Featured Product

    Yves Mersch of ECB Examines Impact of Fintech on Credit Business

    February 26, 2019

    While speaking at the third annual Conference on Fintech and Digital Innovation in Brussels, Yves Mersch of ECB discussed the impact of fintech on core banking services, particularly the credit business. He highlighted that fintech credit makes up only a very small fraction of overall credit, but it is growing rapidly and could become more dominant in certain market segments. In the United States, for example, 36% of unsecured personal lending was issued by fintechs in 2017.

    Mr. Mersch added that globally active technology companies, also known as the big tech companies, are also entering the market. These companies have a competitive advantage because they can leverage their existing customer networks and huge amounts of proprietary data to provide financial services. Moreover, their enormous balance sheets give them the financial capacity to handle credit risks economically on a large scale. These comparative advantages of big tech could, in principle, generate benefits for customers. By using predictive algorithms, machine learning, and a wider range of data, big tech could become more efficient at lending than traditional banks. Moreover, if big tech can speed up loan application processing, reduce transaction costs, and improve credit risk assessments, it could increase the overall degree of competition in credit markets. With their increasing market share, these companies could help diversify the sources of credit to the economy, thus fostering investment and growth.

    However, not only could large technology companies increase market concentration by exploiting their network externalities, but they could also create new risks. For example, risks could arise from big tech’s funding models, which often use a mix of internal and external investors to finance loans or repackage and sell them to third-party investors. Such originate-to-distribute models can lead to information asymmetries, incentive problems and financial instability—as was painfully learned from the mortgage lending that led to the subprime crisis. Another type of fintech is the so-called peer-to-peer lender, which offers credit services in a fundamentally different way to banks in that the services are unbundled. Electronic platforms typically match borrowers and investors without taking on balance sheet risks and generate fee revenue rather than net interest. Technological innovation may enable lending platforms to become more efficient and more targeted in terms of how they intermediate between borrowers and lenders and thus put pressure on incumbent banks. He argue that, until lending platforms can replicate the benefits of intermediation, they will not meaningfully challenge the role of banks in the economy because:

    • Lending platforms are unable to perform liquidity transformation on a significant scale—that is, to provide short-term liquidity services for depositors and long-term loans for borrowers.
    • Lending platforms are less resilient during shocks, being more prone to funding freezes and swings in credit risk appetite than banks, as at this stage they are small and not diversified. Also, banks have both insured deposits, which contain depositor runs, and higher levels of capital, which supports lending during downturns.

    For these reasons, lending platforms are currently unlikely to threaten banks’ market position in lending. Still, these developments should be continuously monitored. As the competition between fintechs and incumbent banks unfolds, the financial system could become more diverse and competitive. It could also become more concentrated and new risks to financial stability could emerge. According to him to scenarios are possible in the future. In the first scenario, banks rise to the digital challenge by upgrading their technological systems and teaming up with fintechs. Risks to financial stability would be rather low, as financial services provision would remain largely subject to the existing prudential regime. In the second scenario, banks fail to provide the digital financial services demanded by customers. New, innovative, and fast-moving fintechs, or big tech firms with large customer networks, would come to dominate the market and lead to the financial stability risks. Therefore, "we certainly must continue monitoring developments closely and adjust regulation when and where needed to ensure that financial services remain safe and sound. He concludes that legislation and regulation should ensure a level playing field for all market players, incumbents, and new entrants alike.

     

    Related Link: Speech

    Keywords: Europe, EU, Banking, Lending, Regtech, Fintech, Bigtech, ECB

    Featured Experts
    Related Articles
    News

    HKMA Finalizes Policy Modules on Group-Wide Approach and Remuneration

    The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.

    July 29, 2021 WebPage Regulatory News
    News

    EBA Guide to Monitor Threshold for Intermediate Parent Undertakings

    The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).

    July 28, 2021 WebPage Regulatory News
    News

    PRA Finalizes Approach to Supervision of International Banks

    In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.

    July 26, 2021 WebPage Regulatory News
    News

    FCA Issues PS21/9 on Implementation of Investment Firms Regime

    The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.

    July 26, 2021 WebPage Regulatory News
    News

    EBA Proposes Regulatory Standards to Identify Shadow Banking Entities

    The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.

    July 26, 2021 WebPage Regulatory News
    News

    IOSCO Proposes Recommendations on ESG Ratings and Data Providers

    The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.

    July 26, 2021 WebPage Regulatory News
    News

    ESMA Group Issues Recommendations on RFR Switch in Interdealer Market

    The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.

    July 26, 2021 WebPage Regulatory News
    News

    ECB Study Assesses Impact of Basel III Finalization Package

    The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.

    July 26, 2021 WebPage Regulatory News
    News

    ISDA Finds FRTB Results in Higher Capital Charges for Carbon Trading

    The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.

    July 26, 2021 WebPage Regulatory News
    News

    PRA Updates Remuneration Policy Statement Templates and Tables

    The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.

    July 26, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7307