This report discusses the impact of technological innovation on the financial sector and its implications for supervision. Given the inherent uncertainty related to this impact, this study applies a scenario analytic approach to develop three alternative scenarios for the future. In the first, established financial institutions embrace and successfully exploit innovation, thereby changing the structure of the financial sector relatively little. In the second, the market becomes fragmented as new, specialist players compete effectively with established financial institutions. In the third, large technology companies such as Google and Apple displace established institutions by exploiting their scale and innovative capacity.

A number of positive effects of innovation emerge from the analysis. For example, innovation can increase efficiency and diversity by boosting competition within the financial sector. Competition can also reduce market concentration and result in better services for consumers. A more diverse financial sector can also reduce systemic risk by increasing heterogeneity between risk profiles of market participants.