As technology has increased information exchange and reduced transaction costs, the production of financial services could be disaggregated. Specialized players, such as fintechs, have unbundled financial services, allowing consumers to find and assemble their preferred suites of products. However, classic economic forces remain relevant even in an age of digital production.
Economies of scale and scope and network effects are present in many aspects of financial services production, including customer acquisition, funding, compliance activities, data and capital (including trust capital). Despite advances in technology, consumer search and assembly costs remain significant.
These forces encourage re-bundling, and confer advantages to large multi-product providers, including technology (big tech) firms expanding into financial services from adjacent markets. The digital transformation of financial services gives rise to a set of important policy issues regarding competition, regulatory perimeters and ensuring a level playing field.
Potential outcomes regarding competition, concentration and market composition include a “barbell” outcome composed of a few large providers and many niche players. Authorities must coordinate across financial regulation, competition, and industry regulatory bodies to manage trade-offs between stability and integrity, competition and efficiency, and consumer protection and privacy. Regulatory challenges include access to lender of last resort programs by new providers, stabilizing credit markets in which non-bank players become major lenders, and maintaining the viability of deposit insurance programs where new players become large.