FinTech and Transformation of the Financial Services Industry ------ SSE Executive MBA Dr. Robin Teigland Stockholm School of Economics robin.teigland@hhs.se www.slideshare.net/eteigland @RobinTeigland

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FinTech and Transformation of the Financial Services Industry ------ SSE Executive MBA Dr. Robin Teigland Stockholm School of Economics robin.teigland@hhs.se www.slideshare.net/eteigland @RobinTeigland January 2016

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Today’s schedule Morning: Financing Innovation 9:00 to 10:30 Lecture Michal Gromek, PhD SSE, FundedByMe, Lendico, Rocket Internet 10:30 to 11:30 Groupwork: Funding your Startup 11:30 to 12:00 Group presentations Afternoon: FinTech and Industry Transformation? 13:00 to 15:00 Lecture 15:00 to 17:00 Discussion: Disruptor vs Industry Incumbent Anna Fellander, Digital and Futuring Economist, Swedbank Henrik Rosvall, CEO and Founder, Dreams

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Groupwork: Funding your startup Prepare a max 5 minute presentation How much funding do you need to get your idea off the ground? Which form(s) of financing will you go after? And When? What will you give in return for financing? E.g., equity, reward, nothing How long will it take for you to provide the return for your “investors”? What do you need to do to prepare for raising financing?

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If the rate of change on the outside exceeds the rate of change on the inside, the end is near.... -Jack Welch

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What triggers industry transformation? Johnson & Scholes 1997 Politics and government Environment Technology Legal structure Social and demographic structure International/ national economy Industry structure

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Two dimensions of transformation Core activities – Recurring actions a company performs that attract and retain suppliers and buyers (profit-making activities) Core assets – Durable resources, including intangibles, that make a company more efficient at performing core activities McGahan, HBR, 2004

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Trajectories of industry transformation McGahan, HBR, 2004

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1980-1999 US Industries’ Share of Transformation McGahan, HBR, 2004

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Industry transformation Picture: http://andrewkarpie.com/wordpress/?p=469

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Number of firms in industry over transformation Economies of scale

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What trajectory is the financial services industry on? McGahan, HBR, 2004

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Digitization of the banking industry

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Further changes…

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Screenshot from Factom.org

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Banking is essential, but banks are not. Bill Gates

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What is FinTech? Accenture/CB Insights Technologies for banking and corporate finance, capital markets, financial data analytics, payments, and personal financial management Finance Technology FinTech

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What is Fintech?

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FinTech World Personal Finance Payments Bitcoin & Blockchain Currency Currency Remittance & FX Lending Crowdfunding Robo-investing & Asset Management Tech Consumer Banking & Saving The Wharton FinTech Club What is FinTech?

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FinTech Overview

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2007, NASDAQ acquires OMX Group Unicorns such as Skype, King, Spotify and Mojang founded 2014, FinTech Funding in Stockholm Explodes Long history of “FinTech” in Stockholm http://www.slideshare.net/eteigland/stockholm-49722748

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In just the past few years in Stockholm…

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Stockholm #2 FinTech city in EU 2010-2014 investment $532 Mln 2014 investment $266 Mln http://www.slideshare.net/eteigland/stockholm-49722748

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”Innovative Lending & Investing” emerging 2013 Stockholm FinTech revenue & Investing Our report: http://www.slideshare.net/eteigland/stockholm-49722748

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Crowdfunding rapidly growing in Europe

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Crowdfunding growth 2012-2015 USD 34 bln E

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But in China alone in 2015… http://www.crowdfundinsider.com/2016/01/79612-report-china-p2p-lending-topped-150-billion-in-2015/

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Four forms of crowdfunding

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Democratizing innovation and investment? Women in USA <30% of business owners <15% of angel investors <10% of venture capitalists Marom, Robb and Sade 2014 Women on Kickstarter 35% of project leaders 44% of investors Women invested in women project leaders (>40% of projects) VS

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Competing for investment?

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Crowd equity

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New forms of ownership…crowd equity

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One step in the financing chain

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Using the crowd to identify investment opportunities Nesta

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P2B lending in Sweden

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Enabling local community?

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Emerging forms of collaborative investing Crowdsourced hedge fund Activist hedge fund +

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Developing investment skills online https://www.quantopian.com/home

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Enabling financial inclusion

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Cryptocurrency mining equipment http://techcrunch.com/2014/09/04/kncminer-raises-14-million-to-take-bitcoin-mining-to-the-moon/

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Transforming insurance

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What is a cryptocurrency? Digital Decentralized, peer-to-peer (P2P), i.e., no central, third party Uses cryptography to validate/secure transactions Also uses cryptography to generate currency itself Non-technical explanation of Bitcoin https://www.youtube.com/watch?v=t5JGQXCTe3c

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Within 6 years: Challenging the fiat money system? Bitcoin – An emergent phenomenon Open source project on SourceForge in Jan 2009 Original source code by “Satoshi Nakamoto” – pseudonym? Developed by self-organizing community of thousands of strangers across globe Approx USD 6.5 bln market cap and approx 180,000 daily transaction volume of USD 101 mln 1 BTC = USD 431 (Jan 14, 2016) Teigland, Yetis, Larsson 2013 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263707

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How does Bitcoin work? Screenclip from: How Bitcoin Works under the hood, by “Curious Inventor” Blockchain Shared public ledger All transactions ever made logged Chronology and integrity enforced by cryptography

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Enabling records, oversight Image from the FT

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Screenshot from the Economist

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But also Vendor Transparency AML and KYC Features…

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IoT and smart contracts Ownership attached to asset/property (e.g., real estate, shares) and can be verified Run on Bitcoin ledger, execute legal rules between two entities: people, organizations, machines Trustless because no center, no one in middle – the network is the middleman Example: I run a private weather station using neighbors’ sensors. Smart contracts enable payment to neighbors for data sent from their sensors to my weather station. But time will tell… uses we cannot imagine today. https://www.youtube.com/watch?v=JsC4ptn2Aik

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IBM + Samsung

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From “trusted”, centralized human authorities to trustless, decentralized networks IBM Institute for Business Value (PDF)

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La’Zooz – Decentralized transportsharing http://lazooz.org/

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FinTech World Personal Finance Payments Bitcoin & Blockchain Currency Currency Remittance & FX Lending Crowdfunding Robo-investing & Asset Management Tech Consumer Banking & Saving The Wharton FinTech Club What is FinTech?

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FinTech – An increasingly crowded space Growing number of entrepreneurs with experience from established finance industry Increasing number of FinTech incubators Collaboration among established banks Open innovation through open APIs Other big non-banking entrants

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Industry transformation Picture: http://andrewkarpie.com/wordpress/?p=469

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Trajectories of industry change McGahan, HBR, 2004

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Responses to disruptive strategic innovation Charitou, C. D., & Markides, C. C. (2012). Responses to disruptive strategic innovation. MIT Sloan Management Review

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Why not embrace disruption? Charitou & Markides, 2003

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Incumbents running incubators “Innovation labs are a sign that banks are taking the FinTech threat seriously as they recognize that we’re coming to eat their lunch.” -FinTech Entrepreneur

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Opening up innovation… Citigroup Capital One BBVA Compass Silicon Valley Bank Bank of America

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P2p industyry incumbents

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Betting on the Blockchain - Together Goldman Sachs, JPMorgan, Credit Suisse, Barclays, Commonwealth Bank of Australia, State Street, RBS, BBVA, UBS, Nordea, SEB, + …… +

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FinTech challenges Regulation Privacy Security Untested in periods of high interest rates, increased risk, and reduced investment

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Previously… In the eight-year period between the Netscape IPO and the acquisition of PayPal (one of the winners of this era) by eBay, more than 450 attackers – new digital currencies, wallets, networks, etc. – attempted to challenge incumbents. Fewer than five of these survive as stand-alone entities today. McKinsey, 2015

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Underperformers vs outperformers

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Two models of industry transformation McGahan, HBR, 2004

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Thomas Jefferson (1816) “Laws and institutions must go hand in hand with the progress of the human mind.” The problem is that the human mind itself can’t keep pace with the advances that computers are enabling.  http://wadhwa.com/2014/04/15/mit-technology-review-laws-and-ethics-cant-keep-pace-with-technology/

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The future is already here, it’s just not very evenly distributed. - William Gibson

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Robin Teigland robin.teigland@hhs.se www.slideshare.net/eteigland @robin.teigland If you love knowledge, set it free… If you like this presentation and would like to contribute to our research, we accept bitcoins: 14hs4JbnQLXE87GGzu84uXGaspmxmnLpwC. Thank you!!!!!