Last month the Basel-based Financial Stability Board (FSB) published an interesting report titled FinTech and market structure in financial services. FSB’s task is coordination of national financial authorities and standards at international level. Their assessment of global fintech innovation trends provides several points market participants should be aware of.



FSB researchers point out that increased competition in financial services is welcome as variety enhances resilience of the system. So far, they continue, the relationship between the emerging fintech companies and established financial institutions has been mostly cooperative and complementary. This is mainly due to the fact that fintech firms do not have easy access to low cost funding and large customer bases. But this relationship will not necessarily last.

Regulators seem to favour the opening of the financial sector to fintech firms and enable them easier compliance. A significant step in this direction was the The Second Payment Services Directive (PSD2) adopted in Europe last year. The directive has the disruptive effect of making available banks’ data bases and payment infrastructure to third parties. Another aspect of competitive pressure may come from fintech firms connecting to each other like the largest US exchange Coinbase announcing its cooperation with PayPal service, to name a recent example.

Such environment is likely to put banks’ payment revenues under pressure as they face competition from emerging digital banks. Marketing campaigns targeting younger generations that prefer to engage with financial matters on smart phones and a struggle to retain customers that are indifferent to brands are expected.

FSB stresses the possibility of an alternative reaction to increased competition such as relaxing the lending standards and exposing themselves to more risk. This is the risk jurisdiction with developed competition might face. The report specifically mention cross-subsidizing as a strategy of players with large pools of different type of customers.



On the other side of the spectrum is the risk of increased concentration in jurisdictions where the financial industry is dominated by few players. FSB mentions BigTech companies such as Ali Baba, Google, Amazon, Microsoft, Vodafone, Facebook, Apple and similar giants of industry. Such entities already have large customer databases and established networks, are well capitalised and have easy access to additional external funding. The possession of technologies to process big data, AI and machine learning and sufficient capital to provide certain services free of charge, may give them a competitive advantage, according to FSB. Given that some unknowns remain regarding the impact of BigTech adopting new technologies it will fall to regulatory authorities of a given jurisdiction to prevent excessive concentration of services.



The transformation of payment systems will be the key point in the adaptation to fintech innovations. It will open doors to third party payment providers who will offer initiation of instant payments from customers’ bank accounts to merchants. This will likely result in the reduced number of card transactions. This adaptation will be taking place in partnership with fintech firms with cross-currency real-time payments as a likely addition to faster and smoother traditional services.

Large institutions have already proven they can adapt to disruptive technologies during the first wave of digitalization of the late 90s, but in this case the speed at which new fintech firms are emerging along with proper regulation may be the key factors allowing another transition of the incumbents to new technologies. Overall, the progress of fintech’s march toward integration with incumbents is an unstoppable process, even though its impact on market structure is not clear at the moment.

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David Prezelj
David Prezelj

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