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P2.T10.20.2. FinTech and market structure in financial services

Nicole Seaman

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Learning objectives: Differentiate between the potential changes to market structure (lending, payments, insurance, trading) and financial stability risks resulting from financial innovation through traditional providers, Fintech providers, Big Tech, and third-party tech servicers. Discuss the impact and risks of technological developments in the areas of APIs, mobile banking, and cloud computing on payment systems along with the scope of the EU’s Payment Services Directive. Analyze the market structure impact and risks of China’s NPI’s online MMFs in the areas of same day cash availability, deposit guarantee mechanisms and concentration risk along with the effort of Chinese authorities to address these risks

(Source for all quotes and information: “FinTech and market structure in financial services: Market developments and potential financial stability implications,” Financial Stability Board, Feb. 14, 2019.)

20.2.1. According to the Financial Stability Board, market structure is characterized by "the number and size of market participants, barriers to entry and exit, and accessibility of information and technologies to all participants." For their purposes, the key elements of market structure are concentration, contestability, and composition. According to their research, each of the following statements is TRUE except which is false?

a. Smartphones have hindered and slowed innovation in fintech due to the composition of the hardware market and the concentration of the operating system market
b. Application programming interfaces (APIs) are the de facto standard for sharing data and the mechanism of choice enabling data-rich organizations to become platforms for third-party innovation
c. A demographic demand factor is the growing influence of millennials and generation Z (the first generation of digital natives) who are more likely to adopt fintech and more likely to trust new technology startups for financial services
d. Cloud computing offers advantages such as economies of scale, flexibility, operational efficiencies, and cost-effectiveness. An example of a cloud service model is Infrastructure as a Service (Iaas) and an example of a cloud deployment model is a hybrid cloud.

20.2.2. According to the Financial Stability Board, with respect to drivers and innovations in the provision of financial services, the current landscape includes (i) FinTech firms, (ii) BigTech firms, and (iii) third-party service providers, including global markets for cloud computing and data services. Which of the following is a TRUE statement?

a. Fintechs have already been highly successful at disrupting incumbents
b. When it comes to entering new markets for financial services, BigTech firms are at a competitive disadvantage against FinTech and incumbent financial services firms
c. In the case of third-party service providers, cloud service providers are highly fragmented and so is the market for financial market data and analysis for financial institutions
d. BigTech is already active in provisioning several financial service functions including payments, lending, insurance and current accounts with experiments in additional areas such as wealth management

20.2.3. According to the Financial Stability Board (FSB), each of the following is true about the online money market fund (MMF) business of Chinese non-bank payment institutions (NPIs) EXCEPT which is false?

a. With respect to market concentration, China’s payment service market is highly concentrated, polarized, and might even be called an oligopoly
b. With respect to systemic risk(s), the online MMFs of Chinese NPIs could raise potential liquidity risks due to potential maturity mismatches because investors can request redemption at any time but their assets have maturities of several months
c. The online MMFs of Chinese NPIs do not confer benefits to their consumers: they earn low, sub-par interest rates on their deposits at commercial banks; redemptions are slow (i.e., T +3); transfer between accounts is expensive; and minimum investment requirements are high
d. The Chinese authorities say that the online MMFs (which are similar to deposit-taking institutions but not subject to similar regulatory frameworks) of Chinese NPIs have engaged in regulatory arbitrage by taking advantage of regulatory gaps

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