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BRANDEIS INTERNATIONAL
BUSINESS SCHOOL
Financial Innovation and the
Future of the Financial System
Stephen G. Cecchetti
www.moneyandbanking.com
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Cost of Financial Intermediation(as a percent of total assets intermediated)
2
Notes: The data are annual through 1944, and quarterly thereafter. The horizontal axis is expanded from 1945 to
make the data more visible. Source: Figure 3 in Thomas Philippon, The FinTech Opportunity, NBER Working Paper
22476, August 2016.
Cost is 1½ to 2%
Unchanged in 130 years!
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Global financial assets by sector
3
Source: Financial Stability Board (2019), monitoring dataset.
2007 to 2017:
Globally:
Banks 48% to 44%
Nonbanks 31% to 36%
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Japanese financial assets by sector
4
2007 to 2017:
Japan:
Banks 60% to 62%
Nonbanks 40% to 38%
Source: Financial Stability Board (2019), monitoring dataset.
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Technology
5
iPhone 8
1975 Cray-1
iPhone to scale
5000 times power =
= 44,000 times price ($42 million vs $950)
Efficiency +50% per year
Improves:Information collection, transmission & storage
Enhances:Service quality, speed, user experience
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Technology
6
Reduces information costs
Improves credit evaluation
Enhances ability of lenders to collect
Lowers transactions costs
Increases convenience
Provides access
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Technology
7
Money & Payments
Saving, Lending & Access
Securities Issuance & Venture Finance
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Impact of Technology on Finance
8
Money & Payments
Saving, Lending & Access
Securities Issuance & Venture Finance
Diversification & Risk ManagementIncreases scope & improves efficiency
Safekeeping & Advising Reduces cost and operational risk, moderates behavioral biases
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Impact of Technology on Finance
9
Money & Payments
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Payments
11
Money is a combination of
Legal framework: government backed/widely accepted
Technology: metal/paper/book entries
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Digital Money
12
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Digital Fraction of Monetary Base & M2
13
Source: FRED, European Central Bank and Bank of Japan
Money is a combination of
Legal framework
Technology
Central bank money is digital!
Nearly all money is digital!
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Digital Money
14
Cannot be anonymous
Must be in unlimited supply
Will be universally available
Has to pay interest
Would commercial banks survive?
What would the central bank become?
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
((Retail) Central Bank Digital Currency
15
Mobile payments
US: Apple Pay, Amazon Pay, Zelle… <1% of GDP
China: Alipay,Tencent… >30% of GDP(Run by nonbanks!)
Scale and scope economies providers become large
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Payments
16
Mobile payments
US: Apple Pay, Amazon Pay, Zelle… <1% of GDP
China: Alipay,Tencent… >30% of GDP(Run by nonbanks!)
Economies of scale and scope become very large
Tech companies are changing payments.
Will they displace traditional banks?
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Payments
17
Global volume of remittances (Billions of 2017 U.S. dollars), 1970-2017
18Note: Inflation-adjusted sum of country-specific remittance flows. Source: World Bank.
Average Cost of Sending US$200 Cross-Border (Percent of Total, 2008-17)
19Source: World Bank.
Costs have fallen.
But why do they remain so high?
Volumes increased dramatically
Prices remain high
Barriers to cost reduction:
Anti-Money Laundering (AML & KYC)
Preventing Terrorist Finance
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Remittances
20
Volumes increased dramatically
Prices remain high
Barriers to cost reduction:
Anti-Money Laundering (AML & KYC)
Preventing Terrorist Finance
Costs will fall when personal identification
is inexpensive and widely accepted.
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Remittances
21
Money & Payments
money unchanged, payments evolving,
risk to banks, some things remain expensive
Saving, Lending & Access
Securities Issuance & Venture Finance
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Impact of Technology on Finance
22
Money & Payments
Saving, Lending & Access
Securities Issuance & Venture Finance
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Impact of Technology on Finance
23
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Saving & Lending
24
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Banks vs Peer-to-Peer Finance
25
SaverSaverSaver Saver
Borrower Borrower BorrowerBorrower
SaverSaverSaver Saver
Borrower Borrower BorrowerBorrower
Peer-to-PeerBank
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Share of Bank Credit in Total Credit
26
1999 to 2018
Japan:
56% to 70%
Euro Area:
66% to 55%
United States:
Unchanged (35%)
Two challenges:1. Is a potential borrower creditworthy?
2. Will a borrower use resources as they claim?
Solutions:1. Screen and demand collateral
2. Monitor and require net worth
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Saving & Lending
28
Two challenges:1. Is a potential borrower is creditworthy?
2. Will a borrower use resources as they claim?
Solutions:1. Screen and demand collateral
2. Monitor and require net worth
Banks are good at screening and monitoring.
Why hasn’t technology reduced costs?
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Saving & Lending
29
Unbanked in 2017: 1.7 billion adults (31%)
Unbanked in Indonesia: > 51% adults
Unbanked in United States: 7% adults
(Only 2% of Japanese adults are unbanked)
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Financial Access: Mobilizing Savings
30
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Unbanked adults by country
and those with mobile phones (millions)
31
Note: Red diamonds indicate those with mobile phones. Source: World Bank Findex.
Numbers large
Everyone has a phone!
Population 15+ in 2014: With no bank account: 450 mn (47%)
With no formal savings: 780 min (85%)
Technology + Government Policy: Aadhaar: Biometric identification issued all adults
Pradhan Mantri Jan Dhan Yojana: no frills, no min balance(Prime Minister’s People’s Wealth Scheme)
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Mobilize Savings: India
32
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Banking India’s Unbanked
33
Source: Table 2.1, Dutta and Das, May 2017, and PMJDY website. Note: Absent data between March and September 2017
are linearly interpolated.
>300 million
in 3 years!
Population 15+ in 2014:
With no bank account: 450 mn (47%) now <200 mn.
With no formal savings: 780 mn (85%) now <550 mn.
Technology + Government Policy: Aadhaar: Biometric identification issued to all of adults
Pradhan Mantri Jan Dhan Yojana: no frills, no min balance(Prime Minister’s People’s Wealth Scheme)
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Mobilize Savings: India
34
Money & Payments
Saving, Lending & AccessBanks are good at screening & monitoring
Governments can use technology to mobilize saving
Diversification & Risk Management
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Impact of Technology on Finance
35
Money & Payments
Saving, Lending & Access
Securities Issuance & Venture Finance
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Impact of Technology on Finance
36
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Securities Issuance & Venture Finance
37
Initial Public Offerings(Exploits Blockchain Mania)
Crowdfunding(Raises small amounts from
large number of people)
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Examples from Kickstarter
38
Cheese maker
Investigative
Journalism
Donation: charitable giving
Equity: value tokens
Debt: peer-to-peer lending
Reward: pre-sell a product
Litigation: funds lawsuits (receive part of settlement)
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Types of Crowdfunding
39
Donation: charitable giving
Equity: value tokens
Debt: peer-to-peer lending
Reward: pre-sell a product
Litigation: funds lawsuits (receive part of settlement)
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Types of Crowdfunding
40
Requirements
Owner net worth
Collateral
Sources
Personal Assets (your own, family, friend)
Credit (credit cards, bank loans)
Equity (Angel investors, venture capitalists)
Nonprofits or Government (grants, guaranteed loans)
Traditional Venture Finance
41
Requirements
Owner net worth
Collateral
Sources
Personal Assets (your own, family, friend)
Credit (credit cards, bank loans)
Equity (Angel investors, venture capitalists)
Nonprofits or Government (grants, guaranteed loans)
Traditional Venture Finance
42
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Tangible and intangible investment(United States, 1976 to 2017)
43
Source: Lee Branstetter and Daniel Sichel, “The Case for an American Productivity Revival,”
Peterson Institution for International Economics, Policy Brief 17-26, June 2017.
Big Shift
Tangible
Intangible
Investment in software, data, intellectual property, etc.
Intangibles more difficult to value, less useful as collateral
Less reliance on debt finance & public equity issuance
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Changing Venture Finance
44
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Number of Listed Domestic Companies
45
Source: World Bank Development database. For Japan, the jump of 1100 firms in 2013 is due to the
integration of the OSE cash market into the TSE,
U.S & Euro Area:
Dramatic Fall
Japan:
Moderate rise
Investment in software, data, intellectual property, etc.
Intangibles more difficult to value, less useful as collateral
Less reliance on debt finance & public equity issuance
Consequence of investment shifting to intangibles:
Rise in private equity
Increase in mergers & acquisitions
Fall in number of listed domestic companies
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Changing Venture Finance
46
Money & Paymentsmoney unchanged, payments evolving,
risk to banks, some things remain expensive
Saving, Lending & Accessbanks are good at screening & monitoring,
governments can mobilize saving
Securities Issuance & Venture Financetraditional sources and methods endure,
but shift toward private equity
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Impact of Technology on Finance
47
BRANDEIS INTERNATIONAL BUSINESS SCHOOL
Cost of Financial Intermediation(as a percent of total assets intermediated)
48
Notes: The data are annual through 1944, and quarterly thereafter. The horizontal axis is expanded from 1945 to
make the data more visible. Source: Figure 3 in Thomas Philippon, The FinTech Opportunity, NBER Working Paper
22476, August 2016.
BRANDEIS INTERNATIONAL
BUSINESS SCHOOL
Financial Innovation and the
Future of the Financial System
Stephen G. Cecchetti
www.moneyandbanking.com
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