To date, the relationship between traditional financial institutions and fintech companies seems to be more complementary and cooperative than competitive. However, the big technology, bigtech (such as Google, Amazon, Facebook and Apple), which have already begun to venture into financial services in certain jurisdictions, could represent a greater competitive impact.
Fintech and Market Structure in Financial Services
The above follows from the report “Fintech and Market Structure in Financial Services: Market Evolution and Possible Implications for Financial Stability”, prepared by the Financial Stability Board (FSB, for its acronym in English).
There it refers that technological innovation is very promising for the provision of financial services, with the potential to increase market access, the range of product offerings and convenience, while reducing costs for customers.
But at the same time, he emphasizes, the new participants in the financial services space, including the finetch and bigtech firms, could materially alter the universe of suppliers, which in turn could affect the degree of concentration and competition, with benefits and risks. potential for financial stability.
“Greater competition and diversity in loans, payments, insurance, commerce and other areas of financial services can create a more efficient and resilient financial system. Despite these clear benefits for financial stability, increased competition could also put pressure on the profitability of financial institutions. This could lead to additional risks among holders to maintain margins, “he says.
The document details that Fintech companies generally have not had sufficient access to low-cost financing or the necessary client base to represent a serious competitive threat to financial institutions established in mature financial market segments.
About the exceptions
However, he clarifies that there are exceptions to this trend. “Fintech credit is growing rapidly, but it is still small as a proportion of general credit in most jurisdictions. To the extent that technology allows a greater disaggregation of profitable services traditionally offered by banks and other institutions, the profitability of these institutions may be adversely affected in the future. ”
Large customer networks
The bigtech usually have large networks of established customers and enjoy recognition and trust. This, combined with solid financial positions and access to low-cost capital, could lead them to reach a very rapid scale in financial services.
“This would be particularly true when the effects of the network are present, such as in payments and settlements, loans and, potentially, insurance. The cross subsidies could allow bigtech companies to operate with lower margins and gain greater market share. ”
However, the analysis clarifies that although bigtech could represent a source of greater competition for traditional financial institutions, in some scenarios their participation may not result in a more competitive market in the long term.
Markets in which they already operate
The FSB report points out that in some jurisdictions, large technology companies have entered the financial services market, especially by partnering with the dominant ones and acting as distributors of their payment products, loans and insurance.
As an example, he mentions that the Chinese firms Alibaba and Baidu are already active in a wide range of financial services.
In the United States, he adds, Amazon loans, launched in 2011, are offered to merchants that sell products through its market; In Australia, Japan and the United Kingdom, PayPal’s working capital is also increasing loans to companies; and in Latin America, the e-commerce platform, Mercado Libre, already lends money.
“While bigtech firms that provide financial services can be considered a subset of fintech, they differ in some key ways,” he says.
He stresses that fintech’s implications for financial stability in general are considered small due to its relatively small size, but this could change rapidly with greater participation from large technology providers.