasons: (Financial Brand, 2014)
“-cash plays a dominant role for small-value transactions,
- cash is the leading payment instrument for specific types of purchases,
- cash is the key alternative when other options are not available,
- cash is the leading payment alternative for Gen Y,
- cash is a primary payment option for lower income segments,
- cash cannot be hacked.”
CHECK
A debit instrument in the form of written, unconditional order of payment. For years,
checks have been the most commonly used cashless payment method. Checks can be
drawn to be paid a specified sum on demand to a certain individual or company. A check

40
clearance is the process of moving money from one account to another. As checks take
the physical form of documents and it takes some time to clear, those paying by check
enjoy the benefit of floats. However, just like cash, checks cannot be exchanged in real
time.
BANK CARDS
Bank cards enable funds withdrawal and purchases. The main types of cards include:
a) credit card – the standard for making payments. Credit cards enable purchases with an
option to borrow funds. Therefore, it indicates that the card holder has been granted a line
of credit. (Summers, 1994). They are used typically for short-term financing and
additionally the issuer collects a percentage of the transaction when the clients use the
card. Additionally, interest is charged when the customer doesn’t pay the full balance on
the due date.
b) debit card – enables purchases by deducting funds directly from a consumer’s current
checking account. It eases cash withdrawals with ATM’s, shopping in stores or shopping
on the internet.
WIRE TRANSFER
Usually an electronic transfer of funds from one person to another. We can also consider
wire transfers as remittances.
Over the last few years, the development of payment technology has accelerated without
any doubts. Non-traditional payment providers entering the payment industry that take
advantage of new technologies, are aiming to disrupt traditional services. Furthermore,
the boundaries between those providers and the product lines are blurring. There are
plenty of enterprises circling around electronic payments. Technology companies (like
Facebook, Amazon), mobile carriers, OEM’s or even merchants who fundamentally see
digital and mobile payments as a redefinition of commerce. All of them create new value
propositions to use mobile and software, to get closer to their customers.
The fast-moving change has aroused fear among banks, because the virtual entrants
evolve rapidly and continue to restructure how people live. The variety of possibilities

41
nowadays is truly broad and diverse. However, the success will mainly depend on
forming shifts in consumer and merchant behavior. (L.E.K, 2015)
Figure 15: Expected impact of startups on payments
Source: EFMA, 2015
Within the payment sector, the main sections, where banks expect the major threats from
non-bank players are mobile P2P payments, mobile wallets and remittances. The last
section has already been covered as a part of FX. However, later in this chapter the
payments breakdown will be focused mainly on P2P mobile payments, as well as a
Bitcoin and Blockchain as a new mean of transferring value.
According to L.E.K Consulting, there are 5 main trends driving opportunities for
payments revolution nowadays:
1) THE MOVE AWAY FROM CASH – the gradually progressing shift of
electronic payments adoption. Both in terms of customers, as well as of
merchants. There is a significant movement towards a “post-cash” economy.
According to John Cryan from Deutsche Bank, within the next 10 years, cash
will disappear, because there is no need for it and moreover it is “terribly
inefficient and expensive”.
2) INCREASE IN “CONSUMER-NOT-PRESENT” TRANSACTIONS – the
constant growth of mobile devices usage is shaping greater volumes of
consumer-not-present virtual transactions for commerce.

42
3) DEMAND FOR MULI-CHANNEL SOLUTIONS – “Merchants are
increasingly sophisticated about payments and require multichannel solutions
that provide seamless online check-outs.” (L.E.K, 2015)
4) GROWING CROSS-BORDER COMMERCE -– the growth in cross-border
transactions due to increase flow of people and international trade.
5) DISRUPTION OF EXISTING BUSINESS MODELS – new technologies and
in general the rising number of players disrupting traditional financial
services.

43
Figure 16: Landscape of the payment system
source: Wonglimpiyarat, 2015

44
After all, what is the main aim of all the electronic payment providers? First and foremost,
providing the best customer experience using new technologies. “By integrating
payments into commerce, nonbank attackers have created more seamless, personalized
and interactive experiences, contributing to increased conversion rates” (McKinsey, 2015).
Since customer expectations are changing rapidly, newcomers need to adjust to them as
well. Thus, all of those 5 trends mentioned above are equally important. Speed, multi-
channel accessibility, efficiency and convenience – these are the main important factors
new entrants are focusing on, in order to take the payment sector to the next level. (BNY
Mellon, 2015)
4.2. Established Internet based payment methods
4.2.1 PayPal
Nowadays, PayPal is the biggest and the most famous alternative online payment
provider. However, the initial idea of the co-founders was to create a new digital currency
and replace the US dollar. Their first product was called PalmPilot, but unfortunately the
product market fit had not been achieved and later on it was announced as one of the 10
worst business ideas of 1999. Nevertheless, the company has been constantly developing
and coming up with new concepts. An e-mail payment product was the next innovation
which allowed customers to transfer funds in the easiest way at that time. However, it
was still tough to attract the attention of users. As a solution, the company had applied an
affiliate marketing program which boosted the PayPal’s customers acquisition and started
off an exponential growth rate. In 2000, in the fear of the dot-com crash, PayPal merged
with Elon Musk’s X.com. It was a breakthrough moment of the company’s history
because it allowed PayPal to endure the bubble and subsequently build a company which
went public in 2002 and, as of March 2016, was valued at almost $47 billon.
Today, the company constantly grows at roughly 15% annually. Apparently, as believed
by Peter Thiel, most of PayPal’s value will come from 2020 and beyond. According to
PayPal, as of December, 31 2015, the business had 179 million active customer accounts
which included 13 million merchants, and in the previous year the company
processed $282 billion worth of total payment volume. The main revenue stream of the

45
company comes from charging fees for providing transaction processing as well as other
payment-related services.
4.2.2. Peer-to-peer mobile payments
According to Business Insider, the volume of peer-to-peer (P2P) payments, which allows
people to transfer money to one another instantly, is over $1 trillion globally. Nowadays,
the market has a huge variety of providers. Ranging from fintech startups to even huge
established non-payment operators, such as Facebook, Apple or even Snapchat. All of
them, see a strong opportunity in the market and evidently are seeking a new stream of
revenues. Most likely, constantly increasing competition will reduce margins on domestic
transactions in upcoming years, however the volume growth in electronic payments,
including P2P and mobile, will definitely increase.
The dynamic development of P2P payments system is the outcome of low cost fund
transfers and no additional requirements on the side of the payer or recipient (for example
a bank account or credit cards is not required). Furthermore, the rapid development of
mobile usage, both in terms of technology and user base, made it possible to use the
smartphone as a tool for making payments. Thus, a mobile P2P payment, is a transfer of
funds between mobile devices
According to Statista, as of 2015, worldwide mobile phone internet user penetration was
52.7%, which means that the number of phone users surpassed 4.4 billion. In 2017,
numbers imply that more than 63.4% of mobile phone users will access online content
through their devices. It means, that the demand for P2P mobile services will be growing
probably at the same pace as mobile internet penetration. So far, the evolution of the
internet has gradually migrated consumers to electronic P2P mechanisms for the last
several years.
On the other hand, the evolution of P2P payments or even more general, electronic
payments system, is based on demand and supply. On the demand side, customers always
want to have control and monitor different payments that they conduct. Presently, this is
supported with technological advancements, which belongs to the supply side. As
consumers worldwide are already familiar with the benefits of using technology, their

46
expectations are big. Especially in emerging markets, where a lack of access to traditional
payment instruments among other financial services availability, is evidently visible,
there is a massive potential for P2P mobile payments. However, the unbanked population
will be elaborated more in the next chapter.
Moreover, in terms of P2P mobile payments, banks are competing not only with fintech
entrants, but also with the world’s most valuable companies: (McKinsey, 2015)
1) Facebook entered the sector by offering the users free peer-to-peer payments
via its Messenger app.
2) Snapchat launched Snapcash, which basically works the same way as feature
introduced by Facebook
3) Samsung unveiled Samsung Pay
4) Apple introduced Apple Pay
5) Google offered Android Pay
The significant advantage of these companies, even over strictly financial companies, is
the established customer base and also other revenue streams beyond payments. It allows
them to offer the service either for free or for prices significantly below-market.
(McKinsey, 2015). Hence, “payments are attractive to these players because they offer
control over the customer purchase experience and ownership of a rich seam of
transactional data – from which the new entrants have a proven capability to use new
technology and analytics to extract value.” (Deloitte, 2014).
4.3. Virtual currencies
„I’m sure that in 20 years there will either be very large [Bitcoin] transaction volume
or no volume.” (Satoshi Nakamoto)
According to the European Central Bank, a virtual currency is "a type of
unregulated, digital money, which is issued and usually controlled by its developers, and
used and accepted among the members of a specific virtual community.” As of March
2016, the current total market value of virtual currencies was roughly $8 billion USD,
whereas, the USD currency in circulation (banknotes and coins) was worth $1.4 trillion.
Therefore, virtual currencies are still a diminutive compartment of total currencies all

47
around the world. However, they are still in the early stages of development, with a great
perspective future.
The emergence of virtual currencies has been an important development in terms of the
global economy, including financial services. According to Christine Lagard from IMF,
virtual currencies are foremost beneficial for customers. They bring better value, reduce
overheads, provide financial inclusion, provide versatility and reach out to places where
unbanked people live – where technology is beginning to make huge entries.
Still, at the same time, it is important to mention the shortcomings and considerable risks
of virtual currencies. No central control, no central bank, no supervision and no
regulations – these are the main factors leading virtual currencies to become a great
instrument of crime. Illicit transactions, terrorist financing or money laundering are easily
available with the use of cryptocurrencies. However, as believed by Christine Lagard,
this scene is going forward and going to change massively in the near future. There are
already startups like Chainalysis, which “create tools that respect user privacy and prevent
abuse of the financial system.” (Chainalysis, 2016) They provide a software which aids
financial institutions to identify malicious actors in the bitcoin network. It is a necessary
step to eliminate all illicit movements around cryptocurrencies.
Illustration 4: Taxonomy of Virtual Currencies
Source: IMF, 2016

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4.3.1. Bitcoin
Nowadays, new electronic currencies provide an alternative to conventional fiat
currencies (declared as money by government regulation or law, legal tender) as a
transmitter of value. Bitcoin - the trendsetter of virtual currencies was launched in 2009
and is the first decentralized digital currency. It is used as a representative example of
cryptocurrencies, since it is so recognizable, Bitcoin has had principal influence on the
development of cryptocurrencies. Bitcoin, which is based on a peer-to-peer structure
enables payments options independent of government control and without the need for a
middleman. Due to the lack of an intermediary, this latest innovation in the payment
industry is becoming extremely disruptive. Furthermore, Bitcoin is an open source
software which means that the source code is accessible for anyone to use, review or
modify.
I would say, that Bitcoin for the world of finance is the same as email is for the traditional
postal service. However, the question arises whether Bitcoin will bring the same
revolution as email has brought. Currently, it is mainly gaining popularity among those
who hope for a cashless society. According to Fisher and Pry (1971), when an innovation
reaches the threshold of about 5% penetration of a potential market, it provides a
fundamental base for forecasting the speed and ultimate penetration achievable. At the
moment, unfortunately the adaption of Bitcoin regarding the market penetration is below
5%. Hence, it is still hard to predict its potential use in the future.
Nevertheless, the Bitcoin market capitalization as of March 2016 was nearly $6.5 billion
USD, which makes it more than 80% of decentralized virtual currencies market value
(CoinMarketCap, 2016). Also, as I type this (8th
of March 2016) its value is roughly $411.
However, it fluctuates a lot and hence this is a part of the reason why this currency is not
ready to overtake PayPal, yet. (Coindesk, 2016). At the moment, there are three major uses
of bitcoin:
1) DIGITAL CURRENCY, as a form of online payment - however, currently, it is
not fully prepared to scale to the level of for instance main credit card networks.
Bitcoin payment processing is conducted through a private network of computers.
2) PROTCOL, as a technology – “Bitcoin is a remarkable cryptographic
achievement and the ability to create something that is not duplicable in the digital

49
world has enormous value”. (Schmidt, 2014). The technology behind Bitcoin can
transfer any digital assets, is not restricted only to money. Hence, it is cheaper and
faster than the alternatives.
3) ASSET, as a digital asset – analogical to gold holding or trading foreign
currencies.
In theory, Bitcoin could serve as money since it satisfies all the official properties of
money. “It is durable, divisible, fungible, easy to transport and impossible to counterfeit.”
(Franco, 2015).
THE BENEFITS OF BITCOIN FOR USERS
According to Jon Matonis, Founding Director at Bitcoin Foundation, major advantages
of Bitcoin are as follows:
- payment freedom - bitcoins are transferred directly from person to person via internet
without a third party at any given time,
- transaction fees are much lower (range from 0.01% to 0.05%)
- unrestricted cross-borders transactions - useable in every country,
- accounts cannot be frozen
- no prerequisites or arbitrary limits
- fixed supply of $21 million makes Bitcoin deflationary
Moreover, he believes that key benefits of adopting Bitcoin as a method of payment for
merchants are:
- extending acceptance to countries not reached by Visa, MasterCard, PayPal
- providing a payment method for the unbanked people
- no disallowed merchant categories codes (MCCs)
- not subject to payments embargo
- eliminating chargeback and fraud risk
- processing fees approaching zero
- near immediacy of settlement

50
THE RISKS AND DISADVATAGES OF BITCOIN FOR USERS
Advantages of Bitcoin have already been discussed, but what about the downsides of this
cryptocurrency?
1) LACK OF AWARNESS AND LIMTED ACCEPTANCE
Many people are still unaware of cryptocurrencies and Bitcoin. Every day, more and more
merchants are beginning to accept bitcoins (see: Figure 17), because they want to
contribute to the development of the currency and also want the benefit of doing so.
However, the list remains fairly short compared to physical currency and must continue
to grow in order to benefit from network effects.
Figure 17: Bitcoin acceptance among merchants
Source. Coindesk, 2016
2) VOLATILITY AND RISK
The volatility of Bitcoin is mainly due to the fact of limited bitcoin supply and the
increasing interest every day. Moreover, regulatory uncertainty, relatively low market
capitalization, low liquidity or limited market access contribute to the volatility even
more. The total value of bitcoins in circulation (nearly $15,300,000 as of March 2016)

51
and the number of businesses using Bitcoin is still very small compared to what it could
be. Nevertheless, the instability of the currency is anticipated to decrease as time goes on
and the markets and technologies become more mature.
3) CURRENT DEVELOPMENT
Bitcoin software is still in its beta stage with many of it incomplete and are still in
development. Developing new tools, features and services aiming to make Bitcoin safer
and more accessible to the masses. Furthermore, speculation of the currency value could
affect overall financial stability.
4) WELL-SUITED FOR INTERNATIONAL CRIMINAL ACTIVITY
Since the currency is not issued or controlled by the government, legality concerns arise.
“By largely eliminating intermediaries, bitcoin allows individuals to conduct transactions
without being subject to anti-money laundering controls, which makes it an attractive
currency to criminals — particularly those who prey on the weak.” (Fagan, 2013).
BITCOIN AS AN ASSET
Figure 18: Bitcoin Price Index
Source: Coindesk, 2016
Figure 18. shows the Bitcoin price index since its very first day on the market. It is clearly
noticeable that it is not stable yet, and the fluctuations are really high. The initial price of

52
the currency was basically 0 in 2009. There were no exchanges or market. The first users
were mainly Bitcoin enthusiasts sending coins for very low or even no value. On the other
side, the all-time high price of Bitcoin was reached in the end of 2013. At this time, we
could have bought 1 BTC for almost $1125.
The bottom line is that Bitcoin is definitely a hot topic in the payments and financial
industry. The transaction fees are much lower than in terms of traditional payment
instruments. It can change the future of banking mainly in developing countries, with
internet access but with an undeveloped banking infrastructure. (Wonglimpiyarat, 2015).
The main concerns about this cryptocurrency are still its illicit possibilities and security
infrastructure. These two factors must be overcome in order to achieve a widespread
adoption of Bitcoin, create a real revolution in the area of payment industry and
forethought, become mainstream.
4.3.2. Blockchain technology – a decentralized ledger
“A Blockchain is a public and distributed ledger of all bitcoin transactions that have ever
been executed.” (Hansen, 2016). This is the technology that empowers and assists
cryptocurrencies and is based on cryptography, peer-to-peer networking and game theory.
It is also a method to secure the Bitcoin database. Nowadays the technology is used by
an increasing number of companies and even banks, and is expected to fundamentally
change the financial industry in the upcoming years, since all transactions using
Blockchain could be authorized and conducted using any fiat currency.
Whereas Bitcoin is a relatively new topic, Blockchain has its beginnings dating back to
the 1990’s. However, Bitcoin was the first phenomenon which started off using this great
potential of blockchain technology. Surprisingly, blockchain technology provides a
useful and interesting regulatory analysis tool. Hence a public key can be linked to a
certain individual, it makes possible to follow particular transactions and gain more
visibility about them. It retains a secure list of all the transactions.
The blockchain key features are the absence of a central authority for transaction
authentication and double-entry book keeping. This is executed by a peer-to-peer

53
network throughout a consensus process. “A blockchain system is composed by two types
of entities:” (UniCredit, 2016)
• A peer-to-peer network of nodes – used to validate and authorize transactions
and to take part in the consensus process.
• Participants – execute transactions protected by means of cryptographic
signatures.
In term of payments, blockchain platforms could be either used as a form of decentralized
interaction or as a service for the customers. For instance, according to The Wall Street
Journal, JPMorgan has already been testing blockchain technology on its 2,200 clients.
Reportedly, the trial is a prelude to use the technology on a large scale. Moreover,
“Blockchain is ready to take center stage”, says a report by the banking giant Goldman
Sachs, which is self-explanatory that also banks see the opportunity to seize and catch up
with fintech players. In February 2016, UniCredit bank published a white paper that
investigates how banks could include blockchain-based services.
Possible solutions based on blockchain technology: (UniCredit, 2016)
• Blockchain as ledger of payments between banks from the same group. In this
situation, every bank is a private blockchain network contributor and is able to
execute transactions and participate in consensus. This solution aids to avoid
intermediaries and in consequence to eliminate related fees. The transaction itself
is performed in near-real time due to peer-to-peer solutions.
Illustration 5: Decentralized payment architecture
Source: UniCredit, 2016
• Blockchain as a ledger of payments between banks either from different groups
or cross border payment system. The main benefit is associated with the absence
of correspondent banks and consequently reducing capital requirements related to

54
middlemen. The constraint in this solution to become attractive is the participation
of a large number of banks.
Illustration 6: Interbank payments scheme with single reserve
Source: UniCredit, 2016
The breakthrough technology behind Bitcoin is a new kind of database and has a massive
potential to entirely reshape the current fundamentals of the financial industry. I believe
that the key advantages of blockchain technology is the elimination of middlemen and
the removal of asking for permission. Within the adaptation of the technology by the
global financial markets, the scope of decentralized technologies will increase
significantly. It is a win-win situation, since banks’ and financial institutions’ operating
costs will drop significantly, and consequently, the efficiency and abilities will increase.
On the other hand, for customers it means instant transfers, the ability to control their
resources and significant commission cost reduction. These movements will have a
positive impact on the global economy hence the number of transactions will increase, so
the market will be more liquid.
4.4. Interview with a practitioner – Bitcoin entrepreneur
Radoslav Albrecht is a founder and CEO of Bitbond – a global peer-to-peer lending
platform for small business loans, based on Bitcoin technology. The company was
founded in 2013 and its mission is to make cross-border borrowing and lending
accessible. The key feature of the marketplace is that with the help of digital currency,
users do not need a bank account in order to either borrow funds or invest in the loans. I

55
had the pleasure to interview Radoslav and to gain fascinating insights about fintech
market and payments sector.
According to Albrecht, there are 3 main areas where startups pose the greatest threat to
the financial market and are able the take away the highest level of market share from
banks. These are:
a) Lending – the main advantages of fintech lending startups are mainly the speed
and cost effectiveness. Albrecht also anticipates lending as the sector with the
most growth in the next 5-10 years.
b) Asset management – banks charge fees that are too high asset management and
therefore new fintech entrants have automated the process and cut down heavily
on the fees which drew the customer’s attention.
c) Payments – similarly as in those other areas, disruptors or even mature companies
like PayPal make the payment process faster and more cost effective. Payments
in the banking sector is always a long process and the conventional financial
institutions charge exorbitant fees.
The CEO of Bitbond believes that fintech disruptors will not make the banks fully
obsolete however a lot of traditional players are losing customer relationships nowadays,
which is ultimately driving down their margins. “Likely, for the next decade, there will
still be banks in the background running core banking processes, but I think they will be
losing the customer relationship which ultimately will drive down their margins.”
(Albrecht, 2016). He thinks that there are many startups worldwide that still use banks in
the background processes and it will remain like this for the next couple of years. Yet,
fintech startups are mainly focused usually on customer acquisition and providing a good
user interface to them. Nevertheless, it is likely that in 10-20 years, banks will not be
needed anymore. Radoslav emphasizes that the main drivers that convince customers to
switch to fintechs are the convenience, the speed and the lower costs. “I really think that
the convenience, the speed and the lower costs are the main reasons why customers are
switching to fintechs. Startups are much quicker in making decisions and they can also
react much quicker to customer demand.” (Albrecht, 2016).
Radoslav also thinks that at the present moment banks do not fear fintechs, however, they
are aware of them and do keep an extremely close eye on the market. Comparing to banks,

56
online players have still too small of market share to trigger an alarm among banks. As
believed by Albrecht, small financial technology companies can compete only in specific
types of services and that is the reason banks are still able to outdistance them. “In my
opinion when you look at a universal bank which provides all the services that a typical
commercial bank would provide, then I think it is relatively clear that we observe the
fintech startups always just picking one specific service and provide just that one service.”
(Albrecht, 2016). However, once banks start to get worried, they might not be fast enough
to catch up to fintechs due to their large legacy system.
Regarding the payments sector, he thinks that there are already a few companies with a
large and established customer base, like PayPal, TransferWise or Azimo which are
shaping the online payment market today. According to Albrecht, these companies will
continue to grow and capture the majority of market share. “I do see a lot of growth in
the payments sector, but I think in the next 10 years it will be more on the corporate sector
than in the consumer sector, because in the consumer sector there are already solutions
like PayPal and comparable services”. Albrecht, 2016). The questionable issue regarding
this area is mobile payments because currently it is more of a problem of merchants, not
payment providers. Therefore, one of the reasons why mobile payments have not really
gained traction yet is because of the fact that it requires additional investments and
infrastructure on the point of sale. He also believes that a completely cashless society is
a possible concept; however, it is not going to happen in the next 10-20 years. Since, the
share of all payment transactions conducted in cash is still 40% worldwide, it is not
possible that it will drop to 0 within 20 years from now. It has a few unique features, for
instance no need for technology, that other methods cannot offer and this is a reason why
cash will be still there in the future. “I think cash has a lot of advantages, for example
there is no need for technology in order to use it. Even though smartphone adoption is
growing rapidly, there will still be a lot of cash.” (Albrecht, 2016).
In terms of Bitcoin and the blockchain technology, Radoslav Albrecht believes that there
are a lot of advantages of the cryptocurrency however it requires consumer to change
their behaviors and approach. “Obviously the advantages of Bitcoin are still there, but it
requires people to change their behavior. There are still not enough people who know
about it and have the willingness to try technologies and services that are based on top of
Bitcoin.” (Albrecht, 2016). He also hopes that Bitcoin will play a huge role in payments

57
and presented a very interesting idea of 2 scenarios which are very likely to happen in the
future:
1) “The Windows scenario” – in this concept, Bitcoin will become a much more
stable currency with significantly less foreign exchange risk for the users. Its
market capitalization will go up to 60 billion dollars or even more.
2) “The Linux scenario” – Bitcoin will become mostly unnoticed by the users. It will
still be used in order to transfer payments efficiently and quickly, but mainly in
the background, so the consumers will not even notice it. He compared it to the
Linux operating system, since a lot of consumers are using it without being aware
of it.

58
Chapter VI. Field of possible disruption no. 3 – Lending
5.1. Banks – traditional lenders
“The traditional role of banks has been to take deposits and make loans.” (Hull, 2012). In
terms of lending, banks have remained basically unchanged for centuries. They play a
major role as an intermediary between savers and borrowers. Savers get interest for
making deposits, and loans are made to private individuals and businesses. From the
banks perspective, the business is working very well. In the 2000’s, in the US alone,
consumers paid $1 trillion dollars of interest to banks. (Moldow, 2014). However,
regulatory modifications and new technologies are transforming this traditional lending
area. Since the worldwide scale of bank lending is so enormous, even the reduction of
banking activities by a few percentage points, will create and open a significant market
for fintech startups.
Lending is a very important revenue stream for banks. According to Goldman Sachs, in
2014, banks earned approximately $150 billion from lending activities. Furthermore, it is
estimated that 7% of annual profit from lending, could be under threat from new actors
entering the market within the next 5+ years. Nevertheless, the 2008 financial crisis has
caused lending to drop sharply. The volume of commercial loans has declined from
approximately $200 billion to roughly $165 billion in 2012. However, while the volumes
have declined, at the same time the profits remained the same. Why is that? Massive and
growing interest spreads are the answer. “The difference between the yield banks receive
from money they loan and the rate they pay on money they borrow” (Moldow, 2014).
Figure 19. points out that the spread has skyrocketed over the last years. “Banks are
borrowing treasury bonds at historically low interest rates – as low as 0.5 percent. They
turn around and lend at as much as 10 to 25 percent interest”. It clearly explains why their
profits have not declined.

59
Figure 19: Bank borrowing costs
By 2025, as believed by Moldow, $1 trillion in loans will be originated globally. This
creates an opportunity for the non-traditional actors. The combination of big data scoring
and new distribution channels allow start-ups to enter traditional lending area. Since
people are not satisfied with the banking lending services and cannot stand such high
interests anymore, lower cost bases than banks and consequently loans at lower interest
rates are the major benefits of these entrants.
Figure 20. points out that the industry generated more than $870 billion in annual
revenues in 2013, of which $420 billion was generated in the consumer lending area, $70
billion in the SME sector and $22 billion in the Pay Day loans sector. This is barely 2%
of the almost $1 trillion lending market that is being captured by online players.

60
Figure 20: Annual lending revenues in 2013 (US $B)
What factors are driving and leading to a rapid development in non-bank lending?
1) Regulations – conventional lenders continue to be controlled by tighter
regulations, along with increased capital requirements. This provides new entrants
a possibility to provide lending services with less documentation and in a more
convenient, automated way.
2) Technology – big data, new distribution channels like blockchain technology or
bitcoin and new marketing possibilities allow fintech companies to provide the
best customer experience. Since the new players are more technology focused,
than finance focused, they provide better customer satisfaction and convenient
transaction possibilities.
3) Borrowers attitude – nowadays, customers prefer not to go to a bank’s branch.
According to Viacom Media Networks, 71% of Millenials (a generation born
between 1981-2000) would rather go to the dentist than listen to what banks are
saying. It simply means people do not need personal interaction anymore. The
process should be quick to apply and the application should be easy to fill in. Even
if the interest rates might be higher.

61
5.2. Online lending
5.2.1. Payday loans
“A payday loan is a type of short-term borrowing where an individual borrows a small
amount at a very high rate of interest.” (Investopedia, 2016). Most of the borrowers use
payday loans in order to cover ordinary or unexpected living expenses. Therefore, the
amount of such a loan is always small and issued for relatively short period of time. A
business model based on providing payday loans has created a new category in the
lending landscape and currently is experiencing fast development. “Revenue for online
payday lenders has more than doubled since 2006, from $1.5 billion to $4 billion” (Yahoo
Finance, 2015). These short-term loans usually target financially-disadvantaged
borrowers. According to World Bank, as of April 2015, the world’s “unbanked”
population stood at 2 billion adults. Hence, new market players make lending fair and
transparent for the population without access to traditional financial services.
„Technology can create efficiencies that allow for solutions to serving low and middle
income consumers.” (Schütte, 2014). Moreover, according to Thomvest Ventures, recently
banks have been exiting the short-term loans business due to more severe regulations.
Also they claim that 27% of payday loan customers use online platforms to get a loan.
Thus, online payday lending has emerged and gained substantial traction in just a few
years.
The main objective of fintech entrants is to reinvent banking activities in terms of short-
term lending. The process should be faster, cheaper and what is most important in this
case – automated by algorithms and data. Nowadays it is possible to assess and score
individuals worldwide in the matter of seconds without any credit check. All of the data
accessible online aids to evaluate the creditworthiness of a customer instantly. Fintech
startups therefore use credit scoring based mainly on worldwide available data, providing
loans that banks cannot. Shortly saying, the sole analysis of credit histories has been fully
replaced by current and real-time data.
PEW Charitable Trusts (2012) finds that instead of taking a payday loan, borrowers are
more likely to choose options that do not connect them to a formal institution, such as
borrowing from family or even cutting back on expenses. It indicates that the need for

62
small and quick loans is high, and there are no trustworthy alternative borrowers can
choose.
Figure 21: Alternatives if payday loans were unavailable
Source: PEW Charitable Trusts, 2012
BIG DATA AS THE MAIN TOOL TO RATE BORROWERS
“Big Data Analytics enables the rapid extraction, transformation, loading, search,
analysis and sharing of massive data sets.” (Bain & Company, 2015). Startups providing
payday loans have changed the entire set of banking processes by using algorithms and
data. Social media, e-commerce transactions, location data and even the way somebody
expresses themselves in emails is analyzed. All of these little data points are enough to
state and provide information on how creditworthy an individual is, what his pricing
should be and what product he is interested in. This process is called machine learning.
The method uses data that everybody generates, even unconsciously. Even though no
company discloses too much detail on how they exactly use big data, I can assume that
most of them make similar uses of it. According to Sebastian Diemer of Kreditech, “Big
Data means an infrastructure to process large amounts of data in a fast way parallelized
over a cluster of machines. It is the enabler to work with a large amount of data which
previously was not possible, but does not bring any smartness in itself.” Therefore,
enterprises start by recognizing substantial opportunities that may be improved by

63
superior data and then determine the exact way how to use them.
With the information obtained for instance on social media or through cookies, lending
platforms are able to adjust their product to a specific person. It makes it also possible to
evaluate the risk associated with a particular customer. Also, several companies are
testing new approaches with regards to credit scoring. “Ranging from looking at college
attended and majors for international students with thin or no credit files to trust scores
based on social-network data.” (McKinsey, 2016). According to Bernard Marr, by the year
2020, roughly 1.7 megabytes of new data will be generated every second for every human
being on the planet. To highlight the exponential growth of data volumes worldwide, in
the past 2 years, more data has been produced than in human history. It denotes the
opportunity for companies from every industry to make a huge use of big data. Increasing
uses of alternative data will make the financial system, including lending, more inclusive
and affordable for many people who lack access to the traditional financial services.
5.2.2. Peer-to-peer lending
“Our mission is to transform the banking system to make credit more affordable and
investing more rewarding.” (Lending Club)
Peer-to-peer (marketplace) lending is the new system which quickly and automatically
matches lenders directly to borrowers. It is a practice of borrowing funds from unrelated
individuals, without using a conventional intermediary such as a bank. It means that P2P
platforms do not lend their own funds but just serve as a connecting platform. “Since the
global financial crisis, the banking sector across the globe has been undergoing a major
overhaul at all levels of operation.” (Barnes, 2016). Therefore, banks, due to regulatory
pressure have been forced to cut back their lending activities. It has caused difficulties
for people to get access to credit, both for individuals and small businesses. Hence, P2P
lending started taking off in the last few years in line with the increasing use of digital
financial services. As an outcome, investors and people seeking credit can now interact
with each other without the involvement of traditional banks. The model is simple –
lenders invest in a small portion of loans and afterwards receive their principal plus
interest. Currently, improved analytics enables online services to identify borrowers and
perform quick lending decisions. (Morgan Stanley, 2015).

The impact of disruptive technology on the shape of future banking

The impact of disruptive technology on the shape of future banking

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