Growing competition from established technology companies (BigTech) and financial technology (FinTech) could adversely affect the profitability of financial institutions and can pressure them to take on more risks to retain their margins, a report by Financial Stability Board said.
The global financial monitoring and advisory body express its optimism in technological innovation for providing financial services, which the group believes have the potential to boost market access, widen the scope of product offerings, and convenience while lowering costs to clients. The organization added that BigTech, FinTech and other new entrants in the industry could change the financial services landscape.
BigTech companies — with their vast, established customer base and better brand recognition — have a more significant competitive impact than FinTech firms, the report said.
The heightened competition in the industry can enhance diversity and innovation in lending, payments, trading, insurance, and other financial services can create a more dynamic and robust financial system, the report said. However, it warns that this rivalry could expose traditional financial institutions to much higher credit and market risk, especially if they are having a hard time keeping up with the competition. A potential result, the body fears, is putting global financial stability in danger.
The report recommends BigTech and FinTech various action plans to avoid this catastrophe. One is to establish partnerships with established banks, insurers, and other financial institutions in improving service and efficiency. The body also suggests BigTechs and FinTechs provide services that complement those offered by existing giants in the industry. Another advice is to compete directly with the existing financial institutions to lower margins in the affected segments and reduce their capacity to cross-subsidize products.