The lines between fintechs and banks have not always been clear. There is in fact some overlap as some of the technology led challengers go after narrow areas of the banking value chain, like payments, loans, credit assessment and investment. Innovation in this space has revealed some grey areas regarding regulation as some industry newcomers are able to operate like banks, at least in part, without full regulatory oversight.
An IMF report shows that fintech companies compete with banks by offering the same services. At the same time, the International Monetary Fund calls for new regulations for fintech companies as they do not follow the same rules as traditional financial institutions.
The report focuses on fintech companies that compete directly with banks by offering core banking services, writes Business Insider.
While IMF analysts acknowledge that fintech has improved the range of financial services, broadened consumer access and forced banks to innovate in order to compete with fintech companies , new regulations are needed.
Although fintech companies offer bank-like services, according to the IMF, they operate under less stringent rules – which has increased the risk in other parts of the financial system.
Examples are consumer lending, which is more unsecured, and thus involves higher risk – where borrowers they target tend to have more risky credit profiles.
Fintech companies often have a higher liquidity risk and their securities portfolios also have a higher risk.
As they are now intermediaries in all types of financial transactions, they exacerbate the risks to the entire system and threaten smaller banks .
The report further concludes that the companies’ risk management and resilience remain untested in an economic downturn.
The new report comes at a time when inflation is soaring and there is much to suggest that a coming recession may be looming. However the challenge for regulators remains in striking a balance between keeping the system safe and secure while enabling innovation and promoting an open market for competitive value propositions.