Traditional Financial Intermediaries Research Articles

Breaking the chains of traditional finance: A taxonomy of decentralized finance business models

Recently, the looming bankruptcy of Credit Suisse, which ultimately led to its merger with UBS, has intensified the discussion surrounding the need for more transparent and democratic financial markets. Decentralized finance (DeFi) represents a departure from traditional financial intermediation by leveraging blockchain technology and smart contracts. Despite its growing importance, limited research has been conducted on the business models of DeFi services. This study aims to address this gap by examining the business models of various DeFi services, identifying key drivers of innovation, differentiation, and value creation. Using a rigorous taxonomy development framework, we identify 12 dimensions and 47 characteristics that operationalize business models in DeFi. Our findings contribute to a better understanding of the transformation of financial services through blockchain technology and provide valuable insights for DeFi entrepreneurs, investors, and policymakers.

MANAGEMENT PUBLIC FINANCE IN THE CONDITIONS OF DYNAMIC DEVELOPMENT OF THE TOKENIZED ECONOMY OF UKRAINE

The article highlights the results of a study of the specifics of public finance management in the context of the dynamic development of Ukraine's tokenized economy. It is substantiated that with the beginning of Russia's full-scale military aggression against Ukraine, budget revenues have significantly decreased and expenditures have begun to grow rapidly, which has led to significant imbalances in public finances and a significant increase in the budget deficit, which today has to be covered mainly from external sources. The author emphasizes that one of the alternative options for filling the budget revenues is taxation of the crypto industry, which has been developing rapidly and has become one of the TOP-5 countries in the world of cryptocurrency introduction in recent years. The author reviews the novelties of domestic legislation in the field of regulation of circulation of virtual assets and emphasis is the presence of contradictions in them with regard to the interpretation of their content and functions. The author identifies specific features of virtual assets and proves that they should be considered as an expression of the value of digital things created using the technology of a distributed ledger or other similar technology that allows their issue, transfer and storage in a decentralized manner, without the need to involve traditional financial intermediaries or centralized administrators. The author studies the global experience of taxation of virtual assets. It is substantiated that Ukraine should choose a policy of moderate regulation of the virtual asset market, capable of ensuring both budget revenues and control over the income from transactions with virtual assets. The author develops proposals for accelerating the introduction of the mechanism of taxation of virtual assets turnover as one of the alternative sources of formation of the state revenues of the country and successful implementation of the policy of moderate regulation of the virtual assets market.

REGULATORY AND LEGAL CHALLENGES OF SHARIA PEER-TO-PEER LENDING IN INDONESIA

Peer-to-peer (P2P) lending is a financial platform that connects lenders directly with borrowers without going through traditional financial intermediaries. Sharia P2P lending applies sharia principles in its transactions. Even though sharia P2P lending in Indonesia has increased in recent years, regulatory and legal challenges still hamper its growth. This research aims to analyze the regulatory and legal challenges faced by Sharia P2P lending in Indonesia and provide policy recommendations to overcome them. This research uses qualitative methods by conducting a literature review of sharia P2P lending regulations in Indonesia and in-depth interviews with regulators, sharia P2P lending practitioners, and academics. The research results show that the main challenges faced are regulatory uncertainty, the need for a Sharia legal framework for P2P lending, and the regulator's lack of understanding of the Sharia-based P2P lending business model. The proposed policy recommendations include establishing a comprehensive and integrated Sharia P2P lending regulatory framework, preparing legally binding Sharia fatwas, and increasing regulators' literacy and understanding of the digital Sharia financial sector. The policy implications of this research can provide input for regulators and practitioners in developing a healthy and sustainable Sharia P2P lending ecosystem in Indonesia.

Understanding the impact of the financial technology revolution on systemic risk: Evidence from US and EU diversified financials

In this paper we first detect the impact of tech-driven downturns on US and EU diversified financials’ systemic risk measures (SRMs). Then, we study the relationship between these latter and the performance of BigTechs, FinTechs and cryptoassets, as proxied by the performance of specifically built market indexes. We find that equity related tech-driven downturns exacerbate systemic risk more than crypto ones. A better performance of BigTechs reduces financial systemic risk, with an increasing magnitude under tail conditions. The interconnectedness between FinTechs and traditional financial intermediaries might end up with an increase in systemic risk even under bullish circumstances. We provide useful insights in the perspective of financial institutions’ and supervisors’ integration of technology-driven risk analysis into their risk management procedures and prudential supervisory practices.

Dynamic Shifts in Digital Currencies: Tracing the Evolution of Digital Currencies from Bitcoin's Inception to 2023

The rapid "development of communication technology" has had a considerable impact on financial transactions, leading to the appearance of new types of "currency." These digital currencies are intended to streamline processes, decrease time and effort expenditures, and minimize financial losses while doing away with the need for traditional financial intermediaries and central bank regulation. Despite persistent worries and hazards that remain in the minds of people participating in currency trading and stock exchanges, digital currencies have significantly impacted the global financial industry. The fundamental issue with digital currencies is the question of the legal and regulatory frameworks. Since digital currencies are decentralized, conventional regulatory frameworks might find it difficult to keep up with the consequences of this rapidly changing technology. This may result in ambiguity and uncertainty regarding the governance and regulation of digital currency.Best in Class In addition to exploring the ideas of Bitcoin and block chain technology, this study attempts to give an overview of digital currencies, including their definition, emergence, and development. The research examined the stages of development of digital currency from its inception in 2009 to the present year, 2023. It traced the evolution of digital currency over this period. The study provided into how digital currency has evolved from its early days, marked by the introduction of Bitcoin in 2009, to its current state in 2023. Index Terms— Digital currency, Block chain, Bitcoin, Advantages, Challenges and Central Bank Digital Currency.

The VAT Treatment of Cryptocurrencies

Since their creation in 2009, crypto-assets have evolved from niche products into assets held and used much more widely. These assets pose challenges for policymakers and tax administrations, because, as pointed out by the OECD, they can be transferred and held without the participation of traditional financial intermediaries and without central administrators being aware of the transactions carried out or the location of crypto-assets holdings.
 On the indirect taxation side, the VAT Committee discussed the issues relating to the VAT treatment of crypto-assets and, in particular, of cryptocurrencies, on several occasions. The discussion on the most recent of the working papers on this subject, No. 1037 on the VAT treatment of crypto-assets, resulted in the adoption of the Guidelines which aim at harmonising tax administrations’ practice regarding the VAT implications of the different transactions linked to crypto-assets.
 The article highlights the main challenges posed by cryptocurrencies in terms of VAT while focusing on the main supplies with the use of cryptocurrencies and their qualification for the VAT purposes. Those transactions range from the creation, verification, validation, and supply of cryptocurrencies through their modification, storage, transfer, to exchange. The article explains in this context the position of the VAT Committee reflected in the Guidelines.

Financial Inclusion through Decentralized Finance: A Citizen Perspective

DeFi, a blockchain-based innovation, eliminates traditional financial intermediaries, offering direct peer-to-peer financial transactions and access to a wide array of financial services including lending, borrowing, insurance, and investment opportunities. This paper delves into how DeFi democratizes access to financial resources, particularly for the underserved and unbanked populations worldwide, by reducing transaction costs, enhancing transparency, and providing secure and equitable access to financial services. Through a citizen-centric lens, this article contributes to the ongoing dialogue on leveraging DeFi for global financial inclusion, suggesting pathways for integrating DeFi into the broader financial ecosystem in a manner that maximizes its inclusivity and benefits for all citizens.

DIGITAL DISRUPTION IN FINANCE: THE RISE OF FINTECH AND ITS IMPLICATIONS

This study investigated the impact of digital disruption (innovation in financial services) on customer satisfaction among users of financial technology (Fintech) related services. Primary data was collected from users of Fintech, with a focus on the Nigerian Fintech space. A quantitative mini-survey method was employed using an online data gathering tool, and the data was analyzed employing descriptive statistics and percentages. It was found that the most-used Fintech provider in Nigeria is Opay. More than half of the respondents claim to use FinTech services every day, suggesting that the channel serves the users well. On ease of use and quality of service, all respondents claimed Fintechs were either average or above average when rated. Four-fifths of the respondents found how Fintechs handle complaints to be satisfactory, while 20% think it is below average. 93% of respondents found the security architecture of FinTech platforms to be standard, while 96% found them reliable in discharging their services. 100% of the respondents are convinced they will recommend their Fintech service providers to others, including family and friends. 66.7% admitted the use of Fintech platforms limited their use of traditional intermediaries like banks, and the top reasons are high transaction costs, poor customer service, no clear interest on savings, and no access to credit, among others. Traditional financial intermediaries like banks should embrace the fast-paced, technology-driven and changing world of finance if they intend to keep up with the emerging innovations. In order to favorably co-exist with Fintechs, traditional intermediaries must consider new ways to reach the underserved, and unbanked and devise means to lower transaction costs. Fintechs need to improve on their security architecture to protect customer data and scarce funds; and must continue to value customer feedback even when they expand. KEYWORD(S): Fintech(financial technology), digital disruption, financial intermediaries, financial inclusion, transaction costs, customer satisfaction

Psychological distancing and language intensity in Peer‐to‐Peer lending

AbstractPeer‐to‐peer (P2P) lending is referred to as lending money to unknown borrowers directly through online platforms without using traditional financial intermediaries. We leverage insights from the literature on psychological distancing and affective intensity to argue that linguistic styles, as the manifestation of social psychological distance, have a negative impact on P2P funding success. Testing our arguments with data from a major Chinese P2P platform, we find that using too many “you” and negations (proxies for social psychological distance) in the borrower's description will dampen a lender's willingness to support a funding campaign. Moreover, when the social psychological distance is large, language intensity can be perceived as desperate, making a lender even less willing to support the funding campaign. Our research shed new light on the role of language in P2P funding success and has practical implications for lenders, borrowers and regulators in overcoming barriers in P2P lending.

Fintech as a concept of functional economic science

The article is devoted to the disclosure of the theoretical foundations of fintech as a concept of functional economic sciences (finance, accounting, economics). Nowadays, there are various approaches to the disclosure of this concept, which does not contribute to the development of an adequate economic policy of the state and legislative regulation in this area. Historical approach, content analysis, system and functional approaches were used to reveal the content of the definition. The analysis of existing approaches allowed us to conclude that there are four basic approaches to the interpretation of fintech: fintech as a technology, fintech as an innovation and a business model; fintech as an industry, fintech as a service. All of them have both weak and strong arguments in their favor, but none of them can exist without the latest technologies that form the basis of fintech. As a result of the study, it was proved that fintech is an innovative financial industry based on digital technologies, which lead to the intensification and growth of the efficiency of financial services. The statement about the emergence of a new fintech industry is grounded in the institutional part as a set of business entities that develop and implement modern innovative technologies in the financial sphere. Regarding traditional financial market intermediaries, it is worth talking about the transformation of their business models under the influence of modern innovative technologies. The latter happens without changing their functional role in the financial market.

Predictive Analysis of Default Risk in Peer-to-Peer Lending Platforms: Empirical Evidence from LendingClub

In recent years, the expansion of Fintech has speeded the development of the online peer-to-peer lending market, offering a huge opportunity for investment by directly connecting borrowers to lenders, without traditional financial intermediaries. This innovative approach is though accompanied by increasing default risk since the information asymmetry tends to rise with online businesses. This paper aimed to predict the probability of default of the borrower, using data from the LendingClub, the leading American online peer-to-peer lending platform. For this purpose, three machine learning methods were employed: logistic regression, random forest and neural network. Prior to the scoring models building, the LendingClub model was assessed, using the grades attributed to the borrowers in the dataset. The results indicated that the LendingClub model showed low performance with an AUC of 0.67, whereas the logistic regression (0.9), the random forest (0.9) and the neural network (0.93) displayed better predictive power. It stands out that the neural network classifier outperformed the other models with the highest AUC. No difference was noted in their respective accuracy value which was 0.9. Besides, in order to enhance their investment decision, investors might take into consideration the relationship between some variables and the likelihood of default. For instance, the higher the loan amounts, the higher the likelihood of default. The higher the debt to income, the higher the likelihood of default. While the higher the annual income, the lower the probability of default. The probability of default has a tendency to decline as the number of total open accounts rises.

Regulation of the development of the market infrastructure of digital payments and the use of tokenized assets

Classic banking operations, such as granting loans, accepting deposits and participating in payment transactions, are on the verge of revolution thanks to the potential use of web 3.0 technologies and tokenized assets. These new financial horizons run the gamut from unsecured virtual assets (like cryptocurrencies) and shadow payments to central bank digital currencies and widespread circulation of money rights. The potential of digital transformations in the financial sphere is best illustrated by distributed ledger technology (blockchain) and new solutions based on it – decentralized digital platforms and tokenized assets. However, there are other forms of decentralized financial instruments, payment services and financing that can allow households and companies to access credit and share unbreakable financial risks, bypassing traditional financial intermediaries. This scientific article discusses relatively new methods of providing access to low-cost and "seamless" payment systems from the point of view of their implementation in small or regional banks. The drive to innovate through alternative financing mechanisms involves the integration of many disparate customers into mainstream and even new financial systems. Tokenized assets can become a means that are available to those who are deprived of access to classic banking services, and even to those who are outside the scope of services of traditional banks.

ЦИФРОВЕ ЗАЛУЧЕННЯ КАПІТАЛУ: МОЖЛИВОСТІ, ВИКЛИКИ ТА ГЛОБАЛЬНІ ТЕНДЕНЦІЇ

The article examines the formation and development of the global digital capital raising market, elucidating the historical emergence and evolution of the market. It identifies that the transition from traditional financial intermediation to digital forms was bolstered by rapid technological progress, notably the widespread adoption of the Internet and the proliferation of digital technologies. These advances collectively facilitated the creation of a new ecosystem for capital mobilization. The essence and structure of the digital capital raising market are defined, encompassing crowdfunding, crowd investing, crowd lending, and marketplace lending. Digital capital raising encompasses digital financial services for business clients and private borrowers. The development of the digital capital raising market globally is analyzed, revealing significant growth in recent years. A substantial regional development disparity is observed, with the highest transaction volumes in the USA and the lowest in African countries. There are also notable differences in the average amounts of funding per campaign in digital capital raising, with the highest in America and the lowest in Asian countries. Differences in the regulatory policies of countries regarding digital capital raising are examined. Challenges that need to be overcome for effective digital capital attraction are identified. Regulatory uncertainty remains a significant barrier as policymakers grapple with the need to protect investors while fostering innovation. Volatility and security issues associated with digital assets, such as cryptocurrencies, also pose risks to investors and could hinder their broader application. The article outlines prospective development vectors for the digital capital raising market. The interaction between technological innovations, regulatory adaptation, and market dynamics will determine the growth trajectory in this sector. The global and decentralized nature of digital capital markets requires international cooperation and the harmonization of regulatory standards to mitigate risks and promote a stable and inclusive financial ecosystem. Keywords: digital capital raising, innovation, financial technologies, digitalization, global financial market, online platforms, crowdfunding, blockchain, cybersecurity.

The technology and digital financial risk management model using intelligent data processing

In order to explore the direct connection between financial technology and digital financial risk management, this paper combines intelligent data processing methods to apply financial technology to digital financial risk management, and analyzes it by taking Internet finance as an example. In order to establish a hypernetwork model consisting of capital owners, Internet financial intermediaries, traditional financial intermediaries, and capital demanders. In addition, this paper introduces the credit penalty function and the operational risk function to build an Internet financial super-network model considering the relationship level, so as to study the general equilibrium state of the integrated super-network composed of social networks and Internet financial networks. The experimental research results show that there is a certain correlation between financial technology and digital financial risk management, so we should pay attention to the application of financial technology in digital financial risk management while developing digital finance.

Impact of Financial Digitalization on Organizational Performance

Digitalization profoundly affects organizational performance, especially in the financial industry, by disrupting established business models and providing new opportunities for value creation. The combination of advanced internet technology and financial services—namely financial technology (fintech)—has become the most inflammatory component of financial digitalization. However, there is limited knowledge in academia about the effect of fintech on traditional financial intermediation. Using panel data of China's bank sector from 2013 to 2019, the researchers found that financial digitalization is negatively associated with the performance of banks. In addition, further research on the moderating effect shows that the monetary policy easing cycle, the high financial friction environment, and the risk-taking preference of banks could mitigate the negative effect of fintech development on bank performance. These findings contribute to the literature on financial digitization and traditional financial intermediation and have implications for banking practitioners and regulators.

The Journey to Open Finance: Learning from the Open Banking Movement

The creation of an open financial data ecosystem is a new frontier to be explored within a financial services industry characterized by the presence of new players, along with traditional financial intermediaries. Spurred by datafication and digitisation, open finance is considered an extension of the open banking foundation launched in Europe through targeted regulation. The open finance journey is just beginning. By taking stock of the open banking experience across jurisdictions, this article examines the future shift from open banking to open finance. Selected critical issues within the open banking context give valuable indications for the development of open finance. Open finance, datafication, digitisation, open banking, APIs, PSD2, Consumer Data Right, reciprocity, consumer education

The importance of a continuous belief-update mechanism on crowdfunding with financial returns

PurposeThe purpose of this paper is to add to the existing literature about whether and how a continuous belief-update mechanism affects investors' risk perceptions in crowdfunding. The authors build on existing literature on the impact of a continuous belief-update mechanism on return expectations and risk perceptions, as a result of the funders' personal return and risk experiences, and apply this approach to the crowdfunding area. The authors thus add two specific insights about these dynamic new markets. First, the authors measure the perceived risk along multiple dimensions. Second, the authors consider how perceived risk differs across experienced investors and inexperienced investors, using two levels of analysis.Design/methodology/approachThe paper uses a unique data set of survey respondents on crowdfunding with financial returns. The data set covers Germany, Poland and Spain. Survey data were derived by market research conducted in two stages. The first stage consists of two questions asked within an omnibus survey conducted by computer-assisted telephone interviews. In the second stage, multiple questions (including QA.1 and QA.2 and demographics) were included in an online survey or computer-assisted web interview for the same three countries.FindingsThe authors find that experienced investors perceive risks at lower levels than users that are aware of crowdfunding, but have not yet had the experience of an actual investment. The authors also find that investors, who invest larger proportions of their savings in crowdfunding with financial returns, perceive risks even lower than “lighter” investors, for the majority of risks the authors investigate.Research limitations/implicationsThe study is limited in three European countries and explores crowdfunding with financial returns only.Practical implicationsThe study suggests that investors' participation and activity in crowdfunding with financial returns can be increased, either via providing incentives for “first investment” or via the creation of investment simulators.Originality/valueThis study contributes to the following three areas. First, the authors shed new evidence on the dynamics of crowdfunding with financial returns and explore how decisions are being made in a context of reverse information asymmetries. Second, the authors explore how the “crowd” reshapes risk perceptions via a belief-update mechanism; this is of high importance under the absence of traditional financial intermediaries, which increases the severity of information asymmetries. Third, the authors enrich literature associated with how laypeople take investment decisions, showing how prior experience affects investment decision making.

Enhancing decision making with machine learning: The case of aurora crowdlending platform

The crowdlending industry is a fast-growing financial technology (fintech) sector that brings together borrowers and lenders. As an alternative financial intermediary, the crowdlending industry plays an essential role in reducing the financial exclusion of small and medium-sized enterprises (SMEs) struggling to obtain funds from traditional financial intermediaries such as commercial banks. With the onset of Covid-19 and the deteriorating economies worldwide, Singapore crowdlending platforms have come under pressure due to the increasing default rate of their borrowers. This case study illuminates the challenges faced by Aurora (pseudonym), a crowdlending platform that operates in Singapore, Indonesia, and Malaysia. In response to high default rates during Covid-19, Aurora’s management made improvement to its current machine learning-based credit scoring model in June 2021. This case study describes the challenges Aurora faced in identifying relevant features for the machine learning model, data preparation and cleansing, and selecting the appropriate credit model algorithms to replace its current approval process.

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.