Fintech firms and traditional banks should be governed by proportional policies, wrote International Monetary Fund analysts in a blog post published today that accompanies the IMF’s latest chapter in its Global Financial Stability Report exploring the implications of fintech’s rapid growth.
“When fintechs provide bank-like services but operate under less stringent regulations than banks, financial stability risks can arise,” according to the report. “The business model of fintechs relies on rapid growth, which—in the absence of appropriate regulations—can lead to excessive risk-taking, including by banks trying to defend their market position. This can lead to capital erosion and higher systemic risk.”
The blog’s authors highlighted decentralized finance, or DeFi, as being particularly vulnerable to risks—market, liquidity and cyber. “Cyberattacks, which can be severe for traditional banks, are often lethal for these platforms, stealing financial assets and undermining user trust,” they wrote. “The lack of deposit insurance in DeFi adds to the perception of all deposits being at risk.”
While fintech firms often challenge traditional banks, the two “often remain intertwined,” IMF analysts added, which poses challenges for financial regulators that may “require supervisory and regulatory action, including better consumer and investor protection.”