Over the past two years, numerous reports have been published by both private institutions and international public organizations exploring the impact of new technologies on the financial market.<\/p>\n
There is widespread consensus around the idea that technological innovation holds great promise for the provision of financial services due to its potential to increase the efficiency of financial operations (internal processes of institutions and customer services) and expand the range of product and service offerings.<\/p>\n
However, one of the areas where authorities have placed greater focus during this past year has been the implications of the FinTech phenomenon in terms of competition and financial stability.<\/p>\n
Indeed, many analytical documents agree in concluding that financial innovations can reduce barriers to market entry by lowering costs, increasing economies of scale, and reducing information asymmetries.<\/p>\n
These factors can affect the structure of a long-established market, such as the financial sector, which is now witnessing the emergence of numerous new entrants of different types and sizes. These new players share with established institutions the objective of leveraging the potential of new technologies in developing their businesses. However, their status as “digital natives” and, in some cases, their exemption from current regulations place them in a highly favorable starting position for developing financial services with greater agility and flexibility. <\/p>\n
The speed with which new providers enter and consolidate in the sector, their ability to gain scale, and especially the regulation and supervision to which they are subject will be determining factors not only for assessing the resilience capacity of established banking institutions, but also for evaluating the potential impact in terms of financial stability.<\/p>\n
FinTech, BigTech and Their Disruptive Potential<\/strong><\/p>\n For years we have witnessed the emergence of new operators in the financial market, initially small startup FinTech companies that, leveraging the use of the most advanced technologies, have entered those banking activities or businesses with higher profitability (payments, advisory services, or business lending). Financed primarily with equity capital and, in many cases, with certain regulatory advantages, these companies have stimulated the creation of a national “FinTech ecosystem” in almost all relevant financial centers, which has served as a stimulus for the entire sector. <\/p>\n However, the disruptive capacity of these companies in the competitive environment faces significant challenges. The absence of an established customer base, limited access to information about potential customers, lack of reputation and brand recognition, or a relatively high cost of capital represent non-trivial competitive disadvantages compared to banks. <\/p>\n As always, there may be exceptions. In some cases, certain value propositions may overcome these obstacles and their promoters consolidate as operators with sufficient scale to compete. In others, however, the proposed solutions will not be aimed at competing, but rather at complementing, providing services directly to banks (B2B or business to business<\/em> services) such as, for example, solutions that facilitate regulatory compliance (RegTech). <\/p>\n The entry of technology giants or BigTech into financial activity may, however, represent a more disruptive change in terms of competition compared to small-sized FinTech startups.<\/p>\n There is no doubt about the enormous potential of these large companies to change the structure of the financial market, given that they are natural monopolies in digital markets where they hold a dominant position, resulting from their access to a large amount of data that is difficult to replicate, or the network effects they achieve.<\/p>\n Unlike FinTech startups, large technology companies have a significant customer base, established reputation, and powerful brands that, in combination with a solid financial position and comfortable access to capital markets, allow them to achieve scale very easily.<\/p>\n Furthermore, and perhaps most importantly, depending on their scope of operation, they control the tastes, trends, and purchasing experiences of many individuals. They can leverage information about their preferences, habits, and behaviors, together with their advantage in developing artificial intelligence tools and big data analysis, to compete head-to-head with traditional financial institutions. <\/p>\n For now, their entry into financial services is proceeding rather slowly in Europe, but not so much in their countries of origin (United States or China), where they are specializing in certain market niches\u2014financial products or services that are less capital-intensive and more profitable\u2014leaving aside other activities, such as deposit-taking, which are subject to heavy regulatory burdens.<\/p>\n Impact on Competition and Financial Stability<\/strong><\/p>\n In general, there is considerable consensus that the entry of large technology platforms into the banking sector can be highly beneficial, by fostering competition and innovation. Some studies suggest that, in addition, it can facilitate access to credit for certain segments of consumers and small businesses that would otherwise be excluded due to lack of credit histories. <\/p>\n However, many also agree that their entry may generate certain dynamics or behaviors in the market that must be closely monitored by the competent authorities.<\/p>\n These dynamics are not only related to the impact on profitability and the business model of established financial institutions in the face of the possibility that BigTech may decide to intervene as a marketplace<\/em> or comparison platform, connecting demand and supply of financial services or, alternatively, enter to compete directly in the most profitable business lines, thereby disintermediating the banking business.<\/p>\n There is a greater threat related to the possible adverse selection or moral hazard effects that could be triggered in the market if the incentives of these companies are not aligned with those of other users and, additionally, financial regulation is configured as an asymmetric framework for companies competing in the same activities.<\/p>\n As an example, in a market scenario where these BigTech companies originate and distribute loans\u2014financed by a banking institution\u2014the incentives to maximize volume\u2014over asset quality\u2014as well as to prioritize linkage with other products from their adjacent platforms, could have a considerable impact on portfolio quality and, therefore, on financial stability.<\/p>\n Of course, the probability of this occurring will depend on how the activity of these companies can fit within financial regulation and supervision. It should be remembered that part of this financial regulation is not functional. That is, it is not based on the function or activity carried out by an institution, but rather there is a clear emphasis on the legal configuration of the entities that carry it out. <\/p>\n Thus, regulated credit institutions face certain barriers to innovation or digital transformation that stem from their prudential and risk management rules. Going forward, it would be worth considering a reconsideration of current regulations, especially those that asymmetrically affect credit institutions compared to new entrants, evaluating the possibility of including the latter within the scope of financial regulation and supervision. <\/p>\n Additionally, competent authorities should monitor the challenges to competition that certain practices of technology giants could introduce, which could constitute an abuse of a dominant position, as well as the consequences of their data monopolies. Challenges that, moreover, are equally relevant for other affected productive sectors. <\/p>\n The participation of BigTech in financial services must entail a medium- and long-term analysis of the impact on competition, financial stability, and consumer protection, to ensure that their entry brings positive effects for competition and efficiency in the financial sector and not new forms of concentration and systemic risks for the system as a whole.<\/p>\n <\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" There is widespread consensus around the idea that technological innovation holds great promise for the provision of financial services due to its potential to increase the efficiency of financial operations and to expand the range of products and services. However, one of the areas where authorities have placed greater focus during this past year has been the implications of the FinTech phenomenon in terms of competition and financial stability. <\/p>\n","protected":false},"featured_media":35987,"parent":0,"template":"","etiquetas":[293,297,352],"categorias-blog":[780,781],"class_list":["post-36443","blog-aeb","type-blog-aeb","status-publish","has-post-thumbnail","hentry","etiquetas-banca-digital","etiquetas-digitalizacion","etiquetas-fintech","categorias-blog-articles","categorias-blog-newsarticles"],"yoast_head":"\n