Fintech is still too small a chunk of the global financial system to present a compelling stability risk but the sector's fast-paced development means that international regulators should collaborate closely to guard against future risks, says a new report.
Put together by the international Financial Stability Board (FSB), the report identifies 10 fintech-related areas that "merit authorities' attention".
Three of these are priorities for international collaboration: managing operational risk from third-party service providers; mitigating cyber risks; and monitoring macrofinancial risks that could emerge as fintech activities increase.
The report identifies several benefits associated with fintech, including decentralisation and increased intermediation by non-financial entities; greater efficiency, transparency, competition and resilience of the financial system; and greater financial inclusion and economic growth.
But with these come potential risks, such as institution-specific micro-financial risks that could emerge and system-wide macro-financial risks, for instance increased connectedness and correlation risk.
The FSB argues that the private sector needs to improve data on fintech applications, and regulators must understand how businesses and the market structure are changing. In particular, international bodies and national authorities should take fintech into account in their risk assessments and regulatory frameworks.
Carolyn Wilkins, senior deputy governor, Bank of Canada and chair of the FSB’s Fintech Issues Group, says: "Regulators need to understand the impact that developments in fintech can have on financial stability, especially given the rapid rise of innovation in this space."