Fintech Risks Test Bank Chapter 18

Chapter 18 Fintech Risks

KEY

1. Fintech adoption rates, which measures fintech users as a percentage of the digitally active population, is universal across developed countries.

2. China leads other countries in adopting fintech at 69% compared to the US at 33% and Hong Kong and South Korea at 32% respectively. 

3. The Financial Stability Board (FSB) defines fintech as “technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services.” 

4. The Basel Committee on Banking Supervision (BDBS) was created to identify risks associated with the emergence of fintech as strategic, operational, cyber-risk, and compliance.

5. Peer-to-peer (P2P) lenders emerged prior to the 2008 global financial crisis and focused predominately on inter-bank lending. 

6. Small businesses and riskier consumers faced risk adverse banks post the 2008 global financial crisis. 

7. Macroeconomic conditions, including low interest rate environments put a downward pressure on profits and increased the incentives of FIs to cut costs. 

8. One of the ways the online marketplace lenders have reduced costs is through the streamlining of the traditional loan underwriting process.

9. Demand for mobile technology and an explosion in data traffic started largely through the unveiling of the first iPhone in 2007. 

10. Demand for mobile technology is controlled by demographic factors, specifically the baby boomer’s generation and adoption of the smart phone.

11. Millennials are considered digital natives with a high degree of technological fluency, resulting in a strong comfort level spending money digitally and purchasing apps. 

12. The changing supply and demand since 2009 has changed the banking services offerings leading some banks to replace banking services completely. 

13. Innovations such as the cryptocurrency Bitcoin in 2009 and Google Wallet in 2011 have aided in the financial and digital disruption that banks have been required to adapt to.

14. Fintech has advantages such as being unburdened by regulators, legacy IT systems, branch networks, and not having the need to protect existing businesses. 

15. The term “narrow banking” refers to when traditional banks would take deposits and hold only safe, liquid assets, leaving the borrowers and savers matching to fintech platforms. 

16. Retail banks still currently hold a huge advantage: customers, compliance, and capital. 

17. Fintech companies typically have a lower cost because of their capital funding structures.

18. Banks that partner with fintech companies can leverage fintech companies’ technology while maintaining the bank’s reputation to better serve their customers.

19. According to McKinsey Panorama, almost 80% of financial institutions have entered into fintech partnerships, however there is a high level of regional variation in fintech partnerships. 

20. The BCBS categorizes fintech innovations into four product sectors: credit, deposit, and capital-raising services; payments, clearing, and settlement services; investment management services; and market support services related to innovations and new technologies.

21. The payments landscape have been transformed by fintech technology that includes card network, merchant acquirers, POS players, digital payment platforms, and person-to-person companies but haven’t yet experienced major changes in bill payment and money transfers. 

22. A mobile wallet is an app on the mobile device that stores payment information from a credit or debit card. 

23. Peer-to-Peer (P2P) payments or transfers allow customers to use a bank account to pay friends and family from their mobile phone, however currently P2P is not yet linked to credit or debit cards. 

24. PayPal is the most well-known P2P payment services with 267 million accounts. 

25. PayPal is the most expensive option for P2P by charging 2.9% fee for money sent from a debit or credit card with a 30 cents surcharge additional, 

26. Zelle, acquired by PayPal is a popular payment app that allows customers to send cash with same-day transfers to anyone with an account at a participating bank. 

27. “Crypto” in cryptocurrencies refers to the complicated cryptography that allows for a digital token to be generated, stored, and transacted securely and anonymously. 

28. Digital ledger technology (DLT) is an electronic ledger or database that records and verifies transactions but is limited only to currency and cannot be adapted to other uses in the financial system.

29. All crypto-assets or sub-class of crypto-assets are considered cryptocurrencies, a store of value and way to transfer value among users of that currency.

30. Bitcoin (BTC), Litecoin (LTC), Ether (ETH), and XRP (XRP) are examples of privately issued digital currencies. 

31. Ethereum is a crypto-asset network that enables the building of smart contracts to allow for conditions to be set on what happens and when events take place.

32. In late 2017 and early 2018, a dramatic rise and fall of cryptocurrencies took place and is referred to as the 2018 Cryptocurrency Crash.

33. Central bank digital currencies (CBDC) refers to a new form of digital central bank money that is distinguishable from reserves or settlement balances traditionally held by commercial banks at central banks. 

34. Individuals looking to invest in crypto are able to purchase niche altcoins directly through a digital exchange platform without engaging in a fiat exchange.

35. Fiat exchanges are more difficult to set up than crypto-to-crypto exchanges due to increased reporting requirements from state and federal agencies. 

36. Protections seen in the stock trading world also exist for cryptocurrencies. 

37. The largest threat to cryptocurrency investments stem from the danger of the investor losing an entire investment from hackers or the exchange holding the assets going out of business. 

38. Half a dozen or more of the largest crypto exchanges have failed since the mid-2014 while others have been shut down by authorities. 

39. Distributed ledger technology works alongside centralized entities for record storage. 

40. A distributed ledger is a database that is independently held and maintained by each participant or node in a large network.

41. Distributed ledgers are unique in that records are not communicated to other nodes via a central authority, but instead are constructed and held by every node in the network. 

42. Upon consensus in the distributed ledger, all nodes maintain their own identical copy of the ledger and transactions. 

43. Blockchain organizes data into blocks, chained together in an append-only data structure.  

44. Industry uses for distributed ledger technology is currently unknown. 

45. Distributed ledger technology has potential uses in payments, clearing and settlement activities due to potential efficiency gains from the technology. 

46. The inventor of the cryptocurrency Bitcoin is widely known in the cryptocurrency world. 

47. Potential gains through the use of distributed ledger technology include simplifying settlement and reconciliation processes for the actors participating in payment, clearing, a settlement arrangements. 

48. Opponents to distributed ledger technology cite increased complexity, reduction in end-to-end processing speed, and lack of efficiency in record-keeping infrastructures.

49. Distributed ledger technology may pose new risks such as potential uncertainty about operational and security issues arising from the technology. 

50. Distributed ledger technology may not operate with existing processes and infrastructures as well as create ambiguity relating to settlement finality. 

51. There is little risk of distributed ledger disrupting the way stocks are issued and traded. 

52. Smart contracts are made possible through blockchain technology and can enforce a relationship with a cryptographic code. 

53. Bitcoin is the biggest, most widely used, and most developed smart contracts platform in the world. 

54. Benefits to smart contracts are they run exactly as programmed without downtime, censorship, fraud, or third-party interference.

55. Artificial intelligence or AI increases the availability of data through recognition of images, processing natural languages, and learning from experience.

56. Machine learning is another name for artificial intelligence and focuses on incorporating robots to replace human labor.

57. Algorithm used to optimize automatically through experience and with limited or no human interventions is referred to as machine learning.

58. Benefits to machine learning algorithms include the identification of patterns that are correlated with other events or patterns that are often not recognizable to human eyes. 

59. Financial institutions are reluctant to incorporate artificial intelligence and machine learning to access credit quality, price and market insurance contracts, and automate client interaction. 

60. Artificial intelligence and machine learning are appropriate for data analysis and report generation but are not yet ready to use for regulatory compliance, surveillance, data quality assessment, and fraud detection. 

61. The largest artificial intelligence deal in history was made in March of 2018 by S&P Global through the acquisition of the fintech firm Kensho, valued at $550 million.

62. The SEC leverages big data to detect possible fraud and misconduct through the use of machine learning to identify patterns in the text of SEC filings. 

63. The Internet-of-things is slang for mobile devices that can be used in the business setting through applications and web technology. 

64. Banks have completed global trade transactions between other banks using blockchain, smart contracts, and the IoT using open account transactions on a private distributed ledger. 

65. Crowdfunding is a method of raising money from collective efforts of individual investors and customers and can be launched through social media platforms. 

66. Online services that use algorithms to automatically perform investment tasks previously done by human financial advisors are referred to as “financial advisor-bots”. 

67. Payment Services Directive 2 requires the sharing of consumer banking data with third parties when authorized by the customer, meaning it creates access to personal data, whereas the General Data Protection Regulation focuses on protecting the data. 

68. Basel Committee on Banking Supervision associated which of the following risks with fintech? 

A. Compliance Risk

B. Strategic Risk

C. Operational Risk

D. All of these risks

E. None of these risks

69. What was the first electronic system that provided real time stock quotes? 

A. Western Union

B. Quotron

C. Fedwire

D. NASDAQ

E. Telex

70. What is the bid-ask spread referred to? 

A. The difference bond asking and bidding prices.

B. The stock markets valuation of stock.

C. The difference between the stock’s bid and asking price.

D. The reduction of the stock’s active price.

E. None of the options.

71. In the 1990’s, the internet allowed which of the following to occur: 

A. Replace the need for phone-drive stock exchanges with online webpages.

B. High frequency stock trades.

C. financial service sectors to flourish.

D. the establishment of NASDAQ.

E. All of the options.

72. What resulted from the 2008 global financial crisis? 

A. Increase in regulations.

B. Rise in risk aversion.

C. Banks were reserved to lend money.

D. New lenders entered the market within innovative products.

E. All of the options.

73. Between 2015 to 2018, what percentage did the usage of internet on mobile phones increase? 

A. 159%

B. 89%

C. 61%

D. 267%

E. 338%

74. Which of the following factor has discouraged the need for fintech 

A. Purchasing products online.

B. Store fronts.

C. Mobile banking.

D. Lending platforms.

E. Brokers support for buying or selling stock.

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75. Smartphone subscribers have penetrated the global market at what percentage in 2017?

A. 66%

B. 73%

C. 63%

D. 52%

E. 48%

76. Which two countries lead the growth in fintech adoption? 

A. Mexico and India

B. Indonesia and United States

C. China and Australia

D. United States and India

E. China and India

77. Google Pay allows users to

A. make payments through programed credit cards in the smartphone.

B. make payments through an app on their smartphone.

C. make payments through their smartphone that have a built in chip.

D. make payments online with username and password.

E. none of these.

78. What benefits does Fintechs have over the traditional bank?  

A. Custom built financial experience for clients.

B. Creative and problem-solving focus.

C. Top of the line networks.

D. Untied by regulators.

E. All of the options.

79. How should banks respond to the growing dynamics of Fintech?

A. Continue to expand the mobile app ability.

B. Focus on getting clients to meet financial advisors.

C. Only allow in-person deposits.

D. Place emphasis on investment transactions.

E. Place emphasis on large loans for interest revenue.

80. What are the “big C” advantages that retail banks hold over fintech:  

A. Customer, compliance, character.

B. Compliance, coin, capital

C. Customer, compliance, capital

D. Capital, customer, cash

E. None of the options.

81. Which industry is most likely affected by fintechs: 

A. Banking

B. Accounting

C. Brokerage

D. Insurance

E. None of the options.

82. What negative effects may fintech have on businesses: 

A. Loss of market share

B. Lower margins

C. Loss of customer service

D. Loss of revenues

E. All of the options

83. AMTD describes the relationship between banks and fintech in all of the following stages besides: 

A. Banks utilize Fintech technology and infrastructure.

B. Banks sell assets to Fintech to help Fintech get started.

C. Banks and Fintech partner in a “Rent a Bank” situation.

D. Banks create fintech sectors and Fintech apply for bank charter.

E. All of these are stages that AMTD describes as the relationship between banks and fintech.

84. BCBS labels Fintech into three product lines including all but which of the following: 

A. Credit, deposit, and lending services.

B. Payments, clearing, and settlement services.

C. Trading services.

D. Market support services.

E. All of them are product lines.

85. In what ways has Fintech changed the way payments are captured from a peer-to-peer standpoint?

A. Businesses ability to collect from customers.

B. Software to store credit and debit card information.

C. The utilization of software on phones to share money.

D. High speed sharing of funds.

E. All of the options are true.

86. Which of the following apps allows users to send money to friends for free? 

A. Paypal

B. Zelle

C. Venmo

D. Facebook Payments

E. All of these app allow money to be sent for free to friends

87. Distributed ledger technology (DLT) is designed to: 

A. Document and confirm U.S. generated financial transactions.

B. Document and confirm financial foreign transactions.

C. Purchase and sell foreign currencies.

D. Triggers currencies to be exchanged under certain economies.

E. Purchase and sell foreign stock.

88. When compared to euro, gold, and S&P500, crypto-assets historically have: 

A. Lower closing price and market capitalization

B. Lower price volatility

C. Higher amounts of daily transactions on average

D. Lower market risk

E. All of the options.

89. Fintech is changing business-to-business payments by making them: 

A. more expensive but accurate

B. faster and cheaper

C. complicated but reliable

D. prevent hackers from obtaining data

E. all of the options are

90. Distributed ledger technology takes on more of a  

A. top-down approach

B. centralized approach

C. decentralized approach

D. franchise approach

E. all of the options are true to some extent

91. How do fiat exchanges compare to crypto-to-crypto exchanges?  

A. Both fiat and crypto have to deal with US laws.

B. Fiat deals with USD while crypto can avoid USD and the laws that come with it.

C. Crypto deals with USD while fiat can avoid USD and the laws that come with it.

D. Fiat and crypto can avoid USD and the US laws.

E. None of the options are true.

92. Distributed ledger technology can be used to simplify which of the following systems:

A. Payment systems

B. Trade exchanges

C. Counterparty interactions

D. Securities settlement system

E. All of the options

93. The process of computational tools used to handle tasks traditionally handled by humans is called 

A. Distributed ledger technology

B. Machine learning

C. Artificial intelligence

D. Fintech

E. Blockchain

94. Pandit predicted that ___% of banking jobs could be eliminated through artificial intelligence within five years of use. 

A. 45%

B. 50%

C. 30%

D. 80%

E. 25%

95. Banks could save between ___ and ____ % of costs if artificial intelligence is used. 

A. 50 to 55 percent.

B. 30 to 40 percent.

C. 10 to 20 percent.

D. 20 to 25 percent.

E. 60 to 65 percent.

96. Thin-file customers are considered which of the following: 

A. Customers with low amounts of retirement funds.

B. Customers with low credit scores.

C. Customers who develop a credit history at a slow pace.

D. Customers with no emergency fund.

E. Customers at risk of defaulting on loans.

97. JPMorgan Chase recently a Contract Intelligence platform in order to

A. Help with over customer service.

B. Review legal documents and extract needed data.

C. Flag customers that are at risk of default.

D. Automate the stock trades.

E. Issue credit cards online.

98. IoT is 

A. Collection of devices that can interact with each other.

B. The transfer of money between accounts.

C. A device to help with banking transactions.

D. App to help with trading securities.

E. All of the options are true.

99. With regards to credit, deposit, and capital-raising services, Fintech created which of the following: 

A. Credit scoring

B. Mobile banks

C. Leading marketplaces

D. Crowdfunding

E. All of the options are

100. Fintechs trading technology allows trades to be exchanged in 

A. microseconds.

B. millisecond.

C. nanosecond.

D. femtosecond.

E. yoctosecond.

101. Robo-advisors 

A. Online investment services that require customers to have a large portfolio in order to use this service.

B. Are online investment services that at this time are more expensive than human advisors.

C. Are human financial advisors that help customers online.

D. Complete online investment services that use algorithms to complete the tasks.

E. Allow human financial advisors to be more cost effective with customers that have smaller accounts.

102. In 2016, the European Union adopted _____ to replace the 1995 Data Protection Directive.

A. Auriemma Consulting Group

B. Specialized Banking Licenses (SPBs)

C. Conference of State Bank Supervisors (CSBS)

D. Payment Services Directive 2 (PSD2)

E. General Data Protection Regulation (GDPR)