The International Monetary Fund has said the competition between fintechs and traditional banks will benefit the economy.
This is coming as African technology companies, dominated by fintechs, raised $1.77bn in the first quarter of 2022, according to a report by Briter Bridges.
The IMF said fintechs, even though small, could easily scale up and serve riskier business segments and clients than traditional lenders.
It disclosed this in its ‘Global Financial Stability’ report. It added that they could quickly make inroads into a wide range of critical financial services.
It stated that this could also give rise to systemic risks, and the speed and depth of changes associated with fintechs could pose challenges for traditional intermediaries.
The IMF said, “The increased competition traditional banks face from fintechs is generally beneficial from an economic point of view.
“Some fintechs might fall outside traditional banking regulations, as most jurisdictions allow for more lenient regulatory requirements, or can even be unregulated to some extent, as in the case of DeFi. The way in which fintechs insert themselves in the financial intermediation chain, therefore, has different implications for financial stability risks.”
According to the Washington-based lender, fintech firms herald efficiency gains, progress in financial inclusion, and better customer experience. It added that the firms have the potential of reducing costs and frictions related to informational asymmetry, increasing efficiency and competition, and broadening access to financial services, especially in low-income countries and underserved populations.
It said users of fintech financial services benefit from a better banking experience through online access to financial services on any device at any time.
The IMF said, “As financial services move from regulated banks to less regulated—or even unregulated—entities and platforms, as in the case of DeFi, so do the associated risks.
“This poses challenges for financial authorities in the form of regulatory arbitrage, interconnectedness, and contagion that require supervisory and regulatory action, including better consumer and investor protection.”
The international fund said banks and fintechs could collaborate by leveraging on each other’s services or through mergers and acquisitions. It stated, “Although banks have been increasing IT-related expenditures, using, or acquiring the services of fintechs can be an effective means of technology adoption.
“Likewise, fintechs have been acquiring and using the services of banks. However, the use of third-party services presents challenges if they are an integral part of risk management, compliance, or fulfillment of regulatory requirements, such as ‘know your customer’ or anti–money laundering/ combating the financing of terrorism. If a large number of banks rely on the same service providers, outages or cyber incidents could give rise to systemic risks.”
The IMF stated that traditional banks and fintech in form of digital banks could be in direct competition. According to it, digital banks are often fully licensed banks, competing with traditional banks across a broad range of core banking services, and tend to follow a technology-driven business model.