Fintech introduction

Location:
Babson Finance Conference
600 Atlantic Ave
Boston
Fintech 101
2017 Copyright QuantUniversity LLC.
Presented By:
Sri Krishnamurthy, CFA, CAP
sri@quantuniversity.com
www.analyticscertificate.com

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My Babson Connection
• 2005 – 2011: Evening MBA Student
• 2007 – BCF + CFA Institute Research Challenge
• 2012+ – Adjunct Lecturer teaching courses in
Analytics and Quantitative methods

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QuantUniversity
• Analytics and Fintech Advisory
• Trained more than 1000 students in
Quantitative methods, Data Science
and Big Data & Fintech
• Programs
▫ Analytics Certificate Program
▫ Fintech Certification program
• Building

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• My Fintech story from 2005!
• What is Fintech?
• The 8 facets of Fintech
• Deep Dive
▫ Trading and Investments
▫ Innovations in Payment systems
▫ Blockchain
▫ Big Data and AI
• Regtech
• The future of Fintech
Agenda

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• Municipal bonds are bonds issued by State and Local governments
to meet their financial needs.
My First Fintech experience!

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Muni Bid-Wanted
Auction
Fidelity
JP
Morgan
BOA
Citi
Trader 1
Trader 2
Trader 3
Muni bond auction in action (2005)

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“Financial Technologies or “Fintech” is used to describe
a variety of
innovative business models
and
emerging technologies
that have the potential to transform the financial
services industry ”
What is Fintech?
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf

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Automation in products or services delivered through the use of the
internet.
Unbundling of different financial services traditionally offered by
service providers like banks and investment managers.
Examples:
• Equity crowdfunding platforms intermediate share placements
• Peer-to-peer lending platforms intermediate or sell loans
• Robo-advisers providing automated investment advice
• Brokerage and investing services through social trading platforms
Innovative business models
Ref: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf

Drivers
• Generational shift
▫ Millennials & Gen Zs more open to
newer mediums and technologies
• Technology growth
▫ Mobile
▫ Internet
▫ Computing power
• Broader accessibility and decreasing
cost of products and services
• Increasing disintermediation and re-
intermediation

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http://www.analyticscertificate.com/fintech/

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Investment support systems

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Comparison websites

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Financial Aggregator Websites

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Robo-advisers

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Social media and Sentiment analysis

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Innovative business models

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Source: Finra Digital Advice report 2016
https://www.finra.org/sites/default/files/digital-investment-
advice-report.pdf

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Which one to choose?
advice-report.pdf

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advice-report.pdf

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advice-report.pdf

The history of payment automation
(https://www.forbes.com/sites/falgunidesai/2015/12/13/the-evolution-of-fintech/#3ad227377175)
Credit card
1950s
ATM
1960s
Electronic stock trading
1970s
bank mainframe computers
1980s
PayPal was founded
1998
Digitalization in
financial institutions
2000s

Major trends in payment innovation
Mobile
Payments
• Smart phone
platform for
payment
process
Streamlined
Payments
• Mobile
ordering and
payment
applications
Integrated
Billing
• Geotagging-
location-based
payment
• Machine to
machine
payment
Next Generation
Security
• Biometrics-
location-based
identification

Current payment process by traditional financial institutions
1. Transaction request from sending bank.
2. Secure message from sending bank to recipient bank.
3. Flow of funds through a clearing house or correspondent bank.
(Graph from WEF’s “The Future of Financial Service”
report)

The leading companies in the revolution of Fintech
payment

Major solutions of innovative payment
Open-loop mobile payment solutions
• Link customers to existing parties on the
platform
• Make payments more convenient for
customers leveraging new form factors(NFC,
QR code)
Companies using open-loop mobile payment solutions (Graph from WEF’s “The Future of Financial Service”
report)

Major solutions of innovative payment(2)
Closed-loop mobile payment solutions
• Combine POS, acquirer and payment network
as one single entity for a more flexible
experience.
• Allow customers to fund transactions through
traditional payment network ecosystem.
Companies using closed-loop mobile payment solutions (Graph from “The Future of Financial Service” report)

Major solutions of innovative payment(3)
Mobile merchant payment solutions
• Leverage mobile connectivity to replace
current POS infrastructure
• Make payment process more effortless and
accessible
Companies using mobile merchant
payment solutions
(Graph from “The Future of Financial Service” report)

The impact of payment revolution on traditional
financial institutions
• Increasing network of alternative financial service
providers.
• Price competition will be more fierce.
• Traditional financial institutions will be challenged and
motivated to launch alternative payment solutions.
• Traditional financial institutions will have to play new role
as interaction between alternative payments and
traditional ways increase.

Future for payment innovation
Payment behavior
• One single default card to process all payment.
• Amazon 1-click ordering
• Uber’s seamless payment
Payment preference
• Increasing focus and preference on differentiation of card
brand and design
• Proliferation of niche and merchant issued cards.
Payment market
• Elimination of physical cards and optimization on card usage.
• Seamless link to customer’s bank accounts

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What is Blockchain?
https://www.cbinsights.com/research/
what-is-blockchain-technology/

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• A blockchain is a continuously growing list of records called blocks,
which are linked and secured using cryptography.
• It is an open, distributed ledger that can record transactions
between two parties efficiently and in a verifiable and permanent
way.
• Bitcoin != Blockchain ; Blockchain powers Bitcoin
• The business applications of Blockchain include:
▫ Contract
▫ Certificate of Ownership
▫ A statement of authenticity
▫ Proof of a bank's financial transaction
Blockchain

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Many applications
Identify where a food product came from in about 2.5 seconds - down from six days
before its history was tracked on a blockchain
From <https://www.coindesk.com/ibm-wants-know-ways-blockchain-can-go-wrong/>

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AI and Machine Learning in the News
https://www.economist.com/news/finance-and-economics/21722685-fields-
trading-credit-assessment-fraud-prevention-machine-learning
https://www.udacity.com/course/machine-learning-for-trading--ud501
https://www.forbes.com/sites/louiscolumbus/2017/10/23/machine-
learnings-greatest-potential-is-driving-revenue-in-the-
enterprise/#3fd4c2da41db
https://www.cnbc.com/2017/09/28/man-group-
one-of-worlds-largest-funds-moves-into-machine-
learning.html

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• “AI is the theory and development of computer systems able to
perform tasks that traditionally have required human intelligence.
• AI is a broad field, of which ‘machine learning’ is a sub-category”
What is Machine Learning and AI?
Source: http://www.fsb.org/wp-content/uploads/P011117.pdf

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Machine Learning & AI in finance – A paradigm shift
Stochastic Models
Factor Models
Optimization
Risk Factors
P/Q Quants
Derivative pricing
Trading Strategies
Simulations
Distribution fitting
Quant
Real-time analytics
Predictive analytics
Machine Learning
RPA
NLP
Deep Learning
Computer Vision
Graph Analytics
Chatbots
Sentiment Analysis
Alternative Data
Data Scientist

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The Virtuous Circle of Machine Learning and AI
Smart
Algorithms
Hardware
Data

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The rise of Big Data and Data Science
Image Source: http://www.ibmbigdatahub.com/sites/default/files/infographic_file/4-Vs-of-big-data.jpg

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Smarter Algorithms
Parallel and Distributing Computing Frameworks Deep Learning Frameworks
1. Our labeled datasets were thousands of times too
small.
2. Our computers were millions of times too slow.
3. We initialized the weights in a stupid way.
4. We used the wrong type of non-linearity.
- Geoff Hinton
“Capital One was able to determine fraudulent credit
card applications in 100 milliseconds”*
* http://go.databricks.com/hubfs/pdfs/Databricks-for-FinTech-170306.pdf

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AI and Machine Learning in Production
https://www.itnews.com.au/news/hsbc-societe-generale-run-
into-ais-production-problems-477966
Kristy Roth from HSBC:
“It’s been somewhat easy - in a funny way - to
get going using sample data, [but] then you hit
the real problems,” Roth said.
“I think our early track record on PoCs or pilots
hides a little bit the underlying issues.
Matt Davey from Societe Generale:
“We’ve done quite a bit of work with RPA
recently and I have to say we’ve been a bit
disillusioned with that experience,”
“the PoC is the easy bit: it’s how you get that
into production and shift the balance”

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A framework for evaluating your organization’s appetite for AI
and machine learning
Source: http://www.fsb.org/wp-content/uploads/P011117.pdf

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Technology enabling the creation or transformation
of business models for reporting, monitoring &
compliance in highly regulated industries
OR
Delivering regulatory compliance through technology
improving upon current and traditional ways
What is Regtech?

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• Scenario analysis, modeling and forecasting
• AML, Fraud detection
• Monitoring payments and transactions
• Trading analytics
• Regulatory compliance and tracking model changes
• Model risk, Stress testing etc.
Opportunities for companies

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Companies in this space
Source: https://letstalkpayments.com/regtech-companies-in-
us-driving-down-compliance-costs-innovation/

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• The regulatory sandbox allows businesses to test innovative
products, services, business models and delivery mechanisms in the
real market, with real consumers.
• The sandbox is a supervised space, open to both authorized and
unauthorized firms, that provides firms with:
▫ reduced time-to-market at potentially lower cost
▫ appropriate consumer protection safeguards built in to new
products and services
▫ better access to finance
• https://www.fca.org.uk/firms/regulatory-sandbox
Regulatory Sandboxes

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Who the sandbox is for:
• Businesses seeking authorization
▫ The sandbox may be useful for firms that need to become authorised
before testing their innovation in a live environment.
• Authorized businesses
▫ The sandbox may be useful for authorized firms looking for clarity
about rules before testing an idea that doesn’t easily fit into the
existing regulatory framework.
• Technology businesses supporting financial services firms
▫ Technology businesses that want to provide services to our regulated
firms (eg: through outsourcing agreements) can also apply for the
sandbox if they need clarity about rules before testing.
Regulatory Sandboxes

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CFA Survey 2016
https://www.cfainstitute.org/Survey/fintech_survey.PDF

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Fintech education becomes serious

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Fintech being noticed by Regulators

• Founder of QuantUniversity LLC. and
www.analyticscertificate.com
• Advisory and Consultancy for Financial Analytics
• Prior Experience at MathWorks, Citigroup and
Endeca and 25+ financial services and energy
customers.
• Regular Columnist for the Wilmott Magazine
• Author of forthcoming book
“Financial Modeling: A case study approach”
published by Wiley
• Charted Financial Analyst and Certified Analytics
Professional
• Teaches Analytics in the Babson College MBA
program and at Northeastern University, Boston
Sri Krishnamurthy
Founder and CEO
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Thank you!
Presentation will be posted here:
www.analyticscertificate.com/fintech
Sri Krishnamurthy, CFA, CAP
Founder and CEO
QuantUniversity LLC.
srikrishnamurthy
www.QuantUniversity.com
Information, data and drawings embodied in this presentation are strictly a property of QuantUniversity LLC. and shall not be
distributed or used in any other publication without the prior written consent of QuantUniversity LLC.
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