As Fintech Spreads, Traditional Financial Institutions' Influence Weakens... Monetary Policy Effectiveness Declines

The Bank of Korea, Impact of Credit Constraint Easing and Decrease in Bank Share

As fintech services spread, the influence of traditional financial institutions weakens, which may reduce the effectiveness of monetary policy transmission, according to an analysis.

On the 21st, Kwak Boreum, a senior researcher at the Macroeconomic Research Department of the Bank of Korea, revealed in the report titled "Analysis of the Spread of Fintech and the Transmission Effect of Monetary Policy: A Case Study of China" that an empirical analysis of the impact of the expansion of fintech service usage on the transmission effect of monetary policy showed these results.

Senior researcher Kwak set up a related model to capture how the responses of economic variables by province in China to monetary policy shocks from the People's Bank of China vary according to fintech usage, and analyzed data from 2011 to 2018. Fintech usage was measured using the volume of financial services such as online payments, loans, insurance, short-term financial funds, and investments through Alipay, the leading third-party payment platform in China.

The analysis showed that the responses of gross domestic product (GDP), consumer price index, bank loans, and housing prices to monetary policy shocks significantly weakened as fintech usage increased. In particular, the decline in the response of bank loans appeared immediately and persisted for a long time.

The report explained that the reason for the weakening response of macro variables is that, while the central bank's policy remains unchanged, the expansion of fintech usage relaxes credit constraints and reduces the proportion of the banking sector, which is highly sensitive to monetary policy.

Senior researcher Kwak stated, "Since the spread of fintech services appears to affect the transmission effect of monetary policy, it is necessary to closely monitor related service trends and pay attention to their impact on monetary policy."