Traditional Financial Intermediaries Research Articles

Why segmentation matters: a Machine Learning approach for predicting loan defaults in the Peer-to-Peer (P2P) Financial Ecosystem

Peer-to-Peer (P2P) lending is an online lending process allowing individuals to obtain or concede loans without the interference of traditional financial intermediaries. It has grown quickly the last years, with some platforms reaching billions of dollars of loans in principal in a short amount of time. Since each loan is associated with the probability of loss due to a borrower's failure, this paper addresses the borrower's default prediction problem in the P2P financial ecosystem. The main assumption, which makes this study different from the available literature, is that borrowers sharing the same homeownership status display similar risk profile, thus a model per segment should be developed. We estimate the Probability of Default (PD) of a borrower by using Logistic Regression (LR) coupled with Weight of Evidence encoding. The features set is identified via the Sequential Feature Selection (SFS). We compare the forward against the backward SFS, in terms of the Area Under the Curve (AUC), and we choose the one that maximizes this statistic. Finally, we compare the results of the chosen LR approach against two other popular Machine Learning (ML) techniques: the k Nearest Neighbors (k-NN) and the Random Forest (RF).

Financial inclusions in social networks

Research background: The study suggests that social networks can offer all the same services and products as traditional financial intermediaries. Moreover, the scope and prospects for the inclusion of financial services in the social network system are not yet fully defined and not clear. Nevertheless, the modern largest social sites are constantly developing their financial functions. Moreover, they do it in their way and often differ from the traditional financial intermediation method: firstly, social networks offer all services in a “single window” - along with other information and in the course of social communications, that is, transfer the service of network users to omnichannel, including in this concept the whole complex of socio-communication and financial interactions. The problems of the interaction of social networks with economic networks are widely studied. Quite a lot of literature is devoted to the problem of innovation in the financial sector. There are also publications that contain literature reviews, conceptual and theoretical generalizations and discussions on this issue. No less abundant electronic finance literature – reviews, textbooks, numerous studies on specific issues and regional specificities of finance, as well as various web applications. Popular with researchers and the media are topics dedicated to social networks sites. Purpose of the article in the analysis of social networks is associated with new processes, the development of new provisions, clarification of terms, the development of new hypotheses and theoretical principles. Findings & Value added: The challenge facing researchers can be summarized as follows: the study of information and behavioral aspects of the interaction of two types of activities - financial intermediation and social networks, leading to new processes and the formation of new organizational forms and behavior. To this end, a purposeful search is carried out for concepts, models, and tools to determine the content and prospects of these processes and new approaches are being developed and proposed. Methods: At the first stage: (1) sociometric analysis based on graph theory, (2) concepts of interpersonal relationships, the behavior of various participants of groups and conditions for forming specific cliques in various groups, and (3) anthropological traditions, which were used to observe community members (including social networks), determine their structure, internal relations and conditions for their sustainability.

РEER-TO-PEER-КРЕДИТОВАНИЕ КАК АЛЬТЕРНАТИВА БАНКОВСКОМУ КРЕДИТОВАНИЮ

The article considers the mechanism of P2P-lending as lending by individuals to other individuals, through specially created online platforms, in which the lender and borrower are directly connected, without the participation of traditional financial intermediaries. The essence, peculiarities and distinctive characteristics of P2P lending in comparison with a traditional bank loan are defined, such as: banks performing the functions of financial intermediation, asset transformation, liquidity and payment operations, and the absence of an intermediary in R2R lending; monitoring and processing of data by banks, assessment of credit quality; diversification and hedging of credit risks by banks. Dynamics of development of world and domestic markets of P2P-lending has been investigated. The main indicators and conditions of P2P lending were analyzed by the largest Russian companies: Fingooroo, City of Money, Вдолг.ру, Loanberry, Bezbank (minimum and maximum amount of investments, average loan amount, average loan rate, minimum and maximum loan rate). It was determined that a feature of P2P lending is its attractiveness for unscrupulous borrowers, in addition, the current Russian P2P lending is characterized by a lack of regulation and supervision, which increases the risks of potential investors. The study highlighted the main advantages and disadvantages of P2P lending for lenders and borrowers. It is noted that the lack of traditional intermediary functions of a financial intermediary in online sites is primarily due to the need to find a balance between certain costs and the advantages of P2P sites over traditional banks. It is formulated that the risks of online sites compared to banks are associated with the safety of investments, the lack of guarantees of a refund, and the advantages are greater freedom and accessibility for the participants in the transaction

Technology Driven Innovations in Financial Services

Financial systems worldwide are increasingly experiencing the mounting pressure of the technology based financial innovations. Some of these developments are generating alternative financial structures, existing parallelly to the “old” ones whereas some others are simply replacing the “old” ones. Alternative inter-mediating institutions are gaining ground vis a vis encumbents, relying on their technological and market supremacy. The space for traditional financial inter-mediation becomes increasingly under the competition of the new solutions. Some technological solutions provide additionally for the partial or entire disinter-mediation of the financial services and thus removing some existing transaction costs and matching directly economic agents. Digitization and data-fication, coupled with artificial intelligence, are offering new immense operational opportunities and economic benefits. On the other hand they are also the source of new risks to the financial and economic systems, financial stability, national security and consumer well-being, which need to be properly addressed. We review in this paper principal components of the current stream of technology based financial innovations, its main drivers, as well as discuss major strategic issues and impacts that we are facing in this area.

Shadow Banking and the Four Pillars of Traditional Financial Intermediation

Abstract Traditional banking is built on four pillars: small and medium enterprise lending, insured deposit taking, access to lender of last resort (LOLR), and prudential supervision. This article unveils the logic of the quadrilogy by showing that it emerges naturally as an equilibrium outcome in a game between banks and the government. A key insight is that regulation and public insurance services (LOLR, deposit insurance) are complementary. The model also shows how prudential regulation must adjust to the emergence of shadow banking and rationalizes structural remedies to counter bogus liquidity hoarding and financial contagion: ring-fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms.

FINTECH AND COMMERCIAL BANKS: COMPETITION AND OPPORTUNITIES OF COOPERATION

Introduction. Recent fundamental changes have taken place in all spheres of society, primarily related to the development of technology. The financial sector is no exception: every year both consumers of financial products and services and their producers are more and more committed to the introduction of new technologies. The pioneers of these changes are FinTech companies, which have managed to achieve significant development over the last decade, and which continue to grow. Traditional financial intermediaries are beginning to be wary of their market shares and see FinTech companies as new competitors. However, it is thanks to them that the financial market can reach a new level, and if their efforts are combined with the knowledge and experience of commercial banks - titans of financial intermediation, a number of benefits for them and for the financial system as a whole will be got. Purpose. The article aims to research the reasons for the rapid development of FinTech companies, possible ways of cooperation between them and commercial banks and the benefits that financial markets will receive from these associations. Method (methodology). General scientific research methods, such as analysis, synthesis and deduction, methods of theoretical substantiation, statistical analysis, comparison, abstract-logical, graphical and tabular methods were used. Results. The article describes the main advantages and disadvantages of FinTech companies compared to commercial banks, which are, on the one hand, their innovation, adaptability and speed of response to environmental change, and, on the other hand, the presence of additional risks. According to this, the prospects of cooperation between FinTech companies and commercial banks and the benefits that will be received by all financial market participants were considered. The article also outlines what activities banks and FinTech companies will engage in as part of such cooperation and what stages they will need to go through to achieve maximum results.

Банківські інновації в системі забезпечення конкурентоспроможності банків

The purpose of the article is to generalize the theoretical foundations and determine the role of banking innovations in the system of ensuring the banks' competitiveness, develop a typology of banking innovations from the standpoint of the theory of competition and implement its concretization, based on the innovative developments of foreign banks in 2018-2019. The importance of banking innovations as the factor of banks' competitiveness was substantiated. The approaches to the banking innovations classification were generalized. The typology of banking innovations was developed from the perspective of a theory of competition with the definition of such classification features as: according to the level of orientation of the competitive position; by the degree of ensuring a competitive position; according to the degree of competitive advantage; in terms of focus on the development of competitive potential. The proposed typology of banking innovations was concretized in the basis of the innovative developments of foreign banks in 2018-2019. As the comparative analysis shows, along with innovative developments in traditional categories (radical financial innovations, innovative products and services, innovations in customer service channels, innovations with the effect of social and social impact, innovations for improving internal processes) the FinTech and RegTech innovation development, human capital management, business models and marketing, as well as innovative accelerators or incubators are gaining relevance. It was proved that the achievement of competitive advantages and the strengthening of competitive positions in the banking services market is facilitated by digital convergence, which allows banks to introduce innovations based on digital technologies, platform and ecosystem approaches. At the same time, banks are facing a problem of disintermediation, namely, competitive pressure from high-tech FinTech companies, which are much more flexible and quickly respond to innovative consumer needs without experiencing regulatory pressure and restrictions compared to traditional financial intermediaries. In this connection, banks should develop competitive strategies based on building effective cooperation with FinTech companies to obtain a synergistic effect for developing competitive potential in the banking services market.

Technology-Driven Innovations in Financial Services: The Rise of Alternative Finance

Abstract Financial systems worldwide are increasingly experiencing the mounting pressure of the technology-based financial innovations. Some of these developments are generating alternative financial structures existing parallelly to the “old” ones, whereas some others are simply replacing the “old” ones. Alternative intermediating institutions are gaining ground vis-à-vis incumbents, relying on their technological and market supremacy. The space of traditional financial intermediation requires new solutions to be more competitive. Some technological solutions provide additionally for the partial or entire disintermediation of the financial services, thus removing some existing transaction costs and matching directly economic agents. Digitalization and datafication, coupled with artificial intelligence, are offering immense new operational opportunities and economic benefits. On the other hand, they are also the source of new risks to the financial and economic systems, financial stability, national security, and consumer well-being, which need to be properly addressed. We review in this paper principal components of the current stream of technology-based financial innovations and their main drivers, as well as discuss major strategic issues and impacts that we are facing in this area.

The role of competition, innovation, and regulation on financial intermediary risk

Purpose This macroeconomic analysis chronicles the risk behavior of market-based financial intermediaries and traditional depository institutions from 1980 to 2010 and assesses the role that competition, financial innovation and regulation played in their evolving risk behaviors. The paper aims to discuss these issues. Design/methodology/approach Using a two-part CAPM framework in line with Campbell et al. (2001), risk measures are constructed through the decomposition of industry-level risk and firm-level idiosyncratic risk. These constructed measures are used in a VAR model with a historical decomposition approach to assess the impact of the three factors on the relative risk behavior of these firms. Findings The results indicate that the market-based and traditional intermediaries exhibited a period of diverging relative average firm-level risk behavior followed by a period of converging risk behavior. Using the derived firm-level risk measures, the impact of competition, financial innovation and regulatory changes on explaining these changing risk behaviors is explored. The results suggest that regulatory changes (i.e. deregulation) can best explain the relative risk behavior over the divergence period through late 1999 relative to the other two variables. The period from November 1999 through the financial crisis marks the converging risk behaviors across these intermediaries. Over this period, the changing nature of competition played the most important role in driving these behaviors. Originality/value The key contribution of this analysis highlights the evolutionary changes in the risk behaviors of market-based and traditional financial intermediaries and the factors driving both their diverging and converging nature over time.

Cryptocurrency and Blockchains: Retail to Institutional

A reduction in cost of traditional financial intermediation was one of the main motivations cited by Satoshi Nakamoto in his/her/their 2008 proposal for: “… an electronic payment system based on cryptographic proof instead of trust.” We begin here with some back-of-the-envelope calculations of these potential cost savings and benefits from the customer perspective. We then discuss the public blockchain ledger and various solutions to two important problems that are constraints on the public blockchain’s trustless consensus, viz. “mining” costs in proof-of-work and governance issues. We speculate that foreseeable institutional implementations will often involve integration of permissioned blockchains with public blockchains. We then discuss exchanges for trading cryptocurrencies, the second component of the crypto blockchains, and in particular their “teething problems” along with the evolution of a subset of them into increasingly “industrial strength” entities. We suggest that with a more industrial strength infrastructure in place, self-executing smart contracts are virtually natural counterparts for more traditional passive investment products. We end with a discussion of Security Token Offerings (STOs) and the newer Initial Coin Offerings (ICOs): STOs are an interesting hybrid between the ICOs and traditional IPOs; they could conceivably pave the way to a long-time-coming “direct electronic IPO” market. TOPICS:Currency, exchanges/markets/clearinghouses, exchange-traded funds and applications Key Findings • A set of crypto exchanges are evolving into institutional-strength entities with law-of-one-price, clearing and settlement, custody services, and user algorithms to deal with fake inflated trade volumes. • Pure public blockchains with well-known “blockchain trilemma” problems like high energy consumption, low performance, governance shortcomings, and no clear “how-to-pay” mechanism for ledger-updating in non-crypto applications, are inexorably leading towards hybrid public/permissioned blockchain networks. • Despite their rocky start, STOs and ICOs are leading to direct or electronic IPO markets, while smart contracts running on blockchains with securities trading identifiers and data seem ideal vehicles for administering passive investment products.

A system Dynamics Approach to Designing a Crowdfunding Model in Technological Entrepreneurship Ecosystem with a Focus on Technology Incubator Centers

Crowdfunding, a new financing method for funding ideas or ventures through a large number of relatively small contributions from many individuals has witnessed the phenomenal development over the past decade. It involves bypassing traditional financial intermediaries and using online web-based platforms to connect users of funds with retail funders. This research first explores in greater detail the crowdfunding phenomenon, discussing its main aspects, as well as the role of the involved Stakeholders, and then introduce the A system dynamics approach to designing a crowdfunding model in technological entrepreneurship ecosystem with a focus on technology incubator centers. The present study is based on the system dynamics method and this research, in terms of the purpose is applied and in terms of the survey method. So for analysis of data, Vensim software has been used. The simulation results show that technological entrepreneurship ecosystem policy combinations can effectively promote crowdfunding, which attracts more entrepreneurs to provide their ideas. So crowdfunding could promote entrepreneurial to give a greater impact on economics, and contribute to building a more sustainable society.

Mandated superannuation contributions and the structure of the financial sector in Australia

Australian workers must contribute a proportion of their wage to superannuation. The mandated contribution rate has risen from 3% in 1992, to 9.5% today, and is scheduled to reach 12% by 2025. We use a financial computable general equilibrium (FCGE) model to simulate an increase in the contribution rate. We find that raising the contribution rate has consequences for traditional financial intermediaries, and for financial structure more generally. This is of interest to Australian policy makers currently concerned with the size and role of Australia’s banks, and the leverage of the household sector.

Complementarity Analysis Islamic Banks / Microfinance Institutions in Senegal

The purpose of this article is to assess the use of the complementary relationship between the Islamic Bank of Senegal and microfinance institutions in the SME financing process. Currently in Senegal, the constraints on the financing of SMEs are intensifying more and more and continue to limit state policies in the process of promoting sustained economic growth for lack of funding model that responds effectively to investment needs of the latter. In this perspective of marginalization of SMEs by traditional financial intermediaries’ especially traditional banks, the importance of using Islamic Bank / MFI complementarity could be a solution to such a situation of under-financing of SMEs. This new funding model can have a downward impact on transaction costs, reduce risk management and increase the medium- and long-term volume of credit available to SMEs. It would thus promote the financial and social inclusion of Senegalese SMEs. This new funding model can have a downward impact on transaction costs, reduce risk management and increase the medium- and long-term volume of credit available to SMEs. It would thus promote the financial and social inclusion of Senegalese SMEs.

Institutional Investors, the Dollar, and U.S. Credit Conditions

This paper documents that an appreciation of the U.S. dollar is associated with a reduction in the supply of commercial and industrial loans by U.S. banks. An increase in the broad dollar index by 2.5 points (one standard deviation) reduces U.S. banks' corporate loan originations by 10 percent. This decline is driven by a reduction in the demand for loans on the secondary market where prices fall and liquidity worsens when the dollar appreciates, with stronger effects for riskier loans. Today, the main buyers of U.S. corporate loans---and, hence, suppliers of funding for these loans---are institutional investors, in particular mutual funds, which experience outflows when the dollar appreciates. A shift of traditional financial intermediation to these relatively unregulated entities, which are more sensitive to global developments, has led to the emergence of this new channel through which the dollar affects the U.S. economy, which we term the secondary market channel.

Crypto mining business models: Points of contact to the AIFMD

This paper provides a technical overview and legal analysis of the activity of miners in proof of work-based crypto assets, focusing on the Bitcoin Blockchain as the most prominent example. The result of this analysis — mainly that mining is a financial service similar to the services performed by traditional financial intermediaries — is used as the foundation of a detailed legal analysis of a widespread crypto mining business model under the Alternative Investment Fund Managers Directive (AIFMD). The paper shows that such business models offer mining packages directly to retail investors via the Internet, and the operators of these so-called mining farms thereby raise capital from the public to generate a pooled return for investors in the form of ‘mined’ crypto assets, for example, Bitcoin (‘BTC’). A detailed analysis of this fund-like structure leads to the conclusion that many currently operating crypto mining business models are already regulated by the AIFMD if all the relevant criteria of the AIFMD are fulfilled. This legal assessment has to be made on a case-by-case basis and entails serious consequences — depending on the national transposition of the AIFMD, it can even result in the prohibition of marketing units and shares of such AIFs to retail investors, as is the case in Austria. Operators of such business models that are already active on the market and that fall under the regulation of the AIFMD would be faced with registration or authorisation requirements and potential legal repercussions for operating an AIF without licence.

Disruption of financial intermediation by FinTech: a review on crowdfunding and blockchain

AbstractBased on a systematic review of influential publications among 402 papers published between 2010 and 2018, this paper identifies gaps in Economics and Finance research regarding two applications of FinTech: crowdfunding and blockchain. Analysing these records shows that (i) current research on FinTech is fragmented with limited theoretical grounding; (ii) crowdfunding and blockchain can be regarded as two innovations that may disrupt traditional financial intermediation but in different ways; (iii) crowdfunding platforms substitute for traditional financial intermediaries and serve as a new intermediary, without eliminating the need for intermediation; (iv) similar to crowdfunding, blockchain also creates new intermediaries; and (v) the trust element inherent in blockchain enables blockchain to eliminate the need for intermediaries in some financial areas but not all.

Optimizing the Borrowing Limit and Interest Rate in P2P System: From Borrowers’ Perspective

P2P (peer-to-peer) lending is an emerging online service that allows individuals to borrow money from unrelated person without the intervention of traditional financial intermediaries. In these platforms, borrowing limit and interest rate are two of the most notable elements for borrowers, which directly influence their borrowing benefits and costs, respectively. To that end, this paper introduces a BP neural network interval estimation (BPIE) algorithm to predict the borrowers’ borrowing limit and interest rate based on their characteristics and simultaneously develops a new parameter optimization algorithm (GBPO) based on the genetic algorithm and our BP neural network predictive model to optimize them. Using real-world data from http://ppdai.com, the experimental results show that our proposed model achieves a good performance. This research provides a new perspective from borrowers in exploring the P2P lending. The case base and proposed knowledge are the two contributions for FinTech research.

Data Protection in Financial Technology Services: Indonesian Legal Perspective

The banking sector has facing a new competitor, namely Financial Technology (Fin-tech). Fin-tech itself can be described as an industry composed of companies that use new technology and innovation with available resources in order to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services. In Indonesia, Fin-tech has been widely developed in the past 3 years. Fin-tech is facing a new challenge as a new service for financial consumer which adapts new way of living in modern digital technology era. Basically, Fin-tech is offering three main categories such as payment, personal finance and financing. In financing application there are peer to peer financing, social crowd funding and also loan marketplace. All of this kind application has some issues in legal framework and data protection due to the using of communication technologies such as internet, social networks, Smartphone, massive use of data with the Big Data, connected objects etc. The using of big data and those new technologies have created new opportunities for these sectors, these developments also raise significant data protection concerns. This paper will discuss two legal issues of Fin-tech, the legal aspect and the data protection

Can a Booming Financial Economy Coexist with a Lagging Real Economy?

The U.S. today experiences an expanding financial economy. Investors benefit as common stock prices rise. Moreover, the finance industry grows relative to other industries (called “financialization”). But at the same time, the real economy lags. Workers’ pay and job opportunities stagnate as economic growth declines. How can these outcomes coexist? This article explains how and why this happened, utilizing a “forensic” approach to analyze a considerable amount of economic data. It argues that bifurcation of the economy started as far back as 1980, with new information and communications technology. Labor markets became “globalized” so that wage growth slowed, thereby reducing inflation and nominal interest rates. This boosted businesses’ profit margins, so there was less need for increased capital investment. Growth in aggregate demand fell and diminished growth in the real economy. Ironically, this helped the financial economy. Slowing demand for capital and central bank intervention led to falling real interest rates and consistently rising financial asset values. Common stocks spiked as bond rates plummeted. This helped the financial industry expand revenues through financial market activities, as opposed to traditional financial intermediation. Expanded securities trading brought increased brokerage fees. Moreover, loans were made and then sold them to open market investors, thereby moving finance into the capital markets (“securitization”). There is discussion of whether the financial sector really did add value, particularly given the financial crisis. The paper ends noting that the bifurcated economy embodies the principal elements of secular stagnation -- persistently slow growth, falling real interest rates, flat real wages, and increasing income inequality. Unfortunately, U.S. economic policy seems unprepared to offer remedy.

Data Protection in Financial Technology Services (A Study in Indonesian Legal Perspective)

The banking sector is facing a new competitor, namely Financial Technology (Fin-tech). Fin-tech itself can be described as an industry composed of companies using a new tech-nology and innovation with available resources in order to compete in the marketplace of tradi-tional financial institutions and intermediaries in the delivery of financial services. In Indonesia, Fin-tech has been widely developed since the past 3 years. Fin-tech faces a new challenge as a new service for financial consumer which adapts to new ways of living in modern digital tech-nology era. Basically, Fin-tech offers three main categories such as payment, personal finance, and financing. In financing application there are peer to peer financing, social crowd funding, and loan marketplace. All of these kinds of application have some issues in legal framework and data protection due to the use of communication technologies such as internet, social networks, Smartphone, massive use of data with the Big Data, connected objects, etc. The use of big data and those new technologies create new opportunities for these sectors, and this development also raises significant data protection concerns. This paper discusses two legal issues of Fin-tech, the legal aspect, and the data protection.