Journal of Operational Risk

Risk.net

Technology risk management in fintech: underlying mechanisms and challenges

Xiaohui Chen, Hongwei Zhang and Lei Teng

  • There are three major drivers of fintech technology risk: algorithms, cloud, and data.
  • Fintech technology risk may cause fintech innovators’ traditional core competitiveness to disappear, affect the quality of their credit assets and even jeopardize their ability to sustain operations. At the same time, it may induce systemic financial risk directly or indirectly through the financial system.
  • Therefore, innovators should reconstruct their comprehensive risk management system and other mechanisms, while regulators should reconstruct their systematic financial risk prevention and control mechanisms. Further, regulators must launch regulatory sandboxes.

Fintech risk is a risk specific to financial technologies. What is its underlying mechanism? What are the challenges? This study focuses on the foundational technology of fintech to address these questions. The results show that there are three major drivers of fintech technology risk: algorithms, the cloud and data. These three factors may have adverse effects on financial consumers, fintech innovators and the financial system. Fintech technology risk may make it difficult for financial consumers to effectively manage risk, leading to forced default and even directly causing property losses. It may cause fintech innovators’ traditional core competitiveness to disappear, affect the quality of their credit assets and even jeopardize their ability to sustain operations. Finally, it may induce systemic financial risk directly or indirectly through the financial system. Therefore, innovators should reconstruct their comprehensive risk management system and other mechanisms, while regulators should reconstruct their systematic financial risk prevention and control mechanisms. Further, regulators must launch regulatory sandboxes.

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