“Fintech’s true promise springs from its potential to unbundle banking into its core functions of: settling payments, performing maturity transformation, sharing risk and allocating capital. 

“This possibility is being driven by new entrants – payment service providers, aggregators and robo-advisers, peer-to-peer lenders and innovative trading platforms. 

“And it is being influenced by incumbents who are adopting new technologies in an effort to reinforce the economies of scale and scope of their business models. 

“In this process, systemic risks will evolve.”

Mr Carney felt that new underwriting models could impact credit quality and even macroeconomic dynamics, while new investing and risk management paradigms could affect market functioning. 

Mark Carney has warned that risks could develop within fintech

However, he also added that a host of applications and new infrastructure could reduce costs, probably improve capital efficiency and possibly create new critical economic functions. 

“The challenge for policymakers is to ensure that fintech develops in a way that maximises the opportunities and minimises the risks for society. 

“After all, the history of financial innovation is littered with examples that led to early booms, growing unintended consequences and eventual busts.” 

Mr Carney said that the FSB was assessing how fintech developments were affecting the resilience of the system by identifying the risks associated with new and existing financial institutions and activities. 

Peer-to-peer lending doesn’t appear, for now, to pose systemic risks 

Mr Carney also spoke about the diversity of funding brought by market-based finance, stating: “…Peer-to-peer lending has [the] potential to provide some customers and small businesses with affordable credit, when retail banks cannot.” 

However, Mr Carney warned that borrowers in some segments may be placing increased reliance on this source of funding. 

“How stable this funding will prove through-the-cycle is not yet clear, as the sector’s underwriting standards, and lenders’ tolerance to losses, have not been tested by a downturn. 

“Due to its small scale and business models, the P2P lending sector does not, for now, appear to pose material systemic risks.” 

Mr Carney noted that it always pays to monitor closely fast-growing sources of credit for slippages in underwriting standards and the promotion of excessive borrowing. 

“…It is not clear the extent to which P2P lending can grow without business models evolving in ways that introduce conventional risks, including maturity transformation, leverage and liquidity mismatch, or through the use of originate and distribute models, such as those seen in securitisation in the 2000s. 

“Were these changes to occur, regulators would be expected to address such emerging vulnerabilities.” 

The FCA has been working with fintech firms to help promote innovation 

Mr Carney concluded: “On the positive side, Fintech could reduce systemic risks by delivering a more diverse and resilient system where incumbents and new entrants compete along the value chain. 

“At the same time, some innovations could generate systemic risks through increased interconnectedness and complexity, greater herding and liquidity risks, more intense operational risk and opportunities for regulatory arbitrage.

“By enabling technologies and managing risks, we can help create a new financial system for the new age… under the same sun.”