Article

System Dynamics Modelling of FinTech Innovation Diffusion, Digital Economy Feedback Loops, and Regulatory Scenarios  

---

Abstract

This study develops an integrated system dynamics model to examine how FinTech innovation diffusion, digital economic performance, and regulatory responses co-evolve in a complex digital ecosystem. Using a 20-year simulation horizon, the model incorporates reinforcing loops of innovation and imitation, balancing loops driven by systemic risk and regulatory intensity, and stock–flow structures capturing user adoption, digital capital accumulation, and regulatory adaptation. Results show that the Innovation-Friendly scenario produces the fastest adoption trajectory, reaching 0.63 by Year 10 and 0.96 by Year 20, compared to 0.45 and 0.88 in the Baseline scenario. This accelerated uptake generates the highest digital economic output, achieving an index value of 223 in Year 20. However, it also produces the highest systemic risk, rising to 54 on a 0–100 scale. Conversely, the Risk-Averse Tightening scenario demonstrates slow adoption (only 0.29 by Year 10), the lowest digital output (index 124 by Year 20), and the lowest risk (31), showing that strict regulatory controls suppress both innovation spillovers and market expansion.  The findings highlight that regulatory design fundamentally shapes FinTech ecosystem behaviour. While innovation-friendly environments maximise growth, they also heighten systemic vulnerabilities; meanwhile, excessive regulatory tightness restricts innovation-led economic gains. Adaptive Regulation emerges as the most resilient pathway, achieving high digital performance with stable risk levels. These insights provide an evidence-driven foundation for policymakers seeking to balance innovation, inclusion, and financial stability while navigating rapidly evolving FinTech landscapes.

 

Keywords: FinTech Innovation, System Dynamics, Digital Economy, Regulatory Scenarios, Innovation Diffusion

How to Cite:

Endahti, L. & Faturahman, M. S., (2025) “System Dynamics Modelling of FinTech Innovation Diffusion, Digital Economy Feedback Loops, and Regulatory Scenarios  ”, FinTech Innovation Journal 1(3), 263-285. doi: https://doi.org/10.63913/ftij.v1i3.91