The news: In a blog post on the latest chapter of its Global Financial Stability Report, the International Monetary Fund (IMF) urged more regulation of fintechs, saying that they’re introducing systemic risks because they’re not playing by the same rules as traditional financial institutions (FIs).
What's the issue? The report focuses on fintechs that compete directly with banks by offering core banking services, like deposit-taking and credit intermediation.
- It singles out neobanks and fintechs in the US mortgage origination market.
- It also looks at fintech platforms—particularly at DeFi.
The IMF’s argument at a glance: IMF analysts acknowledge that fintechs have improved financial services and widened consumers’ access by disrupting core services and pushing banks to innovate to remain relevant.
But there’s a lack of parity between banks and fintechs: Though fintechs offer bank-like services, they operate under less stringent regulations—which has increased risk in other parts of the financial system.
- Their existential imperative to scale up fast takes fintechs into risky business segments.
- Their consumer-lending focus, which is more uncollateralized, exposes them to more risk, and the borrowers they target tend to have riskier credit profiles.
- They have a higher liquidity risk and their securities portfolios are also higher-risk.
- They potentially threaten the viability of smaller banks and technological laggards.
- Since they’re now intermediaries in all kinds of financial transactions, they’re exacerbating risks for the entire system.
- The report concludes that their risk management and resilience “remains untested in an economic downturn.”
- DeFi in particular was criticized for lacking deposit insurance, relying on buildup of leverage, and being highly exposed to cyber risk.
What’s the solution? The report ends with policy recommendations, pushing for national regulatory frameworks and common global standards. That includes:
- Policies that target fintechs and traditional banks proportionately, restoring some parity.
- For neobanks, stronger capital, liquidity, and risk-management requirements that truly reflect their risk exposure.
- For less technologically advanced incumbent banks, more monitoring over concerns about their long-term sustainability.
- For DeFi, globally consistent regulatory frameworks as well as encouragement of self-policing and governance through industry codes and self-regulatory organizations, as in the traditional securities market.
- In particular, regarding DeFi, the report praises the Basel Committee on Banking Supervision (BCBS) proposals on banks’ crypto asset exposures as a big advance toward global standards to help address some cross-border issues.
Why it matters: The timing is right for the IMF’s report. Inflation has spiked and talk of a coming recession is increasing, putting financial constraints back into the center of global policy concerns. There’s already been much hand-wringing about the need to regulate crypto. The IMF has taken a broader, more comprehensive view of the risks that technological innovation has introduced. Its report is a much-needed reminder that regulators still haven’t even satisfactorily addressed alt lenders and neobanks and the complications they’ve introduced into the global financial system.