15th Novembre 2021

“FinTech” explained

The word “FinTech” entered the dictionary in 2018 but what exactly is FinTech and how does it affect banking? We spoke to Dr. Zsofia Kräussl who is Research Scientist at the Department of Finance at the University of Luxembourg.

1. Dr. Kräussl, the word “FinTech” is simply a combination of the words “financial” and “technology”. It describes the use of technology to deliver financial services and products to consumers. What are examples of FinTech?

What are examples of FinTech?

Indeed, FinTech is a combination of two domains: Finance and Technology. Therefore, if I were looking for examples, I would turn to institutions and banks that have always been early industry adopters of advanced technologies. The role and the responsibility of safeguarding personal data, to maintain trusted and reliable operations and to provide financial, often cross-border services under ever-increasing transaction speed, dictate the necessity of technology adoption and diffusion. So, there are numerous service providers on the market specialising in infrastructural/architectural development to directly facilitate these operations at the operational level of banks and institutions.

On the other hand, we, the customers of different banking services are the end users. Experiencing inefficiencies and operational issues directly leads us to see a need for change within the sector. Through this bottom-up innovation, entrepreneurs are designing and developing financial services which exist “outside” of traditional banking. By now, the market is host to a broad set of such “FinTech” solutions, ranging from easy-to-use and fast payment services to account management and financial advice. Regulatory measures of the Financial sector embrace digitalisation, too, bringing many of these solutions to maturity on the market.

2. Paypal is the most famous FinTech giant in the industry. Do only giants qualify as “FinTechs”?

No, this is actually a common misperception. Often to innovate, to provide value-adding services, one only needs to take small steps and focus on a specific inefficiency. Luxembourg is a home to more and more start-ups, as well as to existing SMEs looking for new market opportunities. In my view, Luxembourg provides an ideal commercial, regulatory and infrastructural environment that allows these start-ups to grow, and entrepreneurial ideas to flourish. 

3. A recently published analysis (see GCFI) however, states Luxembourg’s FinTech sector as a particular weakness. Isn’t there a contradiction?

Luxembourg has a well-established, administrative role in the world’s fund industry, whereas its retail banking sector serves a small economy. These features, in my view, determine the current dynamics and plausible weaknesses of the FinTech sector. I am, however, optimistic.

Education is a fundamental requirement to boost sector productivity. Luxembourg offers many interesting and encouraging educational programs related to digitisation and digitalisation, as well as creative Hackathon events, already for kids of primary school-age. On the other side of the educational spectrum, the MSc study programme in Finance and Economics of the University of Luxembourg has just launched its 1-year specialisation track called the “Digital Transformation in Finance”, offering courses that cover topics ranging from advanced data analytics through digital law toward institutional change and digital services to digital assets. Stressing the importance of education and providing qualified graduates for the job market will accelerate the growth of Luxembourg’s FinTech sector. 

4. Open Banking has seen a steep increase in popularity over the past decade. What services does it include as of today?

One of the main features of Open Banking is that it delivers a roadmap for banks on how to collaborate with digital financial service providers, while keeping important regulatory requirements in view. It provides a great opportunity for banks to embrace and potentially create (by adopting and spreading ideas) novel front-end services, which are tailored to individual customer needs.

Providing up-to date, relevant information on financial status - often integrating different banking accounts, to supporting financial decision–making related to credit, to executing transactions in an easier and faster manner – these are all examples of services that digital financial service providers offer, and through which traditional banking services can be enhanced.

5. In your opinion, can digital financial services support sustainability goals of our model society?

In most of the cases, sustainability in the context of Finance, especially in the context of Luxembourg and the Financial sector implies that we want to use technology, and digital services to assess and to evaluate, whether and to what extent investment decisions meet certain ESG goals and regulatory requirements.

Nevertheless, I truly believe that sustainability in the context of Finance has another, very important meaning. We as individuals should be able to make financial decisions by avoiding huge losses, to manage our household debt such that we are not generating long-term, negative implications to our credit-worthiness. In other words, we should be able to keep and maintain our well-being with the financial resources and assets that are available to us. Therefore, sustainable finance in my view also implies that households and individuals can remain sustainable in their everyday lives.

This is often a matter of financial literacy, of educating and informing individuals about the consequences of their financial decisions in our digitalised and connected world – which is as well the task, in my view, of digital financial services. Last, but not least: Sustainable finance implies that banking services should become inclusive, accessible and easy-to-use in our globalised world in the long run. 

6. What are the five important bullet points for you in the area of FinTech?

Five important points for sustainability in the FinTech

1. To continue investing in educational projects related to digitisation and digitalisation, and raise awareness on the importance of data & digital & financial literacy.

2. To maintain an innovative and research-focused environment for digital transformation in Luxembourg for both practitioners and academics.

3. To broaden the myopic view of sustainability for Finance, stressing the importance of financial inclusion and household finance.

4. To remain open-minded: We all should cautiously explore and embrace new technologies and innovative services.

5. To value institutional collaboration that is driven by high-tech – often trustless and irreversible – infrastructural solutions, despite the strong dynamics of market competition.