Fintech Ecosystems: Case Studies of their Emergence, Development and Implications for Incumbent Financial Institutions

Abstract

The contemporary financial landscape in the aftermath of the Global Financial Crisis is characterised by evolving customer expectations, new technologies and tighter regulations providing the impetus for banks to redefine themselves and adapt to the rapidly evolving digital era. The nexus of finance, technology and innovation to provide innovative financial services and products has given rise to high tech firms termed ‘Fintech’. With the emergence of the Fintech phenomenon, conventional centralised IT functions of the incumbent financial institutions of the past are rendered obsolete. Although there is a growing body of work on Fintech, there is a paucity in research specifically looking at the emergence process of Fintech Ecosystem (FE). While the potential of the Fintech to transform the financial services sector is high, there is a lack of research exploring the process of FE development. More importantly, although the Fintech phenomenon is disruptive in nature pushing the incumbent financial institutions to develop capabilities to adapt, there is limited research exploring the incumbent banks’ adaptive strategies as the digital transformation unfolds. With these gaps in the literature, this thesis frames the following research questions: (1) “How did the process of FE emergence unfold in Vizag with the emerging Fintech landscape characterised by complex micro-level interactions among the diverse ecosystem agents?” (2) “How did the process of Fintech ecosystem development unfold in Indonesia?” (3) “How do incumbent banks develop their capabilities in response to the advent of Fintech?”. First, to address research question one, a theoretical lens is built with the key concepts and themes from the Complex Adaptive Systems (CAS). Applying this theoretical framework to analyse the case of Vizag Fintech Valley, one of the upcoming Fintech hubs in Vishakhapatnam, India, a three-stage process model is inductively derived that portrays the specific mechanisms of the emergence process of a FE. With its findings, this case study will be one of the first exploratory studies on the emergence of FE and provides policymakers with an empirically supported framework to make strategic investment decisions on setting up Fintech hubs and to optimise their investments in start-ups. Next, as FEs are redirecting the traditional flows of financial information away from the conventional financial systems, the theoretical lens of business ecosystems is applied to analyse the case of Indonesian FE, one of the upcoming and successful FEs in emerging markets, to address the second research question. In doing so, a process model of FE development across three distinct stages and the key drivers, inhibitors, nature, and outcomes of the ecosystem development across the stages are unpacked. With its findings, this study contributes to a FE maturity model and provides policymakers and practitioners with a holistic, empirically supported framework for the development of FEs. Finally, with the emergence of the Fintech phenomenon, the core entities in the FE, the incumbent banks, are under increased pressure to adapt to the dynamic market conditions. The theoretical lens of Dynamic Capabilities (DC) is applied to analyse the global Fintech landscape, using the data collected by DLA Piper, a global consultancy law firm, to address the third research question. In doing so, a process model is inductively derived that illuminates the capability development process in the incumbent banks in the face of digital transformation in the financial services sector. With its findings, this study contributes to the literature on DC development in the context of financial services and provides an empirically supported framework for incumbent banks and policymakers to devise appropriate strategies in the evolving Fintech landscape.