IMF warns about financial stability risks from fintechs in new report

The IMF report noted that fintechs are penetrating in almost all financial activities, disrupting traditional banking. 

According to the report, light-touch regulation of fintechs could be an enabler of risk. Neo banks target borrowings with riskier credit profile than traditional banks. With loose underwriting standards, the exposure of such banks is to borrowers with lower income for financing riskier assets such as a new business or commercial real estate. Further, these loans are unsecured and borrowers have lower credit scores, the IMF report explains.

The fund also highlights the extent of disintermediation of banking due to fintech companies. The competitive pressure on traditional banks can be significant. As the case study of the US mortgage market shows, there is strong evidence of a negative impact on banks’ income as a result of competition from fintechs, the report noted.

The IMF’s warning comes even as the risks  associated with fintechs seem to have caught up with investors. Stock prices of some of the big fintech companies came under fire in advanced economies recently. The valuation multiples of most fintech companies have dropped over the past one year in the US. Chinese regulators have sharpened their gaze over fintech companies and curbed activities. 

The IMF believes that regulators should catch up fast with the fintech advancements and greater oversight could mitigate some of the risks to stability.