Sustainability in FinTechs: An Explanation through Business Model Scalability and Market Valuation

Round 1

Reviewer 1 Report

Please see my attached report.

Comments for author File: Comments.pdf

Author Response

Reply to Reviewer 1

We wish to thank the Editor and the anonymous Reviewers for their much-appreciated insights that have strongly contributed to improving the quality and soundness of this paper.

Following your precious advice we have made the following corrections:

1. As better explained now in this revised version, we have reformulated and shortened the abstract, focusing it around the research question. The research questions have been re-expressed at the end of the introduction and then developed in the following sections, consistently with the hypotheses, the model, and the stock market evidence.
2. The literature revision (Section 2) contains a new introductory and an ending sentence that links it to the research question and the core canvas of the study. References have been better adapted to the research question and the canvas of the study. Some new references concerning new research avenues have been quoted in the Conclusion. The discussion, and especially the conclusion, has been deeply reformulated to accommodate for some critical insights about the FinTechs and to better focus the outcomes of the research. Reference to regulatory constraints has been underlined, even if it does not represent a core part of the study.
3. The study mainly refers to “economic” sustainability, linked to the business model, the valuation, and the stock market prices of the FinTechs, compared to traditional banks and high-tech firms. The word “sustainability” appears more than 65 times and has been linked even to the Sustainable Development Goals. Tips for further research include a reference to ESG parameters and social/environmental sustainability, with links to additional references.
4. /5 The original empirical analysis is mainly based on the evidence from Figure 3 and Table 2 which show that listed FinTechs are highly correlated with technological firms and less so with banks. This consideration has been thoroughly analyzed and motivated, mainly in the discussion. We humbly believe that this revised evidence now fully backs the research question. It has been better specified that market multipliers represented in Table 3 represent just an ancillary and secondary component of the empirical analysis. Reference to the sources is clearly indicated and any interested reader can access Bloomberg, Eikon/Datastream, or other well-known financial sources to expand the sample. This preliminary research has been conducted even by the authors who reached the conclusion that a wider sample would not change the basic insights recalled through a comment of the market multipliers. The authors may include further cases of FinTechs versus Banks or Tech firms in a repository, should the Editor consider it necessary. Market multipliers have been introduced and explained just to support the ongoing trend of market prices, comparing them with “fundamental analysis” parameters. Finally, just to point out that the sample used in this preliminary research about this industry may be small, due to the fact that the market index considered here is recent and the sample limited to a subset of the potential FinTechs, still largely unlisted.

6. Some Figures have been redrafted and further developed. Reference to the Figures has been better contextualized.

Finally, to all reviewers thank you very much again for your valuable contribution to the revision of our manuscript.

Reviewer 2 Report

The manuscript entitled "Sustainability in FinTechs: an Explanation through
3 Business Model Scalability and Market Valuation is very interesting". It raises issues that are important for many environments and still not very researched.

In my opinion, the authors have very solidly rebuilt the manuscript, based on previous suggestions from reviewers and have significantly improved it.

I would add:

• a clearly defined goal,
• a clear indication of the research gap,
• outlining the strengths and weaknesses of the proposed concept
• describing future directions of research.

Author Response

Response to the Comments of Reviewer 1

Manuscript #: Sustainability-950271

Title of the Paper: Sustainability in FinTechs: An explanation through Business Model Scalability and Market Valuation

Roberto Moro Visconti, Salvador Cruz Rambaud, Joaquín López Pascual

Submitted to Special Issue: Insurtech, Proptech & Fintech. Environment Sustainability, Global Trends and Opportunities

We appreciate the time and effort of the editor and the referees in reviewing this manuscript and providing constructive comments that helped to improve and clarify the manuscript considerably. We hope that the revised version of the manuscript addresses their concerns.

Below we included the comments of the reviewers with our responses, indicating exactly how we addressed each concern and explaining the changes that we have made. Finally, the paper was professionally proofread.

Reviewer Comments, Author Responses, and Manuscript Changes

Review Report Form 1

Open Review

The manuscript entitled "Sustainability in FinTechs: an Explanation through 3 Business Model Scalability and Market Valuation is very interesting". It raises issues that are important for many environments and still not very researched.

In my opinion, the authors have very solidly rebuilt the manuscript, based on previous suggestions from reviewers and have significantly improved it.

I would add:

• a clearly defined goal, The goal has been better focused, in particular at the end of par. 1:

Based on these premises, the research question of the paper is concerned with the hybrid “Fin / Tech” nature of these innovative firms, wondering if they are more similar to traditional banks or trendy technological firms. The business model comparisons will be complemented by stock market empirical evidence, limited to a subset of successful listed FinTechs that represent a mighty target for mushrooming startups. Economic sustainability will be investigated as a prerequisite of other sustainability declinations, ranging from the social impact of financial inclusion to the related environmental concerns, consistent with the SDGs.

• a clear indication of the research gap, The research gaps have been underlined in particular at the end of par. 2 with this new sentence:

The economic sustainability of FinTechs backed by stock market investments has never been comprehensively analyzed. Even the business model comparison between FinTechs, on one side, and either banks or IT companies, on the other, has hardly been investigated and represents a further research gap. 

• outlining the strengths and weaknesses of the proposed concept the conclusion has been expanded to accommodate further critical assessments.

describing future directions of research. Some new sentences have been inserted in the conclusion with further research tips ignited by the aforementioned “weaknesses” of the proposed concept. 11 new references have been added. See the last sentences in the conclusion:

This study has underlined some of the differences between FinTechs and (traditional) banks, suggesting their strong similarity with technological firms. Further research questions, however, remain unanswered [77], for instance, those concerning the likely convergence of the business models, starting from the complementary payment systems. Financial stability implications from FinTechs [78], crucial for the sustainability of the financial intermediation ecosystem, also deserve further interdisciplinary scrutiny.

Finally, as competition develops between FinTechs and established banks, the financial system could become more diverse and competitive. But it could also become more concentrated and new risks to financial stability and sustainability could emerge that merit further research

Submission Date

15 September 2020

Date of this review

24 Sep 2020 21:42:31

Author Response File: Author Response.docx

Reviewer 3 Report

Comments and suggestions for authors.

1. The choice of topic is interesting as both the development of FinTech firms as well as sustainability issues are currently important topics in the academic discussion.
2. The paper would greatly benefit from a more precise definition of the notions of “FinTech” and “sustainability”, as well as the subsets of these notions that the authors focus on in the paper.
   1. FinTech definition: it may be useful to use a broad definition of FinTech, e.g. the used by Financial Stability Board (https://www.fsb.org/work-of-the-fsb/policy-development/additional-policy-areas/monitoring-of-fintech/); the broad population of FinTech firms can be then subdivided by e.g. type of services offered.
   2. FinTech subset analysed in the paper. The authors seem to use the division of FinTechs into subsets of competitors vs collaborators vis-à-vis the banking sector (lines 110-116). Their conclusions point to the potential for collaboration between banks and FinTechs to increase shareholder value (lines 543-547). However, it should be noted that the FinTech firms listed in table 3 are active mostly in payments and it can be argued that their business activities are mostly complementary to banks. This reviewer encourages the authors to be more specific on the sample of FinTech firms that is analysed and to point out to what extent their business models place them in the category of collaborators/competitors. It would be beneficial to spell out exactly which business models of FinTech companies are the subject of analysis (the paper seems to focus on firms from the payments sector, at least judging by table 3).
3. The authors correctly note that there are many aspects to the notion of sustainability (e.g. lines 155-198). However it is not clear to the reviewer which of the notions of sustainability the authors want to explore in the paper. The analysis of valuations of (a subset of) FinTech companies seems to explore the long-term viability of the companies under analysis (at least as seen through the eyes of market participants), which can be seen as one of the aspects of sustainability (see lines 177-178). However, the paper makes also multiple references to e.g. green finance, UN Sustainable Development Goals, financial inclusion, offering strong views on the contribution of FinTech to these aspects of sustainability (e.g. lines 248-253, 432-454, 644-655). In the view of this reviewer, the analysis in this paper (sections 3 and 4) does not offer evidence to support such statements, nor does it analyse any aspect of sustainability other than individual firm viability. This reviewer encourages the authors to reconsider the scope of the conclusions to be more closely aligned to the scope of research contained in this paper.
4. It is not clear to the reviewer what is the purpose of describing the binominal tree valuation methodology (lines 288-322), considering that the method is not used for further analysis in this paper. Furthermore, it is stated that the binominal tree analysis is used in practice for companies in startup phase, while the sample of FinTech firms mentioned in table 3 includes companies such as Visa or Mastercard which are established firms.
5. The authors conclude that FinTech firms have a risk profile that is similar to technological startups (lines 623-624). While sections 4.1 and 5 document the differences in business models between FinTech companies and banks, this reviewer strongly encourages the authors to conduct a more thorough analysis of the alleged similarities in the business models of FinTechs and technology companies. In the view of this reviewer, the current version of the paper relies too heavily on trends in market valuations (including market multipliers) for this conclusion.
6. Given that the market data used in this paper come from a period of historically low interest rates and search for yield in the financial markets (see e.g. assessment in IMF October 2019 GFSR https://www.imf.org/en/Publications/GFSR/Issues/2019/10/01/global-financial-stability-report-october-2019 ),market valuations of firms may be affected to a certain extent by overall market trends, and less by assessment of individual firms by investors. This aspect (mentioned in lines 674-678) is worth exploring further in the paper, even if only as a caveat to the analysis.
7. The paper would greatly benefit from streamlining which would make it clear what are the main research questions and the methods used to answer them. At present, the line of reasoning in the paper is not easy to follow, inter alia due to the multitude of aspects of sustainability which are mentioned, but not analysed further.
8. The paper would benefit from language proofreading.

Author Response

Response to the Comments of Reviewers

Manuscript #: Sustainability-950271

Title of the Paper: Sustainability in FinTechs: An explanation through Business Model Scalability and Market Valuation

Roberto Moro Visconti, Salvador Cruz Rambaud, Joaquín López Pascual

Submitted to Special Issue: Insurtech, Proptech & Fintech. Environment Sustainability, Global Trends and Opportunities

We appreciate the time and effort of the editor and the referees in reviewing this manuscript and providing constructive comments that helped to improve and clarify the manuscript considerably. We hope that the revised version of the manuscript addresses their concerns.

Below we included the comments of the reviewers with our responses, indicating exactly how we addressed each concern and explaining the changes that we have made. Finally, the paper was professionally proofread.

Review Report Form 2

Open Review

Comments and suggestions for authors.

1. The choice of topic is interesting as both the development of FinTech firms as well as sustainability issues are currently important topics in the academic discussion.
2. The paper would greatly benefit from a more precise definition of the notions of “FinTech” and “sustainability”, as well as the subsets of these notions that the authors focus on in the paper. We have included 11 new references mostly dedicated to the definition of “FinTech” and sustainability of FinTechs
1. FinTech definition: it may be useful to use a broad definition of FinTech, e.g. the used by Financial Stability Board (https://www.fsb.org/work-of-the-fsb/policy-development/additional-policy-areas/monitoring-of-fintech/); the broad population of FinTech firms can be then subdivided by e.g. type of services offered. See new sentences in the first lines of the introduction.

The term “FinTech,” which is the short form of “Financial Technology”, denotes the firms that combine financial services with modern, innovative technologies. As a rule, new participants in the market offer Internet-based and application-oriented products. FinTechs generally aim to attract customers with products and services that are more user-friendly, efficient, transparent, and automated than those currently available. Traditional banks have not yet exhausted the possibilities for improvements along these lines [1-3].

In addition to offering products and services in the banking sector, there are also FinTechs that distribute insurance and other financial instruments or provide third party services. In a generous sense of the term, “FinTech” encompasses companies that simply provide the technology (such as software solutions) to financial service providers.

FinTech is recognized as one of the most critical innovations in the financial industry and is evolving at a rapid speed, driven by the sharing economy, favorable regulation, and information technology. FinTech promises to disrupt and reshape the financial industry by cutting costs, improving the quality of financial services, and creating a more diverse and stable financial landscape. FinTechs foster technologically enabled innovation in financial services that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions, and the provision of financial services [4].

The relevance of the link between sustainability, finance, and technology has been evidenced by the COVID-19 pandemic crisis, which has urged all countries to re-think the models traditionally deployed and rely more on technology and sustainability [5].

FinTechs have already started to fill the financial inclusion gap by providing services to the Bottom of the Pyramid unbanked people, enabled by ICT and new business models. The triple-bottom-line impact analysis of FinTechs that considers economic, social, and environmental sustainability is a new, emerging research area [6]. Nevertheless, as FinTech is innovative but inherently unpredictable, customers are still hesitant to adopt and use FinTech, which ultimately affects its growth. Uncertainty is more critical in FinTech than in traditional e-banking transactions because FinTech transactions are complicated and less predictable [7].

FinTechs are gaining more importance and presence in the financial and banking sector. FinTech is touted as a game-changing, disruptive innovation capable of shaking up traditional financial markets [8].

2. FinTech subset analysed in the paper. The authors seem to use the division of FinTechs into subsets of competitors vs collaborators vis-à-vis the banking sector (lines 110-116). Their conclusions point to the potential for collaboration between banks and FinTechs to increase shareholder value (lines 543-547). However, it should be noted that the FinTech firms listed in table 3 are active mostly in payments and it can be argued that their business activities are mostly complementary to banks. This reviewer encourages the authors to be more specific on the sample of FinTech firms that is analysed and to point out to what extent their business models place them in the category of collaborators/competitors. It would be beneficial to spell out exactly which business models of FinTech companies are the subject of analysis (the paper seems to focus on firms from the payments sector, at least judging by table 3).

This concept has been better specified. See:

a) 3.2. The FinTechs listed in Table 3 are mostly active in payments that represent the most mature activity that got first ready for listing, and show the greatest complementarity with banks, even if their stock market behaviour is weakly correlated. Other FinTech activities (InsurTech, RegTech, PropTech, SupTech, etc.) are more specific and mostly embodied in promising startups that consider listed FinTechs as an ideal target. These FinTechs develop a business model that is more distant from that of (traditional) banks.

b) 4 FinTech has previously grown on its promise to expand access to the financial system by providing services to traditionally unserved or underserved populations. But increasingly, the faster/cheaper/better service models offered by FinTech startups [59] are disrupting the incumbent banking system. Financial products that traditionally have been the exclusive domain of traditionally licensed credit institutions - payment services and loans, among others - are now offered by FinTech firms [60]. These smaller, more agile companies support a greater diversity of products and providers; they promise greater portability of financial products that are now digitized, built on hybrid and cross-industry business models that allow them to access markets often closed to traditional banks and credit offerors. They also offer greater transparency and improved risk management, at least partly enabled by their ability to get instant customer feedback, and use it to power real-time adjustments in the services they offer [61].

c) par. 4 …Currently, FinTech has had a more pronounced impact in the payments market, where firms have expanded their presence in non-capital intensive businesses such as cross-border transfers, micropayments, and card payments. FinTechs (especially those focused on payment systems) and traditional banks operate in the same (financial) market and sometimes share common clients

d) par. 4 (end): This co-opetitive pattern mostly refers to FinTechs involved in the payment segment that is mostly synergic with the traditional banking business.

3. The authors correctly note that there are many aspects to the notion of sustainability (e.g. lines 155-198). However it is not clear to the reviewer which of the notions of sustainability the authors want to explore in the paper. The analysis of valuations of (a subset of) FinTech companies seems to explore the long-term viability of the companies under analysis (at least as seen through the eyes of market participants), which can be seen as one of the aspects of sustainability (see lines 177-178). However, the paper makes also multiple references to e.g. green finance, UN Sustainable Development Goals, financial inclusion, offering strong views on the contribution of FinTech to these aspects of sustainability (e.g. lines 248-253, 432-454, 644-655). In the view of this reviewer, the analysis in this paper (sections 3 and 4) does not offer evidence to support such statements, nor does it analyse any aspect of sustainability other than individual firm viability. This reviewer encourages the authors to reconsider the scope of the conclusions to be more closely aligned to the scope of research contained in this paper.

The notion of sustainability has been better focused and analyzed, quoting the Triple bottom-line impact analysis (economic, social, and environmental sustainability). In the introduction this sentence has been added:

FinTechs have already started to fill the financial inclusion gap by providing services to the Bottom of the Pyramid unbanked people, enabled by ICT and new business models. The triple-bottom-line impact analysis of FinTechs that considers economic, social, and environmental sustainability is a new, emerging research area [6]. Nevertheless, as FinTech is innovative but inherently unpredictable, customers are still hesitant to adopt and use FinTech, which ultimately affects its growth. Uncertainty is more critical in FinTech than in traditional e-banking transactions because FinTech transactions are complicated and less predictable [7].

And (at the end of the introduction): “Economic sustainability will be investigated as a prerequisite of other sustainability declinations, ranging from the social impact of financial inclusion to the related environmental concerns, consistent with the SDGs”. The conclusion recalls these statements:

This study analyzes the sustainability features of FinTechs mainly from an economic side that assesses their long-term viability. Economic sustainability is considered here as a prerequisite for further sustainability declinations, embracing social and environmental concerns.

4. It is not clear to the reviewer what is the purpose of describing the binominal tree valuation methodology (lines 288-322), considering that the method is not used for further analysis in this paper. Furthermore, it is stated that the binominal tree analysis is used in practice for companies in startup phase, while the sample of FinTech firms mentioned in table 3 includes companies such as Visa or Mastercard which are established firms.

In par. 3 the usefulness of the binomial tree, especially for startups, is now specified. A link between promising startups and established FinTechs as Visa or MasterCard has been included.:

The binomial tree valuation methodology, as stated above, mostly applies to startups that still lack a consolidated track-record. Whenever FinTechs that survive Darwinian selection evolve and go public (consistently with the panel selected in Table 3), they tend to incorporate their real options in stabler cash flow forecasting, expressed by DCF metrics or market multipliers. Listed FinTechs like Visa or MasterCard are established firms that represent a template and a target for promising startups.

Figure 3 with the picture of the binomial tree has been deleted, as we consider it not essential.

5. The authors conclude that FinTech firms have a risk profile that is similar to technological startups (lines 623-624). While sections 4.1 and 5 document the differences in business models between FinTech companies and banks, this reviewer strongly encourages the authors to conduct a more thorough analysis of the alleged similarities in the business models of FinTechs and technology companies. In the view of this reviewer, the current version of the paper relies too heavily on trends in market valuations (including market multipliers) for this conclusion.

The similarity is given more by the technological features of the FinTechs, embedded in the business model, than by the stock market valuations.

See the new sentence at the end of par. 4.1.:

As shown in Figure 4 and tables 2 and 3, FinTechs and their business models, show greater similarity with technological firms. FinTechs are considered as digital disruptors that are usually associated with mobile functionality, simplicity, big data gathering, and processing, accessibility, agility, personalization, and convenience. These technological components are embedded in a business model that resembles that of other Tech ventures in key features as economic scalability, intangible intensity, and prompt flexibility. Hyper-regulated banks with their heavy supervisory capital, high staff costs, and rigid physical branches, are far less related, even if they share similar clients performing complementary activities, especially if considering payment systems.

6. Given that the market data used in this paper come from a period of historically low interest rates and search for yield in the financial markets (see e.g. assessment in IMF October 2019 GFSR https://www.imf.org/en/Publications/GFSR/Issues/2019/10/01/global-financial-stability-report-october-2019 ),market valuations of firms may be affected to a certain extent by overall market trends, and less by assessment of individual firms by investors. This aspect (mentioned in lines 674-678) is worth exploring further in the paper, even if only as a caveat to the analysis.

A sentence at the end of par. 3.1. introduces the requested caveat:

The data considered in this analysis cover the last five years, from the inception of the FinTech index to the first semester of 2020. This period of historically low interest rates has sustained the overall stock market performance that, however, needs to be selective and able to discriminate between trendy industries and more mature sectors.

7. The paper would greatly benefit from streamlining which would make it clear what are the main research questions and the methods used to answer them. At present, the line of reasoning in the paper is not easy to follow, inter alia due to the multitude of aspects of sustainability which are mentioned, but not analysed further.

Sustainability aspects have been better explained and it has been stated that economic sustainability represents the overarching priority of this research.

8. The paper would benefit from language proofreading.

Language proofreading has been done.

Submission Date

15 September 2020

Date of this review

27 Sep 2020 16:21:34

Author Response File: Author Response.pdf

Reviewer 4 Report

The study put forward by the researchers is interesting. The authors propose the objective, which justify and expose the novelty. The contextualization of the subject under study is adequate. The structure of the document is valid. The methodology used allows meeting the proposed objective. The conclusions are based on the data obtained.
My recommendations and suggestions are:
- The first time an acronym appears it must be defined. For this reason, the summary must define "Fintechs".
- The Fintechs Term is repeated in excess in the document. It is recommended to take care of the wording of the content of the document.
- The acronym SDGs, include its meaning.
- Table 3:
put the font at the end of the table.
The figures are not correct, see numbering in English.
What does the asterisk mean in several of the terms in the columns of table 3: for example WACC *
Define the acronyms used in the columns in the footer of the table.
- Include the limitations of the research in the conclusions.
- Include in the conclusions the contributions of the research to the academic / theoretical and professional fields. For whom are the results of interest and valid?

Author Response

We wish to thank the Editor and the anonymous Reviewers for their much-appreciated insights that have strongly contributed to improving the quality and soundness of this paper.

Following your precious advice we have made the following corrections:

• We have defined FinTechs at the beginning of the abstract and then more comprehensively both in the Introduction and in the Literature analysis.
• Reference to FinTech terms has been reduced, even if it represents the key word of the paper.
• Sustainable Development Goals – SDG have been defined (even with reference to their official website) and the acronym has been replaced by the full wording.
• The font of Table 3 has been put at the end.
• The numbering of Figures has been checked.
• Asterisks in Table 3 have been removed as unnecessary.
• Acronyms used in Table 3 are defined some lines below in the bullet points section (lines 562-583)
• Regarding your advice on the limitations of the study and new research avenues, we have made some significant revisions in this part. We have introduced at the end of the new “Conclusions and limitations” two new paragraphs and adding some references. Contributions of academics and practitioners have been added too.
• The interest in this study has been clarified.

Finally, to all reviewers thank you very much again for your valuable contribution to the revision of our manuscript.

This manuscript is a resubmission of an earlier submission. The following is a list of the peer review reports and author responses from that submission.

Round 1

Reviewer 1 Report

The authors tried to do a valuation of FinTechs firm based on the valuation method for typical tech start-ups. Also, the sustainability of FinTechs is a important issue in the business sector and of high interest. However, the article failed to 1) deliver the sustainability issue in FinTechs; more specifically the main driver of sustainability in FinTechs and 2) clearly defining FinTechs  and Sustainability; Thus, making the entire argument vague and wordy. Based on the author's definition of FinTech laid out in the first part of introduction(see line no 5, 61, 72 and so on), the comparison done in the third section of the paper seems quite awkward and does not make sense. Also, the reviewer can not relate binomial tree and real-option modeling to Venture capital method nor start-up or internet company as suggested in the section 3 of the manuscript. It would be helpful to actually name few companies for each categories instead of using indices provided by Bloomberg. Finally, market multipliers in different sectors make no sense and should not be used to compare the performance in distinct sectors. If needed there should be reasoning and evidence to use the unorthodox approach - clearly not presented. Overall, throughout the entire manuscript, the sustainability, which supposed to be the important goal set by the author is not dealt or impossible to relate with FinTechs' valuation and scalability model.

The reviewer found the manuscript style quite awkward and some concern related to copyright issues; All the "Source" written in the Figure and Table has to be own elaboration as default. Thus, no need of addressing in the caption as it should be your own work otherwise clearly cited and obtain license to be used. Special cases such as Figure 2 and 3 needs approval of content creator or address appropriate license to be reproduced. It is not adequate to state where the source is.

The reviewer found difficult to comprehend the study due to lack of coherency and evidences. There are too many paragraphs to be listed here that looks irrelevant to the study(e.g second, fourth, and the last paragraph of page two; especially the last paragraph seems not aligned to title and abstract of the current study) or failed to place it in the correct order or simply failed to use it in a logical structure.

Reviewer 2 Report

Dear Authors,

This selected topic is highly relevant for the academic community as well as that of the practitioners concerned about FinTechs' market value. The work is well structured.

Regrading the risks (lines 502-511), I suggest to detail the risks of FinTechs in parallel with risks of the traditional banks.

At Conclusion chapter there are some statements that I consider you should explained in more detail:

• lines 526-531: definitely need more in depth explanation, in light of purpose of your research
• lines 532-536: subtracting the valuation of traditional banks from FinTechs valuation method should be better explained and supported by some references, or just presented as a proposed methodology

I hope these suggestions will help you to improve your paper!