Benefit of Using Real Options in a Capital Budgeting Project for Fintech

Abstract

This paper intends to explain the use of real options in fintech (financial technology). Fintech has become a new phenomenon in the financial industry today. Since Alibaba's aggressiveness with various e-commerce products that have penetrated various parts of the world, many conventional financial industry institutions such as banks have begun to convert their traditional service products into digital service products. Once the expansion of fintech has multipurpose uses because it is not only a form of product innovation in the banking world, fintech also has a useful purpose in helping the incubation effectiveness of many startup companies. As in the example of a bank industrial project [(see Lee & Shin (2018)] which analyzes the effectiveness of a fintech project with a 3-year business period using traditional methods using NPV, this project experiences rejection because the NPV results are low then this project should not have been done, but a fintech project that has a very high urgency and commercial value so that from a business perspective it demands to be done. So addressing this, researchers in the field of financial management develop a more sophisticated capital budgeting method, real option. Real options have a higher flexibility compared to NPVs which only depend on the accuracy of the calculation of cash flow, discount rate and time horizon of the related project. The flexibility of the real option is the determination of a scenario that is more suitable for the characteristics of the project. This scenario is built based on the widely used binomial method in statistics; with its emphasis on developing the situation for successful and failed projects. With this real option method the fintech project that is considered uncertain remains an implementation scenario.