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P2.T9.906. The impact of fintech innovations on operations management, deposit services, and lending (Gomber)

Nicole Seaman

Director of FRM Operations
Staff member
Learning objectives: Describe how fintech is changing operations management in financial services. Explain how fintech innovations have impacted lending and deposit services.


906.1. According to On the Fintech Revolution by Gomber, Kauffman, Parker, and Weber, the Fintech Revolution is supported by three pillars: available capital, startups developing innovative products/services, and business model transformation. With respect to innovative products and services, the authors credit three key forces: technology innovation, process disruption, and services transformation. Interestingly, and continuing an informal "rule of three," they quote PwC's paper (Financial services technology 2020 and beyond: Embracing disruption) in identifying disruptors: "(1) The fintech approach will be the new model in the industry, the sharing economy will become more fully embedded in financial services, and the mainstream of products and services will become more fully digitalized and offered through technology platforms, (2) Blockchain will take root beyond cybercurrency applications; public cloud services will dominate; robotics and AI will continue to achieve critical mass in their diffusion in financial services, resulting in more localized services; and cybersecurity will become a more critical risk to financial services firms than fraud and money laundering, (3) Customer intelligence is likely to emerge as the most important driver of financial firm profitability, and regulators will become as active with fintech innovations as the firms it oversees."

In order to make sense of the dynamics of the FinTech landscape, the authors deploy a 2×2 matrix. The matrix is based on several references and modified for the FinTech industry. The first dimension is Customer Experience (is their experience supplemented by improvements in existing functionality, or is their experience enhanced with NEW products or services?). The second dimension is Markets and Competition (are the effects complementary or disruptive?). As they write, "we further consider two kinds of effects that occur with the introduction of fintech innovations. One is based on the manner in which the customer’s experience (first dimension) is affected either by improved functionality or new products, services and functionality, and the second is based on whether there are complementary or disruptive effects from the new technology that are felt in the marketplace and in the context of firm-to-firm competition (second dimension)."

The following four FinTech products/services are located on the landscape, that is, located in the matrix:

I Mobile payments and credit scoring
II. Initial coin offerings (ICOs) and P2P lending
III. Blockchain-based general ledger functionality
IV. Risk management technology and RegTech solutions

According to the frame of the authors' typology, which one of these FinTech products/services is markedly DIFFERENT THAN than the other three?

a. Mobile payments and credit scoring
b. Initial coin offerings (ICOs) and P2P lending
c. Blockchain-based general ledger functionality
d. RegTech solutions and risk management technology

906.2. As Gomber, Kauffman, Parker and Weber explain in On the Fintech Revolution, "Operations are a key feature of financial services including systems design, performance analysis and productivity, forecasting, inventory and cash management, waiting line analysis for capacity planning, personnel scheduling, operational risk management, and pricing and revenue management Hatzakis et al. Key components of financial services operations include high volumes and significant customer heterogeneity, repeated services interactions, and use of technology in the service encounter. The new fintech approaches are changing all of these things in dramatic ways ..."

Some of their observations are perhaps unsurprising, or at least quite plausible at first glance:
  • Open source and scalable infrastructure (e.g., AWS) facilitate the un-bundling of financial services
  • According to a survey by KPMG, most millennials would consider obtaining their banking services from a major tech company
  • The advent of mobile banking means that machine learning (ML) models being deployed by financial services firms today are able to leverage real-time location data to improve detection of fraudulent transactions (e.g., location-based rules), and
  • Advances in the credit scoring market are broadly complementary due to the relatively behind-the-scenes nature of new credit scoring and approval models. With the exception of Loftium, much of the innovations in this area supplement the customer experience.
However, some of their observations are less intuitive, if not counter-intuitive. According to the authors, with respect to how the fintech revolution is changing financial services operations, each of the following observations is actually true EXCEPT which is inaccurate?

a. Due to the escalation of digital advertising, fintech increases average customer acquisition and switching costs but, on the other hand, tends to reduce customer retention costs
b. The combined effect of the changes in customer behavior due to the introduction of mobile banking is a NET BENEFIT to the bank of about US$0.07 per month for the average customer
c. Consumers currently value the consolidation of their data (for example, to create one-stop-shops for transaction monitoring) more than they fear the unknown future cost of a breach enabled by a single point of failure
d. The shift from personalized-service to self-service initially leads to decreases in customer defection but later exhibits an inverted U-shape, such that defections begin to increase again as the extent of customer self-service continues to climb

906.3. Gomber et al explain that the fintech revolution is transforming payment services, deposit services, peer-to-peer (P2P) lending and charitable giving. In these areas, according to the authors each of the following is true EXCEPT which is false?

a. P2P lending encourages lending to unbankable borrowers and opens new avenues for affinity lending
b. As open banking and inter-institutional APIs become more mainstream, the deposit services market will face substantial disruption
c. Microfinance institutions (MFIs) like Kiva (www.kiva.org) illustrate how fintech enables financial inclusion by addressing the core problem of borrowers' cash flow mismatches
d. The role of fintech innovation in the area of deposit services have been constrained by the so-called completion effect: the psychological need of borrowers to have "complete" trust that the institution will not experience a run or systematic failure

Answers here: