If fintech credit growth encourages greater risk-taking by banks and there is an abrupt erosion in bank profitability, it could generate broader stresses for the financial system, according to global watchdogs.
As such, these regulators are calling for increased scrutiny of credit offerings from marketplace lenders.
Fintech platforms account for an increasing share of lending and as such they pose big challenges for policymakers in terms of how they monitor and regulate such activity, according to a new report released by the Financial Stability Board and the Committee on the Global Financial System.
The watchdogs concluded that while small, relative to traditional credit markets, they are growing at a cracking pace.
“A bigger share of fintech credit in the financial system could have both financial stability benefits and risks," the report found.
“Potential benefits include increased access to alternative funding sources in the economy and efficiency pressures on incumbent banks. At the same time, risks may arise, including weaker lending standards and more procyclical credit provision."
Further, after scrutinising the industry, the regulators reported that a lower concentration of credit provision from banks could help to diversify economies’ credit channels and reduce the risks of credit upsets if bank lending is interrupted.
Increased financial inclusion
However, fintech credit could lead to increased financial inclusion; but it could also lower lending standards with negative consequences for financial stability in countries where credit markets are already deep, the report found.
“Incentive problems, caused by a reliance on fee income (an ‘originate-to-distribute’ model), could pose a problem at some platforms," it concluded.
"Fintech credit provision could rise and fall with the business cycle, with the potential for a pullback of credit provision to certain parts of the economy, if market stress leads to a loss of investor confidence."
The report noted that the availability of official data on fintech credit is limited, so most analyses of these markets relies on non-official sector sources, such as academic surveys, industry bodies and financial disclosures by fintech companies.
As a result, the watchdogs said data availability and quality may warrant increased attention from authorities as fintech credit markets develop.
"Having good-quality data will be key as these markets develop,” according to the chairman of the FSB Standing Committee on Assessment of Vulnerabilities, Klaas Knot, the president of De Nederlandsche Bank.
The reason is clear enough. They have found wide variation in the business models of the electronic platforms.
Platforms facilitate various forms of credit, including consumer and business lending, lending against real estate and business invoice financing. The profile of investors, which platforms match to borrowers, also differs across countries.
The report adds to a growing mountain of documentation from the FSB assessing the impact on fintech developments on the global financial system.
The FSB is set to publish a further overarching report, before the G20 Leaders’ Summit in Hamburg in July 2017, on the financial stability implications of fintech in general.