1 Chapter I Introduction Technological advancement makes everything in daily and industry level of operation more efficient and gives more opportunities to improve everything—no exception to a business model in financial service. The usual business model in financial services is banking. However, as technology development penetrated everywhere, financial technology or fintech was born. I.1 Background Banks has been played a crucial role in the economy since a few centuries ago (Lawson, 1850). As an intermediary institution, banks channel funds from people with excess resources to those who need capital for productive expenditure (Mishkin, 2012). Besides that, the banking system supports the payment system from each account to another, from daily to significant corporate transactions (Cecchetti & Schoenholtz, 2015). According to Freixas and Rochet (1999), not only serves the payment systems, but the banks also conduct three other banking functions: transforming assets, managing risk, and processing information and monitoring borrowers. These banks' functions are essential to support the economy to keep it growing, as stated by Roopadarshini and Shilpa (2014). For example, in 1997, the banks in Indonesia collapsed and triggered the rupiah currency depreciation, which was the first wrong step to get into a crisis (Sharma, 2001). Furthermore, in the US and UK case, Swanepoel et al. (2016) explained that unhealthy competition will increase bank’s risk-taking and diminish bank’s financial performance that they identify as one of the driver of the economic condition. This phenomenon explains how the banking system and the economy are closely related. As time went by, the financial service business model began to transform. Mergaerts and Vander Vennet (2016) explained two essential business model approaches: retail activities and diversification. The more retail-oriented, the more the bank relates to higher profitability and stability. The same goes for the bank's 2 stability. They also mentioned that the bank's model could be seen from its capital and total asset size. Along with the times, the financial services business model is determined not only by their activity related to money but also by technological developments. Starting with the automated teller machine (ATM), internet banking system, and mobile banking system. Roopadarshini and Shilpa (2014) explained that technology has radically changed the banking industry. They mentioned that in the past few years, India's banking industry has undergone a significant transformation. It is in line with Anugerah and Indriani (2018) explanation that the banking industry has gradually improved since 2008, which is not only provided by traditional financial service providers. The innovation of financial service providers is called financial technology (fintech). Malika and Yousef (2018) explained that fintech uses technology to upgrade traditional financial services and product quality. Fintech services are replacing traditional banks' lending, payment, and investment products. Almulla and Aljughaiman (2021) gave examples of the replacement, such as crowdfunding, micro-lending, digital payments, money transfers, digital saving, blockchain cryptocurrency, and wealth management. One of the lending services of fintech is called peer-to-peer (P2P) lending. P2P lending differs from bank lending, looking at how each lender can directly invest their funds in their chosen borrowers using an online platform, not decided by the P2P firm (Anugerah and Indriani, 2018). Besides this differentiation, P2P and banking are also different in terms of their loan requirement. According to the Indonesia Financial Service Authority (OJK) consumer protection information, the borrower does not need any collateral to borrow from the P2P lending. However, the interest paid by the borrower is relatively higher than the bank's. Nevertheless, P2P has the benefit of easy access as all can be done using an online platform. This implementation of P2P has shown their business model that relies on technology. 3 Concerning how the P2P lending borrower did not need any collateral, it can be seen that the regulations and requirements are quite different compared to banking. Bank has rigid loan application requirements, such as collateral, pay check copy, and good credit scoring. Bank implemented these requirements as the bank wanted to minimize its risk. In contrast, P2P has a relatively loose requirement for financing applications. In return, P2P financing has a higher risk compared to banks. With less risk in running their business, banking has a larger market, as seen in Figure I.1 which processed by the author from Indonesian Banking Statistic Report of OJK. Figure I.1 Financing and Third Party Funds growth in Indonesian Bank The development of the financial service or banking industry has grown over the years.