On February 14, the Financial Stability Board (“FSB“) published a report assessing Fintech market developments in the financial system and the potential implications for financial stability.

Three Fintech developments were considered: new providers of bank-like services competing or co-operating with established financial services providers; the provision of financial services by large technology companies (BigTech); and reliance on third-party providers for cloud services. These are considered to be developments that are altering, or have the potential to alter, the current structure of the financial system and as a result may have financial implications for financial stability.

Key findings from the FSB’s analysis of the link between technological innovation and market structure include the following:

• To date, the relationship between incumbent financial institutions and Fintech firms appears to be largely complementary and co-operative in nature.
• The competitive impact of BigTech may be greater than that of Fintech firms.
• Although reliance by financial institutions on third-party data service providers (for example data provision, cloud storage and analytics, and physical connectivity) for core operations is estimated to be low at present, this warrants ongoing attention from authorities.

Whilst it was noted that greater competition and diversity in lending, payments, insurance, trading and other areas of financial services can lead to a more efficient and resilient system, the FSB highlighted concerns that increased competition could increase pressure on profitability of financial institutions, which could in turn lead to additional risk taking to maintain margins.

The FSB also highlighted that it will be important to continue monitoring developments and their financial stability implications, including monitoring the impact of heightened competition on profitability and lending standards, as well as increasing cyber risk.