Master Class

DIGITALIZATION OF FINANCIAL MARKETS

Angelo Corelli
Maastricht School of Management

Hosted by CENTRUM PUCP, Lima

26 November 2019
 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

About Myself
• Angelo Corelli, born and raised in Tuscany (Italy)

• Associate Professor of Finance, Discipline Head Finance and Accounting

and Academic Coordinator of the Executive MBA, Maastricht School of
Management

• Bachelor, Master and PhD in Italy, work experience abroad

• Mostly taught courses in Corporate Finance, Portfolio Management and Financial

Derivatives

• Research areas are Credit Risk, Derivatives and Digital Finance

• In my spare time I enjoy playing billiard and latin dance

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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Agenda

• Financial Technology (Fintech)

• Cryptocurrency

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FINANCIAL TECHNOLOGY

(FINTECH)

Angelo Corelli
 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Introduction
• Financial Technology (Fintech) describes the impact of new technologies on the financial
services industry:
• Transforming the traditional way of providing financial services
• Companies develop new technologies to improve financial services
• Fintech companies aim at disrupting the financial (and banking) industry

• Fintech includes a variety of financial activities:

• Money transfers
• Depositing a check with your smartphone
• Bypassing a bank branch to apply for credit
• Raising money for a business startup
• Managing your investments

• Fintech originally referred to computer technology applied to the back office of banks or
trading firms

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Lima. Peru

Users
• There are four broad categories of users of fintech:
• Business-to-business (B2B) for banks
• Their business clients
• Business-to-consumer (B2C) for small businesses
• Consumers

• All of the above categories benefit from:

• Mobile banking and financial services
• Increased information
• Availability of data
• More accurate analytics
• Decentralization of access

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Lima. Peru

Users
• The younger the consumer, the more likely the awareness that such possibilities exist

• The fact is that consumer-oriented fintech is mostly targeted toward millennials

• Focus on millennials: is it more about the size of that marketplace or the tech ability and
interest of Gen Xers and Baby Boomers in using fintech?

• Rather, fintech tends to offer little to older consumers because it fails to address their
problems

• When it comes to businesses, in the past if they intended to accept credit card payments
they would have needed a credit provider and infrastructure

• Now, with mobile technology, those hurdles are the past, and future is easier

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Master Class, 26 November 2019
Lima. Peru

Solutions
• Examples of Fintech solutions:
• Big Data collection and management
• Robo-advising, banking and stock-trading apps
• Payment applications, like PayPal, and mobile payment applications
• Blockchain using Distributed Ledger Technology (DLT) applied to contracts
• Cryptocurrencies (Bitcoin, Ethereum, etc.)
• Internet of Things (IoT)

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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

The Value Chain

• Digitization is happening all along the value chain:
• Cell-phone hosted consumer relationships
• European 100%-digitalized banks (Neobanks) like Revolut
• American automated financial planning services (Roboadvisors) like Betterment
• Technology-enhanced insurance companies (Insurtech) like Ping An

• Raw automation is being applied to the process of assessing, onboarding, and serving the
customer

• More speculative interfaces use machine learning and natural language processing to
generate chat and speech, instead of letting people interact with a live agent

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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Vertical Integration
• Large-scale automation generates massive vertical competition between various industry
sectors, that cross-sell their services

• The best digital lender is now competing with the best digital payments app for the chance
to offer the best digital bank account

• Tech-oriented investors have invested billions of dollars into direct-to-consumer Fintech

companies just to reach millennial customers

• Competition is fierce and also big traditional banks are adding technology-enabled solutions
in their offer to the clients

• Can all this competition result in businesses that return good returns to their investors?

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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Social Apps
• Social apps and e-commerce platforms offer thousands of features to their clients

• Amazon Prime subscribers get next-day delivery on most items

• WeChat users can text, shop, move money and invest from the same phone app

• Attention platforms (Consumer intent and behavior are key factors)

• Google
• Facebook
• YouTube
• …

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Master Class, 26 November 2019
Lima. Peru

Data and Services

• Application Programming Interfaces (API), powered by data aggregation sources, enable
banking and investment data to travel across the world

• Banks-as-a-service (BaaS) financial institutions provide their data to tech companies

• Relevant financial capabilities are now available

• Traditional businesses used to manufacture products and services and push them to the
market through sales channels

• Instead, consumers now interact with finance at the edges of their experience.
• Tesla offers its own car insurance
• Greensky helps contractors offer financing for home improvement
• Affirm offers credit facility alongside the e-commerce business

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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

A Closer Look
• Affirm wants to eliminate third-party credit providers enhancing the online shopping
experience with short-term loans for purchases.
• High rates, but credit is available to most customers
• Can reach out to consumers with poor or no credit (no chance to get loans)
• Offers a way to secure credits and build credit history

• Better Mortgage seeks to streamline the home mortgage process

• Digital-only offering to users
• Verified pre-approval letter within 24 hours of applying

• GreenSky seeks to link home improvement borrowers with creditors

• Help consumers avoid traditional big lenders
• Borrowers save on interest
• Zero-interest promotional periods offered

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Master Class, 26 November 2019
Lima. Peru

A Closer Look
• Tala offers microloans to third world consumers:
• Deep data analysis on customer smartphones
• Transaction history and other habits get analyzed
• Better options to borrowers than traditional lenders

• Robinhood (stock trading app) charges no fees for trades

• Peer-to-peer lending companies (apps) promise to reduce borrowing rates:

• Prosper Marketplace
• Lending Club
• OnDeck

• Business loans apps offer fast platforms to secure working capital (also to startups):
• Kabbage, Lendio
• Accion
• Funding Circle
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Master Class, 26 November 2019
Lima. Peru

Fintech on the Rise

• Fintech startups are on the rise:
• Globally received $17.4 billion in funding in 2016
• CB Insights counted 26 fintech unicorns globally valued at $83.8 billion in 2017
• 39 Venture-Capital-backed fintech unicorns worth $147.37 billion by the end of 2018

• Most of Fintech startups come from North America, with Asia being at second place

• Funding activity in Europe was at a five-quarter low in Q1 2018 but surged back in Q2

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Lima. Peru

Regulatory Issues
• Regulation is an issue

• Financial services are worldwide heavily regulated

• Integrating technology into financial services comes with issues

• Automation of processes and digitization of data makes fintech systems attackable

• Hacks at credit card companies and banks an example

• Companies have responsibility for such attacks as well as misuse of information

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CRYPTOCURRENCY

Angelo Corelli
 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Definitions
• Cryptocurrency is a digital (internet-based) medium of exchange

• It uses cryptography to secure financial transactions

• Blockchain technology is used to achieve decentralization, transparency, and immutability

• It is not controlled by any central authority and (in theory) immune to governmental control

• Cryptocurrencies can be transferred by using private and public keys

• There are minimal processing fees involved, compared to traditional financial transactions

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Master Class, 26 November 2019
Lima. Peru

Features
• General features of transactions in cryptocurrency:
• Irreversible: no transaction can be reverted nor nulled
• Pseudonymous: transactions and accounts are not connected to real-world identities
• Fast and global: transactions are propagated in real time with no geographical limitation
• Secure: transactions are protected by private keys, making impossible to access the
cryptocurrency without knowing the key
• Permissionless: no authorization is needed to make cryptocurrency transactions

• Monetary features of transactions in cryptocurrency:

• Controlled supply: most cryptocurrencies have limited supply
• Not based on debt: unlike traditional (fiat) money, cryptocurrencies do not represent
debt

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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Digital Cash and Cryptocurrency

• Digital cash requires payment networks without possibility of double spending

• In digital money, a central server keeps record about the transactions to avoid the problem

• In a decentralized network there is no central server to do the job

• Blockchain participants contribute to the verification and recording of transactions

• Every peer in the network must have a record of previous transactions to check if future
transactions are valid or an attempt to double spend

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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Blockchain
• “Blockchain is an open, distributed ledger that can record transactions between two parties
efficiently and in a verifiable and permanent way”. Iansiti and Lakhani, 2017

• A series of records (blocks) are linked to each other using cryptography

• Blockchain allows users to verify and audit transactions independently, at low cost

• A network of peer to peer servers allows certification of all transactions, so to make them not
reproducible

• This is the basis of cryptocurrency in that the impossibility to repeat a transaction solves the
issue of double spending of the same coin

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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Transactions
• Cryptocurrencies can be transferred by using private and public keys

• A transaction is a file that says:

• User A transfers 1 Bitcoin to user B, using a public key and a private key
• The transaction is then signed by user A’s private key
• The transaction is broadcasted in the network to every peer, and accessible through the
pubic key
• When certified by the network, the transaction is executed
• User B can now access the transaction and collect the Bitcoin, using the private key

• There are minimal processing fees involved, compared to traditional financial transactions

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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Confirmation
• Confirmation is a critical concept in cryptocurrencies

• As long as a transaction is unconfirmed, it is pending and can be forged

• It is confirmation that makes the transaction immutable and not revertible

• Miners are the peer agents that confirm transactions, and they are the only ones who can do
that, by solving complicated math algorithms (this is done to avoid forging)

• They stamp the transactions as legit and spread them in the network

• Then every node (participant) in the network has to add it to its database

• Miners get rewarded with a fraction of the cryptocurrency for their job

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Master Class, 26 November 2019
Lima. Peru

Source: Ameer Rosic, What is Cryptocurrency? [Everything You Need To Know!], Blockgeeks.com, 2016
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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Advantages and Disadvantages

• Advantages of cryptocurrencies:
• Pseudonymous: no transaction or account is related to real-life identities
• Transfer is done in real time, securely and easily
• Transfer is direct between two parties without financial intermediaries
• Public and private keys make access to the transferred funds secure
• Processing fees are minimal

• Disadvantages of cryptocurrencies:
• Well-suited for illegal activities
• Subject to risk of cyber attacks

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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

The Value of Cryptocurrencies

• Cryptocurrencies are like digital gold.

• Its value is preserved from political influence.

• Beside the payment function, cryptocurrencies have rapidly become a very demanded asset
to invest in, also for speculators

• The trading of cryptocurrencies is incredibly dynamic, fast-growing with daily trade volume
exceeding that of major stock exchanges

• Given the high volume and the fever on the markets cryptocurrency prices show a high
volatility, meaning that cryptocurrencies are a very risky asset to invest in

• Investors recently faced daily gains and losses of 10% on some coins, which is equivalent to
over 250% per year, when scaled

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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Acceptance Worldwide (2015-2018)

Source: www.cryptohound.ai
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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Acceptance Worldwide (2015-2018)

Source: www.cryptohound.ai
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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Acceptance Worldwide (2015-2018)

Source: www.cryptohound.ai
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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Acceptance Worldwide (2015-2018)

Source: www.cryptohound.ai
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 DIGITALIZATION OF FINANCIAL MARKETS
Master Class, 26 November 2019
Lima. Peru

Major Cryptocurrencies

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