The Great Fintech Debate: Risks and Rewards of Financial Innovation

The challenge for policymakers is to ensure that fintech develops in a way that maximises the opportunities and minimises the risks for society. After all, the history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts.

 – Mark Carney, Governor of the Bank of England

We have entered a new era of innovation where apps and digital devices streamline many aspects of our lives, where virtual assistants answer to our every beck and call, and where driverless cars will soon be sitting in our driveways. These innovations are bringing customer service to new heights, providing tailored experiences that increase efficiency, accessibility, and ease. Following suit, the financial services industry has seen a significant uptake in new innovative solutions like digital banking, blockchain, robo-advisors, and telematics, many of which are being introduced by new entrants to the market. But as we all know, there is no such thing as a free lunch. Financial technologies (fintechs[1]) bring many opportunities, but they also come with their own set of risks and, in some cases, exacerbate existing risks. And so, many are left asking: does innovation come at the cost of financial stability? Do the rewards of fintech really outweigh the risks?

To help address these questions, this report will provide an in-depth look at the major risks and opportunities that come with financial innovation. It will consider several vantage points including that of the incumbent financial institution, the consumer, and the financial system as a whole. We will also offer some insight with regards to potential risk-mitigation strategies and commentary on the potential for fintech-related risks to become systemic. For a detailed introduction to fintech and the Canadian fintech landscape, the reader is encouraged to review GRI’s antecedent report entitled “An Overview of Fintech in Canada”[2].