Last week, the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, issued a report assessing the potential impacts of certain FinTech market developments on financial stability. Specifically, the report examines the potential implications of (i) FinTech firms competing with traditional financial services providers; (ii) the provision of financial services by some of the world’s largest technology companies (referred to as “BigTech” firms); and (iii) reliance on third-party providers for cloud services.
Although the report finds that the relationship between FinTech firms and financial institutions has been mostly complementary to this point, it also shows that FinTech firms have started to chip away at financial institutions’ market share in certain industries, such as credit provision and payments. Further, the report posits that the entry of BigTech firms into the financial services space could also have significant competitive impacts, as such firms often have large, established customer bases, brand recognition, strong financial positions and access to low-cost capital, which could allow them to quickly achieve scale in the space. While this could lead to greater competition in the short-term, the FSB hypothesizes that cross-subsidization could allow BigTech firms to operate with lower margins and gain greater market share, which could in the long run lead to a less competitive market (e.g. China, where two firms account for 94% of the mobile payments market). Additionally, according to the report, increased competition over time could also press incumbent financial institutions to take on additional risk in order to maintain margins and profitability, which could have subsequent effects on financial stability.
The report finds that reliance by financial institutions on third-party data service providers (i.e. data provision and cloud storage) for core operations is presently low. However, if financial institutions begin to rely on a concentrated number of service providers for core operations, an operational failure, cyber incident or insolvency at one of the providers could disrupt the operations of multiple financial institutions. According to the FSB, unless these risks are properly managed at the firm-level, new financial stability challenges could be introduced into the global financial system.
Going forward, the FSB recommends that global regulators within their respective jurisdictions assess the impact of heightened competition in the financial services space on profitability and lending standards, monitor the scale of BigTech firms’ financial activities and evaluate potential cyber risks.The FSB also said that its Financial Innovation Network plans to further explore third-party dependencies in cloud services, single point of failure risks and the activities of BigTech in finance.
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