Fintech introduction

1. Location: Babson Finance Conference 600 Atlantic Ave Boston Fintech 101 2017 Copyright QuantUniversity LLC. Presented By: Sri Krishnamurthy, CFA, CAP sri@quantuniversity.com www.analyticscertificate.com

2. 2 My Babson Connection • 2005 – 2011: Evening MBA Student • 2007 – BCF + CFA Institute Research Challenge • 2012+ – Adjunct Lecturer teaching courses in Analytics and Quantitative methods

3. 3 QuantUniversity • Analytics and Fintech Advisory • Trained more than 1000 students in Quantitative methods, Data Science and Big Data & Fintech • Programs ▫ Analytics Certificate Program ▫ Fintech Certification program • Building

4. 4 • My Fintech story from 2005! • What is Fintech? • The 8 facets of Fintech • Deep Dive ▫ Trading and Investments ▫ Innovations in Payment systems ▫ Blockchain ▫ Big Data and AI • Regtech • The future of Fintech Agenda

5. 5 • Municipal bonds are bonds issued by State and Local governments to meet their financial needs. My First Fintech experience!

6. 6 Muni Bid-Wanted Auction Fidelity JP Morgan BOA Citi Trader 1 Trader 2 Trader 3 Muni bond auction in action (2005)

8. 8 “Financial Technologies or “Fintech” is used to describe a variety of innovative business models and emerging technologies that have the potential to transform the financial services industry ” What is Fintech? https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf

9. 9 Emerging Technologies

10. 10 Automation in products or services delivered through the use of the internet. Unbundling of different financial services traditionally offered by service providers like banks and investment managers. Examples: • Equity crowdfunding platforms intermediate share placements • Peer-to-peer lending platforms intermediate or sell loans • Robo-advisers providing automated investment advice • Brokerage and investing services through social trading platforms Innovative business models Ref: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf

11. Drivers • Generational shift ▫ Millennials & Gen Zs more open to newer mediums and technologies • Technology growth ▫ Mobile ▫ Internet ▫ Computing power • Broader accessibility and decreasing cost of products and services • Increasing disintermediation and re- intermediation

12. 12 http://www.analyticscertificate.com/fintech/

16. 16

17. 17 https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf Investment support systems

18. 18 Comparison websites https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf

19. 19 Financial Aggregator Websites https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf

20. 20 Robo-advisers https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf

21. 21 Social media and Sentiment analysis https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf

22. 22 Innovative business models https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf

23. 23 Source: Finra Digital Advice report 2016 https://www.finra.org/sites/default/files/digital-investment- advice-report.pdf

24. 24 Which one to choose? https://www.finra.org/sites/default/files/digital-investment- advice-report.pdf

25. 25 https://www.finra.org/sites/default/files/digital-investment- advice-report.pdf

26. 26 https://www.finra.org/sites/default/files/digital-investment- advice-report.pdf

27. 27

28. The history of payment automation (https://www.forbes.com/sites/falgunidesai/2015/12/13/the-evolution-of-fintech/#3ad227377175) Credit card 1950s ATM 1960s Electronic stock trading 1970s bank mainframe computers 1980s PayPal was founded 1998 Digitalization in financial institutions 2000s

29. Major trends in payment innovation Mobile Payments • Smart phone platform for payment process Streamlined Payments • Mobile ordering and payment applications Integrated Billing • Geotagging- location-based payment • Machine to machine payment Next Generation Security • Biometrics- location-based identification

30. Current payment process by traditional financial institutions 1. Transaction request from sending bank. 2. Secure message from sending bank to recipient bank. 3. Flow of funds through a clearing house or correspondent bank. (Graph from WEF’s “The Future of Financial Service” report)

31. The leading companies in the revolution of Fintech payment

32. Major solutions of innovative payment Open-loop mobile payment solutions • Link customers to existing parties on the platform • Make payments more convenient for customers leveraging new form factors(NFC, QR code) Companies using open-loop mobile payment solutions (Graph from WEF’s “The Future of Financial Service” report)

33. Major solutions of innovative payment(2) Closed-loop mobile payment solutions • Combine POS, acquirer and payment network as one single entity for a more flexible experience. • Allow customers to fund transactions through traditional payment network ecosystem. Companies using closed-loop mobile payment solutions (Graph from “The Future of Financial Service” report)

34. Major solutions of innovative payment(3) Mobile merchant payment solutions • Leverage mobile connectivity to replace current POS infrastructure • Make payment process more effortless and accessible Companies using mobile merchant payment solutions (Graph from “The Future of Financial Service” report)

35. The impact of payment revolution on traditional financial institutions • Increasing network of alternative financial service providers. • Price competition will be more fierce. • Traditional financial institutions will be challenged and motivated to launch alternative payment solutions. • Traditional financial institutions will have to play new role as interaction between alternative payments and traditional ways increase.

36. Future for payment innovation Payment behavior • One single default card to process all payment. • Amazon 1-click ordering • Uber’s seamless payment Payment preference • Increasing focus and preference on differentiation of card brand and design • Proliferation of niche and merchant issued cards. Payment market • Elimination of physical cards and optimization on card usage. • Seamless link to customer’s bank accounts

37. 37

38. 38 Predicting Bitcoin prices

39. 39 What is Blockchain? https://www.cbinsights.com/research/ what-is-blockchain-technology/

40. 40 • A blockchain is a continuously growing list of records called blocks, which are linked and secured using cryptography. • It is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. • Bitcoin != Blockchain ; Blockchain powers Bitcoin • The business applications of Blockchain include: ▫ Contract ▫ Certificate of Ownership ▫ A statement of authenticity ▫ Proof of a bank's financial transaction Blockchain

41. 41 Many applications Identify where a food product came from in about 2.5 seconds - down from six days before its history was tracked on a blockchain From <https://www.coindesk.com/ibm-wants-know-ways-blockchain-can-go-wrong/>

42. 42

43. 43 AI and Machine Learning in the News https://www.economist.com/news/finance-and-economics/21722685-fields- trading-credit-assessment-fraud-prevention-machine-learning https://www.udacity.com/course/machine-learning-for-trading--ud501 https://www.forbes.com/sites/louiscolumbus/2017/10/23/machine- learnings-greatest-potential-is-driving-revenue-in-the- enterprise/#3fd4c2da41db https://www.cnbc.com/2017/09/28/man-group- one-of-worlds-largest-funds-moves-into-machine- learning.html

44. 44 • “AI is the theory and development of computer systems able to perform tasks that traditionally have required human intelligence. • AI is a broad field, of which ‘machine learning’ is a sub-category” What is Machine Learning and AI? Source: http://www.fsb.org/wp-content/uploads/P011117.pdf

45. 45 Machine Learning & AI in finance – A paradigm shift Stochastic Models Factor Models Optimization Risk Factors P/Q Quants Derivative pricing Trading Strategies Simulations Distribution fitting Quant Real-time analytics Predictive analytics Machine Learning RPA NLP Deep Learning Computer Vision Graph Analytics Chatbots Sentiment Analysis Alternative Data Data Scientist

46. 46 The Virtuous Circle of Machine Learning and AI Smart Algorithms Hardware Data

47. 47 The rise of Big Data and Data Science Image Source: http://www.ibmbigdatahub.com/sites/default/files/infographic_file/4-Vs-of-big-data.jpg

48. 48 Smarter Algorithms Parallel and Distributing Computing Frameworks Deep Learning Frameworks 1. Our labeled datasets were thousands of times too small. 2. Our computers were millions of times too slow. 3. We initialized the weights in a stupid way. 4. We used the wrong type of non-linearity. - Geoff Hinton “Capital One was able to determine fraudulent credit card applications in 100 milliseconds”* * http://go.databricks.com/hubfs/pdfs/Databricks-for-FinTech-170306.pdf

49. 49 Hardware

50. 50 AI and Machine Learning in Production https://www.itnews.com.au/news/hsbc-societe-generale-run- into-ais-production-problems-477966 Kristy Roth from HSBC: “It’s been somewhat easy - in a funny way - to get going using sample data, [but] then you hit the real problems,” Roth said. “I think our early track record on PoCs or pilots hides a little bit the underlying issues. Matt Davey from Societe Generale: “We’ve done quite a bit of work with RPA recently and I have to say we’ve been a bit disillusioned with that experience,” “the PoC is the easy bit: it’s how you get that into production and shift the balance”

51. 51 A framework for evaluating your organization’s appetite for AI and machine learning Source: http://www.fsb.org/wp-content/uploads/P011117.pdf

52. 52

53. 53 Technology enabling the creation or transformation of business models for reporting, monitoring & compliance in highly regulated industries OR Delivering regulatory compliance through technology improving upon current and traditional ways What is Regtech?

54. 54 • Scenario analysis, modeling and forecasting • AML, Fraud detection • Monitoring payments and transactions • Trading analytics • Regulatory compliance and tracking model changes • Model risk, Stress testing etc. Opportunities for companies

55. 55 Companies in this space Source: https://letstalkpayments.com/regtech-companies-in- us-driving-down-compliance-costs-innovation/

56. 56 • The regulatory sandbox allows businesses to test innovative products, services, business models and delivery mechanisms in the real market, with real consumers. • The sandbox is a supervised space, open to both authorized and unauthorized firms, that provides firms with: ▫ reduced time-to-market at potentially lower cost ▫ appropriate consumer protection safeguards built in to new products and services ▫ better access to finance • https://www.fca.org.uk/firms/regulatory-sandbox Regulatory Sandboxes

57. 57 Who the sandbox is for: • Businesses seeking authorization ▫ The sandbox may be useful for firms that need to become authorised before testing their innovation in a live environment. • Authorized businesses ▫ The sandbox may be useful for authorized firms looking for clarity about rules before testing an idea that doesn’t easily fit into the existing regulatory framework. • Technology businesses supporting financial services firms ▫ Technology businesses that want to provide services to our regulated firms (eg: through outsourcing agreements) can also apply for the sandbox if they need clarity about rules before testing. Regulatory Sandboxes

58. 58 www.QuSandbox.com

59. 59

60. 60

61. 61 CFA Survey 2016 https://www.cfainstitute.org/Survey/fintech_survey.PDF

62. 62 Fintech education becomes serious

63. 63 Fintech being noticed by Regulators

64. • Founder of QuantUniversity LLC. and www.analyticscertificate.com • Advisory and Consultancy for Financial Analytics • Prior Experience at MathWorks, Citigroup and Endeca and 25+ financial services and energy customers. • Regular Columnist for the Wilmott Magazine • Author of forthcoming book “Financial Modeling: A case study approach” published by Wiley • Charted Financial Analyst and Certified Analytics Professional • Teaches Analytics in the Babson College MBA program and at Northeastern University, Boston Sri Krishnamurthy Founder and CEO 64

65. Thank you! Presentation will be posted here: www.analyticscertificate.com/fintech Sri Krishnamurthy, CFA, CAP Founder and CEO QuantUniversity LLC. srikrishnamurthy www.QuantUniversity.com Information, data and drawings embodied in this presentation are strictly a property of QuantUniversity LLC. and shall not be distributed or used in any other publication without the prior written consent of QuantUniversity LLC. 65

Fintech introduction

Fintech introduction

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Fintech introduction