BIS Paper Finds Accommodative Regulation As Driver of Fintech Adoption
BIS published a working paper that studies the fintech developments to identify drivers of fintech adoption worldwide. The analysis showed that fintech adoption is higher where there is unmet demand for financial services and where regulation is accommodative. While fintech innovations can sometimes overcome specific market failures, fintech activities will remain subject to the risks traditionally present in finance, such as liquidity mismatches, speculative bubbles, interconnectedness in the financial system and, potentially, systemic importance and moral hazard with large intermediaries. As such, there is a need for public policy intervention in the form of adequate and proportionate regulation and supervision.
This paper looks at how agents in different economies around the world are adopting fintech. Fintech services are expanding in payments, credit, wealth management and insurance, in both advanced and emerging market and developing economies. Yet the scale of adoption differs widely. The paper seeks to explain why fintech innovations are more widely adopted in some economies and markets, but not in others. The available evidence shows that unmet demand is a strong driver in emerging market and developing economies and in under-served market segments. The high cost of finance and high banking sector mark-ups are also important.
The paper highlights that a number of studies show how the regulatory environment can aid or hinder fintech adoption. Countries with a stronger rule of law, quality of regulation, control of corruption, ease of entry, and higher profitability of extant intermediaries have higher volumes of alternative finance, including fintech credit. However, countries with less stringent bank regulation, as measured by a World Bank index, have higher investment in fintech. These countries may also be more permissive toward new entrants, in addition to the findings showing higher fintech credit volumes for these countries. Countries in which regulation was judged in surveys to be more adequate (rather than excessive or inadequate) had higher alternative finance volumes.
Regulatory factors can play a role, but in general, regulatory arbitrage does not seem to be a primary driver of fintech adoption to date, at least at an aggregate level. There may be specific activities for which regulatory arbitrage is a factor. Finally, younger cohorts may be driving adoption in many economies, but not universally. Population aging and changes in trust in technology and fintech may have important effects, shaping not just the extent but the future direction of fintech adoption. The available evidence also supports the idea that fintech adoption may enhance cross-border financial integration.
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Keywords: International, Banking, Insurance, Fintech, Insurtech, Bigtech, Regulatory Arbitrage, Fintech Regulation, BIS
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