ORM Assignment
FinTech Innovation
Chapter 28
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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The Pattern of Innovation
Disintermediation (disappearance of traditional intermediaries)
Re-intermediation (appearance of technology-based intermediaries
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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Machine Learning (page 622-623)
Branch of artificial intelligence that allows computers to learn without being explicitly programmed
Uses tools to search for patterns. Some are traditional statistical tools such as linear regression, logistic regression and PCA
An important tools that mirrors the way humans recognize patterns are neural networks
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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Types of Machine Learning
Supervised Learning: develop rules for mapping inputs to outputs
Unsupervised learning: find patterns in data
Reinforcement learning: develop rules for interacting with a dynamic environment in which it must perform certain tasks
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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Examples of Applications
Translation from one language to another
Fraud recognition
Lending decisions
Driving a car
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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Blockchain (page 623-625)
Ledger where new records are added in blocks and records are updated on many different computers
Security system to avoid tampering
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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Hashing 1
Hashing converts text to a 64 string of numbers and letters
Cannot be reversed
Hashing is an important part of blockchain security systems
Blockchain records are made tamper proof with a hash where one of the inputs is the hash of the immediately preceding block
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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Hashing 2
Hashing “Risk Management and Financial Institutions” (without quotation marks) using SHA gives:
1dcc48387a27cd95378b08ab26261b161a97c51a7c9146f3d3ff73710d656a3f
Adding the edition number so that ``Risk Management and Financial Institutions 5'' is input (again without quotation marks) produces a totally different hash:
117e1e23121f8db4b75d3e2a63d37ef052b11a63cf448721825aadb882492c6b
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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Payment Systems (page 625)
Many innovations already: credit cards, debit cards, mobile wallets
Future use of biometric authorization
Data collection and privacy issues
Increasing use of digital currencies
Will central banks use digital currencies?
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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USD Value of Bitcoin (Figure 28.1)
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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Lending Innovations
P2P lending is example of disintermediation followed by re-intermediation
Lending Club statistics published June 2017:
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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| Grade | A | B | C | D | E | F&G |
| Ave Interest Rate | 7.26 | 10.79 | 14.01 | 17.20 | 19.94 | 24.04 |
| Ave Net Ann Return | 4.86 | 6.29 | 6.69 | 6.32 | 5.59 | 4.52 |
Crowdfunding (page 631)
Raising funding for projects on line
Donation based
Debt based
Equity-based
Initial Coin Offerings (ICOs) are an alternative to IPOs where a company issues a new digital currency, usually in return for a digital currency such as bitcoin
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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Wealth Management
Being disrupted by on-line robo-advisors
Service is provided more cheaply
Usually investors are offered a mixture of index and fixed-income investments
Investment strategies may become more sophisticated in the future
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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Insurance (page 633-635)
May not be so easy to disrupt as consumers require a stable well-capitalized company
Brokers and agents may disappear
Greater availability of data means that risks can be assessed more accurately
Black boxes are an interesting innovation in insurance
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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Regulation
Regulation is a barrier to entry for FinTechs
Regulators do not want to stifle innovation and have come up with some plans that provide some regulatory relief for innovators
But regulating FinTechs is a challenge (e.g., HFTs have caused problems for regulators)
Can a computer program be regulated in the same way as the systems in a large bank?
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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RegTech
RegTech is the word used to describe the use of technology to improve compliance with regulations. Examples:
Screen customers and transactions in real time for money laundering, terrorist financing, and sanctions
Monitor staff communications using machine learning to determine outliers
Use a library of global regulatory requirements
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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How Should Banks Respond?
Many of their traditional sources of revenue will be lost
71% of millennials would rather visit the dentist than listen to a bank
Continual need to adapt to a fast-changing environment for financial services and find value-added services
Kodak or IBM?
Risk Management and Financial Institutions 5e, Chapter 28, Copyright © John C. Hull 2018
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