The fintech revolution poses significant risks to the stability of the financial services sector, according to Bank of England governor Mark Carney.
Fintech’s assault on the business models of traditional banks could increase liquidity risks for the broader financial system, Carney warned in a speech delivered at a G20 conference in Wiesbaden, Germany.
“The opening up of the customer interface and payment services business, could, in time, signal the end of universal banking as we know it,” he said.
“If today’s universal banks have less stable retail funding and weaker, more arms-length client relationships, the volatility of their deposits and liquidity risk could increase,” he added.
As chair of the Financial Stability Board (FSB), Carney also has a broad mandate to mitigate risks to the financial system.
However, Carney also welcomed the possibilities of a “fintech revolution that will democratise financial services.”
Carney reiterated his commitment to allowing non-traditional financial services companies access to authorisation from the Bank. Companies such as Transferwise and Monzo have already gained authorisation for activities previously preserved for financial institutions.
Consumer choice and economic growth could be facilitated by the higher efficiency promised by fintech, with the possibility of a “quantum leap in social equity” as banking is opened up to the 2bn people around the world who remain unbanked, according to World Bank figures.
The rise of blockchain technology pioneered by the creators of digital currencies such as Bitcoin is one of the phenomena being watched closely by the FSB, Carney said. Blockchain has the potential to decentralise banking by distributing ledgers recording transactions across thousands of users around the world.
“Fintech innovations, such as distributed ledgers, will need to meet the highest standards of resilience, reliability, privacy and scalability,” he said.
Carney also warned fintech firms they would be treated the same as traditional banks if their activities posed a systemic risk.
"Those systemic risks associated with credit intermediation including maturity transformation, leverage and liquidity mismatch should be regulated consistently regardless of the delivery mechanism or credit algorithm," he said.
New risks around "herding" behaviour could also emerge if robo-advisers or high-frequency traders have a high correlation with each other, as seen in multiple "flash crash" situations in the past few years.
However, the emergence of distributed ledger technology could also enhance the resilience of the financial system by freeing up "tens of billions" in capital through efficiency gains. It could also reduce operational risks by reducing the number of intermediaries whose failure could cause systems to collapse, and by diversifying the number of separate providers of services.
Carney reiterated the Bank's commitment to aiding development of the fintech sector, with regulatory sandboxes for product testing and the active development of prototype technologies.