Financial Powers to Retain Fintech Investors By Dr Uma Murthy and Dr Paul Anthony Maria Das

In recent years, financial technology (fintech) has emerged in both advanced economies and emerging market and developing economies (EMDEs). But the rate of fintech adoption is dying considerably.

While fintech is a niche activity limited to certain business areas in some countries, in others it is moving into the mainstream of financial services. This pattern of fintech adoption is confusing, as it does not reflect either economic development or political boundaries.

Cross-country evidence on fintech adoption is limited, but available data is improving. They show that in payments, new fintech providers have established a strong foothold in mobile payments, especially for personal customers.

As a category of fintech, “techfin” or “big tech” players are increasingly important as payment providers in some countries, but not in others. For example, major technology mobile payments accounted for 16% of GDP in China according to the latest data, but less than 1% in the US, India and Brazil.

Especially in EMDEs, mobile payments benefit from the high proportion of consumers with mobile phones, which often outnumber 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 such as trade finance. However, in wholesale markets, such as syndicated lending, derivatives markets or clearing and settlement, fintech penetration remains low, despite the potential applications of distributed financial 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 more common characteristics, resulting in more implications.

Firstly, where fintech helps to increase financial inclusion, for example for basic payment services in EMDE, 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 can help expand access to finance for small and medium-sized businesses. But if it results in excessive lending or excessive debt burdens for certain (groups of) borrowers, this can be more problematic.

Second, fintech activity can 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 expansion across national borders, and of emulating successful fintech business models in different markets.

Such financial integration across national borders can support greater diversification and risk sharing across economies. It may also help to reverse some of the decline in financial activity across national borders since the global financial crisis.

Given the differences in regulation across markets and the potential for regulatory arbitrage, it is critical 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 example, deposit-like activities remain subject to liquidity mismatches and the potential for bank runs, even when 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 large technology 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 interconnection, including operational dependencies (such as reliance on third-party services such as cloud computing) can transmit market shocks across institutions and markets.

Managing these risks will continue to be the task of public authorities. The supervisors must continue to adapt regulations and crisis management tools accordingly. Much work still remains to assess these findings.

In particular, the quality of data across different economies, although improving, is still not sufficient to draw firm conclusions in many cases. More data are needed to test causality between economic drivers and fintech adoption.

Fintech activity is driven by a number of demand-side and supply-side factors. Available evidence shows that unmet demand (ie financial inclusion) is a strong driver in EMDEs and in underserved market segments. The high financing costs and high mark-ups in the banking sector are also important.

Regulatory factors may play a role, but overall regulatory arbitrage does not appear 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 aging and changes in trust in technology and fintech can have important effects, shaping not only the scale but also 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 Economics 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.