What Is Fintech And How It Came To Change The Landscape Of Financial Services?

The term FinTech stands for financial technologies. In its last FinTech report, FinTech and market structure in financial services: Market developments and potential financial stability implications ,[1] the Financial Stability Board (FSB) defines it 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. [2] The potential benefits of FinTech have been summarized in the same Report as including decentralisation and increased intermediation by non-financial entities greater efficiency, transparency, competition and resilience of the financial system and greater financial inclusion and economic growth, particularly in emerging market and developing economies. [3] With respect to potential risks arising from FinTech, the Board includes among them both microfinancial (e.g. credit risk, leverage, liquidity risk, maturity mismatch and operational risks, especially cyber and legal) and macro-financial (e.g. non-sustainable credit growth, increased interconnectedness or correlation, incentives for greater risk-taking by incumbent institutions, procyclicality, contagion and systemic importance). [4]

The most recent account of what this risk is perceived to be is found in the FSB s February 2019 Report, where the FSB maps out the following key considerations:

That incumbent financial institutions and FinTech firms work together successfully and in symbiosis, where the former provides the latter with large customer base and the latter gives the former access to financial innovation. The result of this cooperation is that the incumbents become more competitive and the FinTechs operational capabilities increase.

That this symbiosis apply to some but not all institutions as there are already FinTechs that have made inroads in the provision of credit and payments. While this is still done on a small scale, it is argued that with the development of technologies, which will allow further unbundling of some financial products that are traditionally offered by incumbent financial institutions, the market share of FinTechs will increase.

That regulators and supervisors must consider the competitive impact of BigTech ( large technology companies that expand into the direct provision of financial services or of products very similar to financial products )[5].

That reliance by financial institutions on third-party data service providers is expected to increase in the future, leading to, subject to certain conditions being satisfied, systemic risk.[6]

The above points made by the FSB drive a conclusion that the Board is wary of the implications of FinTech on competitiveness and competition in the financial market. To this end, their last consideration is an outlier, although not an unexpected one. Rather, the last point is an appreciation that data has become a major factor for promoting financial (in)stability and that the way data gathering, transfer and storage, as well as use, is controlled has a relevance on how well our regulatory structures manage financial risk.

[1]Financial Stability Board, FinTech and market structure in financial services: Market developments and potential financial stability implications (14th February 2019). From here on, the Report .

[2] Financial Stability Board, FSB report assesses FinTech developments and potential financial stability implications (14th February 2019) http://www.fsb.org/2019/02/fsb-report-assesses-fintech-developments-and-potential-financial-stability-implications/ accessed 6th March 2019, 7.

[3] Ibid, 3.

[4] Financial Stability Board (n 2), 3.

[5] Financial Stability Board (n 2), f.n.1.

[6] Financial Stability Board (n 2), f.n.1.