PEER-TO-PEER platforms can benefit markets by offering diversified sources of finance and promoting financial inclusion but they have higher levels of credit risk that need monitoring, regulators have been warned.
A report by international regulator, the Financial Stability Board (FSB), aimed to identify areas domestic regulators should focus on when regulating fintech.
Assessing the benefits of P2P, described as fintech credit, the report said platforms can use new technologies in theory to offer more competitive borrowing rates both within the sector and among traditional banks.
“By increasing contestability of the lending market, these platforms are able to compete with traditional lenders and increase the overall degree of competition in credit markets, the report said.
“Fintech platforms may also pressure incumbent banks to be more efficient in their credit provision.”
The report also highlighted benefits of financial inclusion for those typically shut out by banks.
“Investors may have access to alternative products that are less correlated with other asset classes,” it said.
“In addition, borrowers with limited access to bank-intermediated credit such as small businesses and self-employed individuals may be able to obtain the funding they need for investment or working capital purposes.
“The issue of credit availability appears to be especially relevant in emerging market and developing economies, where demand for fintech credit appears to be relatively strong.”
However, the report warns of risks in the sector, especially if segments of the economy become reliant on it.
The report says the overall credit risk in P2P is “arguably higher” than it is for banks because of untested credit risk models, reliance on investor confidence and no capital backing the activity.
“There is potential for procyclicality due to, for example, changing risk appetite by retail investors in upturns and downturns,” it said.
“In addition to weaker lending standards in the upswing, there is the risk of a significant cutback of lending by fintech lenders due to their reliance on investor confidence.”
The growth of fintech credit could also hit banks, the report warns, if they try to compete by taking on more risk.
The FSB also warns that fintech lenders could be more vulnerable to cyber attacks due to their reliance on digital processes, and claims this could also hit the mainstream market if banks enter into agreements with P2P platforms without enough due diligence into the providers.
To counter these risks the FSB suggests regulators share more information among each other about fintech and employ more staff with relevant skills.
“Regulators need to understand the impact that developments in fintech can have on financial stability, especially given the rapid rise of innovation in this space,” Carolyn Wilkins, senior deputy governor at the Bank of Canada and chair of the FSB’s fintech issues group, said.
“Our report sets out a clear picture of supervisory and regulatory issues, which the FSB will continue to monitor and discuss going forward.”
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