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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

Private Value

FinTech innovations create substantial value for innovators, with median private value of $35 million compared to $2.3 million for non-FinTech financial innovations. Blockchain ($98.1M), cybersecurity ($52.9M), and robo-advising ($49.1M) are the most valuable categories.

Industry Impact

IoT ($18.3B), robo-advising ($11.6B), and blockchain ($6.1B) bring the highest median value to the financial sector. However, some FinTech categories can have negative industry-wide effects by enabling increased competition.

Market Leaders

Market leaders who invest heavily in R&D can better withstand disruption from FinTech startups. Higher R&D intensity helps reduce negative value impacts from disruptive innovation by approximately 16%.

Private Value of FinTech Innovation Categories

  • Blockchain innovations show highest median private value at $98.1M
  • Cybersecurity and robo-advising follow at $52.9M and $49.1M respectively
  • Data analytics shows negative median value of -$45.3M

Industry-Wide Value Impact

  • IoT shows highest positive industry impact at $18.3B
  • Robo-advising and blockchain demonstrate significant positive value
  • Data analytics shows most negative industry impact at -$5.9B

Innovation Activity Over Time

  • FinTech patent applications increased approximately fourfold from 2003 to 2017
  • Surge in innovation activity particularly notable from 2010 to 2014
  • Blockchain emerged as third-largest category by 2017 despite only appearing in 2015

Contribution and Implications

  • First large-scale empirical evidence on the value and impact of FinTech innovation using comprehensive patent data
  • Demonstrates how different FinTech technologies create varying levels of value for innovators and industries
  • Shows importance of R&D investment for incumbent firms facing FinTech disruption

Data Sources

  • Private value chart based on Table 7 - showing median private values for each FinTech category
  • Industry value impact chart based on Table 9 - showing median industry-wide value effects
  • Innovation trend chart based on Figure 1 - showing normalized frequencies of patent applications over time