Digital innovation often begins with a radical idea. It could be a new way to store and process information, a new business model, or a new service. But the idea is just the beginning: realizing the benefits of innovation requires hard work, adequate investment, and adoption by users.
Disruptive innovation has been the watchword in the financial sector over the past decade. New financial technology companies (fintechs) have emerged, large digital platforms (big techs) are offering payment and credit services, crypto assets and stablecoins are growing in value, and many institutions are adopting artificial intelligence. Each of these is challenging traditional financial intermediaries, such as banks, insurance companies, and asset managers, as well as the services they provide (Ben Naceur et al., 2023).
Digital innovations can complement or replace services in the traditional financial system. Many services appear to offer a strong short-term alternative to existing intermediaries. In the medium term, however, they often complement existing services, leading to greater competition and a more diversified financial system. Even so, innovations do not always deliver the best outcomes on their own: things can go wrong, and often do. Harnessing the benefits of digital innovation often requires forward-looking public policies.
Disruption in Payments
Payments are the gateway to financial services. For individuals, a checking account is typically a prerequisite for accessing credit, obtaining insurance, or starting to save and invest. For newcomers to the financial system, such as fintechs and big techs, it is common to start with payments and then branch out into other financial areas. Over the last decade, the way we pay has changed drastically, with so-called real-time or instant payment systems launching in many countries, especially in emerging markets (see chart). They enable real-time (or near real-time) transfers between end users (Frost et al., 2024).
Fast payments, available 24/7, are offered by fintechs, big techs, and traditional banks. They use smartphone apps and QR codes, operating even on simpler devices. In general, they allow disruptive companies to provide services that directly compete with traditional ones. The best-known success stories come from public infrastructures, such as systems operated or overseen by central banks. In Brazil, for example, the central bank launched its instant payment system, Pix, in November 2020. Today, over 90% of Brazilian adults use the service for daily retail payments, such as groceries or travel, and even for recurring payments, such as utility bills. In India, the Unified Payments Interface (UPI)—operated by the National Payments Corporation of India and regulated by the central bank—offers services from traditional banks, fintechs, and big techs on a single platform. Similar successes include Thailand’s PromptPay, privately managed but with a central bank role, and Costa Rica’s SINPE Móvil, also operated by the central bank.
“Radical new ideas are necessary, but they may not be sufficient. Infrastructure, robust regulation, and experimentation are also required.”
These successful public infrastructures contrast with many economies, where multiple private-sector instant payment systems exist, inaccessible to users of other financial institutions. For example, in the U.S., someone using only Venmo cannot pay someone using only Zelle. These “walled gardens,” as they are known, have also emerged in China, with competing wallets like Alipay and WeChat Pay, and in Peru, where Yape and Plin wallets compete for users (Aurazo & Gasmi, 2024). In China and Peru, government intervention was required to make payment systems interoperable.
Often, what starts as a substitute (fintechs and big techs) can complement existing services operating in the same market. Users get faster, cheaper payments, which can also support financial resilience and promote higher economic growth. Disruptors—and public policies—help improve the system, serve new customers, provide new services in the same market, and pressure traditional companies to enhance their offerings.
A Metamorphosis of Digital Credit
Beyond payments, there is the need to borrow. Companies need credit for productive investments, and individuals need it to buy a home, a car, or pay for education. Early in the fintech revolution, it seemed that new lending platforms could eventually replace many banking functions. Crowdlending and other new credit platforms grew rapidly, often using alternative data for credit scoring and connecting borrowers and lenders through simplified digital processes. This was soon eclipsed by new loans from major tech providers, such as Amazon’s commercial loans in the U.S. and Alibaba in China. The volume of credit from large tech companies grew rapidly (Cornelli et al., 2023).
These new platforms have closed gaps in credit markets and increased financial inclusion. In Argentina, for example, Mercado Pago supported small merchants rejected by banks. In China, credit from large tech companies has been less sensitive to real estate prices than bank credit, potentially reducing the importance of collateral. In the U.S., fintechs lending to small businesses target areas with high unemployment and bankruptcy rates, where banks are less willing to lend. Overall, the impact of fintechs and big tech varies widely by country.
Banks remain strong, now competing with a new set of intermediaries. They have adapted their business models to resemble platforms and to use alternative data. Many competitors, such as Revolut in the U.K. and Nubank in Brazil, have obtained licenses and become banks.
Cryptocurrencies and DeFi
While big tech challenges traditional financial institutions in their own game, crypto assets and decentralized finance (DeFi) promise to reinvent finance, relying on trust in code rather than institutions. Global adoption of cryptocurrencies is rising again, despite their long history of volatility, mainly for speculative investment purposes, but also due to political support for these assets in some countries. Stablecoins, which peg their value to the fiat currencies that cryptocurrencies supposedly challenged, have emerged as an alternative. Major stablecoins are issued by centralized entities holding assets like U.S. Treasury bills and bank deposits to back them.
Even with these new intermediaries and the growing presence of stablecoins, the crypto sector remains fraught with risks, including widespread fraud, scams, money laundering, and terrorist financing.
Cryptocurrencies and stablecoins offer a glimpse of functionalities that could have broader applicability. For example, programmability and tokenization could enhance existing functions and enable new ones within the monetary system, based on central banks, the core system, and the interaction of commercial banks with clients. In international payments, tokenization could reconnect the correspondent banking system, allowing messaging, reconciliation, and asset transfers in a single step. New functions, such as atomic settlement and improved collateral management, could drastically enhance capital market operations. These functions could lay the groundwork for a future tokenized financial system.
Public Policies to Guide Innovation
These radical innovations have significantly transformed the financial system over the past decade. Forward-looking public policies have enabled some of the biggest and most important advancements.
Innovation can be intoxicating, but caution is needed: significant risks emerge from innovation that can undermine financial stability. For example, shocks in the cryptocurrency sector can spill over into the traditional financial system, potentially even affecting the U.S. Treasury bond market (Ahmed & Aldasoro, 2025).
To harness the potential of innovation and mitigate risks, radical new ideas are necessary but may not be sufficient. Public infrastructures, robust regulation, and practical experimentation in both public and private sectors are also required to generate new knowledge and guide private investment and policy. Finally, the public and private sectors must coordinate to direct digital technologies toward applications that genuinely benefit people and businesses, establishing a solid foundation for prosperity.
