## What is Really New in Fintech

_IMF Blog, December 17, 2020_

## Source details

**Canonical URL:** [What is Really New in Fintech](https://www.imf.org/en/blogs/articles/2020/12/17/what-is-really-new-in-fintech)

## Other formats

- [Markdown version](/en/blogs/articles/2020/12/17/what-is-really-new-in-fintech/index.md)
- [Structured JSON version](/en/blogs/articles/2020/12/17/what-is-really-new-in-fintech/index.json)
- [Bundle manifest](/en/blogs/articles/2020/12/17/what-is-really-new-in-fintech/bundle-manifest.json)

## Bibliographic details
- Authors: Arnoud Boot, Peter Hoffmann, Luc Laeven, Lev Ratnovski
- Published: December 17, 2020

---

### Overview
- Publication date: December 17, 2020.
- Authors: Arnoud Boot, Peter Hoffmann, Luc Laeven, Lev Ratnovski.
- Central question: Which transformative aspects of recent financial innovation can uproot finance as we know it, and which policy challenges will the transformation of finance bring?
- Key premise: Financial innovation today splits into two distinct dimensions—information and communication—each with transformative components.

### New types of information
- Core finding: The most transformative information innovation is expanded use of alternative data from customers’ digital footprints for credit-worthiness analysis.
- Traditional method: Credit scoring using hard information (income, employment time, assets and debts).
  - Limitations of hard information:
    - Hard information tends to be “procyclical”: it boosts credit expansion in good times but exacerbates contraction during downturns.
    - Many people (new entrepreneurs, innovators, informal workers, expatriates) may lack sufficient hard data to access credit.
- Fintech solution:
  - Taps nonfinancial data: type of browser and hardware used to access the internet, history of online searches and purchases.
  - When powered by artificial intelligence and machine learning, these alternative data sources are often superior to traditional credit assessment methods.
  - Potential impact: advance financial inclusion by enabling more credit to informal workers and households and firms in rural areas.
- Quantitative reach:
  - Fintech’s potential to reach out to over a billion unbanked people around the world.

### New communication channels
- Drivers: Digital platforms in social media, mobile communication, and online shopping have penetrated much of consumers’ everyday lives, increasing digital footprints and available data.
- Platform dynamics:
  - Platforms like Amazon, Facebook or Alibaba incorporate more financial services into their ecosystems.
  - Rise of specialized providers competing with banks in payments, asset management, and financial information provision.
- Effects on banking:
  - Shift from in-person branch visits to remote online communication improves customer convenience and cost-efficiency of financial intermediation.
  - Increases geographic competition among banks, enabling service to more distant customers.
- Usage trends:
  - The financial sector is already the industry most heavily reliant on computers.
  - Doubling in use of online banking in the past two decades in the European Union’s 15 largest economies.
  - Current usage at 50 percent on average, indicating significant room to grow.

### Policy challenges
- Prudential regulation:
  - Regulators must assess operational risks of new lending technologies and business models, which face their first real-life stress test during the COVID-19 downturn.
  - Need to ensure regulatory agencies’ expertise matches industry capabilities as more talent enters financial technology and innovation accelerates.
- Other risks:
  - Cybersecurity: increased online services for financial institutions and customers create potential new opportunities for criminals.
  - Regulatory arbitrage: business models may be tailored to reduce regulatory oversight.
- Monetary policy implications:
  - Procyclical bias of hard information may require central bankers to be more “countercyclical” (i.e., potentially overcompensate with stimulating or cooling measures stronger than actual economic developments would warrant).
  - New monetary policy transmission channels need to be fully understood.
  - As new players make banks less relevant, central banks may need to adjust their monetary policy implementation toolbox, potentially allowing nonbanks access to liquidity lines and incorporating them in their operations.
- Competition and data policy:
  - Competition policy must address monopolistic tendencies of large digital platforms driven by network effects and convergence to a few large platforms.
  - Data policies are critical to ensure consumer privacy and efficient and safe collection, processing, and exchange of data.

### Conclusions and recommendations
- Pace and nature of change:
  - Much technological progress in finance is evolutionary, but its pace is accelerating fast.
  - Fintech’s potential to reach out to over a billion unbanked people around the world, and the changes in financial system structure this can induce, can be revolutionary.
- Policy guidance:
  - Governments should follow and carefully support the technological transition in finance.
  - It is important to adjust policies accordingly and stay ahead of the curve.
- Research context:
  - The blog is based on an IMF Working Paper, “Financial Intermediation and Technology: What’s Old, What’s New?” published in August 2020.

*Source: What is Really New in Fintech (IMF blog, December 17, 2020).*

---


## References

- [Recent IMF and ECB staff research](https://www.imf.org/en/Publications/WP/Issues/2020/08/07/Financial-Intermediation-and-Technology-Whats-Old-Whats-New-49624)
- [new specialized providers that compete with banks in payments](https://www.imf.org/en/News/Articles/2020/12/11/sp121120-four-cornerstones-of-payments-in-the-digital-age)
- [cybersecurity risks](https://blogs.imf.org/2020/12/07/cyber-risk-is-the-new-threat-to-financial-stability/)

_Source: https://www.imf.org/en/blogs/articles/2020/12/17/what-is-really-new-in-fintech_