European Research Studies JournalVolume XX, Issue 3A, 2017pp. 961-973Fintech as Financial Innovation – The Possibilities andProblems of ImplementationSvetlana Saksonova1, Irina Kuzmina-Merlino2Abstract:There is a growing competition between banks and fintech not only in advanced economies,but also in the emerging markets. However, it is yet to be observed in Latvia to the sameextent. This paper aims to evaluate fintech’s level of development in Latvia compared toEurope.The paper identifies financial services using innovative technologies offered by fintechcompanies, analyses the advantages and disadvantages of these services in comparison withservices offered by the traditional financial sector companies (banks, insurance companies,institutions involved in asset management and investment, etc.), and evaluates how preparedare consumers to use fintech services. This paper documents the results of the survey aimingto clarify how well-informed consumers in Latvia are about fintech services, theirconvenience, speed and safety, as well as the consumers' current satisfaction with bankingservices.The hypothesis of this paper is that Latvian society is not ready to use services provided byfintech, but prefers banking services instead. Survey results provide some evidence in favourof this hypothesis: they show that respondents are generally unaware about fintech servicesin Latvia and their associated innovations and new financial products.This paper makes several recommendations for managers of fintech enterprises, associationof start-up enterprises and risk capital funds as well as state institutions.Keywords: fintech, competition, innovation in financial services.JEL code: O16, G21, G23.12University of LatviaTransport and Telecomunication Institute

Fintech as Financial Innovation – The Possibilities and Problems of Implementation9621. IntroductionFintech or financial technology is a term used to denote firms that offer moderntechnology in the financial sector. Such companies have become a noticeable trendsince 2010. Fintech firms are mostly micro, small or medium-sized firms that do nothave a lot of equity, but have a clear idea of how to introduce new or how toimprove existing services in the financial services market. Commonly, these arefintech start-ups, the number of which is constantly increasing (by various estimates,their number has already exceeded ten thousand firms). As a rule, ventureinvestment and crowdfunding are used to finance fintech firms. Some professionalsalso claim that fintech start-up enterprises improve the efficiency of the financialsystem (Vlasov, 2017; Vovchenko et al., 2017; Setyawati et al., 2017).There are two main reasons for the emergence of fintech companies. First, the globalfinancial crisis of 2008, has vividly demonstrated to consumers the shortcomings ofthe traditional banking system that led to the crisis. Second, the emergence of newtechnologies that helped provide mobility, ease of use (visualization of information),speed and lower cost of financial services (Anikina et al., 2016).The potential market for the users of fintech services is very broad - essentially all ofthe adult population of the globe. According to the McKinsey Social Sector page(Chaia et al., 2010), a study conducted back in 2010, nearly 2.2 billion financiallyunserved adults live in Africa, Asia, Latin America, and the Middle East, consisting ofeight percent of population of high-income OECD countries (60 million adults), 65percent of population in Latin America (250 million adults), 49 percent of population inCentral Asia and Eastern Europe (193 million adults), 67 percent of population in MiddleEast (136 million adults), 80 percent of population in Sub-Saharan Africa (326 millionadults), 59 percent of population in East and Southeast Asia (876 million adults) and 58percent of population in South Asia (612 million adults).These people are potential users of fintech services. The increase in the number of peoplearound the world, who for various reasons cannot use or are not willing to use traditionalbanking services, contributes to the development of FinTech which offers the sameservices, but is faster, cheaper and more profitable than banks. For banks, these trendsmean an increase in operational risks and long-term risks (Novokreshchenova et al.,2016; Fetai, 2105; Thalassinos et al., 2015).On the other hand, Sharf (2016) indicates that a survey of 10,131 people acrossAustralia, Canada, Hong Kong, Singapore, the UK and the US about their use offintech products revealed that only 15.5 percent of all respondents were using nonbanking services and it was expected that this number would rapidly increase in thefuture. 25 percent of respondents indicated that they use non-banking services veryoften and in normal practice they use 2-3 non-banking products. These data indicatethat users of banking services are potential customers of fintech services as well.

S. Saksonova, I. Kuzmina-Merlino963According to a report by Accenture (a global management consulting, technologyservices and outsourcing company), fintech is one of the fastest growing sectors ofthe economy. Investments in the industry have increased rapidly reaching 12,2billion dollars in 2014, while in 2008, it was only 930 million dollars. The highestincrease was observed in Europe (Accenture, 2015). Table 1 summarizes statistics oninvestment in fintech in the USA, Europe and Asia for 2014-2016.Тable 1. Investment in FinTech, 2014-2016 bln.US (KPMG, .98.4201613.52.28.6As can be seen from Table 1, the total volume of investment in fintech in theseregions was 46.7 billion in 2015. In 2016 it fell to 24.3 billion, but this does notmean a decrease in interest towards this field of activity in general.However, despite the increase in the total volume of investment in fintech, thesefirms cannot yet seriously compete with the banking and insurance sectors offinancial services - according to a survey of young entrepreneurs, users of bankingservices in Latvia (2016-2017), most clients are not ready to replace them with thefintech alternatives (Kims, 2017).2. Research MethodologyThe research was carried out by summarizing scientists' and experts' estimationabout this new and relatively little researched topic both from theoretical andhistorical aspects. To reach the aim of the research and verify the hypothesis, datawas processed and gathered with the help of consumer survey. The hypothesis of theresearch was: Latvia's society is not ready to use fintech service, preferring to usebanking services instead. 378 people (representatives of legal entities interested inusing innovations in the field of financial services) from the industries represented inFigure 1 have responded to the survey, which is still ongoing.Figure. 1 shows the areas of activity of respondents who participated in the survey.The largest number of respondents work as freelancers (44 percent), followed bywork in the service sector (19 percent), retail trade and information technology werein the third and fourth place (13 and 12 percent respectively).

Fintech as Financial Innovation – The Possibilities and Problems of Implementation964Figure 1. Respondents to the Survey by Industry (authors’ calculations)2.1 Areas of application of fintech industry innovative technology, advantagesand disadvantages of financial services in comparison with traditionalcompanies in the financial sectorMany papers (for example, Harrison et al., 2014) show that business innovationsstimulate economic development on both micro and macro levels. The application ofinformation technology in the finance industry is a field with great potential forinnovations; therefore, both enterprises and investors are highly interested in it.Webster and Pizalla (2015) point out that competition between fintech andtraditional banking services gets more intense every year due to continuingdevelopment of information technology. Simultaneously, fintech increases theinterest in modern financial services from progressive financial institutions that aimto maintain and strengthen their leading role in the field and provide modern servicesof high quality in a convenient and effective form for their clients anywhere,anytime. Recently the collaboration between traditional financial institutions andfintech branch is growing as both parties see promising avenues for furtherdevelopment.A review of the areas in which the fintech industry offers new technologies andtraditional institutions of the financial sector, with which the fintech firms want tocompete, as well as a description of the advantages and disadvantages of fintechtechnology is given in Table 2.

S. Saksonova, I. Kuzmina-Merlino965Table 2. Overview of the areas of application of new technologies, competitors,advantages and disadvantages of fintech services3.Area ofapplicationof newtechnologyOnlinepaymentsand moneytransfers,E-commerceCompetitors:Traditional financial sectorcompanies and fintechcompanies Banks; Companies offering paymentsand other services (PayPal, AntFinancial, etc.) In Latvia:Weststein, Monea, Swipe,MeaWallet; E-commerce in Latvia-eComCharge, Payment Ninja Advantages and disadvantages offinancial services in comparisonwith traditional financial sectorcompaniesSuccessful competition of fintechcompanies with banks is manifestedwith large volumes of transactionsin close cooperation with theworld's largest trading platformseBay and Alibaba;Bank competitors have much lowertransaction costs.Lending Banks; Non-bank lending companiesfor individuals and legal entities:Wonga (UK); In Latvia: 4finance,CreamFinance, SohoCredit; P2P, B2B lending platforms. InLatvia: Mintos, Viventor, Twino. Successful competition of fintechfirms with banks began after thecrisis of 2008 due to the refusal bybanks to lend to certain groups ofborrowers, incl. small enterprises,because of high risks;Fintech firms, working on the peerto-peer (P2P) model, provide aplatform for matching borrowerswith lenders;Banking competitors may chargemuch higher loans andcommissions;A major scandal in the history offintech - bankruptcy of the P2Plending company Ezubao, operatedin China.Fintech companies have a verycompetitive value proposition in thenew technology of robo-advising,when an individual’s investmentportfolio is selected by algorithmsthat offer clients an investmentstructure that corresponds to theirinvestment preferences and riskprofile;Annual maintenance costs arelower than those accepted in banks(1-2 percent), i.e., 0.3-0.5 percent;They allocate free assets of clients Asset andInvestmentManagement Banks and institutions dealing with asset and investmentmanagement; Crowdsourcing platforms:crowdfunding (Indiegogo,Kickstarter, etc.), crowd investing. In Latvia: the brokeragecompany Exante 3The overview is compiled by authors, summarizing scientists' and experts' estimations, dataof FinTech companies.

Fintech as Financial Innovation – The Possibilities and Problems of Implementation966 Neobanks(digitalbanks) Traditional banks; Neobanks – mobile (digital)banks sucxh as ImaginBank (inSpain), EQ Bank (in Canada )based on traditional banks; Personalfinancemanagement,planning,analytics Banks; Fintech firms managingpersonal finances (Credit Karma,USA). In Latvia: Nordigen,Grandma, inBudget Insurance Traditional insurance companies and banks; Digital insurers - newgeneration companies (BrightHealth, USA). In the Baltic States,Estonian companies are known Inspool, Inslyin deposits, convert currencies,bond and stock portfolios, seek tohedge risks and receive credit linesfor these assets.Fintech firms make services thatpreviously were only available tothe wealthy accessible to thegeneral population.Digital banks can provideconvenient mobile services(settlement account, debit card,consumer loans, financialmanagement tools, as well as thelatest innovations in the field ofmobile and p2p-payments) on thebasis of the existing bankinginfrastructure, as well as create theinfrastructure from scratch;Fintech companies use theflexibility of banking regulations:in the UK, after changing thebanking legislation in 2014-2015,five new banks were licensed;In many cases charges for servicesare lower and interest rates onsavings products are higher.In the field of personal financemanagement, fintech firms (forexample, Credit Karma, USA)allow users to access their creditrating and credit history, as well askeep records of all client financialproducts - a free service;Comparable products in banks usedto cost up to 100.In planning and analytics, fintechfirms offer an online platform forproject managers to managebudgets, invoices and reports.Fintech firms can offer newtechnologies in the insurancebusiness instead of conservativedistribution of products through theuse of offline agent networks,charging up to 20 percent in theform of commissions. As a resultservices become cheaper.

S. Saksonova, I. Kuzmina-Merlino967Infrastructureand supportservices B2B-FinTechs offering their technologies to banks andinsurance companies or to otherfinancial companies Technologies related to security,work with large data, scoringmechanisms for borrowers,platforms, for example, onarranging loans or mobilepayments;They do not compete, but cooperatewith banksAs can be seen from Table 2, fintech firms actively and successfully offer theirtechnologies and services in all areas where traditional banks, insurance companiesand other financial sector companies operate. At the same time banks, despite theirinherent conservatism and caution, have already begun to actively recognize fintech,understanding that the new technologies they offer in conjunction with banks’ largeclient base, opportunities to attract low-cost resources and a robust regulatory systemthat ensures clients' trust, can lay the foundations of a new generation of digitalfinancial institution.Thus, the larger fintech firms become, the more they have been overlapping withtraditional financial companies. In fact, in some cases it may be difficult todistinguish between a fintech company and a traditional bank, for example, the socalled low-cost banks, which Hes and Jilkova (2016) define as “retail banking basedon an Internet platform” effectively combine the two. Such banks rapidly gainedclients in Czech Republic and became profitable (Hes and Jilkova, 2016). Manyexperts note that the closer integration of FinTech start-ups with large traditionalcompanies is inevitable and is, in fact, already starting a new stage in thedevelopment of the industry - fintech 2.0.The development of fintech and innovative technologies such as mobile money hasbeen going in parallel for some time and is actively followed by regulators andpolicymakers worldwide, e.g. the U.S. Federal Reserve System (Board of Governorsof the Federal Reserve System, 2015, 2016) or the Federal Deposit InsuranceCorporation (FDIC, 2016). There is abundant literature on the topic, for example,LevyBencheton (2016) and Shrier et al. (2016) who have analyzed current regionalpractices in Africa. In 2016, the question about mobile finance and digitalidentification using biometrics has risen to the top level of discussion reports andstrategic plans by the World Bank (World Bank Group, GSMA, 2016, WBG, 2016)and the World Economic Forum (WEF, 2016).3. The Possibilities of Using Fintech in LatviaThere are few fintech enterprises in Latvia, but those firms that do work and developin Latvia, introduced specific upgrades in Latvia's financial market and changed theconsumers' opinion about financial services, their quality and speed of provision ofthe service. The most popular fintech start-up enterprises are Dacta,,

Fintech as Financial Innovation – The Possibilities and Problems of Implementation968Monea, Mintos, Twino and several others.The authors conducted a survey of start-up businesses, who would be interested inusing innovations in financial services, from industries such as manufacturing,information technology, freelancers, services, energy, retail trade (Figure 1). Thesurvey was carried out using a questionnaire that was posted on social networks, aswell as offered at seminars for professionals and entrepreneurs and 378 people haveresponded to the survey, which is still ongoing.Most respondents were women (about 70 percent of all respondents, which isexplained by their greater willingness to participate in surveys) at the age of 25 to30, who could be considered part of the millennial generation, most ready to acceptinnovations in financial services.The survey was started at the end of 2016 (Kims, 2017) and continue because theauthors believe that involving respondents in the survey simultaneously meansinforming them about the services offered to increase interest in their use. Gatheringfurther survey responses would further increase the statistical power or surveyresults, which for now can be used only as an indicative guide to reveal thepreferences of the population.Respondents were asked about alternative banking service providers in Latvia. Therewas a slight misunderstanding regarding the term “alternative banking serviceproviders”. At first, when the respondents heard the words “alternative bankingservice providers”, they thought that they were asked to provide their opinion aboutfast lending companies, so the question had to be clarified to reveal respondents’opinion about fintech companies.The survey asked the respondents to rate their satisfaction with different aspects ofbanking services as well as alternative financial services providers in Latvia on afive-point scale. The results are shown in Figure 2. In general, the respondentsappreciated the protection of client data in banks, as well as the speed and accuracyof bank transfers as good and very good. However, respondents noted that theattitude of Latvian banks towards new entrepreneurs is such that it is practicallyimpossible for them to get financing for their businesses, even if there is a stablecash flow of the company. Interestingly, the same attitude could hamper thedevelopment of fintech start-ups in Latvia as well. Risk capital funds in Latvia rarelyinvest in small enterprises, such as fintech, because the risk of loss is higher thanfrom enterprises with stable profit and money flow. At the same time access tofinance is one of the critical ingredients for the success of a small or mediumenterprise (Mareš and Dlaskova, 2016), so to the extent that fintech can contribute toalleviating it, it can make an important contribution in the development of theoverall economy in which SMEs play a crucial role.

S. Saksonova, I. Kuzmina-Merlino969Figure 2. Survey respondents’ satisfaction with the services provided by the bank(authors’ calculations).Very GoodGoodAverageAlmost AverageBad0%10%20%30%40%50%60%70%Data Protection in Your Chosen BankAlternative Financial Service Providers in LatviaAnnual Price Increases in the Banking ServicesServices Provided by the BankUnsurprisingly, most respondents viewed the annual growth of bank commissionsfor the services provided unfavourably. Also, in the majority of cases, the recentlyadopted Cabinet Regulations 20 “Procedures for Financial Institutions onPerforming Due Diligence of the Financial Accounts and Submitting Information onFinancial Accounts to the State Revenue Service” (Government of Latvia, Cabinet ofMinisters, noteikumi Nr.20, 2016.) were not evaluated positively either by legalentities or individuals, since the respondents believe that this does not contribute tothe protection and confidentiality of data on the status of clients' accounts, whileillegal transactions are carried out mainly not by using online banking, but in cash.The respondents were also asked about alternative financial service providers. Lowawareness of respondents about fintech services was manifested in the fact that themost common initial reaction to the question was that the respondents thought thatthe question was about non-bank providers of quick loans. After explanations, themajority of respondents noted their willingness to positively assess the possibility ofusing such services, since this will create competition for large banks and limit theirability to dictate their terms. The majority of respondents felt positive about fintechcompanies entering the market, because it keeps the largest banks like Swedbank orSEB Bank from maintaining and dictating their own market rules. When there is aninnovative competitor, market participants tend to improve their offerings or lowerprices thereby benefiting clients. Therefore, the expansion of fintech in the field offinancial services will work for the benefit of their users, especially services such asP2P lending and digital payments using peer to peer platforms. This is evidenced bythe pace of investment in fintech companies in Europe, Asia and the United States.Forty percent of respondents noted that they have an interest in using non-bankfinancial services in their businesses, and they have experience in using suchservices, mainly in online payments and money transfers. This means that this

Fintech as Financial Innovation – The Possibilities and Problems of Implementation970percentage is already so large that the popularization of the provided fintech servicescould be effective.On May 27th, 2017, Latvian government adopted the Latvian Financial Sector’sDevelopment Plan 2017-2019 (Government of Latvia, Cabinet of Ministers,rīkojums Nr. 126, 2017). If in previous similar plans the main goal was to ensure thestability of the financial sector, the newly adopted plan, while not neglecting thatearlier goal, also aims to look for ways of developing the financial sector, especiallyby promoting the export opportunities of financial technologies. The first steps in thedevelopment of FinTech companies in Latvia show that many Latvian companies,for example, Mintos, 4finance and others can create and export competitive financialtechnologies on a world-wide basis.As one of the most important priorities, the Plan puts forward digitalization andinnovations in the financial sector, which is where fintech firms operate. It isencouraging that for Latvia fintech companies have become an object of interestfrom the government, since their activities allow diversifying the services of thefinancial sector by offering financial non-banking services to clients. How could theLatvian state stimulate the development of innovative financial services?There are at least three avenues for exploration. First, the government couldencourage the creation of a platform (sandbox) allowing innovative financialtechnologies to enter the market and validate their safety. Second, there needs to bean understandable and transparent system of supervision over the activities of fintechfirms, especially the P2P and B2B lending platforms. Third, the government couldcreate a program of tax incentives stimulating investments in the financial sector. Assuggested by Menshchikova and Sayapin (2016), taxation system can be a powerfulresource for stimulation of domestic investment at the state level. For example, inthe UK, where the investor, who invests in enterprises on the list giving the right toreceive tax benefits, receives a privilege to reduce corporate income tax payments tothe budget by up to 50 percent.4. Conclusions and RecommendationsThis paper provided an overview of the trends in the development of the fintechindustry. The development of fintech was due to globalization giving a chance tosmall but sophisticated enterprises to develop financial services without the help ofbanks, by combining finance with IT, and offering consumers faster execution oftypical banking processes.Their development in Latvia has been relatively slow, including due to creditconstraints faced by all young businesses in Latvia. This paper posed a hypothesisthat Latvian society is not ready to use fintech services preferring bank servicesinstead. The survey of young entrepreneurs found some supporting evidence for this.Notably, Latvian society isn’t properly informed about new innovations and new

S. Saksonova, I. Kuzmina-Merlino971financial products, because a lot of respondents did not know about fintech servicesin Latvia.Having analysed and summarized the trends of the fintech sector development, theauthors are sure that the new fintech technologies together with the traditionalservices and achievements of banks (a large client base, an opportunity to attractlarge volumes of cheap financial resources, trust from clients) are the basis for theformation of digital financial companies of a new generation. Therefore, thefintech’s development is necessary for both global and Latvian financial sectors,since this will allow clients to use the opportunities and advantages of both thetraditional banking system and fintech companies. One can expect that fintechtechnologies will change the traditional activity of banks - banks will adoptinnovative IT technologies, and fintech companies will have to work in conditions ofmore stringent supervision to ensure the safety of client operations. Suchconvergence will mark the beginning of a new era in the development of thefinancial industry.Several recommendations can be addressed to managers of fintech enterprises,association of start-up enterprises and risk capital funds: Excessively strict licensing regulations in Latvia are one of the maindrawbacks preventing fintech development. Worldwide experience suggests thatreinforcing lobbying and collaboration with State institutions has helped fintechstart-up enterprises to enter the market, gain consumers and regulators’ trust andattract investors. This experience could prove useful in Latvian circumstances. Association of start-up enterprises should inform the population aboutfintech services that are already available for use. Risk capital funds need to support new companies in this field because theyhave a large potential to develop and grow not only in Latvia's but also Baltic andEuropean international markets; Fintech firms have to create impactful marketing campaigns enhancing thepublic’s awareness.Finally, Latvian government should stimulate the implementation of financialservices at least in three directions: By creating a platform (sandbox) allowing innovative financial technologiesto enter the market and validating their safety; By creating an understandable and transparent system of supervision overthe activities of fintech firms, especially the P2P and B2B lending platforms; By creating a program of tax incentives stimulating investments in thefinancial sector.References:Accenture 2015. The future of FinTech and banking: Digitally disrupted or reimagined?,Available at: tech-banking.Anikina, I.D., Gukova, V.A., Golodova, A.A. and Chekalkina, A.A. 2016. Methodological

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investment in fintech in the USA, Europe and Asia for 2014-2016. Тable 1. Investment in FinTech, 2014-2016 bln.US (KPMG, 2016). Region 2014 2015 2016 USA 14.1 27.4 13.5 Europe 12.0 10.9 2.2 Asia 3.3 8.4 8.6 As can be seen from Table 1, the total volume of investment in fintech in these regions was 46.7 billion in 2015.