Over the past 150 years, finance has evolved into one of the world’s most globalized, digitized and regulated industries. Digitalization has transformed finance but also enabled new entrants over the past decade in the form of technology companies, especially FinTechs and BigTechs. As a highly digitized industry, incumbents and new entrants are increasingly pursuing similar approaches and models, focusing on the economies of scope and scale typical of finance and the network effects typical of data, with the predictable result of the emergence of increasingly large digital finance platforms. We argue that the combination of digitization, new entrants (especially BigTechs) and platformization of finance – which we describe as FinTech 4.0 and mark as beginning in 2019-2020 – brings massive benefits and an increasing range of risks to broader sustainable development.
The platformization of finance poses challenges for societies and regulators around the world, apparent most clearly to date in the US and China. Existing regulatory frameworks for finance, competition, data, and technology are not designed to comprehensively address the challenges to these trends to broader sustainable development. We need to build new approaches domestically and internationally to maximize the benefits of network effects and economies of scope and scale in digital finance while monitoring and controlling the attendant risks of platformization of finance across the existing regulatory silos.
We argue for a principles-based approach that brings together regulators responsible for different sectors and functions, regulating both on a functional activities based approach but also – as scale and interconnectedness increase – addressing specific entities as they emerge: a graduated proportional hybrid approach, appropriate both domestically in the US, China and elsewhere, as well as for cross-border groups, building on experiences of supervisory colleges and lead supervision developed for Globally Systemically Important Financial Institutions (G-SIFIs) and Financial Market Infrastructures (FMIs). This will need to be combined with an appropriate strategic approach to data in finance, to enable the maximization of data benefits while constraining related risks.