Fintech and the Digital Transformation of Financial Services: Implications For Market Dynamics and Public Policy

Abstract Information asymmetries and other economic frictions, and economies of scale and scope are some of the economic forces and types of activities that contribute to the emergence of financial intermediaries and shape of the market. Though technology advancement has always been closely coupled with financial services, the recent swells of digital advancements have had a major contribution to the connectivity of systems, computing power, and data access. These innovations have reduced the transaction costs and facilitated new forms of business, which resulted in the introduction of specialized companies. With ease in the exchange of information and reduction in the cost of transaction made possible by technology, the process of financial services production can be even more disaggregated. This has been possible to un-bunch the traditional financial services which has made the specialized entities to provide consumers with the opportunity to choose and assemble desired products. However, there are still some underlying economic drivers in the digital sphere. Economies of scale, domains, and network effects have been influencing financial services, including the domain of customer acquisition, financing, compliance, data, and trust-based capital. In addition, consumer search and product assembly expenses remain, and this supports incentives of re-bundling and creating competitive advantages to large, multi-service companies, such as large technology firms moving into finance out of related industries. Digitization of financial services raises critical policy implications in the competitive aspect as well as the legal jurisdiction and the leveling field. The potential of the market can be the formation of a so-called barbell model with a small set of large providers, and a great number of niche actors. A change in policy can only be well-coordinated by combining financial, competition, and sector-specific regulators to strike a trade-off between financial stability, market integrity, competition, efficiency, consumer protection and data privacy. Key words: - FinTech, Digital Financial Services, Market Structure, Network Effects, Regulatory Policy, Transaction Costs.