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Alla Viktorovna Yakunina,
Doctor of Economics,
professor of the department of finance,
Saratov socio-economic institute (branch)
of Plekhanov Russian University of Economics
Mikhail Vasilievich Popov,
Doctor of Economics,
professor of the department of economic theory, Saratov socio-economic institute (branch) of Plekhanov Russian University of Economics
УДК 336.01
Алла Викторовна Якунина,
доктор экономических наук, профессор кафедры финансов, Саратовский социально-экономический институт (филиал)
РЭУ им. Г.В. Плеханова
<Д»> [email protected]
Михаил Васильевич Попов,
доктор экономических наук, профессор кафедры экономической теории, Саратовский социально-экономический институт (филиал)
РЭУ им. Г.В. Плеханова
DIGITAL FINANCE AND NEW RISKS FOR FINANCIAL MARKET PARTICIPANTS
The article demonstrates that the development of digital technologies leads to unprecedented changes in the financial and banking spheres. The œnter for financial innovations is shifting beyond the traditional framework of the financial system. In addition to cost advantages and better customer satisfaction, digital finance results in new risks to the financial system, the most important of which are cyber-risk and the risk of transaction security loss. Digitalization also increases the credit and liquidity risks which are traditional for the financial system. To control the risks associated with digital finance, both detailed and flexible adaptation of regulatory norms and prudential supervision to new realities, as well as the coordination of regulation at the international levelare required.
Keywords: digital finance, financial system, technology companies, credit risk, liquidity risk.
ЦИФРОВЫЕ ФИНАНСЫ И НОВЫЕ РИСКИ ДЛЯ УЧАСТНИКОВ ФИНАНСОВОГО РЫНКА
Показано, что развитие цифровых технологий приводит к беспрецедентным изменениям в финансово-банковской сфере. Центр финансовых инноваций выходит за традиционные рамки финансовой системы. Помимо преимуществ с точки зрения затрат и лучшей удовлетворенности клиентов цифровое финансирование несет новые риски для финансовой системы, наиболее важными из которых являются киберриск и риск потери безопасности трансакций. Цифровизация также увеличивает традиционные для финансовой системы кредитные риски и риски ликвидности. Для контроля рисков, связанных с цифровым финансированием, необходима детальная и гибкая адаптация нормативных норм и пруденциального надзора к новым реалиям, а также координация регулирования на международном уровне.
Ключевые слова: финансы, финансовая система, технологические компании, кредитный риск, риск ликвидности.
Innovations have a huge impact on the development of the financial system [5; 14]. Recently, most of the innovations all over the world are associated withpro-gressof digital technologies. Digitalization of finance refers to the development of digital instruments and services in the banking and financial sphere.The amount of new diverse applications for mobile, contactless and instant payments, asset management, investment consulting, account information and payment initiation services,data management and informationstorage and the like increases every year.
Lately, more and more attention has been paid to the BigData technologies that allow to processconstantly increasing amount of different dataincoming in large volumes and at high speed. A huge amountof information about transactions has been accumulated by different aggregators, e.g., Amazon,Aliexpress, Buking.com, Yandex.Taxi, etc.The data could be both structured and unstructured. E.g., the traditional client database includes in the dossier structured information about the client'orders and contacts. The use of unstructured data allows the dossier to be supplemented with information
about the hierarchy of customer preferences based on analysis of customer reviews on products, study of customer photos in social networks, etc.
Big Data technologies are often mentioned together with machine learning and data mining [7]. Machine learning means «training» a computer (using a large number of examples) to extract from the incoming data the characteristics predetermined by the operator and required for decision-making. E. g., to teach a computer to recognize the handwritten letter «a» the operator must show the computer the ways of handwriting this letter by several thousand people in order to verify the laid downrules.Datamining refers to the technologies that allow a computer to identify classification characteristics without an operator. Using data mining to analyze stock quotes, the computer can find new trading signals specific to each particular asset. Big Data, machine learning and data mining technologies allow for creation and improvementof an artificial intellect which can make a wide range of decisions (with a fairly high percentage of correct ones) under conditions of incomplete information.
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The rapidly spreading digital technologies are changing the finance sector. There are more and more so called "FinTechs", i.e. startup companies specialized in financial services. This term is applied to the new payments systems offered by, e.g.mobile network operators,Apple Pay, Android Pay (even Facebook offers payment facilities), crowdfunding and crowdlend-ing platforms, firms using high frequency trading technologies, etc.At the end of the 2017, about 250 firms operating in the FinTech sector were registered in Russia [2]. By September of 2017, investments in the financial technology sector in Russia accounted for 2.3 billion rubles and 10.3 billion rubles were invested inbusiness solutions.
The center for financial innovations is shifting more and more beyond the traditional financial institutions [1]. Non-financial companies with digital experience are introducing it to financial services, thus, challenging traditional methods of providing the services.The wave of digitalization is accompanied by a new set of services, which is less focused on selling innovative products and more focused on customers, offering them instant access from any place to a wide range of diverse, affordable, integrated services.As a result, non-standard offers of various services are emerging, rebuilding the banking and financial landscape in the direction of creating an ecosystem that includes a wide range of participants: traditional financial institutions, along with large international digital companies (like Google, Amazon, Facebook), telecommunication operators with a broad opportunities for innovations through mobile telephony, and companies specializing in financial technologies.
This transformation of the financial sector, which involves non-financial firms into regulated financial activities, affects the generally accepted banking models and changes the way the financial system operates. The new entrants are competing with traditional financial institutions. The Bank of Russiasuggests that, by 2025, banks may lose 20-60% of profits as a result of competition with new digital companies [6].
One can only welcome the development of digital tools and services in the banking and financial spheres, if these tools and services meet the needs of clients and investors, contribute to productivity growth and increase the competitiveness of the economy. However, the development of digitalization can also lead to undesirable consequences, for example, to reduce the security of transactions or to facilitate money laundering and the financing of terrorism.It is important to highlight risks thatdigital technologies bring to the financial system.
One ofthe risks mentioned most often is cyberrisk(the risk of cybercrime, that is, crimes committed using computer or information networks and aimed at breaking data or systems of the organization). The development of digital instruments and services in the banking and financial spheremight expose finance to such cybercrime as targeted attacks on financial organizations, attacks on credit institutions' clients, mass attacks using extortion (encryption) programs, billing information leakage, information attacks using social networks, etc.
In 2017, the number of cybercrime victims accounted to 978 million people all around the world, and the number of financial information security breaches has increased in 2.5 times. While 88% of organizations believe that they are not able to resist a cyberattack, 40% of Russian organizations do not have an information security strategy [4].
FinTech companies are particularly vulnerable to cyber-chips as their business models are based on the Internet. Due to the small size and financial policies of these companies, the threat of cyber risk implementation is more dangerous for them than for more traditional financial institutions, but the latter can be affected if they cooperate with FinTech companies.
Another commonly mentioned risk refers to transaction security [1]. Ensuring safe financial transactions (payments, transfers and settlements)has been the main task of any central bank. The significant growth of decentralized trading systems, driven for example by the blockchain technology encompassed in bitcoin, could change the conditions in which central banks perform this task.Blockchaintechnology could replace the traditional operating procedures of clearing houses, which are based on the aggregation and central clearing of flows, thus affecting collateral management frameworks and asset recording procedures.Trying to compete with fiat money, crypto currencies can lead, perhaps, to the most destructive consequences, challenging the monopolies of central banks to issue money.
Development of digital finance can also increase credit risk which is very important and traditional for the financial system.One reason for that is crowdfunding as an innovative method to get financial resources-free of strict banking requirements. Crowdfunding platforms allow for attracting capital and loans in small volumes which is particularly appealing to needs of small and medium-sized enterprises.At the same time, crowdfunding may entail risks associated, firstly, with-the assessing of the quality of the project and the financed entity, and, secondly, with the security and sustainability of the platform through which the funds are transferred.
Another reason for increasing credit risk is associated with FinTechs' activities in crediting. Actually, crediting and P2P (peer-to-peer) crediting obtain up to 15% of the FinTech market in Russia [2]. Aboomin the opening of enterprises in the sector of remote credit wasin 2012 [12]. 71.4% of existing companies got a license from the Bank of Russia and are microfinance organizations (MFO). 28.6% operate under a license of a partner or are separate branch of a credit institution [2]. MFO operate in a much less regulated environment than banks do and, very often, MFO use much more risky strategies in crediting.
An interesting aspect of the MFOs' crediting activities is that developing of a credit program to correct the credit history of a firm or an individual has become one of the most common services offered.Credit historiesare stored in the Bureau of credit histories for 25 years, and every year the weight of long-standing overdue loans significantly decreases as compared to the new ones. MFOs issue loans at high interest rates,
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and the borrower must repay the loan in a timely manner to have the financial company to make positive contributions to the credit bureau's information about the borrower.
MFOs are not the only type of financial firms offering the service of correcting credit history. An interesting case study in this respect is the "Credit Doctor" program of Sovcombank[9]. As it is said on the bank's website, the main purpose of the program is to correct or improve the credit history, which has worsened due to delays, or no payment. The bank provides a small loan (5000 rubles or 10000 rubles) for a short period (3-9 months) at 33,3% per annum. Those are guaranteed money for non-cash use. Since the loan is granted without guarantees and to the "insolvent client", the bank draws up a loan agreement and does not give money in the client's hands. In fact, a client gets a package of services related to the credit, and then the client must pay regularly for it. The package includes:
- expert's consultingto correct credit history;
- issue of a premium card (MasterCard Gold «Gold Key Credit Doctor»);
- an insurance policy; the client is offered two products to choose from: the borrower can buy a policy from an accident (with an insured amount of 50 thousand rubles), or the client can insure his own property (with an insurance amount of 550 thousand rubles).
The clients that have been accurate in their payments can then apply for another step of the "Credit Doctor" program (up to 20000 rubles for 6 months).
Online services for selecting successful financial solutions for potential borrowers are evolving. "Zaim-Srazu" is one of such services. It suggests that: "When money is needed - urgently, without information, without questions, with a bad credit history - pleasec-ontact us. We have offers with various parameters and conditions from 40 credit institutions for a variety of clients. We will help you find the best loan options available in your situation"[10].Given the circumstances, it is easier now for a borrower with a high credit risk to get money. Thus, the credit risk within the financial sector is increasing.
Another traditional financial risk - theliquidity risk - is also increasing. The increase is primarily due to the development of companies engaged in high-frequency trading(HFT) on thesecurities market. HFT is a program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. Typically, the traders with the fastest execution speeds are more profitable than traders with slower execution speeds. HFT uses complex algorithms to analyze multiple markets and execute orders based on market conditions.
Despite the still questionable economic and social benefits, HFT firms are developing rapidly, taking advantage of low entry barriers. As a rule, these are non-banking companies with a small (sometimes quite small) amount of capital in comparison with the traditional market-makers (mostly banks) with periodically growing regulatory requirements to the capital.
Companies practicing high-frequency trading have established themselves as key players in equity markets, accounting for about 24% of trading volume on European stock markets [1]. The shares of HFTparticipants in the Russian market vary from 30 to 50%,depending on instrument.These companies have two characteristics that allow them to make a huge number of small transactions with short-term investment horizons (often intraday):
- ultra-fast (just a few milliseconds) access to trading platforms and market information;
- trading algorithms acting autonomously without the participation of a person.
The rapid growth of HFTcompanies changes the organization of stock markets and business models of trading platforms. Without being burdened with regulatory requirements, HFT traders can displace traditional market makers in providing market liquidity. The latter will also have to overcome the technological backlog if they want to continue to engage in this business.
The market liquidity has been improved as a result of high-frequency trading.But the liquidity risk has increased as well. At present, HFTfirms do not bear any obligations towards exchanges or customers. Thus, in the case of a market shock,the liquidity that the firms supply could dry upvery quickly.
High-frequency trading technologies have increased the speed of information flows, thereby increasing market volatility and exposure to infection between different classes of assets. Many of the HFT strategies are characterizedby high correlation levels and, hence, tend to enhance the transmission of shocks. It is noteworthy that trading algorithms can respond pro-cyclically to a certain market event, causing excessive reaction of prices and volumes and creating the risk of a self-winding spiral caused by cascading transactions and potentially even provoking a sudden collapse, especially during periods of strong risk aver-sion[3]If HFT firms incur large losses, the lack of sufficient capital buffers can lead to failures, especially since these companies often take similar market positions. These failures can then quickly affect their market counterparties [13].
To get all the above risks under control, an appropriate regulation is necessary.The regulator must ensure that the new risks associated with the digital transformation of the financial system do not interfere with the financial stability objectives, and that innovations act to increase the sustainability of the financial system. Recently, the Bank of Russia issued"The Main directions of development of financial technologies for the period 2018-2020". The regulator emphasizes that its task is to ensure equal access of market participants to the digital infrastructure, as well as a safe use of new technologies. To fulfil this task the regulator plansto:
- implement electronic document management;
- broaden access to state information resources for financial organizations;
- create a remote identification infrastructure and «fast» payments infrastructure for the market participants;
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- create platform for the market participants on the basis of technology of distributed registers (blockchain) using domestic cryptographic means of information protection;
- create an infrastructure for piloting new technologies in the financial market - theregulatory platform of the Bank of Russia;
- develop the information security infrastructure in the financial market - FinCERT of the Bank of Russia [8].
It is necessary to strengthen that adaptation of regulatory normsand prudential supervision, should not only be vigilant(to ensure the security of transactions), but also flexible [11]. To create equal conditions, players in the financial market should be regulated in accordance with what they are doing, not what they are. To let the financial service industry benefit from digi-talization the regulationshould also be coordinated internationally wide.
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2. Egorova G. Report on the development of the Fintech industry in Russia 2017. URL: http://fintech-ru.com/pa3BHTHe-OTparaH-$Hmex-B-poccHH-2017.
3. Foucault T. Where are the risks in high frequency trading? // Financial stability in the digital era. Financial Stability Review. 2016No. 20. April. P. 53-70. URL: https://publications. banque-france.fr/sites/default/files/medias/documents/financial-stability-review-20_2016-04.pdf.
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6. Skorobogatova O.N. Digitalization is the driver of the development of the Russian financial market. April 3rd, 2018. URL: https://arb.ru/upload/files/siezd2018/20180403_02%20 Скоробогатова%20ЦБ .pdf.
7. The banking system in the transition to a digital economy. Annual report to the Congress of the Association of Russian Banks - 2018. Moscow, 2018. URL: https://arb.ru/upload/files/ siezd2018/ARB_D0KLAD_2018.pdf.
8. The main directions of development of financial technologies for the period 2018-2020. Central Bank of the Russian Federation, 2018. URL: http://www.cbr.ru/content/ document/file/35816/on_fintex_2017.pdf.
9. The site of PJSC Sovcombank. URL: https://sovcombank. ru/spec_suggestion/kreditnaja_istorija/
10. The site of ZaimSrazu. URL: https://zaimsrazu.ru/page/ about.
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12. Yakunin S.V. Issues of interaction between banks and microfinance organizations // Modern science: actual problems of theory and practice. Series: Economics and Law. 2014. Vol. 1-2. Р. 46-50.
13. Yakunina A.V., Semernina Yu.V. Mechanism of bond financing: participants, institutions, forms of interaction // Economic Analysis: Theory and Practice. 2012. Vol. 44. Р. 33-43.
14. YakuninaA.V., Semernina Yu.V. The main directions of regulation of the Russian corporate bonds market // Financial analytics: problems and solutions. 2013. Vol. 4. Р. 2-11.
