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The head of the International Monetary Fund (IMF), Christine Lagarde, has warned of adverse challenges resulting from fintech developments, reports Reuters.
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Notwithstanding the substantial leaps being made in financial services innovation, the increasing entry of big tech firms into the industry could result in a major disruption of the global financial system, according to Lagarde.
Here’s what it means: Big tech firms continue to wade into financial services — and Lagarde’s comments reflect the threat these players pose to the status quo.
- Growing digitization of financial services has opened the door for big tech firms.Rapid digital innovations within the industry have enabled greater access to financial services, allowing low-income households in emerging markets, where traditional banking infrastructures are scarce, to access cheap payments and settlement systems, for example. However, this has also unlocked a gateway for the biggest tech firms, such as Apple, Amazon, Google, and Alibaba, to disrupt the financial landscape.
- Big techs’ size means they have all the tools necessary to take full advantage of this access to the finance industry. Fintechs have played a crucial role in transforming the industry, yet their relatively small size means incumbents continue to hold on to their established position. In contrast, big techs have huge established customer networks and brand recognition, vast pools of cash, and deep technical know-how. This can enable them to achieve scale as financial service providers at a pace unparalleled with fintechs, making their threat to the established order substantially more serious. For instance, Alibaba affiliate Ant Financial oversees Yu’e Bao, which manages 1.5 trillion yuan ($216 billion) for over 170 million customers, making it the world’s biggest money market fund.
- And these players’ entry into the industry opens the system up to substantial vulnerabilities. While innovation may spur modernization within financial markets, it could also result in financial networks, like payments and settlement systems, falling under the control of a few powerful tech giants, according to Lagarde. Pointing to China as a case in point, she noted that such an outcome presents unique challenges to the stability and efficiency of the financial system: More than 90% of China’s mobile payments market is controlled by two firms, according to Lagarde — likely in reference to Alibaba’s Alipay and Tencent’s WeChat Pay.
The bigger picture: Amid big tech’s seemingly inexorable foray into financial services, banks could face a reprieve from an unlikely source — regulators.
In addition to Lagarde, other powerful voices within the financial services industry have been quick to point to the threat posed by big techs. For instance, at the end of last year, the head of the Bank for International Settlements, Agustín Carstens, sounded the warning bell for incumbent financial institutions (FIs) over the potential competitive advantage tech firms enjoy in their efforts to upend the industry, noting that these players’ vast set of customer data could enable them to assess credit risk for loans better than incumbents.
And this February, the Financial Stability Board released a report detailing the impact of big techs’ entry into the industry, saying these firms could introduce new risks by compelling incumbent FIs to take greater risks to keep up.
These warnings will likely be a precursor to more stringent regulatory controls on the likes of Google and Amazon with respect to financial services. Although the nature of such an outcome is unclear, we anticipate it would drive a more collaborative approach, with big techs leaning on incumbents’ regulatory expertise and incumbents tapping into the new distribution channels provided by these players. The partnership inked between Apple and Goldman Sachs earlier this year, for example, could become a more prominent model within the industry.
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See Also:
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- Open banking concerns may hinder global adoption
- Thirteen leading global banks are planning to launch cryptos in 2020
Source: Business Insider – feedback@businessinsider.com (Mekebeb Tesfaye)