Theemergenceoftheglobalfintechmarket:economic andtechnologicaldeterminants ChristianHaddad Iyeretal.2016),andinves- tors privacy preferences when making an investment decision (Burtch et al. 2015). In equity crowdfunding and reward-based crowdfunding, researchers have in- vestigated the dynamics of success and failure among crowdfundedventures(Mollick2014),thedeterminants of funding success (Ahlers et al. 2015; Hornuf and Schwienbacher 2017a, 2017b; Vulkan et al. 2016),and the regulation of equity crowdfunding (Hornuf and Schwienbacher 2017c). More generally, Bernstein et al. (2016) investigate the determinants of early-stage investments on AngelList. They find that the average investorreacts toinformation about the founding team, butnot startuptractionorexistingleadinvestors. Recently, scholars have also investigated platform de- sign principles and risk and regulatory issues related to virtual currencies such as Bitcoin or Ethereum (Bhme et al. 2015; Gandal and Halaburda 2016)andthe blockchain (Yermack 2017). Others have analyzed social trading platforms (Doering et al. 2015), robo-advisors (Fein 2015), and mobile payment and e-wallet services (Mjlsnes and Rong 2003;Mallatetal.2004;Mallat 2007). To date, only a few studies have investigated the fintech market in its entirety. Dushnitsky et al. (2016) provide a comprehensive overview of the European crowdfunding market and conclude that legal and cultural traits affect crowdfunding platform formation. Cumming and Schwienbacher (2016) examine venture capitalistinvestmentsinfintechstartupsaroundtheworld. Theyattributeventurecapitaldealsinthefintechsectorto the differential enforcement of financial institution rules among startups versus large established financial institu- tions after the financial crisis. Inthisarticle,weinvestigatetheformationoffintech startups more generally, rather than focusing on one particular fintech business model. In line with recent industry reports (Ernst Heetal.2017; World Economic Forum 2017), we categorize fintechs intoninedifferenttypesofstartups:thosethatengagein financing, payment, asset management, insurance (insurtechs), loyalty programs, risk management, ex- changes, regulatory technology (regtech), and other businessactivities.Table1providesadefinitionforeach fintechcategorywe investigate inthisarticle. The remainder of the article proceeds as follows: Section 2 introduces our hypotheses. In Section 3,we describethedataandintroducethevariablesusedinthe quantitative analysis. Section 4 presents the descriptive and multivariate results. Finally, Section 5 summarizes ourcontributionandderivespolicyimplications. 2Hypotheses To derive testable hypotheses regarding the drivers of fintech startup formations, we regard fintech innova- tionsandtheresultingstartupsastheoutcomeofsupply and demandfor this particulartype ofentrepreneurship in the economy. The demand for fintech startups is the numberofentrepreneurialpositionsthatcanbefilledby fintech innovations in an economy (Thornton 1999; ChoiandPhan2006).Ifthebusinessmodelandservices providedbythetraditionalfinancialindustry,forexam- ple, are essentially obsolete, there might be a larger demand for new and innovative startups. The supply of fintech startups, in contrast, consists of the entrepre- neurs who are ready to undertake self-employment (Choi and Phan 2006). Such a supply might be driven bya largenumberofinvestmentbankerswholosttheir jobs after the financial crises and are now eager to use their finance skills in a related and promising financial sector. First, we conjecture that the more developed the economy and traditional capital market, the higher the demand for fintech startups. This hypothesis works through two channels. As in any other startup, fintech startupsneedsufficientfinancingtodevelopandexpand their business models. If traditional and venture capital markets are well-developed, entrepreneurs have better access to the capital required to fund their business. Although small business financing traditionally does not take place through regular capital markets, fintech startupsmightbeeligibletoreceivefundsfromincuba- tors or accelerators established by the traditional finan- cialsector. 1 However,suchprogramshavemostlybeen established by large players located in well-developed economies. Moreover, the more developed the econo- my, the more likely it is that individuals need services such as asset management or financial education tools. Finally, Black and Gilson (1999)notethatactivestock 1 See, for example, the Main Incubatur from German Commerzbank AG(main-),theBarclaysAcceleratorinthe UK (), or the US-based J.P. Mor- gan In-House Incubator (jpmorgan. com/country/US/en/in-residence). 82 C.Haddad,L.Hornufmarketshelpventurecapitaland,thus,entrepreneurship toprosper,because venture capitalists can exitsuccess- ful portfoliocompanies throughinitial public offerings. Active stock markets might therefore have a positive effectonfintechstartupformations. In the case of firms that aim to revolutionize the financial industry, a well-developed capital market might alsopromptdemandfor entrepreneurshipsimply because a larger financial market also offers greater potential to change existing business models through innovative services and digitalization. If the financial sector is small, not much can be changed through the introductionofinnovativebusinessmodels.Thus,for a well-developed but technically obsolescent financial sector,there are moreentrepreneurial positionsthatcan be filled by fintech innovators. We therefore hypothe- sizethe following: Hypothesis 1: Fintech startup formations occur more frequently in countries with well-developed economies andcapital markets. A second driver offintech demand is the extent to which the latest technology is available in an economy so that fintech startups can build their business models on these technologies. Technical advancements are among the most important drivers of entrepreneurship (Dosi 1982;Arend1999), be- cause technological revolutions generate opportuni- tiesthat may be further developed by entrepreneurial firms (Stam and Garnsey 2007). Technological changes enable new practices and business models to emerge and, in the case offintech startups, disrupt the traditional financial services sector. Such technology-driven changes have in the past occurred with the move from banking branches to ATM ma- chines and from ATM machines to telephone and online banking (Singh and Komal 2009;Puschmann 2017). Moreover, modern computer-based technolo- gyhaswidelybeenusedinfinancialmarkets through the implementation of trading algorithms (Government Office for Science2015). More gener- ally, many technologies can be accessed through cloud servers or across multiple vendors or might even be downloadable as open source software. Geographic boundaries are increasingly teared down, and as a result access to supporting infra- structure such as broadband networks might be of Table 1 Classificationofthefintechlandscape.Thistableprovidesadefinitionforeach fintechcategorythat weempiricallyinvestigate Category Definition Assetmanagement Weclassifyfintech startupsasassetmanagementcompaniesiftheyofferservices suchasrobo-advice, socialtrading,wealth management,personalfinancialmanagementapps,orsoftware. Exchangeservices Wecategorizestartupsasexchangesiftheyprovidefinancialorstock exchangeservices,suchassecurities, derivatives,andotherfinancialinstrumenttrading. Financing Thecategory financingentails,forexample,startupsthatprovidecrowdfunding,crowdlending,microcredit, andfactoringsolutions. Insurance Thecategory insuranceentails,forexample,startupsthatbrokerpeer-to-peerinsurance,spotinsurance, usage-driveninsurance,insurancecontractmanagement,andbrokerageservicesaswellasclaimsand riskmanagementservices. Loyalty program Wealsoconsiderstartupsthatprovideloyalty programservicesto customers,becausetheyoftenusebig dataanalyticsandareclosely linkedtopaymenttransactions.Thecategory loyalty programinvolves,for example,startupsprovidingrewardsforbrandloyaltyorgivingcustomersadvancedaccess to newproducts, specialsalescoupons,orfreemerchandise. Others Abulkoffintechstartupsofferinvestoreducationandtraining,innovativebackgroundservices(e.g.,near-field communicationsystems,authorizationservices),white-labelsolutionsforvariousbusinessmodels,orother technicaladvancementsclassifiedunderotherbusinessactivities offintechstartups. Payment Thecategory paymententails businessmodelsthat providenewand innovativepaymentsolutions,such as mobilepaymentsystems,e-wallets,orcrypto currencies. Regulatorytechnology Weclassifyfintech startupsasregulatory technologycompaniesiftheyofferservicesbasedontechnologyin thecontextofregulatorymonitoring,reporting,andcompliancebenefitingthefinanceindustry. Risk management Thecategory riskmanagementcontains startupsthatprovideservicesthathelpcompaniesbetterassessthe financialreliabilityoftheircounterpartiesorbettermanagetheirownrisk. Theemergenceoftheglobalfintechmarket:economicandtechnologicaldeterminants 83crucial importance for the emergence of fintech in a country. Furthermore, the almost inconceivable growth in mobile and smartphone usage is placing digital ser- vices in the hands of consumers who previously could not be reached, delivering richer, value- added experiences across the globe. Mobile payment services differ across regions and countries. Many users are registered in developing countries where financial institutions are difficult to access (Ernst and Young 2014). The prime example of a fintech that delivers access to essential financial services through the usage of mobile phones is M-Pesa. M- Pesa was launched in 2007 and offers various finan- cial services such as saving, sending, and receiving remittances, as well as the direct purchasing of products and services even when people do not possess a bank account (Jack and Suri 2011). Today, M-Pesa has extended its market across Africa, Eu- rope, and Asia, reaching 25.3 million active cus- tomers in March 2016 (Vodafone 2016). In emerging countries, mobile money has served as a replacement for formal financial institutions, and as a result mobile money penetration now out- strips bank accounts in several emerging countries (GSMA 2015; PricewaterhouseCoopers 2016). Ac- cording to a study conducted among 36,000 online consumers, the number of Europeans regularly using a mobile phone device for payments has also tripled since 2015 (54 vs. 18%) (Visa 2016). The study found this trend to hold for 19 European countries, revealing a big shift in customers attitudes toward this new technology. New technology has enabled fintech startups in developed countries to disrupt established players and accelerate change. Technol- ogies such as near-field communication, QR codes, and Bluetooth Low Energy are being used for retail point-of-sale and mobile wallet transactions, transit payments, and retailer loyalty schemes (Ernst and Young 2014). Fintech startups largely rely on ad- vanced new technologies to implement faster pay- ment services, to offer easy operations to their cus- tomers, to improve the sharing of information, and generally to cut the costs of banking transactions. We therefore argue that the better the supporting infrastructure, the higher is the supply of fintech startups, as individuals who are seeking entrepre- neurial activity based on these technologies have more opportunities to succeed. Hypothesis 2: Fintech startup formations occur more frequently in countries where the latest technology and supportinginfrastructure are readilyavailable. A third factor on the demand side of fintech startup formations concerns the soundness of traditional finan- cialinstitutions.Thesuddenupsurgeoffintechstartups, especiallyinthe financingdomain,canbepartlyattrib- uted to the 2008 global financial crisis (Koetter and Blaseg 2015). Moreover, a recent IMF study (He et al. 2017) shows that market valuations of public fintech firms have quadrupled since the global financial crisis, outperforming many other sectors. The financial crisis may have fostered the demand for fintech startups for several reasons. There is a widespread lack of trust in banks after the crisis. Guiso et al. (2013) investigate customers trust in banks during the financial crisis andfindthatthelackoftrustalsoledtostrategicdefaults on mortgatges, possibly initiating a vicious circle of customerdistrust,defaultsonmorgages,evenlesssound banks, and again more customer distrust. Fintech startups, which largely have a clean record, might ben- efitfromthelackofconfidenceintraditionalbanksand breaktheviciouscircleofdistrustandreducedfinancial soundness. Thefinancialcrisisalsoincreasedthecostofdebtfor many small firms, and in some cases banks stopped lending money to businesses altogether, forcing them to contend with refusals on credit lines or bank loans (Schindele and Szczesny 2016; Lopez de Silanes et al. 2015). Fintech startups in the area of crowdlending, crowdfunding, and factoring aim to fill this gap. KoetterandBlaseg(2015)provideconvincingevidence thatwhenbankare stressed,companies are morelikely to use equity crowdfunding as an alternative source of externalfinance.Thedemandforfintechshouldthusbe particularly high in countries that have extensively suf- fered from the financial crises and where the banking sectorislesssound.Finally,someofthefintechbusiness modelsarebasedonexemptionsfromsecuritiesregula- tionandwouldnotworkunderthesomewhatmorestrict securities regulation that applies to large firms (Hornuf and Schwienbacher 2017c). Stringent financial regula- tion was the outcome of the spread of systemic risk to the financial system (Brunnermeier et al. 2012). Thus, economies with a more fragile banking sector and stricter regulation should see more fintech startup for- mations that use the existing exemptions from banking andsecuritieslaws. 84 C.Haddad,L.HornufHypothesis 3: Fintech startup formations occur more frequently in countries with a more fragile financial sector. Fourth,onthesupplyside,weconsidertheroleof the credit and labor market as well as business regu- lation in fintech startup formations. Economies that aim to promoteentrepreneurship and talent generally adopt a supportive regulatory regime to attract entre- preneurs. Individuals are more likely to undertake self-employment if the extent to which credit is sup- plied to the private sector is larger and there are no controls on interest rates that interfere with the credit market. Moreover, for hiring talented individuals for fintechstartups,acountryshouldallowmarketforces to determine wages and establish the conditions that enable startups to easily hire and fire employees. By contrast, cumbersome administrative requirements, large bureaucratic costs, and the high cost of tax compliance might hamper any entrepreneurial activity. Moreover, Armour and Cumming (2008) highlight the importance of bankruptcy laws to en- trepreneuri