“Fintech” companies, which can be incipient startups but also giants of the world economy such as Google, Amazon, Facebook or Apple (known collectively, along with other companies with similar characteristics, such as “Bigtech” entities), have begun to set their eyes on the provision of services traditionally provided by financial institutions, such as payment or financing services, something not badly seen among users, especially by the youngest.
While “Fintech” primarily operate in the financial services sector, “Bigtech” tend to offer financial services as part of a much broader set of activities; the “core” businesses of the “Bigtech” are information technology and consulting, and, although they offer their services all over the planet, their operations are mainly located in Asia, the Pacific and North America, with China standing out as the place where there is a clearer vocation to offer financial services.
If we look to the future, we are puzzled not so much by the new regulatory framework that will determine the performance of financial institutions, but by the leap in a type of banking that has prevailed with little variation during the last hundreds of years towards another radically different model, supported by technological advance and, perhaps more important, by the desire of customers to receive financial services in a different way, without having to go through the bank branch, and by providers of various services of non-financial origin.
Consequently, it can be anticipated that there will be two trends of this time: On the one hand, the traditional providers of financial services will adapt to serve a new type of client, and, on the other hand, “Fintech” companies will try to take advantage of the new habits of these users, which they will be able to do with their own means exclusively, or by integrating or allying themselves with traditional financial players. Perhaps the most delicate question is to know what will be the role of the big technology companies with a global reach, the “Bigtech”.
As if that was not enough, a new area of activity has emerged on the periphery of the financial system, which, at times, can overlap with the “Fintech” sector. We refer to the so-called “shadow banking”, which allocates the funds raised to the purchase of assets with long maturity, less liquid and more risky and in a leveraged way (that is, by magnifying losses or potential gains) and, all this, outside the scope of the supervisory authorities. More and more non-banking entities carry out bank-specific activities.
According to the “White Paper on ‘Fintech’ Regulation in Spain”[1], from a subjective point of view, the “Fintech” concept would encompass three types of players that interact with each other:
- New operators who wish to provide regulated services subject to obtaining prior authorization and with a limited scope in terms of the activity to be carried out in the financial sector.
- Already authorized operators who carry out broader activities in the financial field, and who wish to apply the use of new technologies that facilitate certain processes in the provision of their products and services.
- Technology companies or “technologists”, which are conceived as entities that provide services not subject to authorization and whose activity is based exclusively on technological support to previously identified regulated players.
Thanks to the development of the Internet and the capacity of computers, many “Fintech” already offer services and products in the same lines of business as traditional financial intermediaries. The last major regulatory barrier to be dismantled is that of receiving deposits or other reimbursable funds from the public and granting loans on their own account, an activity that is reserved for credit institutions. The areas of financing and the provision of payment services, for example, are no longer reserved for traditional banks.
Initially, it seemed, in effect, that the “Fintech” would be an alternative to the traditional financial system, although this vision has been gradually softened and it seems to open, rather, a scope of cooperation between the various parties involved, regardless of the decisions that, perhaps in the near future, “Bigtech”, which have the liquidity, may adopt resources and data to substantially alter the current state of affairs.
As has already been shown, the “Fintech” phenomenon does not only affect credit markets, but also every infrastructure and service that can be provided by the financial system. According to the International Organization of Securities Commissions (IOSCO)[2], the term “Fintech” encompasses a variety of innovative business models and technologies that have the potential to transform the financial services industry. This breadth could be specified in eight specific categories depending on the activity carried out:
- Payments.
- Insurance
- Personal finance planning.
- Loans and “crowdfunding”.
- Blockchain (virtual currencies).
- Trading and investment.
- Data analysis.
- Safety.
Some of the risks associated with the new models for the provision of financial services and the new “Fintech” players are the following:
- Systemic risks.
- Cyber threats.
- Reputational risk.
- Impact of algorithms on granting credit.
- Greater volatility in the financial system.
- Dependence on a small number of information providers (concentration risk).
- Cloud Computing.
[1] Spanish Association of Fintech and InsurTech (2017): “Libro Blanco de la Regulación Fintech en España”, February.
[2] IOSCO (2017): “Research Report on Financial Technologies (“ Fintech ”)”, February.
