The Financial Stability Board (FSB) has published a report on FinTech and market structure in financial services.

The digitalisation of finance has the potential to significantly change the current functioning of the global financial system, which raises a number of possible benefits and risks. The FSB monitors digitalisation trends, to assist in harnessing the benefits while mitigating risks. This includes analysis of the financial stability implications of technological innovation.

The report reiterates that technological innovation in financial services gives providers 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.

Greater competition and diversity in lending, payments, insurance, trading, and other areas of financial services can create a more efficient and resilient financial system. However, the report states that heightened competition could also put pressure on financial institutions’ profitability and 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, for instance in cloud computing services.

The FSB found that, to date, the relationship between incumbent financial institutions and FinTech firms appears to be largely complementary and cooperative in nature. Having said that, the report stresses the competitive impact of BigTech may be greater than that of FinTech firms because BigTech firms typically have large, established customer networks and enjoy name recognition and trust.

Interestingly the report states the reliance by financial institutions on third-party data service providers (e.g. data provision, cloud storage and analytics, and physical connectivity) for core operations is estimated to be low at present. However, this warrants ongoing attention from authorities.

Back in June 2017 the FSB published a report on the Financial Stability Implications from FinTech. The report identified 10 areas that merited authorities’ attention, of which three were seen as priorities for international collaboration: managing operational risk from third-party service providers; mitigating cyber risks; and monitoring macrofinancial risks that could emerge as FinTech activities increase.

This report follows up on these issues, providing further evidence on FinTech and resulting changes in market structure. As FinTech firms, BigTech firms, and the markets for third-party services continue to develop, the FSB said it will be important to continue monitoring these developments and their financial stability implications.