Fintech and the digital transformation of financial services ...
BIS Papers
No 117
Fintech and the digital
transformation of financial
services: implications for market
structure and public policy
by Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish
Natarajan and Matthew Saal
Monetary and Economic Department
July 2021
JEL classification: E51, G23, O31.
Keywords: big tech, fintech, credit, financial markets,
data, technology, digital innovation, network effects,
regulation.
The views expressed are those of the authors and not necessarily the views of the BIS
or the World Bank Group.
This publication is available on the BIS website () and the website of the
World Bank Group ().
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The Bank for International Settlements and the World Bank Group 2021.
ISSN 1682-7651 (online)
ISBN 978-92-9259-486-2 (online)
Fintech and the digital transformation of financial
services: implications for market structure and public
policy
Erik Feyen (World Bank), Jon Frost (Bank for International Settlements (BIS) and
Cambridge Centre for Alternative Finance (CCAF)), Leonardo Gambacorta (BIS and
Centre for Economic Policy Research (CEPR)), Harish Natarajan (World Bank) and
Matthew Saal (International Finance Corporation (IFC))1
Abstract
Economic frictions such as information asymmetries and economic forces such as
economies of scale and scope give rise to financial intermediaries. These frictions and
forces also shape market structure. While technological advances are not new to
finance, digital innovation has brought major improvements in connectivity of
systems, in computing power and cost, and in newly created and usable data. These
improvements have alleviated transaction costs and given rise to new business
models and new entrants. As technology has increased information exchange and
reduced transaction costs, the production of financial services could be
disaggregated. Specialized players have unbundled financial services, allowing
consumers to find and assemble their preferred suites of products. However, classic
economic forces remain relevant even in an age of digital production. Economies of
scale and scope and network effects are present in many aspects of financial services
production, including customer acquisition, funding, compliance activities, data and
capital (including trust capital). Despite advances in technology, consumer search and
assembly costs remain significant. These forces encourage re-bundling, and confer
advantages to large multi-product providers, including technology (big tech) firms
expanding into financial services from adjacent markets. The digital transformation of
financial services gives rise to a set of important policy issues regarding competition,
regulatory perimeters and ensuring a level playing field. Potential outcomes
regarding competition, concentration and market composition include a ¡°barbell¡±
outcome composed of a few large providers and many niche players. Authorities must
coordinate across financial regulation, competition, and industry regulatory bodies to
manage trade-offs between stability and integrity, competition and efficiency, and
consumer protection and privacy.
1
The views expressed here are those of the authors and not necessarily the Bank for International
Settlements or the World Bank Group. The authors thank Stijn Claessens, Miquel Dijkman, Sebastian
Doerr, Sara Nyman, Jean Pesme, Beniamino Savonitto, Ghiath Shabsigh and Davide Strusani for
comments. The authors thank Giulio Cornelli for excellent research assistance. This paper is part of a
series of technical notes developed for the ¡°Fintech and the Future of Finance¡± report, a joint effort
by the World Bank and the International Financial Corporation (IFC).
BIS Papers No 117
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