Fintech and the digital transformation of financial services: implications for market structure and public policy

Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish Natarajan and Matthew Saal

No 117 in BIS Papers from Bank for International Settlements

Abstract: Economic frictions such as information asymmetries and economic forces such as economies of scale and scope give rise to financial intermediaries. These frictions and forces also shape market structure. While technological advances are not new to finance, digital innovation has brought major improvements in connectivity of systems, in computing power and cost, and in newly created and usable data. These improvements have alleviated transaction costs and given rise to new business models and new entrants. As technology has increased information exchange and reduced transaction costs, the production of financial services could be disaggregated. Specialized players have unbundled financial services, allowing consumers to find and assemble their preferred suites of products. However, classic economic forces remain relevant even in an age of digital production. Economies of scale and scope and network effects are present in many aspects of financial services production, including customer acquisition, funding, compliance activities, data and capital (including trust capital). Despite advances in technology, consumer search and assembly costs remain significant. These forces encourage re-bundling, and confer advantages to large multi-product providers, including technology (big tech) firms expanding into financial services from adjacent markets. The digital transformation of financial services gives rise to a set of important policy issues regarding competition, regulatory perimeters and ensuring a level playing field. Potential outcomes regarding competition, concentration and market composition include a "barbell" outcome composed of a few large providers and many niche players. Authorities must coordinate across financial regulation, competition, and industry regulatory bodies to manage trade-offs between stability and integrity, competition and efficiency, and consumer protection and privacy.

Date: 2021 Written 2021-07
ISBN: 978-92-9259-486-2
References: Add references at CitEc
Citations: View citations in EconPapers (49)

Downloads: (external link)
http://www.bis.org/publ/bppdf/bispap117.pdf Full PDF document (application/pdf)
http://www.bis.org/publ/bppdf/bispap117.htm (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bis:bisbps:117

Access Statistics for this book

More books in BIS Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Martin Fessler ().