Browsing by Author "Nikander, Iiro"

Technology companies have challenged the incumbent banks in payments. Their digital and personalized services utilize their expertise in cloud computing, AI, and machine learning. In addition, global tech giants or BigTech are providing bank-like services capitalizing on well-established brands, significant financial resources, and access to behavioral data. Competition has increased efficiency, expanded access to finance, improved market diversification, and helped recovery from the pandemic, but also increased cyber risks, reliance on infrastructure providers, and excess volatility that might aggregate to systemic problems inhibiting growth and diminishing welfare. The thesis highlights the factors behind the emergence of digital competitors and examines their stability implications with an extensive literature review. The swift emergence has been caused by technological development, changes in market structure and regulation, and distrust in banks. Technological change has made possible the development of new products and services that agile startups have utilized while banks have struggled to complete the expensive digitalization process of their services. Increased regulation and low-interest rates have also hindered banks' ability to compete with the entrants. In addition to efficiency raising financial inclusion has been one of the core positives brought by FinTech as affordable solutions have allowed previously unbanked groups to get services. However, entrants have been able to work under lower levels of supervision. Regulatory arbitrage can increase volatility and aggregate into system-wide risks through contagion. Some experts are concerned that the ongoing transformation in the financial sector could result in disintermediation, where banks may play a reduced role in the digital financial landscape. This has raised concerns about the effectiveness of monetary policy transmission. Studies suggest that as banks become less important, the impact of monetary policy shocks on lending and the real economy may be diminished. This could pose challenges in maintaining stability. The full extent of FinTech’s effect on market stability is yet to be determined. However, studies have shown its positive role in digitizing the financial industry, enhancing product and service quality, and recovering from the COVID-19 pandemic. Regulation plays a crucial role in balancing innovation and stability. Prematurely imposing restrictions on emerging innovations may hinder the progress that could otherwise enhance overall welfare. Regulators aim to protect consumers and ensure a level playing field. Striking the right balance is essential to foster innovation while mitigating risks. The regulator’s challenge is to combine fostering innovation and competition while limiting malpractice but also to provide a level playing field for firms. This objective is complicated by the rapid pace of development, classification problems, and tradeoffs between increased market efficiency and stability.