Chapter 3: The Rapid Growth of Fintech: Vulnerabilities and Challenges for Financial Stability
Fintech can increase efficiency and competition and broaden access to financial services. However, the fast growth of fintech firms into risky business segments—and their inadequate regulation and interconnectedness with the traditional financial system—can have financial stability implications. This chapter explores three key types of fintech to illustrate these risks: digital banks (“neobanks”), long-established fintech firms in the US mortgage market, and decentralized finance (“DeFi”). The chapter argues that policies targeting fintech and traditional financial firms proportionally are needed. In the case of DeFi, regulations should focus on the elements of the crypto ecosystem that enable it, such as stablecoin issuers and centralized exchanges.
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