Some of Impacts of FinTech on Financial Markets

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 also lowering costs to clients. At the same time, 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. This could in turn affect the degree of concentration and contestability in financial services, with both potential benefits and risks for financial stability. 

Greater competition and diversity in lending, payments, insurance, trading, and other areas of financial services can create a more efficient and resilient financial system. Notwithstanding these clear benefits to financial stability, heightened competition could also put pressure on financial institutions’ profitability. This could lead to additional risk taking among incumbents in order to maintain margins. Moreover, there could be new implications for financial stability from BigTech in finance and greater third-party dependencies. 

Various FinTech services are being used by substantial shares of retail clients in specific markets, particularly in China. Yet to date, FinTech firms have typically found new niches –e.g. platforms for P2P lending, crowdfunding, and cross-border payments – and underserved clients, such as small businesses or people who lack a credit history. In other cases, they have cooperated with incumbents or BigTech firms. Cooperation gives FinTech start-ups access to clients (for example, through selling white-label and co-branded products) while, depending on the jurisdiction and the business model, potentially reducing their regulatory compliance burden. In turn, incumbents get access to innovative technologies and products and can gain advantage by being the first ones to offer their clients new products and services. 

One area that may see more competitive pressure from FinTech is lending, particularly to underserved segments of the population. A range of new lending platforms, including P2P and marketplace lenders, have appeared in jurisdictions around the world. These platforms often have access to online methods of client interaction; new data sources and methodologies for analysing data (such as machine learning); and new business models. In theory, this can create competitive pressure for incumbents, and force them to streamline their own loan underwriting processes and employ better and faster data analytics systems. So far, competitive pressures on incumbent lenders in most established market segments appear limited. Available data suggest that despite rapid growth, FinTech credit is still small as a proportion of overall credit in most jurisdictions, including China, Korea, and the UK. Credit quality of P2P lending platforms has also been a concern. 

On the other hand, cooperation between incumbents and FinTech firms has been observed in a number of markets. Often, incumbents outsource to FinTech firms some of their lending business, while FinTech firms benefit from access to incumbents’ client base and reputation. Lending platforms have also entered segments where they have no competition from the incumbents, e.g. among unbanked clients (providing online services to those who cannot apply for loans from traditional players) and underserved segments (small businesses, subprime customers, and clients with insufficient credit history or lower job security). Partnerships are also common in the payments space.

Clearly many FinTech firms offer products that potentially challenge the traditional business models of financial institutions. However this may play out in a number of different ways, which will have different implications for financial stability.

i. They may partner (or be taken over) by financial institutions, allowing the financial institutions to improve their service level or efficiency. 

ii. They may provide a service which is complementary to those provided by existing financial institutions. This could improve the attractiveness of the existing service, e.g. payments ‘front-ends’ that utilise existing networks and maintain (or increase) existing transaction flows. Or, for instance by using open banking services, they may facilitate stronger competition between financial institutions by increasing transparency or making the switching of providers easier. While these services may complement those offered by a financial institution, they may have some detrimental effects on the financial institution, by replacing or weakening the institution’s traditional customer relationship.

iii. They may compete directly with existing financial institutions, reducing margins in the affected segments and reducing the financial institution’s capacity to cross-subsidise products.

(an excerpt from FSB - Financial Stability Board - document "FinTech and market structure in financial services: Market developments and potential financial stability implications", which can be found on 
http://www.fsb.org/wp-content/uploads/P140219.pdf)