Fintech and Financial Services: Initial Considerations

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June 19, 2017/IMF

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From artificial intelligence to cryptography, rapid advances in digital technology are transforming the financial services landscape, creating opportunities and challenges for consumers, service providers, and regulators alike. This paper reviews developments in this new wave of technological innovations, often called “fintech,” and assesses their impact on an array of financial services. Given the IMF’s mandate to promote the stability of the international monetary system, it focuses on rapidly changing cross-border payments.

Using an economic framework, the paper discusses how fintech might provide solutions that respond to consumer needs for trust, security, privacy, better services, and change the competitive landscape. The key findings include the following:

  • Boundaries are blurring among intermediaries, markets, and new service providers.
  • Barriers to entry are changing, being lowered in some cases but increased in others, especially if the emergence of large closed networks reduces opportunities for competition.
  • Trust remains essential, even as there is less reliance on traditional financial intermediaries, and more on networks and new types of service providers.
  • Technologies may improve cross-border payments, including by offering better and cheaper services, and lowering the cost of compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) regulation.
    Overall, the financial services sector is poised for change. But it is hard to judge whether this will be more evolutionary or revolutionary. Policymaking will need to be nimble, experimental, and cooperative.
    At the same time, regulatory authorities need to balance carefully efficiency and stability tradeoffs in the face of these rapid changes. They need to be assured that risks to stability and integrity–– including from cyberattacks, money-laundering and terrorism financing––can be effectively managed without stifling innovation. They need to ensure that trust is maintained in an evolving financial system. In particular:
  • Regulators may need to complement their focus on entities with increasing attention to activities, as financial services are increasingly provided by a diverse group of firms and market platforms.
  • Governance needs to be strengthened. Rules and standards will need to be developed to ensure the integrity of data, algorithms, and platforms.
  • Policy options to support open networks could be considered. In doing so, central banks may need to assess costs and benefits of increasing access to their settlement systems or offering digital national currencies.
  • Legal principles need to be modernized. Maintaining trust in financial services may also require the development of new legal rules to clarify rights and obligations within the new global financial landscape.
    Fintech is an international issue. With the blurring of boundaries among entities, activities, and jurisdictions policymakers need to consider implications for common standards and legal principles, to the extent that they align with national priorities. International cooperation will therefore be essential, and the IMF is well placed to play a significant role.