Technological advancement has made its way into almost every aspect of human life, including financial services. During the last couple of years, we have seen an astonishingly swift emergence of start-up firms. These companies, popularly called FinTech start-ups, have grown thanks to the ubiquity of technology in financial services.

Consequently, we have become more accustomed with the likes of PayPal, iZettle and Ripple for day-to-day financial services followed by the birth of domestic providers such as Kudo, Jojonomic and Flip. According to online stastics portal Statista, the leading country in FinTech in terms of nominal market transactions and investment globally is the US, which booked an estimated US$769.3 billion in nominal transactions in 2016.

This is a huge amount of money compared to those in emerging countries. Indonesia, for instance, recorded estimated transactions of only $14. 5 billion. From the banking perspective, this development comes with several consequences. On the one hand, the emergence of FinTech has provided borrowers, especially the unbanked population, with an alternative way to access financial services, which could spur consumption and ultimately economic growth. On the other hand, we must be wary of the potential risks.

These risks include counterparty credit, market and operational risks. The first involves the default of one counterparty in a peer-to-peer lending transaction facilitated by FinTech firms. The market risk relates to the probability of losing a portion of investment made by FinTech due to market movement.

Lastly, operational risk covers a wider array of risk events such as disruption to the information technology system, malware infection, and possible fraud by the firms’ employees. The list is possibly longer, including risk in settlement activities and data protection.

Additionally, when FinTech market capitalization reaches a certain level, which might impact the stability of the financial system as a whole, there is also a possible systemic risk.

To assess current developments, KPMG ( 2016 ) released a list of the top 100 FinTech companies worldwide ranked based on innovation level. There are two Chinese firms (Zhong An and Qufengi) among the top five ahead of many European and US based FinTech firms.

The Chinese success is arguably supported by strong networks and great market capitalization. With no less than 1.3 billion mobile subscribers, GDP of $11,000 billion, China is a huge market for FinTech.

Therefore, going forward, there are two inter-related aspects of FinTech that require thorough monitoring: the financial aspect and the technological aspect. The first aspect concerns regulatory measures in the financial sector to avoid the aforementioned risks of FinTech development. The second aspect concerns technology and the ICT domain as the main vein of the growth of the industry. The fact that the majority of FinTech revenue still depends on transactions made through mobile networks means there is some unfinished business in regulating the mobile industry.

A well-regulated FinTech industry has greater possibilities to create spillover impacts, not only for the financial sector but also for the rest of economy.

Source:

Ibrahim Kholilul Rohman and Ariadi Diannegara

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