This section of the journal indicates a few and briefly commented references that a non-expert reader may want to cover to obtain a first informed and broad view of the theme discussed in the current issue. These references are meant to provide an extensive, though not exhaustive, insight into the main issues of the debate. More detailed and specific references are available in each article published in the current issue.

On the determinants of FinTechs and competitive environment

The term FinTech (also Fintech or Fin-tech) is a neologism originated form the words ‘Financial’ and ‘Technology’ and describes Internet-based technologies -e.g. cloud computing or mobile Internet- with established business activities of the banking industry -e.g. money lending or transaction banking- (Gomber et al., 2017)^[1]The digital transformation of the financial sector and the society forces authorities to provide a regulatory framework that includes and promotes new digital value positions, thus benefiting … Continue reading. Such innovations may disrupt existing structures and blur industry boundaries, facilitate strategic disintermediation, and revolutionize how non-financial firms demand financial services and how financial firms supply credit and products (Philippon, 2016)^[2]The increased international focus on financial inclusion is also contributing to the fast pace of regulatory development for digital financial services (DFS hereafter), since these products may … Continue reading. The sector has recently attracted the attention of regulators, industry participants, customers, and scholars alike (Arner et al., 2016). Besides, increased regulatory burdens might favour the emergence of shadow banking (Buchack et al., 2017). In fact, these banks provide credit to underserved and higher-risk borrowers who, otherwise, would be excluded from the traditional banking sector, although these loans are usually poorly performed. According to Buchack et al., FinTech companies provided around the third part of bank loan origination for shadow banks in 2015. In addition, FinTech lenders are able to make use of big-data to better screen borrowers and set interest rates that better predict ex-post loan performances (Rajan, 2015). Contrarily, other studies demonstrate that FinTech lenders might offer more expensive credit than non-FinTech lenders (FSB, 2017). However, consumers’ willingness to borrow costly FinTech lending, it might also reflect that they are offering other convenient services (Philippon, 2015).
An issue in the regulatory debate is whether and how FinTech will affect financial stability (Demertzis et al., 2017, Vives, 2017). For instance, FinTech payment services providers have not currently chosen to undertake traditional banking activities, and at the same time, they have not yet reached the scale to become systemic. Still, regulators should monitor changes in the structure and risk of the financial service industry (Carney, 2017). Regulators and scholars are concerned about the emergence of relatively less sound institutions, and some of them escaping prudential supervision, thus reducing financial stability (Boot, 2016; DNB, 2017).
The concept of crowdfunding comes from the concept of crowdsourcing, which involves the ‘crowd’ to obtain funds, ideas, feedback, and solutions to carry out an entrepreneurial activity (Belleflamme et al., 2014). Kleemann et al (2008) defines crowdsourcing when a profit-oriented firm outsources essential tasks for the making or sale their products to the public –the crowd- in form of an open call on the Internet aimed at attracting the attention of their customers to contribute to the firm’s production process. From the financial point of view, crowdfunding may be related to bootstrapping finance. This form of financing consists of using external sources of funds such as bank loans, business angels or venture capital, amongst others (see Bhide, 1992; Bofondi, 2017; Cosh et al., 2009; Ebbe and Johnson, 2006). An emerging literature on reward-based crowdfunding identifies the factors driving a campaign’s success such as project-level quality signals (Mollick, 2014), narrative (Marom and Sade, 2013), the use of social media (Thies et al., 2014; Hong et al., 2015), stretch goals (Li and Jarvenpaa, 2015), project creator social capital (Colombo et al., 2015) and reputation (Li and Martin, 2016). Kuppuswamy and Bayus (2017) extend the literature proposing that investors support crowdfunding projects when they believe that their contribution will be socially relevant.
Recent research is pointing towards equity crowdfunding as an alternative form of entrepreneurial finance (Hornuf and Schwienbacher, 2017a). Equity crowdfunding (also referred to as investment-based crowdfunding, securities-based crowdfunding, and crowdinvesting) is a subcategory of crowdfunding in which companies issue financial securities to satisfy their capital needs. Empirical research on equity crowdfunding is still embryonic, since this segment is recently approachable to the ‘crowd’ in some jurisdictions like the United States or lacked specific regulation (Hornuf and Schwienbacher, 2017b). Fundraisers in some jurisdictions offer equity shares in a private limited liability company, for instance in platforms like Crowdcube or Seedrs in the UK, or Bergfürst in Germany (Vismara, 2016). Before the campaign goes online, the start-up and the platform agree on a valuation of the company, and the founders must decide the amount of capital they want to raise. Depending on the valuation and the capital needs, the platform provides a standard contract, so that the ‘crowd’ could participate in the future cash flows of the company. The ‘crowd’ generally hold mezzanine financial instruments which ranks between ordinary shares and ordinary liabilities. Some authors have described the size, growth and geographic distribution of markets (Vulkan et al., 2016; Günther et al., 2017). Interestingly, financial literature is growing towards the dynamic effects of equity crowdfunding. Information flows amongst individual investors are a determinant factor in equity investment process. Vismara (2017) finds that the evolution of investment in the early stages determinate the probability of success of an equity crowdfunding campaign. The existence of dynamics within campaigns has been overlooked in previous literature^[3]The firsts days of a campaign are found to be very different from the rest. Agrawal et al. (2015) demonstrate that friends and family, whom may invest for different reasons, support part of the … Continue reading. Furthermore, Block et al. (2017) demonstrate that start-ups can generate credible information when updating new developments of the projects, e.g. funding events.
Despite the growing importance of crowdfunding markets and their perception as markets of the future, understanding of their functioning is still limited. The central issue of peer-to-peer (P2P hereafter) financing is the absence of formal intermediaries. The seminar literature establishes how incentives address investors’ behaviour to draw implications for financial markets. Theoretical research builds on the concept of information asymmetry that may result in agency problems (Holmstrom and Tirole, 1997).
An important challenge for P2P finance is understanding how players screen borrowers when allocating credit. Whether a person defaults on loan is driven by incentives which reflects complexities and idiosyncrasies of human behaviour (Cumming et al., 2015; Dhar and Stein, 2016; Iyer et al., 2015)^[4]See Cumming et al. (2015) for a broad literature review.. This screening process has traditionally been conducted by the banking industry that creates ‘hard information’ such as credit scores, completed by using sophisticated models based on payment history along with verifiable information. Technological advances have allowed P2P platform users to assess creditworthiness of their peers (Li and Martin, 2016)^[5]Lin et al. (2013) demonstrate that entrepreneurial social capital plays an essential role in setting P2P lending market and venture capital. In this line, Burtch et al. (2013) and Lin and Viswanathan … Continue reading. These platforms provide nonstandard – or ‘soft information’– about borrowers. The cornerstone of P2P platforms is that lending decisions are based on collective choices of several individual investors drawing conclusions on their own experience. The downside is that they usually have limited experience in assessing borrowers’ creditworthiness due to soft-information is self-reported, thus outperforming the credit scores in terms of predicting default (Iyer et al., 2015)^[6]This literature builds on theoretical papers that focus on information aggregation through prices (Grossman, 1976; Townsend, 1978; Vives 1993, 1995), and learning on decentralized markets (Duffie and … Continue reading. Liberti and Petersen (2017) reconsider the concept of hard- and soft-information in banking markets. They consider that hard-information is quantitative and its content is independent of the collection process. Technology has changed the collection process and the way in which information is communicated. This has changed the functioning of financial markets and institutions in favour of soft-information which is mostly qualitative, personally transmitted, and accumulated over time. This change in lending technologies altered the design of financial institutions moving decisions outside the traditional boundaries of the organization. Furthermore, Hildebrand et al. (2017) demonstrate that, in presence of rewards, group leader’s bids enhance the credibility of the projects and the perception of high quality, afterwards ex-post default rates suggest the presence of perverse incentives that make leader behave strategically. Accordingly, Agrawal et al. (2017) demonstrate that syndicates align incentives of equity issuers and follow-on investors, enhancing investors’ reputation and performance, which can be used to attract new capital from a global community of investors.
The rising of the ‘new economy’ based on shared economy and huge amounts of information processing, also called ‘big data’, opens the debate amongst scholars on the implications for competition (Carbó-Valverde, 2017). According to Rifkin (2014), the classical industrial organization theory establishes that lower prices resulting from improvements in technology and productivity will increase competition amongst sellers. Nevertheless, in the long run new players continue to introduce new technology which increases productivity and reduce prices for the similar goods or services. Finally, the monopoly is broken, resulting in intense competition which forces the introduction of ever-leaner technology, and leading each additional unit produced to ‘near-zero marginal’ costs^[7]See Carbó-Valverde (2017) for further discussion..

On future challenges for FinTechs

The main challenge seems to be to create a unique environment for banks and non-bank providers under an adequate regulation and supervision. The introduction of digital technology allows for direct matching between borrowers and investors. However, as discussed above, financing is more than this. Given the complexity of financial services, the control of risk after lending or investment have taken place, the trading of claims if investors need to access liquidity, the management of non-performing loans, and systemic importance of start-ups are aspect to be considered for scholars and regulatory authorities (Dermine, 2016).
Digitalization and FinTech represents an opportunity to reduce marginal costs and gain productivity. They may imply a large accumulation of intangible assets which would be difficult to value in capital markets, thus blurring industry boundaries, and creating significant privacy, regulatory and law enforcements (Carbó-Valverde, 2017). Furthermore, the Internet generates a single marketplace -where individuals can engage numerous economic activities- which might raise serious questions of federalism and international coordination (Brummer and Gorfine, 2014).
The lighter regulation of FinTech will have important implications for competition between banks and new entrants such as payment systems and crowdfunding platforms. FinTech are encroaching on the traditional business of banks, despite banks are adapting to the new environment. However, new competitors are able to use ‘hard-information’ to erode the traditional bank-customer relationship based on ‘soft-information’. FinTech competitors stay clear from asking a banking licence and try to skim profitable business from banks. Furthermore, whilst banks have been traditionally focused on business, FinTech are more focused on customers (Vives, 2016)^[8]The core business of banks is maturity transformation by collecting short-term deposits and lending long-term. Capital markets, in turn, consists of stocks and bond markets, derivatives, and … Continue reading. An important question is to what extent existing banks can be at the forefront of new developments, for instance absorbing FinTech players and their innovations (Boot, 2016).
In the EU context, the fundamental question is whether FinTech can disrupt Europe’s financial system in a way that promotes the Capital Market Union, helps integrate financial system borders and increases financial stability and efficiency. Moreover, a further question is whether the disruption will follow at the European Union level or at the national level (Demertzis et al., 2017; Ferrarini and Macchiavello, 2017).

---

References

Agrawal, A.K., Catalini, C., and Goldfarb, A. (2011). The geography of crowdfunding. NBER Working Paper No. 16820. Available at: http://www.nber.org/papers/w16820

Agrawal, A., Catalini, C., and Goldfarb, A. (2015). Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions. Journal of Economics and Management Strategy, 24, 253-274.

Agrawal, A., Catalini, C., and Goldfarb, A. (2016). Are syndicates the killer app of equity crowdfunding? California Management Review, 58 / 2, 111-124.

Arner, D.W., Barberis, J., and Buckley, R.P. (2016). The evolution of Fintech: A new post-crisis paradigm. Georgetown Journal of International Law, 47, 1271-1320.

Belleflamme, P., Lambert, T., and Schwienbacher, A. (2014) Crowdfunding: tapping the right crowd. Journal of Business Venturing, 29, 585-609.

Bhide, A. (1992). Bootstrap Finance: The Art of Start-Ups. Harvard Business Review, 70 (November-December), 109-117.

Block, J., Hornuf, L., and Moritz, A. (2017). Which Updates During an Equity Crowdfunding Campaign Increase Crowd Participation? Small Business Economics, forthcoming.

Bofondi, M. (2017). Il lending-based crowdfunding: opportunità e rischi. Bank of Italy Occasional Papers No. 375. Available at: http://www.bancaditalia.it/pubblicazioni/qef/2017-0375/index.html

Boot, A. (2016). Understanding the Future of Banking Scale & Scope Economies, and FinTech. University of Amsterdam, mimeo. Available at: LINK

Buckley, R.P., and Malady, L. (2015). Building consumer demand for digital financial services – The new regulatory frontier. Journal of Financial Perspectives: FinTech, 3, 112-137.

Brummer, C., and Gorfine, D. (2014). FinTech. Building a 21^st-century regulator toolkit. Center for Financial Markets. Available at: http://assets1c.milkeninstitute.org/assets/Publication/Viewpoint/PDF/3.14-FinTech-Reg-Toolkit-NEW.pdf

Burtch, G., Ghose, A., and Wattal, S. (2013). Cultural differences and geography as determinants of online Pro-social lending. Fox School of Business Research Paper No. 14-021. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2271298

Buchak, G., Matvos, G., Pikorski, T., and Seru, A. (2017). Fintech, Regulatory Arbitrage, and the Rise of Shadow Banking’, NBER Working Paper, No. 23288. Available at: https://www.gsb.stanford.edu/faculty-research/working-papers/fintech-regulatory-arbitrage-rise-shadow-banks

Carbó-Valverde, S. (2017). The impact on digitalization on banking and financial stability. Journal of Financial Markets and Institutions, 5, 133-140.

Carney, M. (2017). The Promise of Fintech – Something New Under the Sun, Speech at Deutsche Bundesbank G20 conference, by Bank of England governor Mark Carney, January 25th. Available at: http://www.fsb.org/wp-content/uploads/The-Promise-of-FinTech-%E2%80%93-Something-New-Under-the-Sun.pdf

Colombo, M., Franzoni, C., and Rossi-Lamastra, C. (2015). Internal social capital and the attraction of early contributions in crowdfunding projects. Entrepreneurship Theory and Practice, 39, 75-100.

Cosh, A., Cumming, D., and Hughes, A. (2009). Outside Entrepreneurial Capital. Economic Journal, 119, 1494-1533.

Cumming, D., Dannhauser, R., and Johan, S. (2015). Financial market misconduct and agency conflicts: A sysntesis and future directions. Journal of Corporate Finance, 34, 150-168.

Demertzis, M., Merler, S., and Wolff, G.B. (2017). Capital Market Union and the fintech opportunity. Bruegel Policy Contribution Issue no. 22. September 2017. Available at: http://bruegel.org/2017/09/capital-markets-union-and-the-fintech-opportunity/

Dermine J. (2016). Digital Banking and Market Disruption: A Sense of Déjà Vu? Financial Stability Review, Banque de France, April, 17-24.

Dhar, V., and Stein, R.S. (2016). FinTech platforms and strategy. MIT Sloan School Working Paper 5183-16. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2892098

DNB (2017), Innovation in the loan market: Prudential concerns for the financial sector and supervision. Policy paper, De Nederlandsche Bank (Dutch Central Bank), November.

Duffie, D., Malamud, S., and Manso, G., (2009) Information Percolation with Equilibrium Search Dynamics. Econometrica, 77, 1513-1574.

Duffie, D., and Manso, G. (2007). Information Percolation in Large Markets. American Economic Review Papers and Proceedings, 97, 203-209.

Ebben, J., and Johnson, A. (2006). Bootstrapping in small firms: An empirical analysis of change over time. Journal of Business Venturing, 21, 851-865.

Ferrarini, G., and Macchiavello, E. (2017). Fintech and alternative finance in the CMU: The regulation of market place investment. Mimeo.

Financial Stability Board (FSB) (2017). Financial stability implications for FinTech. Supervisory and regulatory issues that merit authorities’ attention. Available at: http://www.fsb.org/wp-content/uploads/R270617.pdf

Gomber, P., Koch, J.-A., and Siering, M. (2017). Digital Finance and FinTech: current research and future research directions. Journal of Business Economics, 87, 537-580.

González-Páramo, J.M. (2017). Financial innovation in the digital age: Challenges for regulation and competition. Revista de Estabilidad Financiera, 32, 9-37.

Grossman, S. (1976). On the efficiency of competitive stock markets where traders have diverse information. Journal of Finance, 31, 573–585.

Günther, C., Johan, S., and Schweizer, D. (2017). Is the Crowd Sensitive to Distance? – How Investment Decisions Differ by Investor Type. Small Business Economics, forthcoming.

Hildebrand, T, Puri, M., and Rocholl, J. (2017). Adverse incentives of crowdfunding. Management Science, 63, 587-608.

Holmstrom, B., and Tirole, J. (1997). Financial intermediation, loanable funds, and the real sector. Quarterly Journal of Economics, 112, 663-691.

Hong, Y., Hu, Y., and Burtch, G. (2015). How does social media affect contribution to public versus private goods in crowdfunding campaigns? Thirty Sixth International Conference on Information Systems (Fort Worth). http://www.fox.temple.edu/conferences/cist/papers/Session%207A/CIST_2015_7A_4.pdf

Hornuf, L., and Schwienbacher, A. (2017a). Market mechanisms and funding dynamics in equity crowdfunding. Journal of Corporate Finance, forthcoming.

Hornuf, L., and Schwienbacher, A. (2017b). Which Securities Regulation Promotes Equity Crowdfunding? Small Business Economics, forthcoming.

Iyer, R., Khwaja, A.I., Luttmer, E.F., and Shue, K. (2015). Screening peers softly: Inferring the quality of small borrowers. Management Science, 62, 1554-1577.

Kleemann, F., Voß, G.G., and Rieder, K. (2008). Un(der)paid innovators: the commercial utilization of consumer work through crowdsourcing. Science, Technology, and Innovation Studies, 4, 5-26. Available at: http://www.sti-studies.de/ojs/index.php/sti/article/view/81

Kuppuswamy, V., and Bayus, B.L. (2017). Does my contribution to your crowdfunding project matter? Journal of Business Venturing, 32, 72-89.

Li, E., and Martin, J.S. (2016). Capital formation and financial intermediation: The role of entrepreneur reputation formation. Journal of Corporate Finance, forthcoming.

Li, Z., and Jarvenpaa, S. (2015). Motivating IT-mediated crowds: the effect of goal setting on project performance in online crowdfunding. Available at: http://ssrn.com/abstract=2672056

Liberti, J.M., and Petersen, M.A. (2017). Information: Hard and Soft. Mimeo. Available at: http://www.kellogg.northwestern.edu/faculty/petersen/htm/papers/hard%20and%20soft%20information.pdf

Lin, M., Prabhala, N.R., and Viswanathan, S. (2013). Judging borrowers by the company they keep: Friendship networks and information asymmetry in online peer-to-peer lending. Management Science, 59, 17–35.

Lin, M., and Viswanathan, S. (2016). Home Bias in Online Investments: An Empirical Study of an Online Crowd Funding Market. Management Sciences, 62, 1393-1414.

Marom, D., and Sade, O. (2013). Are the life and death of an early stage venture indeed in the power of the tongue? Lessons from online crowdfunding pitches. Available at:. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2255707

Mollick, E. (2014). The dynamics of crowdfunding: an exploratory study. Journal of Business Venturing, 29, 1-16.

Philippon, T. (2015). Has the US finance industry become less efficient? On the theory and measurement of financial intermediation. American Economic Review, 105, 1408-1438.

Philippon, T. (2016). The FinTech opportunity. NBER Working Paper No. 22476. Available at: http://www.nber.org/papers/w22476

Rajan, U., Seru, A., and Vig, V. (2015). The failure of models that predict failure: Distance, incentives, and defaults. Journal of Financial Economics, 115, 237-260.

Rifkin J. (2014). The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism. New York: Palgrave Macmillan.

Thies, F., Wessel, and M., Benlian, A. (2014). Understanding the dynamic interplay of social buzz and contribution behavior within and between online platforms-evidence from crowdfunding. Thirty Fifth International Conference on Information Systems (Auckland). https://pdfs.semanticscholar.org/ef94/73055dd96e5d146c88ae3cc88d06e7adfd07.pdf

Townsend, R.M. (1978). Market anticipations, rational expectations, and Bayesian analysis. International Economic Review, 19, 481-494.

Vismara, S. (2016). Equity Retention and Social Network Theory in Equity Crowdfunding. Small Business Economics, 46, 579–590.

Vismara, S. (2017). Information Cascades Among Investors in Equity Crowdfunding. Entrepreneurship Theory and Practice, forthcoming.

Vives, X. (1993). How fast do rational agents learn? Review of Economic Studies, 60, 329-347.

Vives, X. (1995). The speed of information revelation in a financial market mechanism. Journal of Economic Theory, 67, 178-204.

Vives, X. (2017). The Impact of Fintech on Banking. European Economy – Banks, Regulation, and the Real Sector, this issue.

Vives, X. (2016). Competition and stability in banking. The role of regulation and competition policy. Princeton University Press, New Jersey, United States of America.

Vulkan, N., Astebro, T., and Fernandez-Sierra, M. (2016). Equity crowdfunding: A new fenomena. Journal of Business Venturing Insights, 5, 37-49.

Wolinsky, A. (1990). Information Revelation in a Market with Pairwise Meetings. Econometrica, 58, 1-23.