Policy feedback dynamics in fintech ecosystems: navigating vicious and virtuous cycles in emerging economies

Abstract The rapid evolution of financial technology (fintech) has transformed financial ecosystems worldwide, introducing innovative solutions. However, developing fintech ecosystems, particularly in developing economies, faces challenges like regulatory difficulties, insufficient infrastructure investment, and limited public trust. This study provides policy recommendations for fintech ecosystem development in developing economies, with a focus on Iran, using a system dynamics approach and cognitive mapping techniques. Applying the Innovation Systems Functions framework, the research identifies systemic barriers and models causal relationships through cognitive mapping. It highlights six critical feedback loops: trust-based growth, competition-driven ecosystem, resilient development, knowledge expansion, law-driven growth, and transparency-driven reinforcement. Data collected through semistructured interviews with fintech companies, regulators, and academics informed these insights. By integrating system dynamics with the Functions of Innovation Systems framework, this study offers a novel methodological contribution, expanding the applicability of innovation system theories to fintech ecosystems in developing economies. Additionally, the comparative insights incorporated in the discussion strengthen the study’s relevance beyond the Iranian context, situating its findings within a broader global discourse. Findings emphasize regulatory sandboxes, governance alignment, infrastructure investment, and collaborative innovation as solutions to systemic challenges. This research underscores a holistic, systems-oriented approach to overcoming inefficiencies and accelerating fintech development in resource-constrained settings.