Fintech group photo ©Denis Faber

Fintechs are transforming the financial system – recognising and mastering the challenges

In the past few years, technology companies have made strong inroads into the financial services market as “fintechs”, competing with traditional providers such as commercial banks. Innovative technologies have the potential to lower consumer costs and to extend the product mix on the market permanently. However, tension surrounds the resulting additional economic growth in the face of possible risks to financial stability. The three-day expert panel on “Fintechs and their impact on central banking” focused on questions faced by central banks and financial supervisory authorities around the world when dealing with these new market participants.

The first day saw discussions about the current situation in the various participating countries. Several participants provided an insight into the emergence of fintechs in their home countries at the current time and how they are dealing with them in their capacity as supervisory authorities. The attendees discussed the various approaches employed to support the new technologies and how regulatory arbitrage can be avoided while at the same time encouraging innovation. As an innovation hub, for example, financial supervision could provide non-binding interpretations in advance. Attention was also given to the use of a regulatory sandbox in which a business model can be tested using a precisely defined plan. In essence, all participants support a general impartiality towards the technology used, but there are international differences in how supervisory authorities accompany the process, for instance through the use of discretionary scope and regulatory advice provided to firms.

The second day kicked off with a presentation by BitBond. The firm unites SME borrowers and investors as part of an international peer-to-peer network. The technical processing is then carried out using blockchain technology. A panel discussion explored the commercial and regulatory issues from the perspective of a fintech. In addition, attention was given to the positive effects that can be gained through a close relationship with financial supervision, for instance by making it easier to plan ahead for regulatory requirements.

There was then a presentation on innovations being made in the world of payments, which included a debate on how crypto-tokens will influence the work of central banks in future. Using the example of the white paper on Libra by US firm Facebook, participants discussed the – in their view – high potential for cross-border payments. It was, however, stressed that a large number of technical and legal questions currently remain unanswered on the whole.

The last day focused on other ways in which fintechs might affect monetary policy implementation. The way that interest rates are managed at present through the provision of central bank liquidity to commercial banks would need to be adjusted if there were a wide shift of market participants. The introduction of Libra was a topic of discussion here, too. Participants believed that backing the crypto-tokens by a basket of currencies would bring various challenges. Amongst other things, its composition would lead to shifts in demand between individual currencies. This would result in significant changes to exchange rates, interest rates and inflation rates.

At the end of the event, there was broad agreement amongst the participants that the above-mentioned financial innovations could transform financial markets significantly and that this transition requires stronger cooperation at the international level between central banks and financial supervisory authorities.

Text: Florian Naunheim