Khóa luận tốt nghiệp: Impact of financial technology on the stability of financial system in VietNam

VIETNAM NATIONAL UNIVERSITY, HANOI ` UNIVERSITY OF ECONOMICS AND BUSINESS FACULTY OF FINANCE AND BANKING KKKKK Topic: IMPACT OF FINANCIAL TECHNOLOGY ON THE STABILITY OF FINANCIAL SYSTEM

VIETNAM NATIONAL UNIVERSITY, HANOI `

UNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

KKKKK

Topic: IMPACT OF FINANCIAL TECHNOLOGY ON THE

STABILITY OF FINANCIAL SYSTEM IN VIETNAM

Lecturer: MSc Nguyen Hong Minh

Student name: Nguyen Duc Trung Student code: 18050976

Date of birth: December 21th, 2000

Grade: QH2018E TCNH CLC 1

Hanoi, 2023

VIETNAM NATIONAL UNIVERSITY, HANOI k `

UNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

Oác áo ác

Topic: IMPACT OF FINANCIAL TECHNOLOGY ON THE

STABILITY OF FINANCIAL SYSTEM IN VIETNAM

Lecturer: MSc Nguyen Hong Minh

Student name: Nguyen Duc Trung

Student code: 18050976 Date of birth: December 21th, 2000

Grade: QH2018E TCNH CLC 1

Hanoi, 2023

First and foremost, I am sincere thankful to University of Economic and Businessfor providing me with the opportunities to write the research paper in the form ofdissertation on the topic “FinTech”.

I am also would like to acknowledge and give my warmest thanks to my lecturerMSc Nguyen Hong Minh who made this work possible Her guidance and advice carried

me through all stages of my writing project Thank you for all your brilliant comments and

suggestions.

Through this research paper, I have learned a lot about FinTech and its impact onfinancial system It helped me to have a deeper understanding and knowledge I hope thisresearch paper will help Vietnam find the right solution for risk prevention

ACKNOWLEDGEMENTT - <5 << 001mg 3 CON TTRENTS - <5 <5 HH HH HH 0A 4

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CHAPTER III: THEORETICAL BASIS ON FINANCIAL TECHNOLOGY (FINTECH)

AND FRAMEWORK FOR ASSESSING THE IMPACT OF FINANCIAL TECHNOLOGY

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3.3 Framework for assessing the impact of financial technology on

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3.3.1 Evaluation based on benefit-risk ƒrameWOFĂ 5c +Ss‡sssscxssxss 30 3.3.2 Evaluation based on the impact assessment framework of FinTech 32

3.3.3 Evaluate the appropriateness of the two assessment framework 38

CHAPTER IV: THE CURRENT STATUS OF THE IMPACT OF FINANCIAL TECHNOLOGY ON FINANCIAL STABILITY IN VIETNAM << «<< 41

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4.1 The current status of development financial technology in Vietnam 41 4.2 The impact of financial technology on financial stability in Vietnam 47

CHAPTER V: RECOMMENDATIONS ON THE MANAGEMENT AND SUPERVISION

OF FINTECH IN VIETNAM cccsssssssssssssssssssssssssssessessessensensssssssssensessessessessesseses 71

REFERENCES sscssssssssssssscscsssssscssscssssssssssssssessscssessscsssssscesssssssssssessscsssssscssssees 77

LIST OF ABBREVIATIONS

ABBREVIATION MEANING

1 ADB Asian Development Bank

2 AI Artificial Intelligence

3 AML Anti-Money Laundering

4 ATM Automated Teller Machine

5 BCBS Blue Cross Blue Shield Association

6 CFT Counter-Financing Terrorist

7 DTCC The Depository Trust and Clearing Corporation

8 E-KYC Electronic Know Your Customer

9 FinTech Financial Technology

10 | FSB Financial Stability Board

11 | FTC US Federal Trade Commission

12 | IBT Institute of Biotechnology

13 (| IT Information Technology

14 | NASDAQ National Association of Securities Dealers Automated

Quotations

15 | P2P Peer to Peer

16 | SBV State Bank of Vietnam

17 | SMEs Small to Medium Enterprises

18 | UK United Kingdom

19 | US United State

20 | WEF World Economic Forum

21 | Y2K Y2K is the shorthand term for "the year 2000”

LIST OF FIGURES

Figure 3.1 The diagram summarizes the history of FinTech:

Figure 3.2 Components of FinTech

Figure 3.3 Structure of the framework to assess the impact of FinTech on the system offinancial institutions

Figure 4.1 Vietnam FinTech startups map 2022

Figure 4.2 Contribution of services in the FinTech sector in Vietnam in 2021

Figure 4.3 Assessing the development stage of Vietnamese FinTech companies in 2021

Figure 4.4 Number of customers using FinTech products in the period 2017-2022

(million people)

Figure 4.5 The number of startups in the FinTech field in 2022

Figure 4.6 Strategy for accessing digital solutions from Fintech companies

Figure 4.7 Cooperation between banks and FinTech

Figure 4.8 Linkage situation of FinTech and banks in Vietnam

Figure 4.9 Top 10 Fintech companies receiving the most investment in the Asean region

in capital raising rounds

Figure 5 Number of investment transactions in the FinTech sector in Southeast Asia inthe period 2021-2023

Figure 5.1 Total value of investments in the FinTech sector in Southeast Asia in theperiod 2021-2023

LIST OF TABLES

Table 4.1 Country Rankings on FinTech development in 2022

Table 4.2 Capital invested by FinTech sector

Table 4.3 Country Rankings on FinTech development in 2022

Table 4.4 Cities Rankings in Asia - Pacific on FinTech development in 2022

Table 4.5 Some typical solutions and products of FinTech technology

CHAPTER I: INTRODUCTION

1.1 Research background

After the 2008 financial crisis, the issue of ethics and information transparency in the financial and banking sectors received increased attention because this was one of thecauses of the crisis In that context, “blockchain”, a technology that allows the safe andtransparent transmission and storage of data based on a complex encryption system, wasintroduced and became the foundation for financial technology developed and widelyaccepted Blockchain technology has evolved from its early form blockchain 1.0 - digitalcurrency to blockchain 2.0 - types of digital contracts (smart contracts, smart assets),followed by blockchain 3.0 and blockchain 4.0 with applications serving monetary, economic and market management (medical records, transaction management,traceability, civil status management, election voting) (Swan, 2015) Currently, FinTechapplications have been developed in five areas, in both retail and wholesale, including (i)payment and clearing; (ii) deposits, loans and capital mobilization; (iii) insurance; (iv)investment management; and (v) market support activities (FSB, 2017) The use ofFinTech in financial activities allows parties to participate in direct transactions withoutgoing through traditional financial intermediaries, thereby contributing to increasedfinancial stability (Weller, 2013 ; Schimel, 2016; Velde, 2016; FSB, 2017; CGFS, 2017;Carney, 2017).The Covid-19 pandemic has greatly affected many industries, causing manydifficulties for the whole country's economy However, for the FinTech industry, this isthe time of its strongest development The FinTech market in Vietnam has made very strong developments in terms of quantity, diversity in products and services andattracting investment capital FinTech appeared in Vietnam since 2017, but it was notuntil 2020, especially 2021, that the market witnessed the development of both quantityand quality of FinTech startups in this field According to research by Solidiance - a leadingstrategic consulting company, Vietnam's FinTech market reached 4.4 billion USD intransaction value in 2017 and reached about 22.6 billion USD in 2022 (Tuyet & Thuy,2021) The number of FinTech companies in Vietnam is also increasing rapidly According

to statistics from the State Bank of Vietnam (SBV) as well as the Vietnam FinTech MarketReport 2021, the number of FinTech companies has increased four times, from 39companies at the end of 2015 to more than 154 companies by the end of 2021 AmongFinTech companies in Vietnam, about 70% are startups The year 2021 has witnessedgreat progress in the Vietnamese FinTech market when the Internet economy reached avalue of 21 billion USD, ranking 14/50 in Asia and 70 in the global rankings, (Le, 2022)

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According to a survey by MasOffer FinTech (2021) - the leading Affiliate Marketingplatform in Vietnam, out of 154 companies operating in the FinTech field in Vietnam atthe end of 2021, there are 37 companies operating in the payment segment, 22 companiesoperating in the field of peer-to-peer lending (P2P Lending), 22 companies operating inBlockchain, Crypto Vietnamese FinTech companies operate in many different fields, butthe two most focused areas are payment via e-wallet and P2P Lending.

FinTech's diverse applications are affecting almost every area of operation of theentire banking and financial system FinTech creates new business models that changedistribution channels and traditional financial service products, especially bankingservices, for example: Internet banking, Mobile banking, QR code, digital banking, e-wallet Along with that, FinTech applies new technologies such as Big data, blockchain,biometric personal identification system, electronic customer identification which willhelp financial institutions collect data and orders Simplify the process of analyzingcustomer behavior, improve service quality, reduce technical infrastructure costs,increase transparency, but still ensure safety, speed, and efficiency, especially incommunication Banking services bring added value as well as greater satisfaction tocustomers Besides, FinTech can also be at risk of being attacked by technology itselfbecause the more modern the information technology solution, the more likely it is thatrisks will occur, an incident can lead to both system and market risks The share offinancial institutions tends to decrease due to market share sharing with FinTechcompanies This affects the stability of the financial system, weakens the financial systemand easily causes financial contagion Therefore, it is necessary to research and evaluatethe impacts of FinTech on financial system stability Because FinTech has only been born

in the past few years, research on its impact is not much and incomplete in both theoryand practice This is the urgency that creates the need for research on assessmentframeworks Assess the impact of FinTech on financial stability from which there is aperspective and practical assessment of the safety and stability of the financial system

1.2 Research objectives

There are four main research objectives as follows:

To begin with, this research paper focus on ing the theoretical basis of FinTech and financial stability And then, the research paper research on the framework for assessingthe impact of FinTech on financial stability Last but not least, it analyze the situation of

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the impact of FinTech on the financial stability in Vietnam Finally, recommends on themanagement and supervision of FinTech in Vietnam.

1.3 Subjects and scope of study

This research paper concentrate research framework for assessing the impact ofFinancial on financial stability in Vietnam market in the period from 2017-2022 This isthe time when FinTech appeared in Vietnam, shaking the financial market and affectingfinancial stability along with the Covid 19 pandemic.

e Which framework does FinTech affect on financial stability?

e If yes, then what solutions and recommendations should be given?

1.5 Research methods

- Historical method: The experiences of countries in the world on research issues,

thereby drawing experiences and lessons for Vietnam

- Information collection method: Collecting information from references, information

from the press, websites: General Statistics Office, Ministry of Planning andInvestment, Electronic Newspaper

- Meta-analysis method: From the sources of information collected, analyzed,

evaluated, then reached conclusions about the situation

1.6 Contribution of the topic

According to McKinsey Global Management and Consulting Company (USA), theCovid-19 epidemic has accelerated the global digital transformation process by 3-5 years

2021 is a leap forward for the Vietnamese FinTech market According to CB Insightsstatistics, the third quarter of 2021 recorded an increase of 147%, a record increase forthe Vietnamese FinTech industry compared to the same period last year

According to data from the Vietnam Securities Depository Center (VSD), in 2021,domestic investors opened more than 1.5 million new securities accounts, 1.5 times largerthan the total number of new accounts opened in the last 4 years years from 2017 to 2020combined (total of 4 years reaching 1.04 million accounts) In January 2022 alone,domestic investors opened 195,068 new securities accounts, a decrease of 31,512

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accounts compared to the record time of account opening in December 2021 As of theend of January 2022, the total number of trading accounts of domestic individualinvestors was 4.45 million accounts; Foreign individual investors have 35,676 accounts,

an increase of 4 accounts compared to the end of 2021.

A new model that is gaining attention is companies providing asset managementservices using robots Data from Statista shows that assets managed by robo-advisorsworldwide reached nearly 1 trillion USD in 2020 and is forecast to reach 2,500 billion USD

by 2024 The number of people using the service will increase from 45 million in 2019 to

147 million in 2023 The emergence of FinTech companies makes buying and sellingeasier through applications, and the minimum investment involved is also significantlyreduced Some applications require only 50,000 VND to invest in treasury stocks

Because of the strong development and application of advanced and moderntechnologies in building and managing FinTech companies, there will be many potentialrisks, also directly affecting the stability of the financial system Therefore, this studyfocuses on assessing the impact of FinTech based on an assessment framework Inaddition, assess the current situation in Vietnam and point out limitations and proposesolutions to stabilize the financial system in Vietnam The main research of this studyobjectives are to investigate the impact of FinTech development on financial stability inVietnam This study contributes limitations and shortcomings that previous studies havenot pointed out regarding the impact of FinTech and its development on financial stability.The stability of the banking system is considered a key factor influencing economicgrowth, especially in underdeveloped and developing economies Besides, thedevelopment and growth of FinTech generally reduces financial stability This study seethat the negative impact of FinTech development is higher On the other hand, The reseachhave relied on a number of frameworks to assess the impact of FinTech on financialstability applied to the Vietnamese market This study contributed to the literature byinvestigating in the relationship between FinTech development and financial stability.And I also found that the negative impact of FinTech on financial stability becomesstronger when banks have a higher state ownership but weakens when banks have higherforeign ownership.

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1.7 Thesis structure

This research consists of five chapters:

Chapter I: Introduction

Chapter II: Overview of the literature

Chapter III: Theoretical basis on financial technology (FinTech); framework for assessingthe impact of financial technology on financial stability

Chapter IV: The current status of the impact of FinTechon the financial stability in Vietnam

Chapter V: Recommendations on the management and supervision of FinTech in vietnam

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CHAPTER II: LITERATURE REVIEW

2.1 Foreign studies

According to Arner et al (2015), FinTech is a new market that integrates financeand technology, replacing traditional financial structures with new technology-basedprocesses (Hochstein, 2015) Thakor (2019) argues that FinTech is a technology-enabledfinancial innovation aimed at creating new business models, processes, applications orproducts that have an important impact on the market and financial institutions as well

as the provision of financial services Up to now, the fields of FinTech provided include 5main areas: Deposits and capital mobilization; Credit service; Payment, clearing andsettlement services including digital currency; Investment management services(commercial); Insurance (Navaretti et al., 2017)

FinTech has grown significantly in recent years and received considerableattention pertaining to its effect on economies and financial systems FinTech providesnew operating models for start-ups and traditional financial services firms FinTechinnovations emerging in many aspects of finance, such as investment management, retailfinance, insurance, wholesale payments, equity capital raising, and credit provision, arenot only promoting banks’ innovations and transformations in traditional service (Luo etal.,2022, Murinde et al., 2022), but also competing with them (An and Rau, 2021, Panosand Wilson, 2020) Therefore, FinTech development can have a larger impact on thefinancial system As e-commerce grows, so does the parallel development of FinTech.Based on the theoretical model of risk-benefit through consumer decisions based on trust

in e-commerce, it is possible to make objective judgments for FinTech Consumers oftenact on incomplete information, so they face different levels of risk (Dan J Kim et al., 2008).Through the behavioral theory basis, it can be seen that the influence of FinTech isassessed through the behavior of users before the potential benefits and risks fromFinTech products

The rise of FinTech frms has been welcomed by numerous observers who believe

that new technological innovations in the fnancial industry have great potential totransform fnancial services by ofering M.Safullah, S.R.Paramati less expensivetransactions, thus making these services more convenient and secure Similarly, Philippon (2016) argued that FinTech frms in the fnancial sector ofer digital innovations andtechnology-enabled business model inventions, which signifcantly contribute inimproving fnancial services to the wider communities An important model of FinTech

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innovations in the recent period is P2P lending, which has attracted great attention owing

to its rapid expansion in emerging markets, such as China The P2P lending transaction

volume in China is the highest in the world, reaching nearly $550 billion in 2017.

Importantly, the market difusion rate is also ranked highest in China Further, Huang(2018) argued that the main drivers of P2P lending in China are a large supply of funds,greater market dispersion rate, and increasing demand for fnancial products

Most importantly, P2P lending replaces the traditional banking system through anelectronic marketplace that enables the brokerage of consumer loans between lendersand borrowers However, notably, P2P lending in China is continuously evolving in arelatively underdeveloped legal and regulatory environment Huang (2018) and Milne and Parboteeah (2016) documented that the P2P lending platform does not merely work

as an intermediary to pull funds from retail investors and lend money to individualborrowers and small and medium-sized enterprises (SMEs); instead, it ofers other value-added services, including checking the solvency of borrowers and loan ratings, managingpayments, and providing investment advice to clients Similarly, Tang (2019) reportedthat U.S P2P lending is a substitute for bank lending but complements small loans.Likewise, Fuster et al (2019) reported that FinTech frms in the U.S ofer more efcientmortgage lending services than other lenders - irrespective of clients’ level of fnancial

access.

Despite increasing attention among scholars and practitioners of FinTech frms, theempirical literature on this research topic is scant A recent study by Chen et al (2019)investigated the value of FinTech innovations using patent-flling data from 2003-2017.The authors used machine learning to identify and classify innovations in their underlyingtechnologies Their analysis showed that most FinTech innovations ofer substantial value

to innovators Specifcally, the authors stated that the Internet of Things, robo-advising,and blockchain are the most valuable innovations for the overall fnancial sector Further,the authors highlighted that fnancial industries can avoid the negative impact ofinnovations by investing heavily in their own innovations

Lee et al (2021) investigated whether the development of the FinTech industryinfuenced cost efficiency and technological adoption in the Chinese banking industryduring the 2003-2017 period Their evidence confrmed that Chinese stateowned banksnot only operate with a less efficient technology but also have the lowest cost efciency.However, the authors reported that FinTech development not only enhances the use of

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technology by the banks but also improves their cost efciency This dual benefit is moreclearly observed in instances of market-supported service innovations Notably, theChinese fnancial system does not have a fully developed system of credit referencing.

In another study, Li et al (2020), examined the risk spillover between FinTechcompanies and conventional financial institutions during a period of rapid technologicaladvancement Using the U.S financial and FinTech firms’ stock returns and the Grangercausality framework, the authors investigated pairwise risk spillovers across quantiles.The main findings from the study indicated that FinTech firms’ risk spillover to financialinstitutions positively correlated with an increase in the systematic risk of financial

institutions.

Additionally, using a sample of banks and FinTech firms in Indonesia, Phan et al.(2020), examined whether the growth of FinTech firms negatively influences bankingperformance Their main results demonstrated that Fingtech firms’ growth negativelyinfuences banks’ performance.

However, in a recent study, Sheng (2021),explored the impact of FinTech firms onbank lending to SMEs in China Using provincial Chinese banks’ lending data for the periodfrom 2011 to 2018, the author confrmed that FinTech firms have signifcantly contributed

in facilitating banking sector credit to SMEs Noteworthily, FinTech firms’ infuence onbanking lending to SMEs is much stronger for large banks than for small banks Evidently,although the literature on FinTech has been growing recently, it is still sparse

Regarding relationship between FinTech and financial stability, there are someprevious studies were performed but the results are mixed By using a sample of listedbanks across 84 countries, Fung et al (2020) investigated the divergent effects of FinTechshock on financial stability when a country implemented a FinTech regulatory sandbox.They found that shock to FinTech innovations decreases the fragility of financialinstitutions in emerging financial markets but increases the fragility of financialinstitutions in development financial markets However, they did not address howFinTech development affects financial stability after such a shock In other words, theydid not examine how the continued growth of FinTech impacts financial stability.Similarly, by using data from 63 developing and developed countries, Daud et al (2021)found that FinTech positively related to financial stability in general They also found thatFinTech promotes financial stability through channels of cloud technology, artificial

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intelligence, and data technology However, the degree of development of cloudtechnology, artificial intelligence, and data technology differ greatly between developedand developing countries Meanwhile, some previous studies showed the contrary result:Pantielieieva et al., 2018, Vucini¢, 2020 stated that FinTech development increasedpotential risks for the financial system Therefore, the effect of FinTech development onfinancial stability may be heterogeneous and may differ between developed anddeveloping countries.

Overall, a FinTech company is a company that applies new achievements ininformation technology to create better new financial services for both consumers andcompanies The most outstanding feature of FinTech companies in financial services is the speed of payment and convenience in personal financial management, the ability to accessloans quickly In addition, FinTech companies also bring a lot of benefits to commercialbanks, businesses and specific individuals: Transactions are more convenient, safe andcheap; Reduce the search costs of the right trading parties; Achieve economies of scale in big data collection and mining; Reduced verification costs (Thakor, 2019).

Besides the benefits and positive impacts that FinTech brings, there are alsopotential risks affecting the safety of the financial system The biggest risk of FinTech isnetwork security (Kopp et al., 2017) Practices from previous FinTech applicationcountries show that, as the financial system becomes more dependent on electronicplatforms and digital records, the more vulnerable they become to cyber attacks, and afailure can lead to the risk of the whole system At that time, both businesses andregulators have to deal with cybersecurity problems such as financial fraud problems,system failures, technology criminals stealing data, spreading code Toxic e.g (Furche etal., 2017) The speed of law change has not kept pace with the rapid development of

financial technology This causes difficulties for regulatory agencies in operating and

managing FinTech services In addition, with the convenience, simplicity and rapidpopularity of FinTech products and services, customers sometimes accept the service tooeasily while they do not know how to protect themselves personal data, therebyfacilitating attacks by financial criminals That makes the variation of financial servicessuch as black credit or multi-level scams about bitcoin business.e.g continuouslyhappening in the past time in our country According to Furche et al (2017), experienceshows that even in developed countries, consumers often misuse financial instrumentsand also often bear large debt burdens and complex contracts that they not fully

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understood Furthermore, FinTech often attracts high-risk customers These are thegroups of customers who often cannot get loans from banks and credit institutionsbecause they do not meet the credit score standards or are a group of customers with highcredit risk assessment results At that time, in order to raise capital and access financialservices, customer groups tend to look to FinTech services The concentration of high-riskcustomers can bring risks to FinTech service providers, threatening the stability of thefinancial intermediation process as well as the stability of the entire financial system Inaddition, the rapid development of FinTech may lead to many non-cash financial activitiesthat are difficult to control, and may even increase some new types of crimes related tothe use of technology not only on a national scale, but possibly on a global scale On theother hand, while digital currencies can be safe in direct transactions between users, theycan also facilitate tax evasion, fraud and illegal transactions (He et al associates, 2016).FinTech also can influence the conduct of monetary policy by the central bank Currently,FinTech has not had a clear impact on monetary policy, but if it continues to developstrongly, it may have a significant impact Privately-issued cryptocurrencies (such asBitcoin) can restrict the use of official currencies and create risks to monetary stability,including deflationary risks such as is the case with the gold standard when there is a fixedmoney supply, flexibility to respond to temporary shocks to money demand, and theability to act as a lender of last resort At the same time, it becomes more difficult to track and record the economy's total means of payment, potentially creating new challenges formonetary policymakers (He et al., 2016) Moreover, according to Furche et al (2017), theprice volatility of virtual currencies and operational risk due to loss of confidence caninfluence money managers in providing liquidity Besides, because the market share oftraditional credit institutions tends to decrease because they have to share with FinTechStartups, monetary policy transmission channels such as interest rates, credit channels,etc affected and should be closely controlled by policy makers (Bernoth and Gebauer,2017).

DTCC (2017), argues that the development of FinTech brings a lot of potential andpromise but it also poses many risks And regulators around the world are looking forways to address the potential risks associated with FinTech Besides, they also try tomaintain the potential of FinTech to improve the material

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2.2 Domestic research

Since the wave of technology-focused startups in finance emerged after the 2008crisis, FinTech has come to represent a digital revolution that could radically change theway of doing business of banking and finance industry According to a widely acceptedsemantics, FinTech - financial technology is the application of technological innovations

in identifying needs, customer behavior, designing and providing diversified financialservices in order to best satisfy the utilities for consumers but at a cheaper cost.

FinTech's strategic customers and partners are diverse, be it banks, insurancecompanies, traditional financial institutions and even direct consumers The interestingpoint in the above definition of the FSB is that FinTech is not only the activities of FinTechcompanies, but also existing banks This definition is also useful in analyzing the bases forcooperation or competition strategies between FinTech enterprises and banks FinTechhas a strong impact on the financial-banking ecosystem, including supply, demand,support system and regulatory framework In particular, the traditional banking system

is most affected, both in terms of operations and administration

In the context of the industrial revolution 4.0 in Vietnam, new technologies haveallowed more and more new entities to participate in service provision, most notablyfinancial technology companies with the trend of In the direction of development in theform of linkage, banks can turn emerging organizations into a system of partners that play

a role of satellites in a financial services ecosystem where banks are central The furtherassociation with suitable FinTech companies may be a future trend of financial servicesfor credit institutions in Vietnam in the near future (Nguyen Thi Hoa, 2020)

FinTech is used to describe new technology that improves and automates theprovision and use of financial services At its core, FinTech is used to help companies,business owners, and consumers better manage their financial operations, processes, andlives using specialized software and algorithms developed by them used on computersand increasingly popular on smartphones Therefore, it brings many potential risks tousers as well as partners In addition, financial institutions are characterized by theirinfluence through the transmission mechanism, which has a large and systemic impact

In addition to security risks, network security also has a number of limitations forFinTech such as when FinTech develops in the direction of decentralization without the

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presence of users, this is a disadvantage from a perspective safety and security forcustomers, the alternative of FinTech (Tran Thi Xuan Anh et al., 2020).

A report by KPMG in 2021 shows that global FinTech investment reached $94.7billion and increased 94% compared with the value in 2008 Developing and emergingcountries, such as Vietnam, also use FinTech a great deal so it has shown a dramaticgrowth Following an ICTVIETNAM report in 2021, new FinTech startups reached 215%

in the period 2015-2020 and the number of transactions increased accordingly In 2020,Vietnamese FinTech market have more than 120 FinTech startups covering a broad range

of services that include digital payments, alternative finance, wealth management andblockchain Cooperation between FinTech and banks accounts for more than 90% ofFinTech companies In the field of payment intermediaries, 100% of FinTech companieslicensed by the SBV cooperate with banks (Son, 2020)

Beside, legal regulations on cybersecurity for the FinTech sector have not yet beenissued In a study on cybersecurity, Paypal - a company operating in the field of e-commerce conducted a survey on the current situation of cybersecurity and safety in theFinTech region in ASEAN in early 2021 Research results shows that countries in theASEAN region where the FinTech ecosystem is developed such as Indonesia, Singapore,Vietnam are also aware of the challenges of ensuring security and network safety for theFinTech sector because this is where storing and processing large amounts of userinformation, related to large amounts of people's assets, while regulations on informationtechnology safety and security in the FinTech field are not as strict as those in the FinTechsector banking system (Lan Nguyen, 2021)

Because the amount of data Vietnamese users create every day is huge, so manyFinTech companies have taken advantage of the opportunity to exploit this amount ofdata However, large official databases (databases) such as: residential database, nationalidentification database have not been completed and shared, so customer identificationhas not met the needs of the market; The banking industry's database is not complete due

to lack of data on subjects who do not have the opportunity to access popular financialservices; The database of the telecommunications industry has not yet fully identifiedcustomers (Trung Anh, 2019) The above issues have greatly affected the marketshaping of businesses operating in the FinTech field as well as the control and orientation

of managers in this field Besides, Community awareness of finance helps FinTechmaximize its role in promoting financial inclusion in the context of the explosion of

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science and technology (Nhung et al., 2020) However, currently, modern financialproducts and services are still quite new to many people, so Vietnamese consumers'awareness of these products and services is still limited.

After more than three decades of comprehensive innovation, Vietnam is deeplyaware of the importance of financial stability as a necessary condition for macroeconomicstability due to the close connection between these two goals It can be said that financialstability includes many elements, but the most important is stabilizing the operations offinancial intermediaries, financial infrastructure (payment systems and creditinformation systems) and financial markets (Thu Huong, 2014) Stabilizing theoperations of credit institutions plays a key role in monetary and financial stability, is a prerequisite for macroeconomic stability, sustainable growth and must be guaranteed bySynchronous and effective coordination between monetary policy, fiscal policy and othermacro policies, along with harmonious and balanced development between the banking,securities and insurance sectors (Minh Duc, 2018 ) Vietnam is welcoming the FinTechwave in the financial market This brings positive changes to the overall traditionalbanking system The entry of FinTech companies not only creates advantages but alsoposes many potential risks to financial stability that policymakers and regulators need toresearch, thereby having appropriate management and supervision policies for this type

of company However, because it has not gone through a complete financial cycle,assessing the impacts of FinTech companies on financial stability is very difficult andpolicy decisions issued during this period are very difficult important and directional forthe development of FinTech companies (Nguyen Trung Hau, 2019)

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FinTech and then spread to other countries, they also build a strict legal system for riskscaused by FinTech.

Meanwhile, in Vietnam, FinTech started to step into the market in 2017 until nowfor 6 years with rapid growth and development taking place at the end of 2019 - the firstyear of the Covid 19 creates new habits for consumers during the period of socialdistancing due to the epidemic, so FinTech has competed directly with financialinstitutions, forcing financial institutions to change and transform to survive Because ofthat rapid development, it causes many inadequacies and causes ineffective financialstability and a series of contagion risks Therefore, the legal corridor for this new type isstill lacking and has many loopholes, leading to increased risks and instability for the financial system Second, there have been a number of research topics on factorsinfluencing young people's decision to use FinTech or national financial stability based oncooperation between FinTech and banks and countless related topics but there are notmany research topics on the impacts of FinTech on financial stability There are currentlyonly a few topics and those topics still have many gaps, not providing a comprehensiveassessment framework for the direct impacts of FinTech FinTech is about synthesizingand analyzing based on a benefit-risk perspective based on human psychology andbehavior, causing many risks and indirect effects that make the financial systemineffective (Trinh Thi Phan Lan et al., 2023)

Therefore, an assessment based on DTCC's general assessment framework willalso clearly see the impacts FinTech causes in emerging markets like Vietnam In addition,

it is possible to build a separate assessment framework suitable for the Vietnamesemarket that will capture and evaluate the impact of FinTech in emerging markets likeVietnam while monitoring and building a legal corridor stability management as well asstrategies to prevent instability of the financial system in Vietnam.

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CHAPTER III: THEORETICAL BASIS ON FINANCIAL TECHNOLOGY (FINTECH) AND

FRAMEWORK FOR ASSESSING THE IMPACT OF FINANCIAL TECHNOLOGY ON

FINANCIAL STABILITY

3.1 Overview of FinTech

3.1.1 The Evolution of Financial Technology!

The term FinTech is a fairly simple and clear combination between the finance

and technology application domains According to the Financial Stability Board (FSB),FinTech is “technology-based financial innovations that create new business models,applications, processes, products, and services with specific impact access to financial markets and institutions, as well as in the provision of financial services” (BCBS, 2018).

FinTech has gone through a very long process of formation and development.Arner et al (2016) paint a broader picture and acknowledge financial technologies thathave been around since the mid-nineteenth century A historical perspective may evenbegin earlier with the emergence of financial institutions

FINTECH 1.0 (1866-1967)

FinTech history dates back to the 19th century and even before that In 1860, adevice called the PENTELEGRAPH was developed to verify the signatures of the banks ofthe time Historians accept 1866 as the year FinTech was born with the first validfootprint This was also the year the transatlantic cables were established leading to theera of creating infrastructure and networking around the world The establishment ofelectronic money transfers via Telegraph and Morse code in 1918 by Fedwire led to thefirst step in the digitization of money Besides, in 1919, the book “The Economicconsequences of Peace” was published, which is considered the first thought onpromoting the development of FinTech in the future

All in all, FinTech historians missed out on an important event that changedFinTech 1.0 in 1950 - the Diner's Card This effort has changed to a cashless paymentmethod Although, this method is not yet popular and is limited to restaurant payments.Along with that was the introduction of Credit Cards by Amex in 1958 At the same time,the introduction of stock data-based Screen by Quotron in 1960 brought a new stepforward for the Financial Markets

1 Vivek Agrawal “History of FinTech” Linkden.com/pulse/history-FinTech-vivek-agrawal August 27, 2021

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FINTECH 2.0

FinTech 2.0 is considered to have begun with the introduction of an ATM byBarclay in 1967 Just a year before that, Telex had replaced the Telegraph to transmit information around the world Foreshadowing a new era with the growth potential offinancial and information transactions Most of FinTech's development started in 1971with the formation of NASDAQ - the first electronic stock market This introductionchanged the bidding process and significantly modernized the Initial Public Offeringprocess This is arguably one of the most important advances of all time It was followed

by SWIFT in 1973 - another revolutionary service standard

The early 1980s saw the development of e-commerce and the online bankingsystem Tradeplus (E-Commerce) first introduced E-Commerce in 1982 Entering 1983was also the year mobile phones first entered the market The rapid growth of complexcomputer systems has helped launch newer and more dynamic processes and products.

A major breakthrough was the development of E-Commerce in the mid-90s which greatlyincreased dependence on digital finance 1998 saw the birth of PAYPAL - A pioneer in non-cash payment in the coming years

The year 2000 and the dotcom bubble (Y2K) and the years that followed saw therapid development of technology in the banking and financial sector, mainly implemented

by traditional banks as a support function for channels their main The 2008 crisis led to

a fundamental change in outlook for the FinTech sector, and the need for innovation led

to areal boom in the years that followed

FINTECH 3.0

The 2008 global financial crisis resulted in the following requirements along withmany others:

> Post-crisis reform introduced requirements such as: Stricter regulation for

traditional banks and it opened up a new market for young men This was helped

by the public's distrust of major financial institutions

> Overall industry focus is on cutting operating costs by using technology

> These requirements and developments lead to a new era of financial services and

FinTech The two major events were the development of Bitcoin in 2009 as the firstcryptocurrency and P2P peer-to-peer payment systems in 2011 The West hasmade breakthroughs month by month and hundreds of years New unicorns since

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then like RegTech, Digital Lending, InsurTech, Wallets and many more are seeinggrowth and innovation every day.

FINTECH 3.5

From 2014 onwards saw the non-linear increase of the two most populouscountries in FinTech namely India and China Without large chains of complex physicalbanks infrastructure, these two countries have witnessed rapid growth in the FinTechsector This is in contrast to FinTech development in Africa that is seen as a growth driver

in the near future Looking at its growth potential through the development of SaaS22,financial software by Indian IT companies, M-Pesa in Africa, Payments Bank in India, Alipay in China and many other prominent faces.

Figure 3.1: The diagram summarizes the history of FinTech

® Transatlantic cable ® Fintech as we know it

® EFT using Morse code * Advent of Cards & ATM Xem ‘ * Emergence of Fintech in

& Telegraph © Rise & Rise of E- ® Bitcoins since 2009 Developing countries.

commerce * Expected to overtake

? a method of software delivery and licensing in which software is accessed online via a subscription, rather than

bought and installed on individual computers

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According to Wikipedia quoted from the Huffington Post, FinTech is defined as anew financial industry that applies technology to improve financial performance FinTechcompanies provide new applications, processes, products, and business models in thefinancial services industry, including one or more complementary financial services oninternet and digital platforms.

Unlike the traditional financial market, which consists of two objects: financialinstitutions and customers, FinTech's object consists of three objects: financialinstitutions, FinTech companies and customers

Basically, it is possible to classify the services that FinTech companies provide bytypes of services: Financial services (crowdfunding, credit ); Asset management(investment social network); Personal financial management; Investment and bankingservices; Payment services (alternative, secure payment); Other services (insurance,guarantee, other technology solutions)

FinTech businesses are divided into 2 groups The first group are companies thatprovide digital tools to create new financial products for users, including all FinTechproducts that correspond to existing segments of the financial industry traditionalinclude payment; raise capital; loan; investment and asset management; insurance

In payment, FinTech provides modern payment methods such as mobile payment,e-wallet, peer-to-peer money transfer

In fundraising, FinTech creates an online crowdfunding product that allows peoplewho have a project or product idea but don't have the capital to implement it, can raisecapital from society Currently, on the market, there are forms of capital raising such as:Calling capital in the form of support, in the form of remuneration, in the form of capitalcontribution, in the form of loans, in the form of issuing virtual currency.

In lending, FinTech provides online-based peer-to-peer lending products toconnect borrowers and lenders.

In insurance, FinTech provides a broker model and an insurance company modelthat helps promote the ability to find the right insurance types and bring better solutions

to customers through the use of technology turmeric.

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In investment and asset management, FinTech provides technology-basedinvestment advisory, form selection and management solutions through social tradingnetworks and automated advice.

The second group is the group that provides new technology solutions and supporttools, also known as the support group Examples: security tools, customer identification,data management and analysis, risk management, customer relationship management,personal and business financial management software.

On the Internet and digital platforms, many product applications or businessmodels in the financial - banking sector have been developed by FinTech businesses.Especially, with the strong development of new technologies such as big data, artificialintelligence, Blockchain, smart phones FinTech is developing strongly in manycountries around the world Technology-based financial services bring manyconveniences, opening a new era in financial activities around the world: the digital age

3.1.3 Components of FinTechCurrently, there are more than 200 different concepts about FinTech, but the mostgeneralized and unified concept is: FinTech is the application of innovative, creative andmodern technologies to the financial sector, aims to provide customers with transparent,efficient and convenient financial solutions/services at a lower cost than traditionalfinancial services (Mackenzie, 2015, Partrick, 2017)

According to the World Economic Forum WEF FinTech only focuses on theapplication of technology developed by small companies, new to the market, not tomention that large technology companies such as Apple develop Apple Pay, or largefinancial institutions develop their own high-tech application services (WEF, 2017) Thereare many ways to classify the main areas of FinTech's activities

According to Dorfleitner et al (2017), FinTech includes four broad areas: finance(including crowdfunding, credit and factoring), asset management (social trading, usingrobots) , personal financial management, banking and investment services), payments(non-traditional forms of payment, blockchain and Cryptocurrencies); and other FinTechassets (insurance, search and comparison engines, IT infrastructure platforms)

According to the World Economic Forum WEF, FinTech's main areas of activityinclude: Payments, capital mobilization, lending, investment and asset management,

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insurance, blockchain and applications, supporting technologies financial and bankingsupport (e-KYC, credit information/rating ) (WEF, 2017).

According to DBS & EY (2016), FinTech includes financial data and analytics,financial software, digitized processes, and a platform for payments According to ADB(2017), FinTech includes five priority areas: (i) e-KYC electronic customer identification;(ii) Blockchain; (iii) payment (Payment); (iv) open source technology Open APIs; and (v)peer-to-peer lending.

Figure 3.2: Components of FinTech

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3.2 Financial stability

3.2.1 Definition of financial stability

There are many definitions of financial stability The German Central Bank

defines financial stability as the ability of the financial system to function well, including in times of economic stress and periods of structural adjustment, in order

to help allocate effectively utilize resources and financial risks as well as create an effective financial infrastructure foundation The Europe Central Bank believe that

Financial stability can be defined as a condition in which the financial system

-which comprises financial intermediaries, markets and market infrastructures - is capable of withstanding shocks and the unravelling of financial imbalances.3

A stable financial system is capable of efficiently allocating resources, assessingand managing financial risks, maintaining employment levels close to the economy’snatural rate, and eliminating relative price movements of real or financial assets that willaffect monetary stability or employment levels A financial system is in a range of stabilitywhen it dissipates financial imbalances that arise endogenously or as a result of significantadverse and unforeseen events In stability, the system will absorb the shocks primarilyvia self-corrective mechanisms, preventing adverse events from having a disruptive effect

on the real economy or on other financial systems Financial stability is paramount foreconomic growth, as most transactions in the real economy are made through thefinancial system

The true value of financial stability is best illustrated in its absence, in periods offinancial instability During these periods, banks are reluctant to finance profitableprojects, asset prices deviate excessively from their intrinsic values, and payments may

not arrive on time Major instability can lead to bank runs, hyperinflation, or a stock

market crash It can severely shake confidence in the financial and economic system

3.2.2 The importance of financial stabilityFinancial stability not only plays an important role in stabilizing prices (the maingoal of the Central Bank) but also contributes to supporting sustainable economicdevelopment because that stability creates a more favorable environment for both

3

https://www.ecb.europa.eu/pub/financial-stability/html/index.en.html#:~:text=Financial%20stability%20can%20be%20defined,the%20unravelling%20

%20financial%20imbalances.

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investors and depositors, increase the efficiency of financial intermediation, increase thefunctions of financial markets and improve resource distribution to develop a healthy andtransparent financial system, reduce avoid shocks and systemic risks A stable financialsystem is one that operates healthily, reliably and efficiently, with little volatility and theability to absorb shocks On the contrary, financial instability leads to situations such as:(i) reduced effectiveness of monetary policy; (ii) weakening the intermediary function ofthe financial system due to unreasonable distribution of resources, slowing down thedevelopment of the economy; (iii) loss of people's trust in the financial system; (iv) it costs

a lot to address the weakness of the financial system For these reasons, many countriesaround the world have begun to pay more attention to financial stability whenimplementing their policies , especially in the context of the emergence of more and morenew factors capable of causing financial instability such as the increasingly tight linksbetween countries’ financial sectors and the continuous development of financialinstruments complex

3.3 Framework for assessing the impact of financial technology on financial

stability

3.3.1 Evaluation based on benefit-risk frameworkThe rapid development of science and technology, especially information technology, has created conditions for the fourth scientific and technological revolution,the 4.0 revolution That context along with the explosion of big data systems has led to thebirth of an innovative service in the financial market: FinTech provides financial serviceswith high technology in the financial market Using modern applications and software onpersonal devices such as computers, mobile phones, tablets, etc The financial servicesprovided by FinTech companies are diverse and complete improved and developedstrongly, including the services of banking and non-banking financial institutions.Therefore, the impact of FinTech on the financial system in general and financialinstitutions in particular is inevitable

Based on the risk-benefit theory framework of Dan J.Kim, Donal L.Ferrin et al.(2008) built on the basis of psycho-behavioral theory Accordingly, people's behavior iscontrolled by their perception of acceptability, motivation and attitude towards aparticular event In addition, this behavior is also influenced by the information theyreceive in the market However, this information may be incomplete and inaccurate,leading to anxiety, thereby affecting the decision to use them However, the risk is not the

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only thing that consumers are sensitive to in the context of using banking links through wallets or shopping applications or shopping websites on the internet get consumersmotivated to use Combining psychology of fully aware of benefits and concerns related

e-to risks, Dan et al (2008) argue that basically the user's decision e-to use a product orservice Any new born is influenced by these two factors In addition, Tarpey and Peteralso proposed a hypothetical value framework: if users perceive the product in bothpositive and negative ways, then they make the final decision which maximizes value netbalance Therefore, users will always consider and weigh their benefits and harms beforemaking a decision to use FinTech companies’ products Research by Lue and Shim (2010)also adds the consumer's trust factor to the risk-benefit framework to evaluateconsumers’ decision to use

Trinh Thi Phan Lan et al (2023), built a benefit-risk hypothesis including 8hypotheses that affect young people's awareness of using FinTech services as follows:

Hypothesis 1: Perceived benefits have a positive impact on the intention to continue usingFinTech

Risk perception is defined as a user's perception of uncertainty and negativeconsequences when using FinTech Risk perception has been shown to have a negativeimpact on intention to use information technology services

Hypothesis 2: Risk perception has a negative impact on the intention to continue usingFinTech

Economic benefits are external motivations that have a positive impact on FinTechusage Economic benefits include: Reducing costs and increasing benefits whenperforming financial transactions on FinTech For example, using FinTech to transfermoney can help users reduce transaction costs more than traditional ways Or usingFinTech in P2P Lending, will help lenders bring in more profits by reducing operatingcosts, thereby reducing interest rates for borrowers

Hypothesis 3: Economic benefits have a positive impact on FinTech users' perceivedbenefits

Continuous transactions are used to evaluate the perceived benefits of usingFinTech This is an important characteristic of FinTech that helps users avoid the

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limitations of traditional transactions in the financial process Helps users managetransactions on FinTech effectively, simply and quickly.

Hypothesis 4: Continuous transactions have a positive impact on FinTech users'perceived benefits

Convenience is a contributing factor to the success of IT services because itpromotes immediacy and immediate accessibility Convenience is also the most importantfactor in the success of mobile services, and users can enjoy great convenience andefficiency when using technology without the need for financial institutions

Hypothesis 5: Convenience has a positive impact on FinTech users’ perceived benefits

Risk is one of the important factors affecting customers’ intention to use anyproduct or service Users often make wrong decisions due to missing and ineffectiveinformation, leading them to have to Face risks when making decisions FinTech is a newfinancial technology, so users are susceptible to many risks such as the risk of lack ofperformance or problems arising when using In this study, the author usesCumningham's (1967) risk perception analysis framework to analyze factors affectingrisk perception including: Financial risk, security risk and operational risk dynamic

Hypothesis 6: Financial risk has a positive impact on FinTech users’ risk perception.

Hypothesis 7: Security risk has a positive impact on FinTech users' risk perception

Hypothesis 8: Operational risk has a positive impact on FinTech users' risk perception.*

Based on the above perceived benefit-risk framework, it can be seen that FinTech'sinfluence is assessed through users’ behavior before the potential benefits and risks fromthis new product or service When deciding to use a product or service related to finance,they will tend to be wary and weigh the benefits - risks that the product or business brings

to them Financial markets with financial institutions are characterized by influencethrough transmission mechanisms that can have larger and systemic effects

3.3.2 Evaluation based on the impact assessment framework ofFinTech

The Deposit Trust & Clearing Coporation (DTCC- The Deposit Trust & ClearingCoporation, 2017), according to which the potential impact of FinTech on financial

* https://www.sbv.gov.vn/webcenter/portal/vi/links/cm255?dDocName=SBV564814

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stability is a matter of concern importance, especially in the early stages of testing and

developing this product or service DTCC has developed an assessment framework

consisting of 9 factors leading to FinTech's influence on financial system stability,

including:

Figure 3.3 Structure of the framework to assess the impact of FinTech on the

system of financial institutions

Automated decision making structure &

Source: The author summarizes

Factor 1: FinTech companies' offering of core banking products

FinTech companies have been providing core banking products such as capitalmobilization, credit, and payment to customers To a certain extent, this will diversify

products and services in the money-banking market However, in essence, banking

operations need to be based on a solid trust system from users, while FinTech companies

develop in the direction of decentralization, without the direct presence of users This is

both an advantage but also a disadvantage of FinTech companies from the perspective of

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safety and security for customers Therefore, despite providing functional products such

as commercial banks, FinTech companies tend to develop product lines for small-scaleretail customers, or small-scale products new products that traditional commercial banks

do not have with the characteristics of reducing transaction time and increasingconvenience Therefore, for now, the impact of FinTech on the risk of contagion (FinancialContagion) through the credit or liquidity channel may be relatively small, but this must

be watched as they develop in the future

Factor 2: Degree of fragmentation (split) related to FinTech product

The development of digital technology in the financial industry is creating drasticchanges to consumer behavior when accessing financial products and services at lowerfees, more convenient thanks to the diversity in the way FinTech companies design anddistribute products Products are designed to suit the characteristics of each customerinstead of being easily imitated by the masses Products are distributed through manydifferent channels, reducing the direct presence of customers when making transactions.However, this also has potential risks such as: sharing risks, leaking customer information

as well as risks from third parties, also known as intermediary/agent risks; blurring theline of responsibility between distributors and financial service producers regardingoperational problems, product conformity, liability for possible damages; Extending theuse of proprietary data standards can impede interoperability, introduce errors, and lead

to an inefficient financial system

Factor 3: FinTech's impact on financial market concentration and monopoly

Although FinTech is growing rapidly, its scale in the financial system as a whole isstill limited in most countries Some companies are tending to be more concentrated incertain financial services sectors and geographies The report of the US Financial StabilityBoard (2018) shows that the development of new credit providers (FinTech companies)can lead to a rapid increase in the importance of these companies in the financial markets.The financial system is the playground of traditional financial institutions This willreduce the monopoly or concentration of the financial industry as new service providerscan compete directly with traditional financial institutions For example, FinTech creditplatforms can help diversify sources of capital, thereby reducing the concentration ofcredit in the banking sector, a fact that can be beneficial if a bank encounters problems.risks during operation

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Factor 4: Substitutability of FinTech services

A product or service is said to be highly substitutable if it can be replaced easilyand quickly when the supplier is unable to provide it Substitutability is one of the key factors in assessing systemic risk In a perfect market, highly substitutable financialservices would generate lower systemic risk than non-substitutable services

The interchangeability of a FinTech service depends entirely on the context, such

as the nature of the service, the competitive environment, and the ease with which serviceusers can switch to alternative providers (or services) service) in case of failure As such,the degree of substitution must be assessed on a case-by-case basis For example, thefailure of Apple Pay or an online payment service provider could easily be replaced by aswitch to credit and debit card payments On the other hand, the transition betweenFinTech solutions offered as an online platform service can take months or longer tomake

Factor 5: FinTech's influence on financial connectivity

The connectivity of financial service providers can have a significant impact onfinancial stability In most cases, interconnectedness reduces systemic risk by spreadingfinancial stress across multiple interconnected financial institutions However, in some cases, interconnectedness can become a diffuser in the impact of a single entity's financialshocks on the entire financial system Therefore, it is very important to analyze thedevelopment of FinTech affecting the financial network and should be considered fromthe following angles:

Firstly, the emergence of FinTech companies on the one hand can create a widernetwork of connections in the system of financial institutions, on the other hand, it willincrease the risk of contagion as well as the level of complexity complexity for thefinancial system Even when FinTech services are specifically designed to improve userexperience and create better efficiency, these companies still create middle classes in thedelivery of products and services, creating The link is both complementary andcompetitive in the financial institution system

Secondly, partnerships between FinTech companies and other financialinstitutions are becoming more and more popular, thereby increasing the depth ofconnection in the financial system As the number of contracts and other arrangementsbetween FinTech companies and other financial services companies increases, the

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agreements also become more complex, and the risks of association and contagion arelikely to increase.

Thirdly, some FinTech applications tend to change the traditional central topology

of the financial network in the direction of increasing decentralization, often associatedwith lower risk of centralization and greater resilience

As mentioned above, the degree of fragmentation and interchangeability also need

to be considered when assessing the overall impact of FinTech-driven changes onfinancial stability

Factor 6: Level of competition and cooperation between FinTech companies andtraditional financial service providers

Each FinTech company pursues a strategy as they position themselves in thefinancial ecosystem Initially, market performance showed that new entrants to FinTechcompete with financial service providers, often in a narrow market segment where theyhave an advantage Recently, many FinTech companies and companies have decided tocooperate with each other, either as preferred or exclusive partners or through someother form of partnership agreement

Competitive pressure on banks can erode their profitability, thus potentiallyreducing the financial buffer This may prompt banks to pursue higher-risk strategies,leading to the risk of a crisis Therefore, an environment where FinTech firms andtraditional financial institutions work together under mutually beneficial arrangements

is more likely to promote financial stability than one characterized by completecompetition whole

Factor 7: Reliance on automated decision-making processes

By definition, FinTech companies adopt cutting-edge technology to automatefinancial services processes, redesign business processes, eliminate duplication in order

to make them faster and more efficient more fruitful More and more decisions that oncerequired human judgment are being replaced by data-driven algorithms, artificialintelligence, and robotics This development creates a number of challenges and presentscertain risks:

Firstly, being too dependent, even completely dependent on data-driven algorithms can lead to errors that would never have occurred in a traditional human-

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controlled work environment as before High-speed automated systems cause errors topropagate faster and more widely, the risk oftransmission of risks beyond human ability

to handle is also more pronounced The 2012 Knight Capital incident was a prominentexample of this type of risk5, specifically the failure of the order routing system identified

as a result of the use of new software that made a lot of buy orders, incorrect sale of

securities, resulting in a loss of $440 million incurred in less than an hour of trading.

Secondly, the complexity of algorithms also easily leads to errors, asymmetry ofinformation, and it is not easy to identify potential operational risks This risk hasprompted the US Federal Trade Commission (FTC) to issue a set of Principles onAlgorithm Transparency and Accountability, designed to address concerns about the lack

of transparency in algorithms maths

Thirdly, in the context of technology 4.0, risk management by artificial intelligence(AI- Artificial Intelligence) quickly emerged as a new priority, which also created a change

in human resource management The World Economic Forum 2017 report notes,companies will need to manage the balance between AI relationships and train theiremployees to effectively coexist with AI

Factor 8: Level of capital investment in FinTech startups

Since the beginning of the 21st century until now, there has been a sharp increase

in investment in FinTech, the value of FinTech companies has also increased rapidly inthe market This strong growth has made the level of technology that will become a majorplayer in the financial ecosystem, especially when it is used to provide important services,that will have an impact potential for the financial stability of the entire financial system.

As expectations for FinTech adoption are very high, some analysts see signs ofhype and consolidation in the FinTech sector Similarly in the early days of the internetboom, predicting winners and losers was virtually impossible, but it is entirelyconceivable that FinTech could significantly disrupt financial sectors or certain segments.market segment FinTech adoption can also vary across geographies Whatever the casemay be, the outcome of this process will greatly determine the impact FinTech has on thecountry's financial stability

> https://nhipcaudautu.vn/the-gioi/knight-capital-co-the-pha-san-vi-su-co-ky-thuat-3 182362/

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Factor 9: Development of the legal environment

Regulatory agencies across the country are paying attention to the increasinglystrong development of FinTech A global survey released in February 2017 by the FinTechGroup Financial Stability Council indicated that, of the 26 jurisdictions contacted, 20 hadtaken measures to meet the with FinTech, with five additional jurisdiction plans forcompliance

The importance of the regulatory landscape in which FinTech companies operatecannot be denied Policy decisions and regulatory actions will directly determine howFinTech will impact financial stability for years to come To help ensure a level playingfield, it is important for regulatory initiatives to harmonize across jurisdictions Closecoordination among financial supervisors globally is required to avoid regulatoryloopholes and other undesirable outcomes

With the above theoretical framework, I see FinTech can affect the financial systemfrom two angles: micro-influence through influencing and changing the business modeland way of regulations traditional financial institutions, and the macro effects that couldresult from altering the structure of the financial-banking market as well as the nationalfinancial supervision system These changes in a positive direction will reshape thefinancial system in a more sustainable and effective way, on the contrary, will affect thenational financial stability, the research team provides a diagram to reflects theframework for assessing the impact of FinTech on the system of financial institutions andthereby affects the stability of the whole financial system (Figure 3.3)

3.3.3 Evaluate the appropriateness of the two assessment frameworks

From the benefit-risk theoretical framework of Dan J.Kim (2008) and the hypothesis of Trinh Thi Phan Lan (2023), itis found that FinTech users' perception

of benefits is positively affected by economic benefits and the Convenience of using

FinTech Therefore, to encourage users to continue using FinTech, credit institutions should focus on improving service quality, improving processes to

increase economic benefits when using FinTech and continuously innovate , improving FinTech's transmission line to ensure users can comfortably and

conveniently use it when needed, thereby raising awareness of the benefits of

users when using FinTech At the same time, the risk perception of FinTech users

is affected by the financial risks and security risks of FinTech because FinTech is

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evaluated through the user's behavior towards potential benefits and risks from

the product., this new service In addition, the financial market, whose subjects are financial institutions, is characterized by influence through transmission

mechanisms that can have a larger and systemic impact as well as the problem of financial contagion.

DTCC's assessment framework offers 9 factors that FinTech companies impact andaffect the stability of the financial system Overall, the factors cited by DTCC show thatFinTech can also cause negative consequences, such as exacerbating cybersecurity threats

or amplifying third-party risks or causing risk of spreading

More broadly, FinTech is likely to have a larger systemic impact through keytransformational mechanisms, such as the disintermediation of incumbents, thedisintermediation of financial services and network hierarchy These impacts, along withFinTech's potential to fundamentally change competitive forces, market dynamics,financial inclusion, consumer rights and many other areas, could strengthen or weakenweaken overall financial stability Therefore, the assessment framework has pointed outthe negative impacts FinTech causes that affect the safety of the financial system and isalso a premise for building legal documents, laws specifically for FinTech or introducingthem measures to prevent adverse effects on financial stability

It can be seen that in the two evaluation frameworks, each evaluation frameworkhas different characteristics and evaluation directions For the customer-oriented benefit-risk assessment framework, the consumer's decision to use and the influence of FinTechare evaluated through consumer behavior and perception of benefits and risks Potentialrisks from the product The impact FinTech causes is presented by this assessmentframework as a systemic spread that has a huge impact on the financial system andfinancial stability

It can be seen that in the two evaluation frameworks, each evaluation frameworkhas different characteristics and evaluation directions For the customer-oriented benefit-risk assessment framework, the consumer's decision to use and the influence of FinTechare evaluated through consumer behavior and perception of benefits and risks Potentialrisks from the product The impact FinTech causes is presented by this assessmentframework as a systemic spread that has a huge impact on the financial system andfinancial stability

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In contrast, DTCC's assessment framework builds an assessment frameworkincluding 9 transmission factors at the micro and macro levels that directly affect financialstability The 9 factors include: core banking product offering, degree of fragmentation,degree of concentration, substitutability, financial connectivity, degree of competition andcooperation, automated decision-making process, sustainable growth, and thedevelopment of the legal environment FinTech acts as a new factor that competes directlywith traditional financial institutions, and is also considered a source of contagion risks

or cybersecurity risks through third-party risks or risks risk by automated making processes

decision-I realize that DTCC's assessment framework is broader, more comprehensive and provides factors that directly impact the instability of the financial system Eachevaluation framework has advantages and disadvantages and different levels of relevancedepending on the scope and topic of the research topics For this research topic, |prioritize choosing the 9-factor evaluation framework of DTCC because of its suitabilityand effectiveness for my research topic.

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