FinTech companies are also being challenged by Adyen released in 2018 show that the company the major traditional banks who are rapidly develop- may survive competitive challenges. Year-on-year, ing their own versions of online payment systems, Adyen reports, the processed volume of payments from peer-to-peer payments for retail customers, to has grown by 43.1 percent. TransferWise has also highly automated online payment and billing sys- been growing rapidly; in 2018, it reported that 3.9 bil- tems for global businesses. As consumers and firms lion dollars is being sent through its network every have moved towards mobile and online payments, month. Both firms illustrate how fintech startups are many traditional banks have invested heavily in changing the traditional bank and payment systems new technologies in part using the funds saved by using new technologies and business models. closing down traditional physical bank branches. Where in-house innovation has not worked, the large banks have purchased fintech firms and folded them Sources: Jan Hammer, "Adyen: A Global Success Born in Amster- dam," Index Ventures, June 13, 2018, https://www.indexven- into their existing business and technology plat- tures.com/blog/adyen-a-global-success-born-in-amsterdam; forms. Traditional banks have a decided advantage The Forrester Wave"": Global Merchant Payment Providers, over fintech startups: extraordinary cash flow and 24 2018," Adyen, https://www.adyen.com/landing/online/ tens of millions of loyal customers and firms. In this global/forrester-wave-report; "Dutch Payment Firm Adyen First-Half Profit Surges," CNBC, August 22, 2018, https://www. scenario, fintech firms have been early to the party, cnbc.com/2018/08/22/dutch-payments-firm-adyen-first-half- but typically do not survive to the end of the party, profit-surges.html, "Bank Jobs Could Fall by 50% in 10 Years at least not as independent firms. Says Ex-Barclays Boss," BBC News, November 26, 2015, https:// Like so many other companies in fintech, Adyen www.bbc.comews/business-34933960, Kamal Ahmed, "Bank of England Chief Economist Warns on AI Jobs Threat, " BBC News, is still more of a financial promise than an immedia August 20, 2018, https://www.bbc.comews/business-45240758; ate reality. Investors pay for profits that are still to Tomasz Grynkiewicz, "5 Years Ago Nobody Took Their Bank come, as well as IPO exit strategies that promise Seriously. Today This Fintech Attracts 2,000 Customers a Day,' rich rewards even in the absence of profits. CEOs Netguru, April 9, 2018, https://www.netguru.com/blog26-fin- of startup companies in the fintech sector need to tech-disruption-digital-banking; Transferwise.com, all accessed January 2019. have a keen marketing instinct; they must be able to explain why their idea will make money in the years to come. TransferWise, the company that facilitates CASE STUDY QUESTIONS money transfers without asking for huge fees for cur- 1-12 According to Adyen, the payments platform rency conversion, was founded in 2011, but it only has two advantages compared to other pay- made its first profit in 2017. ment platforms. Describe these advantages in Adyen's founders were very experienced entre- your own words. preneurs when they started their company. They 1-13 Many fintech companies are very valuable on had already created another company, Bibit, which he stock exchange even though they make lit- they sold to The Royal Bank of Scotland for E100 le or no profit. Explain this situation. Why do million. Indeed, the word adyen means "again" in a investors pay so much for shares of companies language from Surinam, meaning that Adyen is their that hardly make any profits? second endeavor in the field of financial technol- 1-14 Explain the term "creative destruction." Is the ogy. Many companies never get a second chance, German bank N26 destroying jobs or creating and research shows that around 90 percent of new new jobs? fintech companies go bankrupt without ever having 1-15 Explain why such a high percentage of fintech been profitable. at all. startups go bankrupt before making any profits But those that survive change the banking and payments industry. The first financial results that Case contributed by Bernard BouwmanChanges in the Financial Industry: Adyen and Fintech spbelword amsize CASE STUDY was an especially successful 2018 for Adyen, payments increase exponentially, there is huge room a Dutch company that mostly focuses on pro- for improvement here. Adyen is reducing this per- cessing Internet payments. In February, Adyen formance gap by integrating several components of announced that it would become the primary pay- the payment chain (such as the gateway, risk assess- ments provider of American Internet giant eBay. ment, and processing) into one platform. It has thus This was a big success for two reasons. First, eBay been successful in ensuring a higher success rate in is, of course, a huge company with a large revenue; its payments chain than other facilitators. (It also in 2017, the value of goods sold on the platform provides the company with a wealth of data on cus- amounted to a staggering $36.28 billion. For Adyen, this meant a huge increase of its business. Second, tomer behavior) A second advantage of the Adyen business model and perhaps more importantly, eBay gave preference is that its payments platform is connected to most to Adyen over PayPal, which is very often the first payment systems being used in the world. Payment choice of online companies. For a startup like Adyen systems can differ greatly from country to country. to beat a market leader like Pay Pal was remarkable. In the Netherlands, for instance, most online pay- As if that was not enough, Adyen also had a very ments are done through the iDEAL system, which successful initial public offering (IPO) at the stock links payments to checking accounts. In other coun- exchange. Its shares, which were priced at 6240, tries, most payments are done through credit cards nearly doubled in value during the first trading day. or debit cards like Visa or Mastercard. When it comes Some conservative commentators stated that this to processing payments, this variety of methods com- was the outcome of overhype, emphasizing that the plicates things enormously, as the payment proces- price of the shares did not reflect the profits the sors need to have several platforms. Adyen, however, company was making. However, at least for the first has one integrated platform that can link with most few months after the IPO, the optimism seemed well payment methods being used all over the world. This founded, for in December 2018, Adyen shares were is, of course an attractive option for merchants or still priced around 6430. Adyen, a company with online companies that sell their goods worldwide. around 750 employees, was at one point more valu- When eBay decided to work with Adyen, it gave two able than Deutsche Bank, a traditional financial instireasons for its decision: Adyen processes payments tution that employs more than 100,000 people! more cheaply and gives more control to merchants What explains Adyen's success? The answer to that use the platform. that lies in the data technology it uses. To put it Adyen is a good example of a company that works simply, Adyen makes payment transactions easier. in the field of fintech (financial technology). Compa- Making payments on the Internet is a much more nies that use technology to facilitate financial trans- complicated business than many people think it is. actions have been highly successful over the last ten In many payment cycles, several companies work years. Founded in 2006, Adyen is relatively old for a together to ensure that the payment is successful. fintech company, but it has grown enormously-in To start with, there is, of course, the merchant, but 2017, as its website proudly boasts, it had 6108 billion there are also companies providing a gateway for the in processed volume. Remarkable as Adyen's case payments, assessing the risk, and so on. Because of is, it is definitely not unique; other firms have used this crowded field of facilitators/ many things can go technology to find a new niche in the international wrong. For instance, software may be outdated, or payments universe. The company Transfer Wise programs used by one provider may be incompatible (which was founded in Estonia but now mostly oper- with those of another. Because of this, many pay- Vates from the United Kingdom) is another example: it ments fail for technical reasons even when the client facilitates money transfers from Country A to Coun- has enough funds to make the transaction. try B while avoiding currency conversion. According to Forrester, a consultancy firm that Initially traditional banks find it hard to com- focuses on financial data, around 10 percent of all pete with companies like Adyen. It is in the DNA payments fail for such "technical" reasons. As online of fintech companies to develop and focus onstate-of-the-art information systems. Traditional how fintech is changing the banking industry. This banks are very different; they work in buildings, company provides payment services just like a nor- value direct, physical contact with the customer, and mal bank does, but it does not have buildings where often have branches in various countries that are customer agents give advice to the customers; every- more or less independent. Their IT staff often has thing is online. In 2018, N26 was attracting 2,000 new a supporting role and not, as in the case of Adyen, customers every day and had secured $160 million guiding one. Traditional banks use IT systems to from private investors to expand. One of the found- facilitate business operations, not to compete with ers, Maximilian Tayenthal, remarked that traditional other financial providers. Their IT systems are usu- banks had not taken N26 seriously when the com- ally at the national level and may differ from coun- pany was launched. try to country. The heart of Adyen is the financial Companies like Adyen and N26, which make platform, and the IT staff works continuously to online banking so much easier, have already had make it cheaper and more user-friendly. The data a huge impact on the physical presence of banks that come in on this platform are analyzed and used in many countries. In the United Kingdom, for to upgrade and update it! The data that Adyen gets instance, there were 18,000 branches in 1990; at the are global (the platform processes payments from end of 2017 there were only 8,000 left. In the Neth- all over the world) and highly diverse (from pay- erlands, the digital banking experience progressed so ment transactions on the Internet as well as transac- rapidly that the Dutch government felt it necessary tions performed in physical shops). This wealth of to make it clear that it would not allow the loss of data ensures that Adyen has better opportunities to cash payments from the Dutch High Streets as this analyze the market of payment transactions and its would severely limit the participation in society of developments than traditional banks do) vulnerable groups such as the elderly. Fintech is a good example of what economists call According to experts, the next wave of technol- "creative destruction." This term, originally labelled ogy will be even more disruptive. In 2018, Antony by the Austrian economist Joseph Schumpeter, Jenkins, who ran Barclays from 2012 to 2015, told the describes the influence of technology on the econ- BBC that in the coming years around 50 percent of omy. According to his theory, new technologies inev- all jobs in banking (including those of middle manag- itably result in winners and in losers. One famous ers and customer agents) would be replaced by some example of a disruption is the invention of the Spin- kind of artificial intelligence. Andy Haldane, the ning Jenny, a device invented in Britain during the chief economist of the Bank of England, warned in eighteenth century. The Spinning Jenny made the production of cloth more efficient, cheaper, and- the same year of a fourth industrial revolution that critically-reduced the number of laborers needed would cause severe disruptions in the job market, in the textiles industry, Over the last 30 years, the and at the heart of it would be artificial intelligence- a modern counterpart to the Spinning Jenny. Internet has had the same effect on society: some This does not mean that success is automatically jobs have disappeared, and others have come into guaranteed for new companies like Adyen, Transfer- existence. A good example is travel agencies. Forty Wise, and N26. A majority of these fintech startups years ago, there was a travel agency on every high go bankrupt, and many of these fintech companies street, but according to the official Dutch statistics need to make large investments before they can gen- agency, 67.2 percent of all holidays in 2017 were booked online. Likewise, traditional hotels now have erate profits.) Even when they generate profits, these are often, for a time at least, rather small compared to compete with sites like Airbnb. Creative destruction comes in waves, and the to the overall value of the company on the stock (banking industry is now in the frontline of change exchange. During the first six months of 2018, for because of the emergence of fintech companies.) instance, Adyen increased its profits by 67 percent to 6156.4 million. This may seem like a staggering Adyen has incorporated many stages of the pay- amount for a company that was only founded in ment chain, and traditional companies that used to 2006/ but it is not a lot of money compared to the provide, for instance, risk assessment now have to either make their business model more efficient or total amount of payments it processed (670 billion). face the very real possibility of going out of busi- It pales even more if one takes into account the total ness. The German firm N26 is also a good example of (16 billion). value of the company on the stock exchange (around