• CFRED CUHK Law

Why is Fintech being adopted in Some Markets More than Others?

Jon Frost - Innovation and the Digital Economy, Bank for International Settlements (BIS); Financial Stability Division, De Nederlandsche Bank (DNB); and Cambridge Centre for Alternative Finance (CCAF).


-- Disclaimer: The views expressed here are those of the author and do not necessarily reflect those of the BIS or DNB.


-- Technology-enabled financial innovation (fintech) is being adopted in different economies around the world. Fintech start-ups and large technology companies (big techs) are expanding their services in payments, credit, insurance and wealth management. This is happening both in advanced economies and emerging market and developing economies. Yet the scale of adoption differs widely. Why is this?


The paper The economic forces driving fintech adoption across countries seeks to explain why fintech innovations are being widely adopted in some economies, but not in others. The paper draws on the nascent literature on fintech in different markets. It presents novel indicators and insights from empirical research on the use of fintech in different areas of financial services. It shows that while fintech activities are, on aggregate, small compared to the global financial system, fintech is becoming economically relevant in some specific economies and markets. The paper aims to explain this ‘curious geography’ in a widely accessible way.


The findings include the following. In some economies, especially in the developing world, adoption is being driven by an unmet demand for financial services. Here, fintech promises to deliver (and in many cases has delivered) greater financial inclusion. Similarly, fintech adoption can be related to the high cost of traditional finance and other macroeconomic factors. For instance, studies suggest that fintech credit volumes are higher in countries with higher banking sector mark-ups, or a higher overall cost of finance. Fintech adoption also seems to be higher where the regulatory environment is favourable. Regulatory arbitrage does not seem to be a driver of fintech adoption at the aggregate level, but it could be a driver in some specific cases. Finally, demographics play an important role, as younger cohorts are more likely to trust and adopt fintech services. Population aging and changing attitudes towards technology may influence the trajectory of fintech adoption going forward.


These findings have several implications. First, where fintech helps to enhance financial inclusion, this is likely to be positive for economic growth and development. Expanding the reach of financial services, particularly in payments, could support individual consumers and the economy as a whole. Second, fintech activity could increase cross-border competition in financial services over time. Yet given differences in regulation across different markets and the potential for regulatory arbitrage, it is crucial that this cross-border expansion is accompanied by adequate cooperation between global regulators. Finally, while fintech innovations can sometimes overcome specific market failures (eg by reducing information asymmetries or transaction costs) fintech activities will remain subject to the same risks traditionally present in finance. These include credit risks, liquidity mismatches, speculative bubbles, interconnectedness and, potentially, systemic importance. While the technology of financial services may change, the underlying economics remain the same.

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