FinTech and Financial Stability

Offering innovative financial services requires data-driven applications of financial technologies. Issues of security and privacy play an integral role in maintaining financial stability

Financial technology (FinTech) enables the rapid innovation of financial products and services. This presents both opportunities and challenges from a financial stability perspective. The key areas from policymakers and regulators’ perspective are operational risks from third-party service providers, cyber risks, and macro-financial risks.

In my opinion, the highest priority issue is related to managing operational risks from third-party providers. Often, a quicker time-to-market may mean that not enough due diligence was done to address the risks of technology adoption. According to a survey (Gai, Qiu and Sun), a breakthrough in technologies such as big data, image processing, mobile networks, etc. has created complicated integrated systems with distinctive demands for financial services offerings. From a technical perspective, both the financial industry and regulators should consider issues across five dimensions: security and privacy, data techniques, applications, facility and equipment, and service models.

Security & Privacy
Source: Gai, Keke, Meikang Qiu and Xiaotong Sun. “A survey on FinTech.” Journal of Network and Computer Applications (2018): pp.262-273.

A summary review of the issues is presented below.

  • In FinTech applications, security and privacy are paramount; for example, in payments, money transfers could risk data of many consumers if privacy by design principles and cyber-security practices are not followed by FinTechs.
  • Data techniques are critical as many technology systems become important to provide services. For example, in P2P lending data-oriented issues become a priority as data use via data analytics and models will play a key role in as both hardware and software required to provide the services become critical to the functioning of the FinTech services.
  • FinTech applications and their management are essential as their wide adoption can change industry practices e.g. Robo-advisors that rely on machine learning and algorithms, can provide speed efficiency and cut costs to serve customers, and therefore, regulators should consider financial data governance frameworks. If third parties are concentrated, then this could increase operational risks as parties are interdependent.
  • The use of facilities and equipment will also be a high priority. Data controls in the cloud can have unpredictable vulnerabilities due to the usage of virtual machines and physical locations of servers which may come under different regulatory environments. This may also pose legal risks.
  • New FinTech service models that require high computing performance or integrations with smart city or cloud computing could also present cyber and operational risks.
Security & Privacy in FinTech
Source: Gai, Keke, Meikang Qiu and Xiaotong Sun. “A survey on FinTech.” Journal of Network and Computer Applications (2018): pp.262-273

In summary, FinTech companies will get first-mover advantage with their unique business models but incorporating cybersecurity and privacy principles will reduce the risks associated with the new business models and promote financial stability.

Works Cited

FSB. “Financial Stability Implications from FinTech.” 2017.

Gai, Keke, Meikang Qiu and Xiaotong Sun. “A survey on FinTech.” Journal of Network and Computer Applications (2018): pp.262-273.

Featured Image Credit: Photo by Aaron Sebastian on Unsplash

Uber is relying on network liquidity to turn to profit

Improving margins for Uber is dependent on the network effects of liquidity provided by drivers and riders. For the quarter ending December 31, 2018, Uber had 91 million and 3.9 million, MAPCs (Monthly Active Platform Consumers) and drivers, respectively.

Uber is the world’s largest ridesharing platform. In 2018, The company had Gross Bookings of $49.8B, revenues of $11.3B, and Gross Platform Adjusted Contribution Margin of 9%.  Uber is not profitable and had a net loss of about $4B in 2017 and $1B in 2018.

How does Uber plan to improve margins and grow profitably?

Uber aspires to have the largest network in each market to improve margins by creating a network liquidity effect (Figure 1).

Figure 1[1]

The company uses promotions and incentives to attract both drivers and customers to increase liquidity in the network. This practice results in negative margin until the company achieves a network size. Once the company reaches an operating level then, it slowly plans to take the incentives away. Uber goes on to state that its margin advantage depends on alternatives such as the cost of personal vehicle ownership. Specifically, as per S-1 filing, Uber says,

“In addition to competing against ridesharing category participants, we also expect to continue to use Driver incentives and consumer discounts and promotions to grow our business relative to lower-priced alternatives, such as personal vehicle ownership, and to maintain balance between Driver supply and consumer demand.”

Uber S-1 Filing

Above information yields two conclusions:

•    As competition in ridesharing services increases, margins will come under pressure. Also, hailing taxis may be cost-effective in many cases as Uber charges surge based pricing.

•    Uber’s return to profitability is linked affordability to own a personal vehicle.

How do alternatives to Uber determine liquidity in its network? Uber did about 26 Billion miles in 2018 with Gross Bookings of $49.8B. So, the average of Gross Bookings per miles comes out to be $1.91, and it is $1.19/km. Although it is just an average over whole operations, the cost of hailing taxi rates per mile across the world[2] are comparable to get insights. It is cheapest to hail a ride in Cairo at $0.10/km, and it is most expensive to hail a ride in Zurich at $5.19/km. Given that the cost of vehicle ownership varies across the world[3], the driver incentives to participate in Uber’s network will also vary.  From a driver perspective, it will be income generation capability that will motivate them to participate in Uber’s network vs. others. From a consumer perspective, if it becomes cheaper to own a vehicle, then more people will own cars as opposed to taking a Uber ride. Generally speaking, if the cost to own a private vehicle increases, then Uber makes more money and vice-versa. 

Figure 2[4]

In summary, it will take a dominant position in the market to improve the margins as in network effects businesses, the winner earns a disproportionately big chunk of the industry profits. Further, any short term incentives for drivers and customers will be reduced over time. The cost-effectiveness of personal vehicle ownership will keep a cap on Uber’s ambitions to penetrate the total serviceable market (Figure 2). The fundamentals of sharing economics are strong but it remains to be seen how Uber returns to profitability.  


[1] Source: Uber’s S-1 Filing

[2] https://www.travelandleisure.com/travel-tips/ground-transportation/carspring-taxi-index-cabs

[3] https://www.telegraph.co.uk/expat/before-you-go/the-price-of-driving-car-ownership-costs-around-the-world/

[4] Source: Uber’s S-1 Filing

Featured Image Credit: Photo by Aaron Sebastian on Unsplash