FSB published a report that assesses fintech-related market developments and their potential implications for financial stability. The report assesses the fintech landscape, including market concentration of third-party providers, and provides case studies on fintech credit and payments services. The report offers an overall conclusion on the financial stability implications of fintech developments, along with the possible actions from FSB, BCBS, and IOSCO. Additionally, the Annexes (2,3, and 4) to the report examine fintech developments in China.
The report establishes that technological innovation holds great promise for the provision of financial services, with the potential to increase market access, the range of product offerings, and convenience, while lowering costs to clients. New entrants into the financial services space, including fintech firms and large, established technology companies (bigtech), could materially alter the universe of financial services providers. Greater competition and diversity in lending, payments, insurance, trading, and other areas of financial services can create a more efficient and resilient financial system. However, heightened competition could also put pressure on financial institutions’ profitability and this could lead to additional risk-taking among incumbents in an effort to maintain margins. Moreover, there could be new implications for financial stability from bigtech in finance and greater third-party dependencies.
As per the FSB analysis, the following are the key findings on the link between technological innovation and market structure:
To date, the relationship between incumbent financial institutions and fintech firms appears to be largely complementary and cooperative.
The competitive impact of bigtech may be greater than that of fintech firms. Bigtech firms typically have large, established customer networks and enjoy name recognition and trust.
For core operations, reliance by financial institutions on third-party data service providers (for example, data provision, cloud storage and analytics, and physical connectivity) is estimated to be low at present. However, this warrants ongoing attention from authorities.
BCBS notes that, although most supervisors have some reach over third-party providers—either directly or through contractual arrangements—the majority of supervisors indicate that they supervise third-party providers only in limited cases and have no formal structures in place to do so regularly. Particular attention is being devoted to the third-party dependencies issue, including by the BCBS and IOSCO. Going forward, the FSB Financial Innovation Network (FIN) is planning on, in cooperation with other groups, further exploring third-party dependencies in cloud services and single point of failure risks. Specifically, the FIN is seeking to better understand the market for cloud services for financial institutions (rather than for all clients), including how they manage lock-in risk and cross-border issues. Moreover, it is monitoring the activities of bigtech in finance, including cross-border activities.
Keywords: International, Banking, Insurance, Securities, Fintech, Financial Stability, Bigtech, Market Structure, FSB
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