A new report published today by the World Economic Forum explores how technology-driven risks originating in financial services sectors could become systemic threats to the global financial system.
Pushing Through Undercurrents, developed in collaboration with Deloitte, examines how different forces influence the way tech-driven risks spread and offers approaches that financial services executives, policy-makers, regulators and others can use to mitigate these risks.
“While continued tech integration into the financial system has many benefits, it’s important that industry leaders, regulators and consumers be aware of emerging tech-driven risks and take appropriate action to mitigate them,” said Drew Propson, Head, Technology and Innovation in Financial Services, World Economic Forum. “As the financial system becomes more dependent upon technology, new risks are surfacing as a result and it’s essential to apply solutions throughout the financial services ecosystem to ensure resilience and stability in coming years.”
The risks include everything from social media enabling the manipulation of stock markets to increased risks from a rise in “buy now pay later” debt and more. The report also explores managing geopolitical risks, such as the financial system’s vulnerability to state-sponsored cyberattacks, as a top priority for the financial system. If they become systemic, these risks would have profound economic impact for individuals and global economies.
“Our experience over the past few years has shown that powerful new vectors for systemic risk often enter the financial system from unexpected sources. Compounding this challenge, better interconnectivity between financial and non-financial players means that the speed at which new products and services emerge is now measured in weeks, not years,” said Rob Galaski, Vice-Chairman and Managing Partner, Financial Services, Deloitte Canada.
“This all points to the need to monitor and mitigate systemic risk at the level of the entire ecosystem. To do this, the industry will rely on data to build a clearer picture of the complex web of links between financial institutions, technology vendors, consumer platforms, social service providers, and other players – and predictive capabilities like AI to spot and evaluate risk vectors before they become systemic.”
These rapidly evolving, tech-driven risks can be mitigated through creative uses of technology, alongside greater collaboration within and across the public and private sectors.
Mitigation solutions include:
- Promoting trust-enhancing products and services that reinforce financial system stability
- Dismantling information siloes to better identify tech-driven risk at the ecosystem level
- Ensuring predictive analytics capabilities reflect geopolitical and regional uncertainty and are applied to resilience efforts
The report also identifies specific mitigation strategies for each of the sector-specific and regional risks examined.
Emerging tech-driven risks in the financial system
Overall, fragmentation in the global financial system will continue to create risks that could spread through sectors and regions. Additionally, highly dynamic geopolitical and regional forces outpace a financial institution’s resilience measures for cybersecurity, workforce shortages and environmental threats.
Many risks, as well as mitigation opportunities, are emerging from tech adoption in financial services. Potential systemic risks that could emanate from the increased use of technology include:
- Geopolitical tensions and growing cyberattacks
As cyberattacks become increasingly geopolitically motivated, sophisticated and frequent, financial institutions are at high risk of serious damage from such attacks. Added to the risk is increased competition for tech talent. The shortage of such talent in some regions is so severe that they could be unable to resume critical operations after a cyberattack.
- “Buy now pay later” debt
One mitigation strategy to combat attacks is to develop centralized resource centres for private entities to collectively build cyber resilience. Cybersecurity centres for financial institutions have been established regionally but their use could be expanded.
Demand for buy now pay later (BNPL) products, a short-term credit option for consumers looking to pay for purchases in instalments, is on the rise. BNPL is not a new concept but it has grown in popularity due to lenient credit approval processes and ease of access in e-commerce channels through partnerships between fintechs and retailers. By 2025, 12% of global e-commerce spend is estimated to come from BNPL transactions.
While BNPL products provide easy credit with the convenience of interest-free instalment payments for consumers, they also come with a host of risks to the broader financial system. For example, conflicting incentives between protecting customer interests and increasing sales credit increases the chance of over-borrowing, the piling up of shadow debts and defaults.
Additionally, risks of BNPL default may spill over into the broader financial system through securitization. If the scale of BNPL securities were to grow significantly, large-scale defaults could have a spiral effect on the financial system. Research by S&P has indicated that the volume of securitized BNPL assets is on the rise in Europe, with Fitch sounding the alarm on the credit risks associated with this product.
To mitigate this risk, rating organizations could incorporate an assessment of BNPL securities as part of their ratings services. Similar to how banks are rated based on the quality of their credit portfolio, BNPL providers with sound credit underwriting processes and risk management in place can be assigned ratings to guide investors in pricing their credits.
- Social media and investors
With retail investor activity reaching record highs recently, stock speculation on social media platforms continues to proliferate. This creates opportunities for the growth of “meme stocks”, where asset prices are highly disconnected from the underlying value of a company. Resulting market volatility risks have been seen previously and they are growing as meme-stock strategies are now being extended to short-term options positions.
While social media-driven market effects are not limited to meme-stock activity, their influence is well observed in this space. For example, social media platforms driven by algorithms (e.g., Reddit, Twitter) are playing a pivotal role in amplifying stock volatility and heightening individual risk appetites by creating “echo chambers” for investors to communicate frequently with others that have similar views and potentially reinforcing speculative investment decisions.
Expanding the use of machine-learning algorithms to spot warning signs of meme-stock surges can mitigate this risk. One could use real-time data, sourced from third-party data providers, for example, to proactively identify and monitor heightened risk exposure for institutional investors’ existing holdings.