Fintech

Frontier and Beyond

Zhong Xu, Chuanwei Zou

• Éditeur: Routledge
• Année: 2022
• ISBN:
  9781000545173
• Édition: 1
• Sujet: Business
• Sous-sujet: Business General

Fintech, the integration of technology into the delivery of financial services, has revolutionized the world of Finance. This book introduces a new framework to study the concepts that underly Fintech while examining the driving forces and underlying logic behind Fintech-based innovation and predicting the future development of Fintech.

The first three parts of the book cover the development and basics of Fintech and its relationship with inclusive finance, while later parts constitute a deep dive into several core issues surrounding Fintech. First, the book introduces an economic explanation of blockchain and its application in various scenarios based on the token paradigm. Second, it studies digital currency and discusses its impacts on payment systems, financial inclusion, monetary policy, and financial stability. Third, the authors explore how to build a compliant and effective market for data while protecting data privacy, impinging on the future development of AI application, the digital economy, and Fintech. Fourth, the book examines public policies related to Fintech, including regulatory technology, the regulation of financial activities of Big Tech companies, and how to promote financial inclusion.

The title will appeal to scholars, students, and financial practitioners and regulators in a broad range of areas including economics, finance, technology, and public policy, especially Fintech, blockchain, and digital currency.

Part IThe Development of Fintech

DOI: 10.4324/9781003266921-1

Fintech has been a universal and vital trend for global financial development. It refers to innovative business models, applications, processes, and products that are enabled by new technologies (including big data, AI, blockchain, and cloud computing). Fintech can exert an essential impact on financial markets, institutions, and services. According to the Financial Stability Board (FSB), Fintech activities can be divided into five categories: 1. payments, clearing and settlement; 2. deposits, lending and capital raising; 3. insurance; 4. investment management; and 5. market support. Fintech can increase efficiency and reduce the costs of financial services, have a profound influence on the financial ecosystem, reshape financial market structures, and become an essential element in the analysis and management of financial stability.

Many factors drive the rise of Fintech globally, including shifts in user preferences toward financial services that are more convenient, efficient, user-friendly, and cheaper; the application of technological advances, such as the Internet, mobile network, big data, artificial intelligence (AI), and blockchain, to the financial sector; and changes in financial regulation, which has scaled up the application of Fintech.

Fintech will profoundly change the financial market structure through three channels. The first is disintermediation, as Fintech reduces customer demand for financial intermediaries. The second channel is the promotion of joint ventures and mergers and acquisitions of financial intermediaries. The third channel is the reduction of barriers to entry into financial markets. In the banking sector, Fintech facilitates bank transformations and generates new products and services that banks cannot provide. Banks can complement emerging Fintech companies through investments or partnerships.

Fintech can promote financial stability through many transmission channels. First, decentralized and diversified financial systems can lessen the damage caused by the distress of individual financial institutions, avoiding paralysis of the whole system. Second, Fintech can enhance the efficiency of the financial system. Third, it reduces information asymmetries, promotes price discovery in the financial market, and improves market participants’ risk-management ability. Fourth, Fintech improves the accessibility and convenience of financial services provided to households and businesses and can further support sustainable economic growth and safeguard financial stability.

However, Fintech can also undermine financial stability. Micro-level financial risks may become aggravated, including maturity mismatch risks, liquidity risks, and operations risks. Fintech platforms are more vulnerable to cyber-attacks. An increasing number of Fintech platforms rely on cloud services; if certain platforms become systemically important, this reliance may cause significant threats to financial stability. Macro-level financial risks, such as contagion risks and procyclicality, are also amplified. Due to the high efficiency of information dissemination, the distress of a single Fintech institution can be quickly transmitted to related financial systems. Procyclicality is more common in Fintech platforms that engage in robo-advice and algorithm trading businesses.

Currently, regulators are striking a balance between encouraging Fintech innovation and enhancing Fintech regulation. First, they regulate Fintech companies by adopting uniform rules and regulations and eliminating regulatory arbitrage. Second, regulators design rules with technological neutrality and use various technologies and business models to encourage fair competition. Third, they treat market participants equally, including Fintech companies and traditional financial institutions. Fourth, regulators fully protect consumer rights. Fifth, regulators promote the cybersecurity of Fintech companies. Sixth, they also promote the standardization and sharing of financial data to enable smooth communication between regulators and market players. Facing challenges brought by Fintech development, some countries have introduced mechanisms such as “regulatory sandboxes,” “innovation hubs,” and “innovation accelerators.”

Based on China’s practice, we propose the following for the development of Fintech. First, one should hold a balanced view of the relationship between finance and technology and understand the historical patterns. Until now, innovative technologies have not disrupted the financial system; they have become integrated into the system. Technology alone cannot solve every problem. Fintech should follow the logic of finance and technology should serve the needs of financial services. Once applied to the finance sector, new technologies should be supervised reasonably to follow the rules and regulations of the financial industry.

Second, a public-private-partnership model can be adopted to develop financial infrastructure. Private enterprises and Big Tech companies can help build financial infrastructure, but they need to follow certain requirements. For instance, private companies have to serve the public interest and profit should not be the only goal. Meanwhile, regulatory change needs to keep pace with technological change, promoting data and privacy protection, consumer protection, financial stability, and coordination across financial authorities. We also need to design appropriate mechanisms that foster positive incentives and defuse regulatory arbitrage.

Third, we must have confidence in new technology-enabled business models, applications, processes, and products. As long as we adopt proper strategies, we can take off the “veil of technology” and clearly understand its impact on financing, risk transfer, and related stakeholders. Then we can establish a regulatory framework based on functional regulation. Regardless of business entity type or technical form, if entities are engaged in the same business they should be held to the same financial and regulatory standards. The same regulations should be imposed on Fintech institutions and traditional financial institutions engaged in the same business; otherwise, fair competition between the two types of institutions will be distorted and lead to regulatory arbitrage.

Fourth, given that financial risks are self-reinforcing, the supervision of Fintech innovation should advance as far as possible, instead of taking an approach of “easy start, error tolerance, gradual compliance, and profit first, stability next.” Supervisory mechanisms must not wait until risks have evolved from “too small to be noticed” to “too big to be ignored” or even “too big to fail.”

1The Impacts of Fintech on the Financial System and Financial Regulation

DOI: 10.4324/9781003266921-2

Fintech will profoundly impact the financial ecosystem, restructure financial markets, and become a vital factor in financial stability. Regulators have positive attitudes towards Fintech, and therefore, Regtech and international regulatory cooperation will become the most important topics in Fintech.

1 What is Fintech?

The Financial Stability Board (FSB) defines Fintech as follows: “Fintech stands for new business models, new technological applications, new products, and services, facilitated by Big Data, blockchain, cloud computing, Artificial Intelligence, and other frontier technologies, that will greatly impact financial markets and financial services.” Fintech, which has been widely used in lending, wealth management, credit reporting, crowdfunding, payments, digital currency, internet insurance, and retail banking, will improve productivity and reduce the costs of financial services at the same time. On the one hand, Fintech can assist the transition of financial institutions; on the other hand, through technological innovation, it has created new products and services that cannot be offered by traditional financial institutions. Traditional financial institutions can cooperate with and invest in Fintech companies in order to complement each other’s businesses.

Traditionally, the concept of Fintech has been divided into different types of businesses. Based on the classification of FSB’s Financial Innovation Network and World Economic Forum (2015), Fintech can be divided into five types of financial businesses: payment, clearing, and settlement; deposits, lending, and financing; insurance; investment management; and market support. All the types of financial innovation have constantly been evolving, including retail (family, small and medium enterprise) and wholesale (enterprises, non-bank financial institutions, and interbank financial institutions).

The World Economic Forum (2017) has pointed out in Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services that even though Fintech has a significant impact on the structure, supply model, and consumption habits of financial services, Fintech itself has not yet become the dominant power of the financial industry. The report stated the below seven areas that Fintech could work on in the future. First, cost reduction. Financial institutions will actively reduce operational costs. Second, profit redistribution. Fintech will break the current value chain and bring huge challenges to traditional financial institutions. Third, website traffic is the power. Internet platform companies that have a significant amount of website traffic will control the market power. Financial enterprises have to provide products through the platform. Fifth, artificial intelligence will not only create new financial products and services but also change the organizational structure of financial businesses. Sixth, financial institutions will increasingly rely on the services and infrastructure provided by Fintech giants. Seventh, compared with traditional financial institutions, the flexibility of Fintech companies will make them adapt to the different development stages, regulatory rules, and customers’ preferences among different countries.

There is a number of factors promoting the continuous development of Fintech. FSB (2017) believes that the below three aspects are the most important. First, changes in customers’ preferences. Customers want more convenient, effective, friendly, and low-cost financial services. Second, continuous innovation in technology. The technology development in the Internet, big data, mobile terminal, and artificial intelligence has constantly been evolving and has been applied in the financial industry. Third, the reform of financial regulations has promoted the mass application of Fintech in the financial industry.

In order to motivate innovation, the International Information Technology and Innovation Foundation points out in its Principles of Fintech that there are ten principles policymakers should follow. First, provide support for the Fintech industry. Second, cooperate with Fintech companies to ensure the co-development of Fintech and regulation. Third, cooperate with different regulatory bodies, eliminate redundant rules and regulations, and properly...