Fintech competition in the retail foreign exchange market

Digital currency exchanges have become increasingly popular in Peru over the past few years. To assess whether this has had a competitive effect on the retail foreign exchange market, we use 2019 – 2024 data on the exchange rate spreads quoted by retail Fintech and bank-backed currency exchange online platforms; as well as market interest in these solutions, measured by Google Trends data. To analyze the impact on the competition of the retail currency exchange market, we employ a vector autoregression (VAR) model. The results show that digital banking platform spreads narrow in response to the narrowing of Fintech spreads, with a more pronounced and persistent effect during the period of high exchange rate volatility following the 2021 elections. Furthermore, during this period, bank spreads reacted negatively to increases in market interest in Fintech, suggesting that banks had to intensify their efforts to remain competitive as Fintech grew in popularity.