Big tech companies offering financial services pose risk to financial stability as their complex intertwined operational linkages with financial institutions could lead to contagion effects and potential anti-competitive behavior, the RBI has said.
The central bank, in its 25th Financial Stability Report (FSR), said the advent of FinTech has exposed the banking system to new risks which extend beyond prudential issues and often intersect with other public policy objectives relating to the safeguarding of data privacy, cyber security, consumer protection, competition and compliance with anti-money laundering policies.
Big techs can scale up rapidly and pose risk to financial stability, which can arise from increased disintermediation of incumbent institutions, it noted.
”Moreover, complex intertwined operational linkages between BigTech firms and financial institutions could lead to concentration and contagion risks and issues relating to potential anti-competitive behavior,” as per the report released on Thursday.
Regulators and supervisors face a challenging balancing act between innovation-friendliness and managing risks to financial stability.
This requires more engagement of stakeholders such as regulators, the FinTech industry, and academia to work toward common principles for the management of FinTech activities, including business and revenue models, governance, conduct, and risk management, it said.
Citing a survey, the report said regulators/supervisors globally are aiming to strike a balance between risks and benefits from the entry of Big techs into the financial domain.
Going forward, regulators need to be mindful of the new interlinkages that big techs might create with the existing financial institutions, it added.
The report pointed out that the financial technology (FinTech) industry has undergone tremendous growth over the past few years. The global FinTech market size was valued at USD 111 billion in 2020 and is projected to reach USD 698 billion by 2030, growing at a CAGR of 20.3 percent.
The Indian FinTech industry, which is amongst the fastest growing in the world, was valued at USD 50-60 billion in 2020 and is projected to reach USD 150 billion by 2025. India has the highest FinTech adoption rate globally (87 percent) receiving funding of USD 8.53 billion (in 278 deals) during 2021-22.
FinTech innovations are ubiquitous, especially in retail and wholesale payments, financial market infrastructures, investment management, insurance, credit provision, and equity capital raising, and may lead to material changes in the financial landscape, it said.
The report further said the adoption of FinTech can promote financial inclusion, broaden the offering of financial products and services, increase efficiency for delivery of financial services, and lead to better accessibility, affordability, and enhanced customer experience.
It may also result in efficiency gains in credit delivery processes, better targeted products, and improved risk management, including better underwriting models, among others.