FinTech, a systemic risk for global finance?
The Financial Stability Board will investigate the systemic risks associated with FinTechs and will present its roadmap to the G20 in April.
The announcement is indeed surprising in the world of FinTech. To consider FinTechs as likely to pose systemic risk to the global financial system is to do them a great deal of credit. They have neither the size nor the means to trigger such a shock. On the contrary, they strengthen the banking system by contributing to its digital transformation. They are also subject to strict European regulations and are supervised by competent supervisory authorities at national level.
Regarding size, let’s take the example of France where the production of financing for the new “crowdfunding” ecosystem in 2015 represented 300 million euros, or a drop in the bucket for the French banking system. What makes it a weak signal worthy of interest is its innovative character, as it is collaborative, and its strong dynamic since production triples from one year to the next.
Regarding the means, Fintechs are incapable of creating a systemic shock, because they have no autonomy. FinTechs are unable to create a self-sustaining chain reaction because they depend on the banking system. Cut off their access to the banking network and they will stop immediately like the VTCs which would immediately stop driving if they were prohibited from accessing the road network.
A collaboration that accelerates the digital transition
Unlike VTCs which oppose taxis, FinTechs and banks, do not oppose, but complement and reinforce each other. They just don’t have the same offer. Thus, banks do not wish to open payment accounts by the millions as payment institutions do. They prefer to delegate to them the fight against fraud, money laundering and the financing of terrorism. FinTech are doing this with new weapons, such as finer management of Internet users’ IP addresses and above all at a lower cost given their low start-up costs. In exchange, payment institutions deposit funds collected from investors and lenders with banks and remunerate banks for using their payment systems.
The fruit of this collaboration is helping to accelerate the digital transformation of banks, which see their customers visiting their branches less and less. Banks see FinTech as a source of innovation and invest in the most promising FinTechs.
That they have become for some the R&D departments of the big banks does not mean that the finance start-ups are doing anything. They are subject to the same supervisory authorities as the national banks, in France the AMF or the ACPR. And since the latter no longer supervises the few large French banks deemed potentially “systemic” and whose supervision is now the responsibility of Europe, it theoretically has more resources to devote itself to FinTech, which it does.
In response, most FinTechs have recruited skills from the banking world, all the more reason to consider that the fear of new financial technologies putting the global financial system at systemic risk is grossly overstated.
Passionate about innovation in financial services, Damien Guermonprez is the CEO of Lemon Way, a company that secures payments for the “new economy”. He is an executive and investor in Financial Services and FinTech, sectors in which he has spent most of his career. As one of the 10 Business Angels in France, he has invested in 15 start-ups, mainly Fintechs.