Question

Question 1
(a) Analyse and discuss the importance of the following two major services performed by financial intermediaries:
(i) Maturity intermediation
(ii) Denomination intermediation

(b) Analyse and discuss whether each of the two functions in part (a) is likely to be disrupted by Fintech.

Answer 1

Answer:

Maturity intermediation:

Maturity intermediation is an investment term that describes a bank's long-term lending on funds borrowed for a short-term investment. When a financial institution borrows money from certificates of deposit or demand deposits and then loans that money out as a 30-year mortgage, it engages in maturity intermediation.

Making long-term loans on funds borrowed at short-term interest rates. It is a vulnerable position for a bank.

The point of maturity intermediation is to make profits off the differences in interest rates. Banks transform short-term debt into long-term credit using maturity intermediation. Banks borrow money from depositors and pay those customers interest. Banks, in turn, take that money and lend it to people who need funds to pay for vehicles, houses and other large items. The short-term interest paid out to depositors is less than the long-term interest gained over a 30-year mortgage, so the financial institution profits.

Denomination intermediation:

Denomination intermediation is the process whereby small investors are able to purchase pieces of assets that normally are sold only in large denominations. Individual savers often invest small amounts in mutual funds. The mutual funds pool these small amounts and purchase a well diversified portfolio of assets.

Denomination values are graduated and usually divisible by some common denominator (hence, 'denomination'). For example, in addition to the $1 bill, denominations of U.S. paper money include $5, $10, $20, $50, and $100 notes, all divisible by 5.

Denomination is defined as the act of categorizing or making a category, particularly of a religion. An example of a denomination is Catholicism as a category of Christianity. An example of a denomination is a $5 bill.

Cash calculation formula

Divide the amount with the highest denomination. The quotient is the number of notes required for that denomination. Use the remainder as the dividend for division by the next highest denomination and so on until all denominations are covered.

b) likely to be disrupted by Fintech.

Fintech, the portmanteau of finance and technology, represents the collision of two worlds—and the evolution of the use of technology in financial services. Financial services and technology are locked in a firm embrace, and with this union comes both disruption and synergies.

Identifies gaps in Economics and Finance research regarding two applications of FinTech: crowdfunding and blockchain. Analysing these records shows that

(i) current research on FinTech is fragmented with limited theoretical grounding;

(ii) crowdfunding and blockchain can be regarded as two innovations that may disrupt traditional financial intermediation but in different ways;

(iii) crowdfunding platforms substitute for traditional financial intermediaries and serve as a new intermediary, without eliminating the need for intermediation;

(iv) similar to crowdfunding, blockchain also creates new intermediaries; and

(v) the trust element inherent in blockchain enables blockchain to eliminate the need for intermediaries in some financial areas but not all.

Five ways fintech is disrupting the financial services industry

1.    Chatbots for customer service

2.    Machine learning and AI for fraud detection

3.    Omni-channel banking and obsolescence of bank branches

4.    Biometrics for stronger security

5.    Blockchain for digital transactions

Conclusion:

Mobility, smartphones and online payment apps coupled with the demand for secure and personalised banking experiences are giving new impetus to the adoption of financial technology within the financial services industry. Today, fintech encompasses everything from customer service chatbots and machine learning algorithms for fraud analytics to blockchain for digital transactions and biometrics-enabled authentication. Increasingly, retail banks are being upstaged by new fintech players that offer customers all of this and more, making it imperative for traditional banks to make strategic investments in innovative technologies. This will help them upgrade their operations and deliver seamless services for higher customer retention.