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How Valuable Is FinTech Innovation?

Journal: Review of Financial Studies

Date: 20190501

Author: Chen, Mark A.; Wu, Qinxi; Yang, Baozhong

Abstract:
We provide large-scale evidence on the occurrence and value of FinTech innovation. Using data on patent filings from 2003 to 2017, we apply machine learning to identify and classify innovations by their underlying technologies. We find that most FinTech innovations yield substantial value to innovators, with blockchain being particularly valuable. For the overall financial sector, internet of things (IoT), robo-advising, and blockchain are the most valuable innovation types. Innovations affect financial industries more negatively when they involve disruptive technologies from nonfinancial startups, but market leaders that invest heavily in their own innovation can avoid much of the negative value effect.

Link: Google Scholar

Key Findings

Value to Innovators

FinTech innovations create substantial private value, with median value of $35 million compared to $2.3 million for non-FinTech financial innovations. Blockchain, cybersecurity, and robo-advising are the most valuable categories.

Industry Impact

IoT, robo-advising, and blockchain bring the highest value to financial sector, with median impacts of $18.3B, $11.6B and $6.1B respectively. However, some innovations like data analytics can have negative industry effects.

Competitive Dynamics

Disruptive innovations from FinTech startups have more negative industry effects, but market leaders can mitigate impact through R&D investment.

Private Value of FinTech Innovation Categories

  • Blockchain shows highest median private value at $98.1M
  • Cybersecurity and robo-advising follow at $52.9M and $49.1M respectively
  • Data analytics is the only category showing negative median value

Industry-Level Value Impact

  • IoT innovations show highest median industry value impact at $18.3B
  • Robo-advising creates $11.6B in median industry value
  • Data analytics shows most negative impact at -$5.9B

Innovation Activity Over Time

  • Blockchain shows fastest growth, rising from 5% to third-largest category by 2017
  • Cybersecurity share declined from 70% in 2003 to 52% in 2017
  • Mobile transactions increased from 4% to 22% over sample period

Contribution and Implications

  • First large-scale empirical evidence on value creation from FinTech innovation using patent data and machine learning classification
  • Documents how disruptive technologies from startups affect incumbent firms and industry structure
  • Shows importance of R&D investment by market leaders in managing technological disruption

Data Sources

  • Private value chart based on Table 7 showing private value statistics by FinTech category
  • Industry value impact visualization derived from Table 9 median industry effects
  • Timeline chart constructed from patent filing frequency data presented in Figure 2