Federal Reserve: FinTech and Financial Innovation – Drivers & Depth

Abstract: This paper answers two questions that help those analyzing FinTech understand its origins, growth, and potential to affect financial stability. First, it answers the question of why “FinTech” is happening right now. Many of the technologies that support FinTech innovations are not new, but financial institutions and entrepreneurs are only now applying them to financial products and services. Analysis of the supply and demand factors that drive “traditional” financial innovation reveals a confluence of factors driving a large quantity of innovation. Second, this paper answers the question of why FinTech is getting so much more attention than traditional innovation normally does. The answer to this question has to do with the ‘depth’ of innovation, a concept introduced in this paper. The deeper an innovation, the greater the ability of that innovation to transform financial services. The paper shows that many FinTech innovations are deep innovations and hence have a g reat er potential to change financial services. A greater potential to transform can also lead to a greater chance of affecting financial stability.

Keywords: FinTech, financial innovation

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DOI: https://doi.org/10.17016/FEDS.2017.081

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