ABSTRACT
Although technological advances have always been readily adopted into finance, the current wave of technology-enabled financial innovation – driven by advances in data transmission and processing – is notable for its influence on the structure of the provision of financial services.
The chapter starts by reviewing the drivers and forms of technology-enabled innovations in financial services. The next section reviews the impact of innovations on the structure of the financial system including competition dynamics between traditional and new financial service providers, including large technology companies. As the business model of large technology companies is based on their capacity to collect and analyze data on their customers (which is fundamental to the provision of financial services) and involves positive network externalities, large technology companies can gain significant market share in financial services. On the other hand, decentralization and disintermediation of financial services may reduce risk exposure of financial intermediaries but systemic risks borne by the real sector may stay unchanged. The potential changes in the financial system structure are then assessed from the point of view of systemic risk, using the framework of intermediate objectives of macroprudential policy developed by the ESRB as a typology of systemic risk. Finally, implications for public policy are presented. It is argued that in order to counter systemic risk, an integrated analysis and policy response is warranted, covering the fields of financial stability, competition policy, data and consumer protection.
JEL classification: G21, G28, O33, E51.
