For What It’s Worth: Research Team Measures the Value of FintechJune 6, 2019
By Becca Broaddus
From Apple Pay to bitcoin, financial technology (fintech) is rapidly growing and evolving. But despite its prominence in business magazines and board rooms, there is no universally accepted definition of fintech nor large-scale evidence on its impact on the value of financial industries. Or there wasn’t, until Assistant Professor of Finance Qinxi Wu, along with co-authors Mark A. Chen and Baozhong Yang, decided to classify it and find its value effects in their Review of Financial Studies article, “How Valuable is FinTech Innovation?”
First, the researchers classified fintech into seven categories: mobile transaction, cybersecurity, blockchain, data analytics, robo-advising, peer-to-peer and Internet of Things (IoT). With these seven technology categories established, they constructed the data by analyzing all U.S. patents filed from 2003 to 2017.
“It’s a good measure for company’s innovation activities,” Wu said. “The data is available, and we have all the patent filings in that range in public record. Difficulty is, there are more than 4 million patents in that time period.”
Rather than comb through 4 million patents manually, the team harnessed machine learning technology and textual based analysis to identify and classify the fintech patents. Even before evaluating value, the researchers had some interesting findings at this stage.
“First interesting fact is, that although public companies have very rich resources of technology and financial resources, they contributed less than half of fintech innovation,” Wu, whose research focuses on fintech and corporate governance, said. “More than 60 percent of fintech innovation is contributed by private companies and individuals. What’s more, among the company innovators, non-financial companies contributed more than financial companies. It’s a signal that many companies outside of the financial industries are maybe interested in the financial industry and now, that means some potential competition in the future.”
To determine the value of the fintech innovations, the trio used the stock market response to the announcement of patent filings. However, patent filings can be partially anticipated by investors (e.g., it is not surprising to see an innovator with active innovation records to file a new patent). The anticipation of future innovation may have already been incorporated into a company’s stock price today, and so, the abnormal stock return around a new patent filing will give a biased estimate of its intrinsic value. To adjust for this “surprising component”, the researchers built a Poisson model that predicted each company’s innovation intensity. The adjusted abnormal return was then multiplied by the market cap of the firm to measure the value.
The result? In general, fintech innovation has positive value on its innovator and the financial sector as a whole. However, some fintech technologies may destroy the value of certain industries. (There are five industries in the sector: banking, insurance, payments, brokerage and investment.) For each, the researchers found the value impacts of the seven fintech technologies varied. For example, mobile transaction had a negative value effect on the banking industry, but it had a positive value effect on the payment industry.
The researchers then worked to identify the disruptive technology that brought challenges to the existing model of the financial sector.
“We find that if this disruptive technology is filed by young companies outside the financial sector (e.g. fintech startups), then it is more harmful for the value of existing financial industries,” Wu explained. “For those startups outside of the financial industry, it’s easy for them to change to another industry. Essentially, they’re potential competitors of incumbent financial companies.”
The research team found that disruptive innovation by fintech startups harms market leaders less than followers, significantly because of their ability to invest heavily in their own innovation.
“Fintech is a hot topic recently,” Wu, who started at Baylor in 2017, said. “Our contribution is not only to academia, but also to the industry. Last November, we presented our research in New York to investment managers and mutual fund managers. According to the feedback, they said they can immediately apply some of our methods in what they do.”