FINTECH DISRUPTION AND RISK MANAGEMENT: EVALUATING THE IMPACT OF DIGITAL BANKING ON FINANCIAL STABILITY

Abstract

The rapid advancement of financial technology (fintech) and digital banking has transformed the global financial system by reshaping traditional banking operations, financial intermediation, and risk management practices. This Study evaluates the impact of fintech disruption on financial stability, focusing on innovations such as neobanks, peer-to-peer lending platforms, decentralized finance (DeFi), artificial intelligence (AI), stablecoins, and central bank digital currencies (CBDCs). Technological developments including cloud computing, big data analytics, machine learning, and blockchain technology have enhanced operational efficiency, accelerated payment systems, expanded financial inclusion, and improved customer accessibility to financial services. However, these innovations have also introduced new systemic risks related to cybersecurity, liquidity instability, operational concentration, algorithmic bias, and digital bank runs. The paper examines the structural transformation of the financial intermediation chain through the unbundling and rebundling of banking services, highlighting the increasing influence of big tech firms and digital-only banks. It further discusses the role of AI-driven credit scoring and alternative data in expanding lending opportunities while simultaneously increasing model risk and pro-cyclical behavior in financial markets. Additionally, the review analyzes the macro-financial implications of stablecoins and digital assets, particularly their effects on sovereign debt markets and monetary sovereignty in emerging economies. The study also emphasizes the growing importance of adaptive regulatory frameworks, including Basel Committee reforms, regulatory sandboxes, and CBDC initiatives, in addressing the evolving challenges of digital finance. Overall, the review concludes that fintech offers significant opportunities for innovation, efficiency, and financial inclusion, but without robust governance, cybersecurity measures, and coordinated regulatory oversight, it may amplify systemic vulnerabilities and threaten long-term financial stability in the digital era.