Fintech – Finance for all

Like insurtech and regtech, fintechs are growing rapidly today as they benefit from a favorable environment that allows them to offer innovative and diversified banking and financial offers. However, this development brings new risks to financial stability.

The rapid development of fintech

Fintech has been around for many years, as an example electronic wallet, appeared in 1998 with Paypal. However, they have experienced significant growth only recently. According to Accenture, annual fintech investment has more than tripled from $928 million in 2008 to nearly $3 billion in 2013. But some 105 billion dollars will be invested in fintech in 2020!

An environment favorable to the development of fintech

The rapid development of fintechs in recent years has been made possible by a combination of several factors:

  • increasing public appeal digital solutions ;
  • AND increased distrust in banks after the 2008 financial crisis;
  • reinforcement financial regulationwhich led to an increase in intermediation costs and thus allowed the entry of new players;
  • development in the area data storage and management electronic, with the generalization of “open data” and the “cloud” that enable the aggregation and exploitation of large-scale data flows.

Diversified banking or financial offers

The financial or banking service offerings offered by fintechs can be divided into three different categories: payment services, investment services and financial services.

Payment services

Due to the large standardization of operations and significant fixed costs, retail banking and the payment services linked to it represent an ideal target for small digital players operating with low structural and personnel costs. Thus, in connection with the strong development of online commerce in the middle of the 21st century, companies offering new offers in terms of retail payments appeared (cards, direct debit, transfers) at a limited price.

At the end of 2015 it happened 24 payment institutions approved in France, such as Hypay, Lemonway, Paytop or Slimpay, compared to only 3 in 2010. Their market share remains low, as they combined 25 billion euros of processed payment flows in 2014, compared to more than 5,000 billion euros of flows managed by the company traditional banking system. In the United States, the impact of new digital solutions on banking transactions is estimated at 1.1% of the individual market.

However, digitalization of payment services can also take other forms, such as e.g third party payment service providersthat present themselves as intermediary platforms between consumers and merchants (such as Paypal, Paybox, Payzen or Bluepaid) that allow them to receive online payments, or aggregators, which allows multiple account holders to have an aggregated overview, categorize their expenses, easily view different items in their budget and provide them with a preliminary balance each month. This is the case, for example, with the Money Dashboard platform in England, Tink in Sweden or the French Bankin and Linxo.

Investment services

Fintechs have also invested in trading activities in financial markets through trading firms. high frequency trading, which today represent key players in the equity markets with around a quarter of the volumes traded in Europe and almost 60% in the United States. These companies using algorithms with extremely fast access to trading platforms perform a very high number of modest transactions on the exchange in very short periods with the aim of multiply the winnings of small amounts.

Financial services

Platforms crowdfunding (crowdfunding Or crowdlending) have recently developed to offer VSEs, SMEs and ETIs alternative funding sources to traditional bank loans and better suited to their needs. In France, according to the crowdfunding barometer, there were 205 crowdfunding platforms in France in 2020.

In 2020, the platforms collected 1,020 million euros (+62% compared to the previous year). However, these amounts still remain marginal compared to bank loans. mobilized French companies, whose debt amounts in February 2021 are close to 1,200 billion euros.

Fintechs pose new risks to financial stability

While the evolution of digital services offered by fintechs meets the needs of consumers and businesses and enables increased productivity, it also harbors risks in terms of cybercrime, dark money and financial stability.

Risks associated with cybercrime

With services offered exclusively over the internet, fintechs seem particularly at risk cyber crimethat is, crimes originating from remote computer networks affecting the data they manage or their computer systems.

Due to their small size and reduced financial strength, the realization of such a risk would have serious consequences for the further functioning of fintechs and could subsequently affect banking institution a classic that fintechs maintain relationships with partner relationships.

Risks associated with dark money

Due to their small size and limited manpower, fintechs are less equipped than traditional banking institutions to combat any inappropriate or fraudulent use of their innovative solutions, more specifically on issues related to money laundering and during financing of terrorism.

Risks to financial stability

Due to the weak market share of crowdfunding in financing the economy, the credit risk that would result from the demise of one or more crowdfunding platforms is currently minimal and fintech developments do not raise concerns about expansion systemic risk. It would be completely different if crowdfunding took a much bigger place in the financial environment in the future.

High frequency trading and systemic risk

However, the situation is different for high-frequency trading companies due to their importance in providing liquidity in the financial markets

Because they are not subject to any regulatory obligations to exchanges and their clients, they can suddenly reduce the liquidity they offer to the market in the event of stress.

In particular, transactional algorithms can react extremely quickly and simultaneously to a given event and cause movement that is important, excessive reaction of prices and volumes of traded securities can lead to the phenomenon of ” lightning strike » – a momentary collapse in stock prices – like the one on May 6, 2010, when the New York Stock Exchange lost nearly 10% in ten minutes before recovering.

On the other hand, if high-frequency trading companies suffer significant losses due to the fact that they often take similar positions, the absence of capital adequacy requirements could lead to cascading failures and affect their market counterparties (banks, insurance companies, hedge funds, etc.).

The European regulation MiFID II, which entered into force on 1ahem of January 2018 establishes the establishment of a permit for high-frequency commercial activity, as well as obligations transparency and requirements for robustness of transaction algorithms.

Regulators are organizing in the face of the rise of fintech

In the context of rapid technological changes brought about by fintech and the risks they can pose financial stabilityThe Financial Markets Authority (AMF) and the Authority for Prudential Control and Resolution (ACPR) decided to create specialized structures within them.

The AMF has therefore decided to create a “Fintech, Innovation and Competitiveness” division with the aim ofanalyze innovations ongoing in the investment services sector andidentify challenges in terms of competitiveness and regulationincluding the opportunities and risks facing the regulator and potential investors.

The ACPR, for its part, has created a “Fintech-Innovation” center to be this hubpreferred contact for fintechs guide them in their approval or authorization procedures. Its mission is also to work closely with the AMF on common topics.

Focus on Fintechs – video from the Cité de l’Économie

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