Too Connected to Fail? Network Evidence on Fintech’s Systemic Risk and Financial Stability

Abstract

The increasing integration of financial technology (fintech) into mainstream financial systems offers speed, efficiency, and expanded access, but also heightens systemic vulnerabilities. This study applies network analysis to investigate how fintech adoption—captured through digital lending, payment volumes, funding flows, and associated technological dependencies—interacts with systemic risk drivers such as cybercrime, bank fraud, market volatility, macroeconomic uncertainty, and cryptocurrency regulation. Using data from 2014–2024 on India’s fintech ecosystem, degree and betweenness centrality metrics reveal that variables including the UCRY Policy Index, India VIX, and cybercrime rates occupy critical positions within the network, acting as hubs and bridges for risk transmission. The findings highlight the “Too Connected to Fail” nature of certain fintech segments, where disruptions in high-centrality nodes can cascade across markets and institutions. To mitigate these risks, the study recommends adaptive regulatory frameworks that address fintech-specific vulnerabilities, strengthening cybersecurity protocols modelled on best practices such as Singapore’s MAS Cyber Hygiene Guidelines, and implementing market safeguards like liquidity backstops and transaction halts during periods of extreme volatility. The analysis also demonstrates how divergent cryptocurrency regulatory regimes—from Japan’s licensing approach to China’s bans—reshape network structures and influence stability. While the results are most applicable to emerging market contexts, the framework and strategic recommendations are relevant across jurisdictions. The study advances the understanding of fintech-related systemic risk and offers actionable guidance for policymakers, regulators, and industry stakeholders seeking to enhance financial stability in the digital era.