In the past few years, financial technologies (fintech) have emerged in both advanced economies and emerging market and developing economies (EMDEs). But the rate of fintech adoption diers considerably.
While fintech is a niche activity confined to certain business lines in some countries, in others, it is moving into the mainstream of financial services. This pattern of fintech adoption is puzzling, as it does not reflect neither economic development nor political boundaries.
Cross-country evidence on fintech adoption is limited, but the data available are improving. They show that in payments, new fintech providers have established a strong foothold in mobile payments, especially for retail customers.
As one category of fintech, “techfin” or “big tech” players are increasingly important as payment providers in some countries, but not in others. For instance, big tech mobile payments made up 16% of GDP in China according to the most recent data, but less than 1% in the United States, India, and Brazil.
Especially in EMDEs, mobile payments are benefiting from the high share of consumers with mobile phones, which often exceed those with bank accounts or credit cards. In many African countries, but also in Chile, Bangladesh, and Iran, over 20% of the population had a mobile money account, according to the latest World Bank survey.
There is increasing fintech activity in insurance markets (“insurtech”), and even in some wholesale applications like trade finance. Yet in wholesale markets, like syndicated lending, derivatives markets, or clearing and settlement, fintech penetration remains low, notwithstanding potential applications of distributed ledger technology.
Technological advances such as smartphones, cloud computing, and big data analytics are present in many economies around the world. The greater adoption of these technological innovations in financial services is concentrated in markets with several common characteristics, resulting in several implications.
First, where fintech helps to enhance financial inclusion, e.g., for basic payments services in EMDEs, this is likely to be positive for economic growth and development. Credit services are the only area where the picture may be more mixed.
Fintech credit may help to expand access to finance for SMEs. But if it results in excessive lending or overly high debt burdens for certain (groups of) borrowers, this could be more problematic.
Second, fintech activity could increase cross-border competition in financial services over time. While many fintech firms start by focusing on one economy, there have been several examples of cross-border expansion, and of the imitation of successful fintech business models in different markets.
Such cross-border financial integration could support greater diversification and risk-sharing across economies. It could also help to reverse some of the decline in cross-border financial activity seen since the global financial crisis.
Given the differences in regulation across markets and the potential for regulatory arbitrage, it is crucial that this cross-border expansion is accompanied by adequate cooperation between global regulators.
Third, while fintech innovations can sometimes overcome specific market failures (e.g., by reducing information asymmetries, transaction costs, etc.), fintech activities will remain subject to the same well-known risks traditionally present in finance.
For instance, deposit-like activities remain subject to liquidity mismatch and the potential for bank runs, even when they are offered by non-banks. New financial assets can still be subject to speculative bubbles, as was the case with Bitcoin in 2017.
If specific fintech or big tech firms achieve a large enough scale, there is the potential for them to become systemically important (“too-big-to-fail”), resulting in moral hazard and excessive risk taking.
Finally, new forms of interconnectedness, including operational dependencies (such as reliance on third party services like cloud computing) could transmit market shocks across institutions and markets.
Managing these risks will remain the remit of public sector authorities. Supervisors must continue to adapt regulatory frameworks and crisis management tools accordingly. Quite a bit of work still needs to be done to assess these findings.
In particular, the quality of data across different economies, while improving, is still not sufficient to draw hard conclusions in many cases. More data are needed to test causality between economic drivers and fintech adoption.
Fintech activity is driven by a range of demand-side and supply-side factors. The available evidence shows that unmet demand (i.e., financial inclusion) is a strong driver in EMDEs and in underserved market segments. The high cost of finance, and high banking sector mark-ups, are also important.
Regulatory factors can play a role, but in general, regulatory arbitrage does not seem to be a primary driver of fintech adoption to date, at least at an aggregate level. There may be specific activities for which regulatory arbitrage is a factor.
Finally, younger cohorts may be driving adoption in many economies, but not universally. Population ageing and changes in trust in technology and fintech may have important effects, shaping not just the extent but the future direction of fintech adoption.
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Dr Uma Murthy is a lecturer and Dr Paul Anthony Maria Das is a senior lecturer for the School of Accounting and Finance, Faculty of Business and Law at Taylor’s University. Taylor’s Business School is the leading private business school in Malaysia and Southeast Asia for Business and Management Studies based on the 2022 QS World University Rankings by Subject.
