KONG SAR - Media OutReach - 6 May 2021 - The rapid
development of financial technology, also known as FinTech, in recent years has
transformed how people use financial services. On the one hand, the increasing
use of automation in banking services has brought with it greater convenience
for consumers. On the flip side, the advent of new technological developments
such as cryptocurrency, high frequency and algorithmic trading, the rise of the
digital wallet or peer-to-peer (P2P) lending, are all examples of FinTech that
have brought new challenges to traditional financial service providers to some
extent. Given the disruptive influence of FinTech, it was only natural that a
group of researchers sought to closely examine its effects on the stability of
traditional financial institutions. What they found was that the result very
much depended on the market.
The stability of financial institutions usually refers to
the ability of these institutions, such as banks, brokerage firms or credit
unions, in performing their roles in financial transactions or other
intermediation functions without assistance from external forces such as the
government. The promise behind FinTech is that it would help financial
institutions to enhance transparency, efficiency and make its services more
convenient for users. For example, mobile banking has allowed consumers to
conduct their daily financial activities, such as transferring funds or paying
bills, without the need to talk to a teller or visit a bank branch.
On the downside, Fintech could amplify volatility in
financial markets and make the financial system more vulnerable. For instance,
the speed and ease of moving cash between banks in response to financial market
performance enabled by FinTech can increase volatility. The heavy reliance on
third-party service providers for the FinTech activities could also pose a
systemic risk to financial institutions. Finally, online lending platforms
often fail to conduct effective credit checks on borrowers, which can lead to
higher default risk.
For example, China's P2P lending industry, once the world's
biggest, has completely collapsed in just a few years. Many Chinese P2P lending
platforms were plagued by fraud, defaults and even alleged Ponzi schemes, which
eventually led to a government crackdown. The Deputy Governor at The People's
Bank of China Chen
Yulu announced in January that it had eliminated all P2P lending
platforms in the country, however more than 800 billion Chinese yuan in debt is
still left unpaid, state media Xinhua
More recently, two of China's homegrown fintech champions,
Ant Group and Tencent, are coming under intense regulatory scrutiny by domestic
regulators over business models that some worry will lead to a dangerous
accumulation of systemic financial risk.
"Where there is light there must also be shadow,"
Yeh, Associate Professor in the Department of Finance at The
Chinese University of Hong Kong (CUHK) Business School, and one of the authors
of a new study. "Given the disruptive nature of technology, the rise of
FinTech is bound to have an impact on traditional financial institutions. So
it's kind of fitting that we find that the bright and dark sides of FinTech
seem to offset each other and the promotion of FinTech doesn't necessarily make
financial institutions more vulnerable."
or Foe: The Divergent Effects of FinTech on Financial Stability,
the study was co-conducted by Prof. Yeh with Profs. Derrick Fung, Wing Yan Lee
and Fei Lung Yuen at The Hang Seng University of Hong Kong.
To examine the impact of the rise of FinTech on the
stability of financial institutions, the researchers looked at the introduction
of FinTech regulatory sandboxes. A FinTech regulatory sandbox is a way for a
financial regulator to allow companies to try out new business models, products
or services (under a controlled and supervised environment) that are not
covered or permitted by existing legislation. The first such sandbox was
introduced in the U.K. in 2016. Since then, 73 similar initiatives have been
set up in 57 countries around the world, according to the World
The team sampled all listed banks worldwide that were active
on the Thomson Reuters Datastream platform between 2010 and 2017. Their final
sample included 1,375 banks from 84 countries. Using a common measurement of
bank stability, the research team found that the introduction of sandboxes did
not have a statistically significant impact on the financial stability of the
institutions in the same jurisdiction.
They found that the positive and negative effects of these
FinTech sandboxes on financial stability tended to offset each other after
discounting for the characteristics of individual firms or markets, or
macroeconomic and other bank-specific factors. In general, they also found that
FinTech increases the stability of financial institutions in emerging financial
markets and decreases it in developed financial markets.
Stability and Profits
Looking at specific market characteristics, the study also
found that the promotion of FinTech through the setting up of regulatory
financial sandboxes can at the very least enhance the stability of financial
institutions if the market has low financial inclusion, with
- A bank branch ratio of less than
11.7 per 100,000 adults;
- A central bank assets to GDP ratio
of less than 1.6 percent;
- An industry-wide bank net interest
margin of less than 2.4 percent, or
- A provisions to nonperforming loans
ratio of less than 44.2 percent.
On the other hand, the launch of financial sandboxes in
markets with high financial inclusion can undermine financial stability, the
Moreover, Prof. Yeh says that FinTech can also improve the
stability of financial institutions by boosting profitability. According to the
study, when a country has fewer bank branches than 11.4 branches per 100,000
people, a central bank assets to GDP ratio of less than 1.7 percent, bank net
interest margin of less than 2.2 percent, or a provisions to nonperforming
loans ratio of less than 45.6 percent, promoting FinTech by setting up
regulatory sandboxes can increase the profitability of financial institutions.
But why does FinTech enhance the profitability of financial
institutions in emerging financial markets? The authors speculated this may be
due to three reasons. First of all, FinTech has been widely adopted in emerging
financial markets and has greatly increased the profitability of the banks that
invested in these FinTech start-ups. Second, the operational efficiency of the
banks in emerging financial markets improved as a result of collaboration with
technology companies. Third, the products provided by FinTech companies are
often complementary to the existing services provided by banks. These banks
gain more customers as a result, and the complementary effect is greater in
emerging financial markets.
"FinTech is disruptive but it is also a force for emancipation.
Not only has it democratised the access to financial services for the masses in
emerging markets, but it also plays a pivotal role on the road to greater
financial inclusion," Prof. Yeh says.
As the FinTech industry continues to grow, policy makers and
financial institutions are seeking ways to reap the benefits of technology
further. Prof. Yeh and his co-authors think that their research findings can
help policy makers and regulators to better utilise FinTech in different markets.
For developed financial markets, the researchers advise
regulators to focus on implementing measures that can address the instability
caused by FinTech. In contrast, regulators in emerging financial markets should
consider designing specific measures to promote FinTech innovations.
"Regulators should give up on the idea of a
one-size-fits-all regulation for FinTech," Prof. Yeh comments. "What
they need is to come up with a tailor-made framework that matches the
characteristics of their own financial markets."
W.H. Fung, Wing Yan Lee, Jason J.H. Yeh and Fei Lung Yuen. Friend or foe: The divergent effects
of FinTech on financial stability. Emerging
Markets Review, Volume 45, December 2020, 100727
article was first published in the China Business Knowledge (CBK) website by
CUHK Business School: https://bit.ly/3swNHfZ.