On July 16, the Bank for International Settlements (BIS) published an extensive Paper on the digital transformation of financial services that are shaping the market of small fintech, big tech and traditional financial institutions.

Central to this transformation are the improvements in system connectivity and computing power and cost, which in turn resulted in the creation of large volumes of usable data. However, the traditional economic forces of economies of scale, economies of scope and network effects remain strong factors in business and organizational models. Digital transformation has multiple consequences to financial services firms, including on market entry, cost of service delivery, organizational structure.

The paper examines how technological improvements address traditional economic frictions, closing market gaps and cutting costs by:

• Reducing information asymmetries

• Enabling customization of financial services, building more complete markets

• Reducing fixed and marginal costs of producing financial services

Despite these benefits, fintech remains exposed to the same risks traditionally present in finance and introduces new risks including risks to privacy, consumer protection and cyber risks.

From a regulatory and policy perspective, these changes have implications for market efficiency, inclusivity, market structure, risk and stability, competition and composition, consumer protection and privacy.

The report highlights new and heightened trade-offs between:

(i) financial stability and market integrity

(ii) efficiency and competition

(iii) data privacy and consumer protection

As digital innovations and new financial service providers develop, new challenges in regulation and supervision also emerge. This paper calls on authorities to be “intentional with respect to market structure” and collaborate internationally to shape market forces.