Fintech’s double-edged sword

Ultra-low interest rates and fintech were two of the major threats to the stability of the financial system identified by the global regulator in its recent annual economic report.

“Sustainable profitability is especially important at the current juncture: banks have been facing the dual challenge of persistently and unusually low interest rates eating away at their net interest margins, and growing competition from new technology-savvy players – big tech and fintech,” the Bank for Financial Settlements reported.

“Once [fintechs] do have the scale to disrupt they will be regulated as if they were part of the established order.”

According to Fabio Panetta, the deputy governor of the Bank of Italy, up to 60 per cent of the profits in retail banking are under threat from fintechs.

The BIS was focussing on competition, on the probability big tech like Amazon and the myriad startup fintechs would eat away at the established players. That’s almost certainly true up to a point but there is a further threat to the global system posed by these disrupters: they are outsiders, falling outside the established regulatory and supervisory order.

At the moment the officials interested in these non-bank competitors are securities regulators – those charged with protecting investors and ensuring fair markets. That’s because at this stage of evolution fintechs either don’t have scale themselves or where they do – as with what Amazon is doing – they are not systemically important.

So these regulators, like the Australian Securities and Investments Commission, have a mandate to provide a fair market for those providing capital in the form of funding rounds – where they are involved at all.

Theoretically, in a catch-22 for those non-banks wishing to disrupt the established order, once they do have the scale to disrupt, they will be regulated as if they were part of the established order.

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Source: Fintech’s double-edged sword