A Survey of FinTech

Franklin Allen, Imperial College London;

Xian Gu, Central University of Finance and Economics (CUFE); University of Pennsylvania;

Julapa Jagtiani, Federal Reserve Banks - Federal Reserve Bank of Philadelphia

-- The rapid advance in financial technology (fintech) in recent years has penetrated all areas of the financial system and resulted in dramatic growth of innovations. The vast amount of data collected and monetized, together with the fast and complex computing algorithms, have been the key drives of these innovations. The current COVID-19 pandemic may also lead us to embrace digital and contactless technologies and expedite us toward a cashless economy. While fintech could greatly improve credit access and enhance efficiencies in the financial system, risks cannot be neglected.

In our recent paper, “A Survey of Fintech Research and Policy Discussion”, we provide a comprehensive review of the recent research and policy discussions around fintech so far, what the academics, practitioners and regulators are working on, and the impact of fintech on the financial and payment systems as well as overall welfare. The topics that we cover in our survey include marketplace lending, credit scoring, alternative data, usage of big data, artificial intelligence (AI) and machine learning (ML), distributed ledger technologies, blockchain technology and smart contracts, cryptocurrencies and initial coin offerings, central bank digital currencies, robo-advising, quantitative investment and trading strategies, cybersecurity, cloud computing, anti-money laundering, know your customers (KYC), regulations of fintech, regtech, and so forth.

Fintech has played a critical role to play in democratizing credit access to the unbanked and thin-file consumers around the globe as well as the consumers who are currently well served but seeking faster services and greater transparency. However, it is unclear whether the complex algorithms with alternative data will continue to perform well in the new landscape after the COVID-19 crisis. The ML/AI models may need to be re-trained with new data to adapt to the “new normal.”

Blockchain and other digital ledger technologies (DLT) have been used in creating various cryptocurrencies, initial coin offerings (ICOs), other payment applications, and smart contracts. Though there has been some disappointing evidence on the role and potential of blockchain, especially its scalability, blockchain technology has made possible for real-time payment and settlement, eliminating frictions in the current payment system, especially for cross-border payments. The success of stablecoins could potentially contribute to more widespread use of blockchain technology. Central banks around the globe are considering whether to issue central bank digital currency (CBDC) to stabilize the value of digital assets or to take a supporting role for the public sector to operate in the new cash-lite economy.

Cloud storage and cloud computing have greatly improved the efficiency, resiliency and flexibility of financial services. With the usage of cloud storage and cloud computing, it is possible that smaller firms outsource to the cloud computing service providers, share the cost with other firms, and beat the larger firms. BigTech firms are playing increasing roles in financial services and real-time payments and providing cloud computing services to large and small financial institutions. In the meanwhile, it should also be recognized that cloud computing may introduce new exposure to cyber-risks that did not exist before. There have been concerns among regulators about the impact of cloud computing on financial stability (e.g., the impact on the payment system when a cloud service platform is rendered nonoperational, the exposure to a greater risk of cyberattack, and other similar events).

Given all these innovations and rapid digital transformation, the existing regulations need to adapt to keep up with the new financial landscape — to protect consumers and financial systems while continuing to promote responsible fintech innovations. Going forward, it is uncertain how fintech as the mainstream technology for the financial services industry would evolve. The entire fintech industry is facing a real test for the first time under the current COVID-19 crisis, and it has been evident that collaboration among fintech firms and traditional lenders have been critical in pushing the funding relief to those targeted recipients (mainly small businesses) in a timely fashion. It is also an opportune time for researchers to further explore the impact of fintech on consumers, overall financial systems, and stability.

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