The Evolution of Banking: From Retail to Mobile Banks and Fintech (Thesis) PDF

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UNIVERSITA' TELEMATICA INTERNAZIONALE UNINETTUNO FACOLTA’ DI ECONOMIA C.L. IN ECONOMIA E GESTIONE DELLE IMPRESE ELABORATO FINALE In Banking and Finance The Evolution of Banking: From Retail to Mobile Banks and Fintech RELATORE CANDIDATO Prof. Ing. Marco De Marco Antonios Kalaitzakis ANNO ACCADEM...

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UNIVERSITA' TELEMATICA INTERNAZIONALE UNINETTUNO

FACOLTA’ DI ECONOMIA C.L. IN ECONOMIA E GESTIONE DELLE IMPRESE

ELABORATO FINALE In Banking and Finance

The Evolution of Banking: From Retail to Mobile Banks and Fintech

RELATORE

CANDIDATO

Prof. Ing. Marco De Marco

Antonios Kalaitzakis

ANNO ACCADEMICO 2019-20

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ABSTRACT

During the past few years, with the use and availability of the internet exponentially increasing, many sectors, including banking, undergo a rapid and often abrupt change in the way they operate. Technological innovations, along with changes to the preferences of the modern customer open up the way to a digitalised world. Banking services and delivery channels go through an enormous shift from traditional non-digitalised processes supported by bank employees, to fully online and selfserviced; rendering physical branches and employees vastly redundant. This research aims to examine this evolution by analysing the technological and sociological factors that have contributed to it, including advances in mobile telephony and online data management, as well as customer trends of reducing visits to physical branches and liaising with bank employees. This thesis further illustrates how, with the use of cloud technology, big data analysis and internet of things devices, the transformation of financial institutions fostered the rise of tech-savvy start-ups, which are widely known as fintech companies. It also examines the effort made by traditional banking institutions to catch up with this new environment, by introducing mobile banking services that substitute their physical services. This thesis will also analyse some of the novel services provided by these start-ups including new ways of account management, mobile payments and wallets, cryptocurrency trading, P2P lending, AI robots, etc. Lastly, this research analyses the demographic characteristics of the customers adopting these novel services, as well as the regulations applied in the EU and UK in which financial and non-financial institutions operate in. The research concludes that the future of banking is characterised by innovative services and products offered online which, however, would need to be supported by a regulatory framework, able to eliminate entry barriers for newcomers in the banking sector.

Keywords: banking, mobile, fintech, evolution, retail banks, digitalisation, payment service, wallet, NFC

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ACKNOWLEDGEMENT

I would like to express my deepest appreciation to my family and friends who provided me with their guidance and support throughout this project. I would also like to extend my sincere thanks to my supervisor Prof. Dr Marco De Marco, for the excitement and encouragement he showed towards my thesis. Special thanks to UNINETTUNO University for this beautiful journey.

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ABSTRACT ACKNOWLEDGEMENT 1 INTRODUCTION……………………………………………………………………….…....…..8 2 APPROACH TO BANKING……………………………………………………………………10 2.1 Definition of Banking……………………………………………………………………..…10 2.1.1 Definition of Retail Banking…………………………………………………………10 2.1.2 Definition of Mobile Banking and novel Fintech………………...…....…………….11 3 THE EVOLUTION OF BANKING………………………………………………………….…14 3.1. From Retail to Mobile Banking and Fintech.………………………………………………14 3.2 Delivery Channels……………………………………………………………………………16 3.2.1 Branches………….…………………………………………………………...………17 3.2.2 Automatic Teller Machine (ATM)……………………………..……………………17 3.2.3 Phone Banking………………………………………………..………………………18 3.2.4 Internet Banking………………………………………………………..……………18 3.2.5 Mobile Banking………………………………………………………………………18 3.3 (R)Evolution in Information Technology (IT) ..……………………………………………19 3.3.1 Cloud…………...…………………..……………………….…………………………22 3.3.2 Big Data……….….….….……….……….……….……….………….……….………23 3.3.3 Internet of Things (IoT)….……..….……….……….……….……….……...….……26 4 BANKING SERVICES…………………………………………………………………..………28 4.1 Evolution…………………………………………………………………………………...…28 4.2 Account Management………………………………………………….…….………………30 4.3 Payments………………...……………………………………………………………………31 4.4 Mobile Wallet……………………………………………………………………...…………34 4.5 Lending………………………….……………………………………………………………39 4.6 Insurance…………………………………………………………………..…………………41 4.7 Investment.…………………………………………………………………...………………43 4.8 Cryptocurrency and Blockchain……………………………………………………………44 4

4.9 AI Robots………….……….…….……….……….……….……….………………...………46

5 ADOPTION AND REGULATIONS……………………………………………….……...……48 5.1 Customer’s Trust and Mobile Banking Adoption...………………..……..……………..…48 5.2 Regulators and Regtech………………..….............................................................................51 5.3 GDPR and Personal Data…………………………………………..….…….………………53

6 CONCLUSION………………………………………………………….....……….....…………56

REFERENCES…………………………………………………………………………….………58

FIGURES Fig. 3.1. “Global VC-backed Fintech Companies with a private market valuation of $1B+; Recent years have seen an explosion of Fintech’ unicorns’ ” (CB Insights Research, 22 October 2018 as cited in Arslanian and Fischer, 2019). p.16

Fig. 4.2. “The average value of banknotes and coins in circulation in Sweden” (Arslanian and Fischer, 2019). p.34

Fig. 4.3. “Share of NFC-enabled and non-NFCenabled cellular handset shipments worldwide” (Statista.com, 2020). p.38

Fig 3.2. “Usage of retail channels” (Clickfox, 2014 as cited in Marous, 2014) p.19

Fig. 4.4. “The total volume of P2P lending in Europe” (Shumsky, 2020). p.41

Fig. 3.3 “Cost per gigabyte of storage over time” (Arslanian and Fischer, 2019). p.21

Fig. 4.5 “Global investment activity in Fintech companies (measured in billions)”. (KPMG, 2018 as cited in Arslanian and Fischer, 2019) p.44

Fig. 3.4 “Number of smartphones sold to end users worldwide from 2007 to 2020” (Statista.com, 2020). p.22

Fig. 4.6 “Top ten cryptocurrencies and utility tokens by market cap (January 2019)”. (CoinMarketCap, 2019 as cited in Arslanian and Fischer, 2019). p.46

Fig. 3.5 “Forecasted global spending on cloud computing” (Statista.com, 2019 as cited in Arslanian and Fischer, 2019). p.23

Fig. 5.1. “Comparison of FinTech adoption in six markets from 2015 to 2019” (Ernst & Young, 2019).

Fig. 4.1. “Some of the mobile banking services” (Nicoletti, 2014) p.29

p.51

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Abbreviations and Acronyms

API= Application Programming Interface ATM= Automated Teller Machine BIC= Bank Identification Code C-TPB-TAM= Combined Technology Acceptance Model/ Theory of Planned EC= European Commission ECB= European Central Bank EDW= Enterprise Data Warehouse FCA= Financial Conduct Authority Fintech= Financial Technology GDPR= General Data Protection Regulation ICT= Information Communications Technology IDT= Innovation Deffusion Theory IP= Internet Protocol IT= Information Techonology IoT= Internet of Things MM= Motivational Model MPCU= Model of PC Utilisation NFC= Near Field Communication

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PC= Personal Computer POS= Point Of Sale PSD1/2= Payments Systems Directive 1/2 PSP= Payment Service Providers QR= Quick Response Regtech= Regulatory technology SCT= Social Cognitive Theory SIM= Subscriber Identity Module SWIFT= Society for Worldwide Interbank Financial Telecommunication TAM= Technology Acceptance Model TPB= Theory of Planned Behaviour TRA= Theory of Reasoned Action URL= Uniform Resource Locator UTAUT= Unified Theory of Acceptance and Use of Technology

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1 INTRODUCTION

Traditional financial institutions were always leaders in the financial sector. However, today’s world is characterised from rapid technological changes, which pave the way to a more open environment. Multiple factors, such as technological innovations, regulatory changes and increased competition have been profoundly affecting the financial sector during the past years (Omarini, 2018). One of the most exciting innovations of the past three decades is the invention and evolution of the mobile telephony (Shaikh, Hanafizadeh and Karjaluoto, 2017). In this fast-paced environment, traditional financial institutions have been watching their market leadership being under attack from newcomers (Omarini, 2018). Start-up companies competing with traditional financial institutions offer customer-centric services, combined with speed and flexibility. At the same time, the modern customer is adopting mobile banking due to the perceived usefulness and benefits associated with its usage (Nisar and Prabhakar, 2017). This research aims to examine the evolution of banking, the factors that drive this evolution and the adoption of novel technologies and services. The research method used in this thesis was supported by literature studies and empirical research published in creditable data sources, like journal cuttings and expert statistical analysis. The literature study was based on conceptual theories, along with historical facts and figures. The empirical study was based on up-to-date statistical figures and researches, collected through professional statistical companies or creditable intermediaries. The primary purpose of the empirical study was to present a summary of today’s statistical data in regards to customers’ behaviours and monetary facts. This research is divided into six chapters. The first chapter provides an introduction to the mobile banking evolution and provides information about the way we conducted the research. The second chapter attempts to initiate an approach to the definition of banking in regards to retail banking institutions, mobile banking institutions and fintech companies. Chapter three describes a retrospection of the financial institutions, from their foundations to the modern development, and outlines their delivery channels. To understand how technologies and their applications change the future of the banking sector, we should first understand the fundamentals of how technology itself is evolving. Therefore, chapter three analyses the evolution in the IT systems applied, along with three novel technologies as well. Chapter four describes the banking services provided by the traditional retail banking institutions, start-ups and fintech companies. Chapter five analyses the regulatory and data protection framework applied, along with the mobile banking’s customer adoption in regards to 8

different demographics. Finally, the last chapter overviews the topics mentioned above and presents the research’s results, along with its limitation.

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2 APPROACH TO BANKING

2.1 Definition of Banking

In order to define banking, we should first determine what a bank is. Although each individual has a different definition of banks, a regulatory definition is that banks are organisations that bring customers together by accepting deposits, making loans and investing in securities. However, banks can also be classified as financial intermediaries and corporate entities. The latter derives from the fact that banks, as financial intermediaries, convert the surplus deposits to loans, assist to the economic development and act as an economic engine. Furthermore, banks are considered corporate entities as they are formed by shareholders and are governed by a board of directors (Omarini, 2015). Given the above, the banking definition is linked to all services provided by banks at a given point in time. In the first indications of banking, which can be traced back to the earliest civilisations in Italy, Egypt and the Middle East, the term banking was based on the governments’ recordings of monetary deposits and withdrawals and foreign money changers. Today, banking is a significant industry which covers a wide range of retail banking activities such as deposits, loans, insurance, investment, and wealth management (Omarini, 2015). Chapter 4 will discuss each of these items in detail. Hence, the definition of banking is only as broad as the banking activities carried out at a specific moment.

2.1.1 Definition of Retail Banking

“Retail banking is the cluster of products and services that banks provide to consumers and small businesses through branches, the Internet, and other channels.” (Hirtle et al. 2007) Retail banking, or commercial banking, can be split into two types: Retail and Wholesale banking. The key difference between these two is that retail banking provides its services to consumers and companies, while wholesale banking involves other banks and governments (Pond, 2017).

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The retail banking institutions are widely used for three primary objectives; (Omarini, 2015) •

To process payments

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To deposit savings for the future

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To secure funds for emergencies

Having said that, it is clear that retail activities are based on three different dimensions: customers, products and services provided, and the delivery channels with which customers are linked to these products and services (Hirtle et al. 2007). However, there is a fourth dimension which we are all used to refer to; the term of money. To fully understand this term, we should properly define it. “Money is anything that is generally accepted as a medium of exchange. A medium of exchange is something that people are readily willing to accept in payment for purchases of goods, services, and resources because they know it can be easily used for further transactions.” (Welch, 2009). In this thesis, we will analyse the retail banking type intended for the public.

2.1.2 Definition of Mobile Banking and novel FinTech

Mobile banking or internet banking is a service that allows bank customers to access any banking information, or facilitate monetary transactions using either a personal mobile device (smartphone, tablet) or a personal computer. It can be used anytime and anywhere with the only requirement having an active internet connection (Shaikkh, Karjaluoto, 2016 cited in Shaikh, Hanafizadeh and Karjaluoto, 2017). M-banking operates through mobile digital devices rather than the traditional infrastructures (branches, ATMs, etc.) (Nicoletti, 2014). Mobile technology provides a two-way practical and inexpensive way for the customer and the bank to interact, dissociating the location requirements (Krishnan, 2014). During the last two decades, both banking and payment services have seen a vast worldwide scale digitalisation (Bons, 2012 cited in Shaikh, Hanafizadeh and Karjaluoto, 2017). This evolution saw traditional banking to evolve from a branch-oriented to a branchless and mobile-oriented approach (Shaikh, Hanafizadeh and Karjaluoto, 2017). Therefore, mobile banking is characterised as a disruptive innovation, considering that it creates new markets and networks by disrupting the existing 11

ones. In such way, it improves a service or a product in ways that markets did not expect (Nicoletti, 2014). Mobile services are one of the most attractive trends today, both in the customer territory and in the business sector, with an ability to transform financial institutions and their relationships with their customers (Nicoletti, 2014). Currently, due to the usefulness and benefits of mobile banking, the majority of banks worldwide offer mobile banking services (Nisar and Prabhakar, 2017). As a result, customers are expecting limitless access to more personalised banking services (Megargel, Shankararaman and Reddy, 2018). A variety of factors, such as technological innovations, consumer behaviour and new regulations have profoundly changed the financial sector during the past recent years. These factors have led to a novel environment where even non-banking institutes have gained the opportunity to enter the financial markets (Omarini, 2018). The extent of the impact of the factors mentioned above is as follows: •

Technological innovations in IT such as social media, big data, IoT (Internet of Things) and cloud data storage have allowed the financial institutes to automate and digitalise their existing services, as well as introduce new and innovative products (Puschmann, 2017). Today’s mobile devices are equipped with millions of times more processing power than what was used by NASA to complete the Apollo 11 mission (Puiu, 2017 as cited in Arslanian and Fischer, 2019).

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Changes in consumer behaviours that occurred with the introduction of mobile devices have forced the financial institutes to introduce online delivery channels focusing on automation and customer self-services (Puschmann, 2017).

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Regulatory changes established after the 2008 financial crisis, introduced initiatives that allowed start-up financial institutes such as FinTech companies to join the financial markets (Puschmann, 2017).

The word Fintech derives from the fusion of the words Financial and Technology (Nicoletti, 2017). Although the economic dictionaries cannot agree on one definition, a simple definition is that: “Financial technology, also known as Fintech, is the new sector in the finance industry, that incorporates the whole plethora of technology that is used in finance to facilitate trades, corporate business or interaction and services provided to the retail consumer” (Micu, 2016 as cited in Schueffel, 2016). FinTech companies are usually start-up companies with a purpose to disrupt the current financial systems that rely mostly on outdated software (Nicoletti, 2017). FinTech companies

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are also referred to as “nimble piranhas” as they are targeting small parts of a bank’s business model (Mudar, 2015 as cited in Omarini, 2018). However, FinTech initiatives are not limited to start-ups only; simply, start-ups are closely tied with the term as they have the ability to use advanced and modern technology. Thus, it is worth noting that even mature institutions are transforming their businesses with modern financial technologies such as mobile services or collaborate with these start-ups (Nicoletti. 2017). This statement can be supported by the very first definition of Fintech. “Fintech is an acronym which stands for financial technology, combining bank expertise with modern management science techniques and the computer” published in 1972, years before the public access to the internet and its services (Bettinger, 1972 as cited in Schueffel, 2016). Customers nowadays choose their financial services providers based on factors such as speed, personalised banking services and flexibility (EBA, 2018 as cited in Tanda and Schena, 2019). The rise in the usage of devices such as smartphones and tablets along with modern trends like IoT (Internet of Things) has thoroughly changed the way consumers use financial services and has promoted a new digital attitude (Nicoletti, 2017). This attitude has led to the creation of a competitive environment between retail banks and Fintech companies, as fintech institutions can provide swift, accessible and user-friendly solutions to users (Tanda and Schena, 2019).

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3 THE EVOLUTION OF BANKING

3.1. From Retail to Mobile Banking and Fintech

Although the history of banking can be traced back to the earliest civilisations in Italy, Egypt and the Middle East, in this thesis, we will begin from the customer-driven era. During the 1950s, retail banks started shifting their focus from producing and selling only, to a more customer-driven business model. As the competition was increasing, the need for the usage of correct marketing strategies was recognised; therefore, banks started offering various products to target new customer groups (Omarini, 2015). At that time, banks were also one of the early adopters of computers. In 1954, Bank of America purchased the first computer; the UNIVAC-1, a machine capable of reading 12,000 characters per second; an acquisition that signalled the beginning of more efficient delivery of financial services (Arslanian and Fischer, 2019). During the 1960s, retail ban...