The Dark Side of Digital Financial Transformation: The New Risks of FinTech and the Rise of TechRisk

Abstract

Over the past decade a long-term process of digitization of finance has increasingly combined with datafication and new technologies including cloud computing, blockchain, big data and artificial intelligence in a new era of FinTech (“financial technology”). This process of digitization and datafication combined with new technologies is taking place in developed global markets and at times even faster in emerging and developing markets. The result: cybersecurity and technological risks are now evolving into major threats to financial stability and national security. In addition, the entry of major technology firms into finance – TechFins – brings two new issues. The first arises in the context of new forms of potentially systemically important infrastructure (such as data and cloud services providers). The second arises because data – like finance – benefits from economies of scope and scale and from network effects and – even more than finance – tends towards monopolistic or oligopolistic outcomes, resulting in the potential for systemic risk from new forms of “Too Big to Fail” and “Too Connected to Fail” phenomena. To conclude, we suggest some basic principles about how such risks can be monitored and addressed, focusing in particular on the role of regulatory technology (“RegTech”).

Keywords: FinTech, RegTech, Systemic Risk, TechFin, BigTech, Too Big to Fail, Too Connected to Fail

JEL Classification: G23, G24, G28