The combination of rapid growth and increasing importance of digital banks and FinTechs entail system-wide risks for financial stability as new digital platforms grow aggressively into risky business segments, the International Monetary Fund (IMF) has said. Although FinTechs can broaden consumers’ access to financial services, reduce costs and increase efficiency, their rapid growth in “systemic importance” is also creating regulatory challenges, the fund in Washington said in a blog on Wednesday. “Such changes also raise the stakes for regulators and supervisors -while most individual FinTech firms are still small, they can scale up very rapidly across both riskier clients and business segments than traditional lenders,” Antonio Garcia Pascual, deputy chief at the IMF’s Global Markets Analysis division and Fabio Natalucci, deputy director at the fund’s Monetary and Capital Markets department, said in the blog post. “The risk management systems and overall resilience of most neo banks remain untested in an economic downturn.” Demand for digital payments and other FinTech services has grown during the pandemic as more people use online banking services to transfer money and pay for e-commerce transactions. The global FinTech market is expected to reach $334 billion by 2026, growing at a compound annual rate of more than 25 per cent between 2022 and 2027, research consultancy Market Data Forecast said in its FinTech report. Banks, which directly compete with FinTechs for business, are also aggressively investing in their smaller rivals or creating their own digital arms to capitalise on growing demand for digital banking services. In the Middle East, the FinTech sector is growing at a 30 per cent annual compound annual rate. By the end of this year, more than 800 FinTech companies operating in segments including payments, InsureTech and cyber security are expected to raise more than $2bn in venture capital funding, estimates by the Middle East Institute suggest. Mena start-ups received $2.6bn in venture capital investments last year and FinTech was the only sector to have recorded more than 100 deals, accounting for 17 per cent of total capital raised last year, data platform Magnitt said. The IMF said despite the growing importance of FinTech platforms and neo banks in their local markets, these platforms are more exposed than their traditional counterparts to risks from consumer lending, which usually has fewer buffers against losses as it tends to be more uncollateralised.