Fintech | Questions with 100% Verified Answers | Latest Update
2026/2027
Question: 1.1 Define FinTech and explain its primary objective in relation to financial services.
Answer: FinTech is financial technology that make it easier to have financial transactions by solving the
frictions of information asymmetry, unit cost, moral hazards, trust issues, search costs, behavioral bias, and
convenience issues.
Question: 1.2 According to Philippon's research, describe the paradox between the financial sector's growth
and its efficiency over the past century. What does the unit cost of financial intermediation reveal about the
industry?
Answer: Philippon's research shows that the unit cost of transactions has stayed at roughly 2% for over a
century. The paradox is that unit cost has remained the same despite advances in technology and the increase
in computing power.
Question: 1.3 List and briefly explain the seven major frictions in financial services that FinTech aims to
address.
Answer: Information asymmetry: One party has more information than the other. Buyers are wary because
they lack the information of sellers. Unit Cost: Costs that are tacked on to a transaction Moral Hazard/Agency
Conflict: The managers of money don't have the same incentives as the owner of the money Trust: Search
Costs: Takes time and effort to match buyers and sellers Behavioral Bias: People may act a certain way just
because they feel like it, not necessarily because it makes sense Convenience: Processing time is long
Question: 2.1 Explain the concept of proprietary data in FinTech. Provide two specific examples of proprietary
data and discuss one advantage and one disadvantage of firms holding proprietary data.
Answer: Propriety data is unique data that a firm collects or owns. Examples would be Transaction payments
(CashApp) or alternative credit data (education, work history). An advantage is that it improves the accuracy of
credit risk, which makes it easier for people to obtain loans. A disadvantage is that it reduces competition
because large fintech firms own massive amounts of data and it's a difficult environment for new competitors.
Question: 2.2 Describe the key differences between Open Banking in the UK and the EU's PSD2
implementation. Why did the UK achieve greater success with Open Banking compared to Europe?
Answer: UK was centralized and had high quality API's vs decentralized in Europe and API's that vary in quality.
The UK's centralized governance, strict mandates, and consistent API standards created a predictable,
developer-friendly ecosystem. PSD2's fragmented implementation meant fintechs faced inconsistent APIs,
varying interpretations of rules, and a lack of coordination across countries. This made integration more costly
and slowed innovation
Question: 2.3 Explain what a regulatory sandbox is and identify two potential benefits and two potential
drawbacks of regulatory sandboxes for FinTech innovation.
Answer: A regulatory sandbox is where fintech companies are allowed to test new products and services with
real people but under supervision. The purpose is to encourage innovation. Benefits: 1) Start-ups can reduce
costs by avoiding full regulations 2) Regulators gain early insight into new technologies and how to manage
them Drawbacks: 1) Firms inside the sandbox have an unfair head start compared to firms now in the sandbox
2) Close collaboration between regulators and selected firms may slow down tough enforcement or create
pressure to "approve" tested models even when risks remain.
, Question: 3.1 Explain the difference between clearing and settlement in the payment system. Using the
example of a Venmo transfer between two users at different banks, describe the role of the Federal Reserve
(ACH) in this process.
Answer: Clearing is the process of verifying and routing the payment. Settlement is the actual transfer of funds
between accounts, usually through central bank money. When someone sends money through Venmo, Venmo
records the transaction in ACH files which are managed by the Federal Reserve. Accounts are then adjusted by
the Fed at set times. Venmo has accounts in various banks.
Question: 3.2 Describe how FinTech companies like Wise have innovated cross-border payments to reduce
costs and complexity. How does their peer-to-peer matching approach differ from traditional correspondent
banking?
Answer: FinTech firms like Wise cut the cost of cross-border payments by avoiding traditional correspondent
banking. Instead of sending money through multiple intermediaries, Wise uses a local-to-local, peer-to-peer
matching system: when a U.S. user sends dollars to the UK, Wise pays the recipient from its UK account using
pounds from another customer sending money in the opposite direction.
Question: 4.1 Explain the four pillars of financial security using a checkcashing analogy.
Answer: Financial security works a lot like cashing a check. Authenticity is making sure the check is real and
the person who wrote it is who they claim to be. Confidentiality is keeping the check's information private so
only the right people see the account details. Integrity is verifying that nothing on the check has been altered,
like the amount or signature. And non-repudiation is the idea that once someone signs the check, they can't
later deny that they issued it.
Question: 4.2 What is a hash function? Describe its three key properties and explain why these properties are
important for verifying financial transactions.
Answer: Hashes are Deterministic: The same input always produces the same output One-Way: Impossible to
reverse-engineer the original data from the hash Avalanche Effect: A tiny change in the input results in a
massive, unpredictable change in the output These hash properties are crucial because they ensure accuracy,
security, and tamperresistance. Determinism means every time a bank or payment system hashes a
transaction, it gets the same result, so it can reliably compare records to confirm nothing has changed.
One-way hashing protects sensitive data—like account numbers or payment details—because even if someone
sees the hash, they can't reconstruct the original information. And the avalanche effect makes fraud extremely
difficult: even the smallest unauthorized change to a transaction (like altering an amount by a penny) produces
a completely different hash
Question: 4.3 Compare and contrast symmetric encryption and asymmetric encryption. What is the main
advantage and disadvantage of each approach?
Answer: Symmetric encryption uses the same key to encrypt and decrypt data. It's fast and efficient—great for
large amounts of data. Its main advantage is speed, but its main disadvantage is key distribution: both parties
must securely share and protect the same secret key, which can be risky. Asymmetric encryption uses two
different but mathematically linked keys: a public key for encryption and a private keyfor decryption. Its main
advantage is secure key exchange— you can share your public key openly without exposing the private one.
However, it's much slower and computationally heavier, making it less ideal for encrypting large data directly.
In practice, modern systems combine them: asymmetric encryption to securely exchange a symmetric key,
and symmetric encryption to handle the actual data transfer
2026/2027
Question: 1.1 Define FinTech and explain its primary objective in relation to financial services.
Answer: FinTech is financial technology that make it easier to have financial transactions by solving the
frictions of information asymmetry, unit cost, moral hazards, trust issues, search costs, behavioral bias, and
convenience issues.
Question: 1.2 According to Philippon's research, describe the paradox between the financial sector's growth
and its efficiency over the past century. What does the unit cost of financial intermediation reveal about the
industry?
Answer: Philippon's research shows that the unit cost of transactions has stayed at roughly 2% for over a
century. The paradox is that unit cost has remained the same despite advances in technology and the increase
in computing power.
Question: 1.3 List and briefly explain the seven major frictions in financial services that FinTech aims to
address.
Answer: Information asymmetry: One party has more information than the other. Buyers are wary because
they lack the information of sellers. Unit Cost: Costs that are tacked on to a transaction Moral Hazard/Agency
Conflict: The managers of money don't have the same incentives as the owner of the money Trust: Search
Costs: Takes time and effort to match buyers and sellers Behavioral Bias: People may act a certain way just
because they feel like it, not necessarily because it makes sense Convenience: Processing time is long
Question: 2.1 Explain the concept of proprietary data in FinTech. Provide two specific examples of proprietary
data and discuss one advantage and one disadvantage of firms holding proprietary data.
Answer: Propriety data is unique data that a firm collects or owns. Examples would be Transaction payments
(CashApp) or alternative credit data (education, work history). An advantage is that it improves the accuracy of
credit risk, which makes it easier for people to obtain loans. A disadvantage is that it reduces competition
because large fintech firms own massive amounts of data and it's a difficult environment for new competitors.
Question: 2.2 Describe the key differences between Open Banking in the UK and the EU's PSD2
implementation. Why did the UK achieve greater success with Open Banking compared to Europe?
Answer: UK was centralized and had high quality API's vs decentralized in Europe and API's that vary in quality.
The UK's centralized governance, strict mandates, and consistent API standards created a predictable,
developer-friendly ecosystem. PSD2's fragmented implementation meant fintechs faced inconsistent APIs,
varying interpretations of rules, and a lack of coordination across countries. This made integration more costly
and slowed innovation
Question: 2.3 Explain what a regulatory sandbox is and identify two potential benefits and two potential
drawbacks of regulatory sandboxes for FinTech innovation.
Answer: A regulatory sandbox is where fintech companies are allowed to test new products and services with
real people but under supervision. The purpose is to encourage innovation. Benefits: 1) Start-ups can reduce
costs by avoiding full regulations 2) Regulators gain early insight into new technologies and how to manage
them Drawbacks: 1) Firms inside the sandbox have an unfair head start compared to firms now in the sandbox
2) Close collaboration between regulators and selected firms may slow down tough enforcement or create
pressure to "approve" tested models even when risks remain.
, Question: 3.1 Explain the difference between clearing and settlement in the payment system. Using the
example of a Venmo transfer between two users at different banks, describe the role of the Federal Reserve
(ACH) in this process.
Answer: Clearing is the process of verifying and routing the payment. Settlement is the actual transfer of funds
between accounts, usually through central bank money. When someone sends money through Venmo, Venmo
records the transaction in ACH files which are managed by the Federal Reserve. Accounts are then adjusted by
the Fed at set times. Venmo has accounts in various banks.
Question: 3.2 Describe how FinTech companies like Wise have innovated cross-border payments to reduce
costs and complexity. How does their peer-to-peer matching approach differ from traditional correspondent
banking?
Answer: FinTech firms like Wise cut the cost of cross-border payments by avoiding traditional correspondent
banking. Instead of sending money through multiple intermediaries, Wise uses a local-to-local, peer-to-peer
matching system: when a U.S. user sends dollars to the UK, Wise pays the recipient from its UK account using
pounds from another customer sending money in the opposite direction.
Question: 4.1 Explain the four pillars of financial security using a checkcashing analogy.
Answer: Financial security works a lot like cashing a check. Authenticity is making sure the check is real and
the person who wrote it is who they claim to be. Confidentiality is keeping the check's information private so
only the right people see the account details. Integrity is verifying that nothing on the check has been altered,
like the amount or signature. And non-repudiation is the idea that once someone signs the check, they can't
later deny that they issued it.
Question: 4.2 What is a hash function? Describe its three key properties and explain why these properties are
important for verifying financial transactions.
Answer: Hashes are Deterministic: The same input always produces the same output One-Way: Impossible to
reverse-engineer the original data from the hash Avalanche Effect: A tiny change in the input results in a
massive, unpredictable change in the output These hash properties are crucial because they ensure accuracy,
security, and tamperresistance. Determinism means every time a bank or payment system hashes a
transaction, it gets the same result, so it can reliably compare records to confirm nothing has changed.
One-way hashing protects sensitive data—like account numbers or payment details—because even if someone
sees the hash, they can't reconstruct the original information. And the avalanche effect makes fraud extremely
difficult: even the smallest unauthorized change to a transaction (like altering an amount by a penny) produces
a completely different hash
Question: 4.3 Compare and contrast symmetric encryption and asymmetric encryption. What is the main
advantage and disadvantage of each approach?
Answer: Symmetric encryption uses the same key to encrypt and decrypt data. It's fast and efficient—great for
large amounts of data. Its main advantage is speed, but its main disadvantage is key distribution: both parties
must securely share and protect the same secret key, which can be risky. Asymmetric encryption uses two
different but mathematically linked keys: a public key for encryption and a private keyfor decryption. Its main
advantage is secure key exchange— you can share your public key openly without exposing the private one.
However, it's much slower and computationally heavier, making it less ideal for encrypting large data directly.
In practice, modern systems combine them: asymmetric encryption to securely exchange a symmetric key,
and symmetric encryption to handle the actual data transfer
