The Darker Side of Fintech: the Emergence of New Risks

Jović, Željko and Nikolić, Ivan (2022) The Darker Side of Fintech: the Emergence of New Risks. Zagreb International Review of Economics & Business, 25 (SCI). pp. 46-63. ISSN 1331-5609

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Abstract

The financial sector has always been recognized as a traditional activity. One of the biggest challenges facing the financial sector recently is the introduction of new technologies. Financial innovations, and especially the development of financial technologies (FinTech), contribute to changing the way the entire financial system, including the banking sector, changes in the digital economy. The changes brought about by financial innovations and technologies condition all market participants, and especially banks, to continuously improve their business in order to keep up with the competition. FinTech enable easier access to financial services, improvement of traditional services, provide greater efficiency, lower costs and automation of regulatory reporting. They have changed the way we perceive financial institutions. Banks can increasingly be seen as an application on the phone and computer through which financial services can be performed, less and less as a grand building that instils confidence. However, it should be borne in mind that the application of financial innovations, in addition to the advantages, carries with it many risks, in a way that it can be said that digital technologies change existing ones, but also bring new risks in the field of financial services. The key risks caused by these technologies include strategic, operational and cyber risk, the risk of business compliance with data protection regulations, as well as liquidity risk. The importance of outsourcing risk is not negligible. It is precisely because of the speed of change and innovation that new risks are constantly emerging. With the growing importance and number of these firms, as well as the speed of their cross-border transactions, the fact is that it is necessary that these firms must adjust the way they measure risk in accordance with the speed and pace of their development. The importance of risk management must be one of the key points for FinTech companies, both now and in the future. Due to the observation of advances in financial technologies and the assessment of the risks that financial innovations bring, there is a need to harmonize regulatory frameworks, in order to ensure that none of the financial service providers would be at a disadvantage. However, regulatory bodies must carefully consider the dynamics and manner of regulation, bearing in mind that in a rapidly changing environment, excessive and rapid regulation carries the risk of undesirable outcomes in a way that does not exploit the full potential of innovative technologies. The development and increasing use of financial technologies affects the activities of all participants in the financial market, which imposes the need for continuous learning and adaptation of users and providers of these services, as well as supervisors and regulators. An additional challenge for financial institutions is the fact that competition in the provision of financial services comes from IT companies, which necessarily imposes the need to adapt its business models. Financial institutions are facing one of the biggest business challenges. All this brings special challenges for the creators of regulatory standards (RegTech) and the development of supervision based on new technologies (SupTech).

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