A new IMF paper looks at how innovations in information and communication have (i) provided greater opportunities for new financial service entrants, such as Apple, Amazon, Revolut and N26, and (ii) challenged the traditional bank business models. The results from the paper point to two major structural changes that are occurring in the financial system:
1. Innovation in information has given rise to economies of scale in data usage, benefiting large technology firms. Bigtech firms with the informational capacity to compete have, therefore, the potential to outperform banks in financial service provisions.
2. Innovation in communication has reduced barriers to entry and weakened banks’ traditional role as the ‘first point of contact’ for financial services. This is allowing digital platforms to include financial services into their ecosystems to further reduce search and connectivity costs.
There are risks that an increased reliance on hard information and a disaggregated financial service sector will make the banking system become more volatile and less responsive to monetary policy. On the other hand, greater information and communication can increase competition and efficiency. Whichever holds most true, the paper points out that it is crucial policymakers do not fall behind the curve by protecting outdated business models, having no structured approach vis-à-vis the new entrants, and being unprepared for new technologies.
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