Recent Developments in the FinTech Industry

In this article, we review some recent developments in the field of Financial Technology or “FinTech.” We begin with an overview of what FinTech is and why it has become an important growth industry in the financial services area and therefore an important research topic in finance. In the next section, we review some of the academic literature in the FinTech area. In the subsequent section, we characterize the financing of FinTech startups, especially by venture capital firms. In the following section, we characterize innovation by FinTech firms as well as by incumbent financial intermediaries. In the next section, we move on to discuss potential sources of value creation by FinTech start-up firms relative to existing incumbent firms: we conjecture that one source of value creation may arise from FinTech startups being able to provide a superior customer experience relative to incumbent firms in various areas of consumer finance. In the following section, we discuss the regulatory environment facing FinTech firms, in their banking as well as in their financial market activities. In the penultimate section, we analyze the buy-versus-build decision facing firms choosing to enter the FinTech sector, and discuss the trade-offs that may drive such decisions in practice. We conclude with some remarks about the future directions that may be taken by the FinTech industry.


Introduction
Over the past decade, since the financial crisis brought the global economy to its knees, financial technology startups have swooped in and offered more innovative solutions to problems in the traditional banking, insurance, and asset management areas. This new and burgeoning industry, which has become known as the "FinTech" industry, has been growing at a rapid rate.
FinTech, as the name suggests, refers to the use of latest technology in solving problems in financial services (often relating to customer experience and insight). In this article, we restrict our definition of FinTech firms to startup firms (including software developers, hardware manufacturers, data analytics firms, mobile technology, and e-commerce platforms) that have entered into the space traditionally occupied by intermediaries like banks and other financial institutions. Of course, traditional financial institutions, or the "incumbents" in the financial service industry are also increasingly using technology to serve their customers: banks provide the option of online lending to their customers and venture capitalists (VCs) may use artificial intelligence to identify start-ups in which to invest. However, for the purposes of this article, we will not include traditional intermediaries as FinTech firms, focusing mainly on start-up firms in the FinTech industry.
The FinTech Ecosystem can broadly be divided into following eight industry segments (see, e.g., Imerman and Fabozzi (2020) After the Financial Crisis, there has been significant growth in the number of new FinTech firms springing up in the U.S. as well as globally. Many of these FinTech firms have the potential to displace traditional intermediaries by exploiting the economies of scale in data analytics and providing lower cost financial services to their customers compared to the incumbents. Furthermore, the increased penetration of smartphones and improvement in internet speed enabled continuous real-time provision of financial services in the hands of customers through such mobile devices. As we will show, the largest amount of investment in FinTech companies was made in consumer payment, consumer lending, and payment infrastructure. Prominent FinTech firms in these sectors include Prosper, Lending Club, Venmo, and Square among others. This had a direct implication on banks as these small business lending and peer-to-peer lending firms competed directly with banks in some cases, while also addressing the needs of previously underserved consumer segments. Incumbent banks responded to the increased competition from FinTech firms by investing in FinTech innovation and in some cases acquiring FinTech firms. A representative example of the latter case is Capital One's acquisition of Wikibuy in 2018. Similarly, several startups made forays in the wealth management space leading to growth in robo-advisors in recent years. Again, the incumbents responded with their own robo-advising services. For example, Vanguard, Schwab, and Fidelity now offer robo-advising services to their clients.
The rest of this article is organized as follows. Section 2 reviews some of the academic literature in the FinTech area. Section 3 characterizes the financing of FinTech startups, especially by venture capital firms. Section 4 characterizes innovation by FinTech firms as well as by incumbent financial intermediaries. Section 5 discusses potential sources of value creation by FinTech start-up firms relative to existing incumbent firms. Section 6 discusses the regulatory environment facing FinTech firms, in their banking as well as in their financial market activities.
Section 7 analyzes the buy-versus-build decision facing firms choosing to enter the FinTech sector.
Section 8 concludes with some remarks about the future directions that may be taken by the FinTech industry.

Related Academic Literature on FinTech
In the past few years, it has become apparent that recent technological advancements, including using machine learning and artificial intelligence to provide financial services, has led to a paradigm shift worthy of serious research. After all, the ways in which consumers conduct their financial business, from paying bills to managing investments to business and consumer banking, is in the process of changing drastically due to these new technologies. Philippon (2016) provides an important forward-looking perspective on how technological innovation and the growth of FinTech firms are transforming financial services. He argues that Electronic copy available at: https://ssrn.com/abstract=3558163 FinTech is reducing the cost of access to financial services and is likely to continue. However, he also points out the new risks and regulatory challenges that FinTech presents. A useful review article by Thakor (2019) specifically analyzes how FinTech innovation may fit in with traditional banking theory. He argues that FinTech innovations may result in lower search costs and verification costs, cheaper and more secure information transmission, and will continue to have a disintermediating effect on financial services (i.e. reduced need for traditional intermediaries due to the development of new technologies).
Recently, researchers have done some significant work on consumer lending, especially peer-to-peer (P2P) lending. Using data from Prosper, a leading P2P lending firm, Duarte, Siegel, and Young (2012) show that appearance-based impressions affect financial transactions. Using the assessments of photographs of borrowers on the Prosper platform by 25 independent raters, the above authors show that borrowers who appear more trustworthy have higher probabilities of getting a loan. Tang (2019) shows that P2P lending firms act as substitutes of banks in serving infra-marginal bank borrowers and small borrowers. Vallee and Zeng (2019) use a theoretical model to study the trade-off between screening by sophisticated investors versus adverse selection problems faced by unsophisticated investors in the context of P2P lending platforms. Their model predicts that, as a lending platform develops, it increases screening intensity but reduces information provision to outsiders. Using investor-level data, they find that sophisticated investors outperform unsophisticated investors, and this outperformance shrinks with reduction in information provision by platforms. Hertzberg, Liberman, and Paravasini (2018) make use of a natural experiment by LendingClub, one of the first P2P lending firms, and show that more borrowers prefer long-term loans over short-term loans, while those who prefer short-term loans default less. They compare two observationally equivalent groups, one of which could only take 36-months loans, while the other group could take either a 36-month or a 60-month loan, to arrive at the above conclusion. Jagtiani and Lemieux (2019) show that the correlation between Lending Club rating grades and FICO scores have declined over time. However, they find that these rating grades perform well in predicting defaults and conclude that alternative sources of data (other than FICO scores) help to serve financially underserved consumers.
To the extent that FinTech represents non-financial (technology) companies providing services that were traditionally provided by banks and other financial institutions, combined with the fact that significant growth in FinTech began in earnest only after the Financial Crisis, it is Electronic copy available at: https://ssrn.com/abstract=3558163 natural to think of the similarities and differences between FinTech lenders and "shadow banks." Buchak, Matvos, Piskorski, and Seru (2018) study these questions within the context of mortgage lending. They show that both FinTech lending and shadow bank lending in this space have grown between 2007 and 2015. The major difference is that FinTech lending growth seems to result from using alternative information to set rates and online origination of loans (which reduces both the cost and the time of origination), whereas the shadow banks' growth occurred mostly in geographic and socioeconomic areas that were hardest hit by increased regulation in the post-crisis era. By analyzing FinTech lenders in the U.S. mortgage lending sector, Fuster, Plosser, Schnabl, and Vickery (2019) show that, controlling for observable characteristics, FinTech lenders process applications at a 20% faster rate compared to other lenders. Further, they show that this faster processing does not come at the cost of higher default.
There has also been a significant literature pertaining to the application of blockchain technology in finance. Biais, Bisiere, Bouvard, and Casamatta (2019) discuss the coordination problems among blockchain miners. They argue that although mining the longest chain is the intended equilibrium, there can be multiple equilibria with "forking." 1 They posit that forking maybe caused by information delays or software upgrades. Chiu and Koeppl (2019) discuss issues associated with blockchain forking in the context of settlement of asset trading. They argue that, on the one hand, the benefit of blockchain-based settlement technology is a faster and more flexible settlement; but on the other hand, there is scope of tampering where participants may intentionally fork the chain to avoid trading losses. Cong and He (2019) discuss tension in the usage of blockchain-based smart contracts. They argue that, while decentralized contracts and tamper-proof algorithms will expand contract space and enhance contract efficiency, the process of reaching decentralized consensus will change the information environment on the blockchain, promote collusion, and may lead to welfare reduction.
They argue that cryptocurrency is among the largest unregulated markets and document that around 46% of bitcoin transactions (equivalent to around $76 billion) is in illegal activities. They find that cryptocurrencies are enabling "black e-commerce." However, they note that the techniques developed in their paper may be used for cryptocurrency surveillance. Griffin and Shams (2019) find that purchases with Tether, a digital currency pegged to U.S. dollar, are timed following market downturns. By mapping the blockchains of Bitcoin and Tether, they find that one large player on Bitfinex, a cryptocurrency exchange, is purchasing large amounts of Bitcoin after the printing of Tether (increase in supply) as prices are falling. Their evidence supports a supply-based story of inflation of cryptocurrency prices.
There has also been recent work on the disruption of FinTech to investments and wealth management. D'Acunto, Prabhala, and Rossi (2019) study robo-advising and find that adopters of robo-advising are similar to non-adopters in terms of demographics and prior interaction with human advisors. They also find that adopters display a decline in major behavioral biases: disposition effect, trend chasing, and rank effect. Using data from the largest U.S. robo-advisor, Vanguard's Personal Advisory Services (PAS), Rossi and Utkus (2019) find that clients with little investment experience as well as clients with large cash holdings and high trading volume benefit the most from robo-advising.
As FinTech is, by definition, an interdisciplinary area, there has also been research by scholars from fields other than finance studying the impact of technological innovation on financial services provision. One example is the review article by Gomber, Kauffman, Parker, and Weber (2018), which looks at FinTech innovation and disruption from an information systems (IS) perspective. Another article is by Arner, Barberis, and Buckley (2015), which considers legal and regulatory issues facing FinTech firms. They argue that the challenge for the regulators is to come up with a regulatory system which is flexible enough to encourage innovation but transparent enough to preserve the confidence of investors, customers, and the market.

Venture Financing of Start-up Firms in the FinTech Industry
The previous section illustrates how interest and excitement around FinTech has grown rapidly in recent years from academics. However, investors have been increasingly excited about FinTech for even longer. To examine the patterns in funding for FinTech companies over time, we use data from the Venture Scanner database. Venture Scanner collects detailed data on funding rounds and exits for startup companies mostly in the technology sector. The data are arranged in sector verticals with drilldowns going deeper into subcategories within the taxonomy. For this paper, we focus on the "FinTech" sector which includes 16 subcategories and 3,229 companies as of January 2020.
Information on Venture Scanner is sourced from a wide variety of application programing interfaces (APIs) (including the API of AngelList, which is a database covering over 800,000 startup companies), web scraping of media articles, and more. Venture Scanner then uses proprietary clustering and matching algorithms to populate the database. The dataset comprises startups founded as early as 1980s, although the number of startups seems to pick up substantially in the 1999 to 2000 period. Specifically, a substantial number of FinTech firms were founded in or after 2014. Figure 1 shows an infographic named "FinTech Sector Map" from Venture Scanner's website, which displays the different subcategories within the FinTech sector with representative companies in the Venture Scanner database. Table 1 presents data on the number of countries from which the startups originate, the number of startups, the number of investors making investment in the startups, and the total amount of capital raised for each subcategory.   Figure 2 shows the concentration of companies in each FinTech subcategory in the Venture Scanner database as of January 2020. The biggest subcategory is in the Consumer Lending space, making up 12% of the companies in the Venture Scanner database. This includes some well-known FinTech companies such as SoFi and CommonBond. The former is a P2P lending platform which matches investors who are looking to earn higher returns by building a portfolio of microloans with individuals who may not be able to access credit through traditional sources. And the latter is a FinTech lender that helps individuals to refinance their student loans, with all of their transactions completed through their web-based platform and decisions are made very rapidly, which is more efficient than other private student lenders. Furthermore, CommonBond is able to keep interest rates low and competitive by securitizing student loans that are funded through their platform which also helps to free up capital to make new loans. The Business Lending subcategory is quite well represented as well, making up 8% of the companies in the Venture Scanner database. The Atlanta-based company, Kabbage, which helps to provide funding to small and mid-size businesses is among the famous names within this subcategory.

Concentration of Companies in Each FinTech Subcategory
Electronic copy available at: https://ssrn.com/abstract=3558163 users. 3 The company makes money entirely from targeted advertisements as well as referral fees for recommending partner lenders to their users. The smallest subcategory in the Venture Scanner database is crowdfunding, which makes up just under 3% of the companies, includes companies such as Kickstarter and Indiegogo. Both of these crowdfunding platforms, which have raised a combined $66.5 million in venture capital, are featured prominently in the case study "Crowdfunding: A Tale of Two Campaigns" (Zacharakis and Muller (2016)). These platforms allow startups to raise funds in small amounts from many individuals, who in return receive rewards and/or sample products.

Total Amount of Capital Raised ( in millions of USD)
Total Funding (millions of USD) and institutional combined) has raised over $9 billion. On the retail investing side, this includes companies such as the robo-advisors Wealthfront and Betterment as well as the micro-investing platform Acorns. On the institutional side, this includes companies such as San Diego-based Artivest which operates as a platform for alternative investments. Crowdfunding has raised the smallest of amount, with less than $1 billion in total funding. Electronic copy available at: https://ssrn.com/abstract=3558163 was over $18 billion, in 2016 it was over $19.5 billion, and in 2017 increased another 45% to almost $28.5 billion. By 2018, FinTech funding was bumping up against $40 billion.
Similar to other types of startups, FinTech companies raise money in stages. Typically, this begins with "Seed Funding" which may often come from an Angel Investor, family, and/or friends; some Seed Funding has also been known to come from founders' credit cards (Fabozzi (2016)).
In fact, Google's first two years of operations were financed with credit cards. 4 Seed Funding can also come from accelerators and incubators. Seed Funding is used to help the company to literally start up. Once the companies are established and exhibit some potential for success (not necessarily profitable though), they typically will raise money from VCs. "Early Stage" VC investments include Series A, Series B, Series C equity investments, and sometimes venture debt. The proceeds of Early Stage funding are typically used to build out and scale the company. There is an extensive literature on VC investment in young firms, with evidence suggesting that VC investments are not only associated with increase in patenting (Kortum and Lerner (2000)) but also economic growth (Samila and Sorenson (2011) (2014)). 5 As the company matures and its need for funding continues, it will receive "Late Stage" funding. Late Stage funding may come from VCs (both IVCs and CVCs) as well as Private Equity (PE) firms. biggest year for Seed Funding was in 2013, as discussed earlier, when FinTech investment really started to take off. Interestingly, there was slightly more Late Stage funding than Early Stage funding in 2019, suggesting that the market may not necessarily be cooling off significantly, but maybe that the industry is maturing. Therefore, FinTech companies that have already been around for some years would be looking to raise more capital after having shown evidence of strong performance.

Innovation Activities by FinTech Firms
It is becoming difficult to quantify the amount of innovation that is occurring in the FinTech space. Standard practice in the finance and economics literature is to use patents filings and patent citations as proxies for the amount and impact of innovation, respectively. 6 However, Bessen and Maskin (2009) developed a model in which patents may stifle innovation and follow-6 The literature is extensive but some early examples include Schmookler (1954), Schmookler and Brownlee (1962), Mansfield (1986), Jaffe (1986), Scotchmer (1991); and more recently, Tian and Wang (2014) with respect to corporate innovation and VC-backed IPO's, Lerner, Sorensen, and Stromberg (2011)     We then match our sample of FinTech firms from Venture Scanner with the patent dataset obtained from the USPTO website, using a fuzzy name matching algorithm following Bernstein, Giroud, and Townsend (2016). We study the trends of patent counts as well as citations received by these patents filed by FinTech firms over the 1983 to 2015 period. We restrict our analysis to year 2015 to account for the lag between patent application and eventual grants, which is known as the truncation bias. We find that 191 FinTech firms (14.6% of 1,309 firms in our sample) have at least one patent. Further, all of these patents were filed after 1990. As shown in Figure 7, we find an upward trend on patenting by FinTech firms over the years with a sudden jump in patenting after 2010.   (2019) show that most of the value patents in the financial sector have been filed in the internet of things (IOT), robo-advising, and blockchain sectors. They also find that majority of patents are filed by firms outside the financial sectors, i.e., mostly technology firms. In Section 7, we will discuss two options available to new entrants ("build vs. buy"): developing new technologies or innovations from scratch versus acquiring innovation and how these options affect the innovation activities of firms.   users' needs in mind. 9 Many financial apps, which are developed by FinTech companies either in standalone apps or licensed to the big financial incumbents, have location monitoring and push notifications. This allows for a more interactive experience for customers. For example, a payment app is able to recognize that a customer just walked past her favorite coffee shop which is running a "50% off" deal on iced specialty beverages. The app will immediately send her a push notification thereby driving her into the store, generating transactions for the payment app.

Consumer Finance Experience and Banking the Unbanked
Furthermore, the UX Engineers at the FinTech companies can analyze the data and figure out how often these push notifications are likely to result in a sale. Another example, from the retail investments subcategory of FinTech, might be the use of event alerts on one's mobile device to prompt trading. An investing app may send users a push notification when a company whose stock they own, or is on their "watch list," is announcing earnings. They might even include a link to the company's research on whether they expect earnings to beat or miss analyst expectations. The investor can then make an informed decision about whether they want to buy, sell, or just hold onto their position with the earnings announcement coming up. As with the payments technology example, this results in a higher likelihood of transaction and the aggregation of user statistics can be used to quantify and even predict the effectiveness of this technology.
It is true that many of the latest technology breakthroughs, especially when it comes to mobile apps, have been made by FinTech startups rather than the financial incumbents. The former, despite being newcomers to the market without a well-established reputation yet, are viewed generally as more customer friendly and socially conscious. FinTech companies around the world pride themselves on improving financial literacy and financial inclusion. Many of the FinTech products that are available today have an educational component that is seamlessly integrated. Customers thus can not only utilize the technology to bank or invest, but also acquire some knowledge of budgeting and wealth planning.
The incumbents often tend to be a stodgy group which historically has put share price and profits over customer satisfaction. Since the financial crisis, they have even been labeled as "greedy fat cats" that have preyed on the lack of financial literacy in the market and charge 9 Although often used interchangeably, experts contend that CX is more of a macro, or holistic approach that develops a brand image with which the customer identifies; UX, on the other hand, is more of a micro perspective, at the transaction level. These can usually be more easily quantified with metrics such as "clicks," "hit rates," or how often a prompt or recommendation results in a sale. exorbitant fees in their quest to get rich. 10 Some have aimed to change that image and simultaneously have licensed technology from FinTech companies or have developed their own technology in-house.
In traditional finance theory, the objective function of a typical corporate optimization problem is to maximize shareholder value, an idea that can be traced back to Milton Friedman in the 1970s. This suggests that, subject to certain constraints, the business is considered to be successful as long as shareholder value increases. No other stakeholders (such as employees, suppliers, and customers) matter in the traditional decision process. Although the CEOs sometimes may argue that customers are their most important stakeholders, their actions may not support their claims. 11 In contrast to the above strict shareholder value maximization approach, some FinTech starts seem to be targeted at the needs of specific consumers, as revealed by the innovative financial services they have offered recently.
Thus, developing products that the customers actually like to use (i.e., satisfying the needs of specific groups of consumers) seems to be at the core of FinTech innovation, at least in the case of some FinTech start-ups and the services they offer. According to the "Voice of the Consumer Survey," a report released by Capgemini and LinkedIn in 2017, 44.8% of customers use at least one FinTech provider (in addition to traditional firms) for investment management services and 29.4% of customers surveyed said they use at least one FinTech provider (in addition to traditional banks) to do their banking.
When it comes to financial services providers, such as banks and asset managers, trust by consumers is clearly paramount. The survey quoted in the previous paragraph asked customers to rate on a scale of 1 to 7 "What level of trust do you have in the following entities: traditional trust the financial service incumbents with issues in cybersecurity and fraud. However, it will be interesting to see how much progress will be made by FinTech companies that are working on emerging technology in the above area in the next few years.
In closing, it would also be useful to consider the development of FinTech and the sources of value creation by FinTech start-up firms in developing countries and other emerging markets where traditional banking has left many types of consumers behind. As Canuto (2020) points out, FinTech firms have the power to drastically improve the financial landscape for underserved populations in Africa, Latin America, and the Caribbean. But for FinTech's potential in these countries to be fully realized, national governments will need to adapt regulatory environments to keep up with the times. The good news is that some policymakers are starting to pick up the pace; the bad news is that there is much work left to be done.
A recent IMF working paper (Berkmen et al. (2019)), describes numerous deficiencies in developing countries (especially in Latin America) when it comes to financial access, the depth of financial tools available to customers, and the efficiency of financial markets. Despite some variation across countries, low credit-to-GDP ratios, high service fees, heavy reliance on nontraditional finance sources, and large unbanked populations common in these markets. In each of these areas, there is a place for FinTech to make markets work better for average people. To give one example (pointed out by Canuto (2020)), mobile operators can now supply bankingrelated tools to clients directly on their phones, while e-commerce platforms offer numerous other mobile payment services. In remote areas, mobile technology and bank-appointed agents on the ground make reaching unbanked customers easier than ever before. Asia have addressed the FinTech regulation over the past few years.

Regulation of Banking Related Activities
In the U.S., the Federal Reserve Board oversees the entire Federal Reserve System and is therefore responsible for regulating member banks. They are also the primary regulators for Bank Four of the Federal Reserve Banks have dedicated groups that are working on the FinTech area. The Federal Reserve Bank of San Francisco (FRBSF) has a group called "Navigate" that is 12 Traditional banks in the region charge roughly 6% to send remittance payments, compared to the 3 percent paid by mobile remittance users in sub-Saharan Africa (see, again, Canuto (2020)). dedicated to FinTech Innovation. 14 The Navigate Team interacts with Bay Area FinTech companies and banks so that technological innovation can be pursued in financial services but with an understanding of the very gray area that currently exists. In fact, these are the most challenging aspects of FinTech regulation. First of all, there is not yet a well-established framework for regulating FinTech or the entrance of tech companies into financial services. The decades old regulations that apply to BHCs do not apply to FinTech, which in some ways may benefit the This Center is concerned with regulatory issues concerning FinTech firms, sponsors an annual conference on financial markets related to the above issues (namely, the Financial Markets Conference), and computes market-implied probabilities for short-term interest rates. 17 There is also the Mobile Payment Industry Workgroup at the Federal Reserve Bank of Boston. 18 This group at the Boston Fed is primarily interested in researching trends in mobile payments, digital currencies, and similar topics. Lastly, the Federal Reserve Bank of Cleveland 14 Please refer to the following link for more details: https://www.frbsf.org/banking/fintech/about/?utm_source=frbsffintech-home%20about&utm_medium=frbsf&utm_campaign=fintech. 15 https://www.newyorkfed.org/aboutthefed/ag_fintech.html. 16 https://www.frbatlanta.org/cenfis.aspx. 17 The methodology is based on "simplex regression" with details that can be found in Fisher (2016). For more information, please see: https://www.frbatlanta.org/-/media/documents/cenfis/market-probability-tracker/marketprobability-tracker_simplex-regression.pdf. Also see: https://www.frbatlanta.org/-/media/documents/cenfis/marketprobability-tracker/market-probability-tracker_estimation-specifics.pdf. 18 https://www.bostonfed.org/publications/mobile-payments-industry-workgroup.aspx. Project Innovate. More recently, the BoE has discussed the ramping up their use of more sophisticated technologies and data analytics, noting that banks in the U.K. are becoming more digital and investing more heavily on AI than ever before with the trend expected to continue. 27

Regulation of Activities in the Financial Market
As we discussed in the introduction, FinTech innovation is not only occurring in banking but also in derivatives and capital markets. One of the biggest influences in this space in the U.S.
is the Securities and Exchange Commission (SEC). However, some would say that when it comes to FinTech, they have largely been reactive and not proactive. The SEC's stated mission is to "protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation." To that end, the SEC has been involved in conversations regarding robo-advisors, equity crowdfunding, and most recently cryptocurrencies and initial coin offerings (ICOs).
When it comes to robo-advisers, most are already and have been registered as investment advisors (RIAs). 28 Table 3 presents information on the latest filing dates, number of clients, and assets under management of four different robo-advisors in the U.S. for individual clients only (i.e. does not include high net worth individuals, pensions/profit sharing plans, charitable organizations, corporate entities, etc.). This table shows that a substantial number of retail investors have provided a significant amount of money to robo-advisors for investment management. crowdfunding platforms, which present both opportunities and risks. The opportunity is that firms that otherwise would not be able to raise capital through an IPO issuance can tap equity investors through the crowdfunding platforms. However, the risk is that, in a market already riddled with information asymmetry and misalignment of incentives, exemptions from registration may potentially amplify problems associated with lack of transparency (see, e.g., Afterman (2016)).
As the primary regulator for capital markets in the U.S., the SEC is also involved in regulating cryptocurrencies and ICOs. Cryptocurrencies such as Bitcoin and StableCoin are increasingly viewed as an alternative asset class in the post-crisis era. The SEC has recognized the regulatory issues related to ICOs and have made the following comment on their website: "Companies and individuals are increasingly considering initial coin offerings (ICOs) as a way to raise capital or participate in investment opportunities. While these digital assets and the technology behind them may present a new and efficient means for carrying out financial transactions, they also bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets.

The Decision to Buy versus to Build New Financial Technologies
As we briefly mentioned in Section 4, in addition to deciding whether or not to patent expensive "build" strategy to enter. Gallini (1984) argues that the incumbents deter entrants to come up with breakthrough innovation that may hurt the incumbents, by sharing their (incumbents') technology with new entrants via licensing. In her model, firms are encouraged to enter the product market while deterred from R&D activities at the same time by making rights to lower-cost technologies easily accessible.
Using a Cournot oligopoly model, McCardle and Viswanathan (1994) discuss the choice between direct entry and acquisition made by new entrants. They argue that entrants will acquire incumbents in case of higher costs to entry, while they prefer direct entry in case of lower entry cost barriers. Phillips and Zhdanov (2013) build a theoretical model to examine how the market for mergers and acquisitions affect the "build versus buy" decisions on R&D spending and innovation. They show that large firms find it expensive to participate in R&D activities compared to acquiring innovation through acquisition in an active mergers and acquisitions market. Further, an active mergers and acquisitions market gives bargaining power to small firms, encouraging them to engage in innovation activities and increase their probability to get acquired.
FinTech firms may also experience trade-offs similar to those discussed in the above literature in terms of developing new products or technologies in-house versus accessing them through acquisitions (build or buy). We show in Table 4 that, 230 (17.54%) of the 1,309 U.S.based FinTech start-ups are eventually acquired. Further, we find that 52 of the 230 acquired firms (22.6%) had at least one patent at the time of acquisition. This may suggest a phenomenon similar to that discussed by Phillips and Zhdanov (2013) that FinTech start-ups are engaged in innovation activities and are getting their payoffs for their innovation through their future acquisitions by established firms. For FinTech firms, we observe many instances of the above trade-offs in play, such as in the robo-advisory space. For example, the startup Wealthfront develops its financial advisory technology in-house whereas, the 2015 acquisition of FutureAdvisor by BlackRock is an example of a new financial advisory technology being bought through a M&A deal. Similarly, the strategic decisions of build-versus-buy occurred within the digital wealth management space as well.
Incumbents such as Vanguard and Fidelity now have their in-house robo-advisory services, while Capital One Financial acquired United Income in 2019, an innovative data-driven wealth management company. The former is an example of a new technology being built through the firm's own R&D, whereas the latter is an example of an acquisition of a new technology by an asset management powerhouse.

Conclusion
In this article, we have reviewed recent developments in FinTech and discussed how FinTech has affected and how it is likely to continue to affect the financial service industries. We began with an overview of what FinTech is and why it has become an important growth industry in the financial services area and therefore an important research topic in finance. In the next section, we reviewed some of the academic literature in the FinTech area. In the subsequent section, we used data from the Venture Scanner database to characterize the financing of FinTech startups, especially by venture capital firms. In the following section, we used FinTech data from Venture Scanner and patenting data from the USPTO to characterize innovation by FinTech firms and compared it to innovation by incumbent financial intermediaries. In the next section, we moved on to discuss potential sources of value creation by FinTech start-up firms relative to existing incumbent firms: we argued that, in developed economies like the US, an important source of value creation arose from FinTech startups being able to provide a superior customer experience relative to that provided by incumbent firms; in contrast, in less developed (emerging) markets, perhaps the most important source of value creation by FinTech firms came from providing banking services to large sections of the population that have been left unbanked by traditional intermediaries. In the following section, we discussed the regulatory environment facing FinTech firms, in their banking as well as in their financial market activities. In the penultimate section, we analyzed the buy-versus-build decision facing firms choosing to enter the FinTech sector, and discussed the trade-offs that may drive such decisions in practice.
As for the future of FinTech, we expect that FinTech services will become ubiquitous in near future with both incumbents (traditional banks, wealth management services, and others) and FinTech startups offering a wide spectrum of services, including both traditional and Fintech services. They will either develop such capabilities in-house or will acquire smaller FinTech firms.
We also expect some FinTech firms offering services provided by traditional intermediaries, e.g., we expect many more FinTech firms to apply for banking licenses. We also expect tech giants like Google, Amazon, Facebook, and others to participate more actively in the FinTech space. For example, Google and Apple have already offered digital wallet services to consumers across the world. Amazon Pay, launched in 2007, has evolved into digital wallet for consumers and payments networks for merchants. Facebook-owned WhatsApp have acquired licenses from the Indian authorities for their digital payment system. Given the scale of growth of FinTech firms in Asia and Europe, it is likely that the next big breakthrough in FinTech will come from FinTech firms operating in countries in Asia or Europe rather than from FinTech firms in the U.S. It is also likely that, in developing countries, FinTech startups will make great strides in providing banking services to large sections of the population currently left unbanked by traditional financial intermediaries.