With the rapid deployment of innovative financial technology (fintech) solutions, legacy business models in financial services have been redefined and reshaped. Citigroup reported that fintech investment saw phenomenal growth from $1.8 billion in 2010 to $19 billion in 2015. As a result, financial policy makers and regulators must strike the right balance of fostering competition between traditional financial players and new fintech entrants while also preserving system stability in consideration of technology-enabled innovation.
Because many fintech solutions offer an attractive alternative for services like loans and payments, big banks have begun to collaborate with more fintech companies. Up until now, Citigroup found that banks in the U.S. and in Europe still have the advantage of scale over fintechs for the time being, but that edge is narrowing as fintech continues to experience accelerated growth. Already in China, fintech companies are acquiring more customers than major banks.
One of the outcomes of the growth in fintech funding is that regulators around the world are paying closer attention to the industry. At the end of March 2016 during a meeting of the Financial Stability Board (FSB) – composed of central bankers, regulators, and finance department officials from the Group of 20 (G20) countries – agreed upon a framework that could be used to categorize the different areas of fintech and assess their potential risk. This move brings the fintech sector one step closer to being regulated.
As fintech grows, so do the potential risks to the economy if appropriate policies and regulations are not in place. Predatory lending, money laundering, funding of terrorists, and fraud are realities that must be addressed, and the regulators’ priorities are to protect consumers while fostering inclusionary practices. The goal of regulation is to enhance the fairness and resilience of the financial system to help and not to hinder fintech’s contribution to creating a better financial system and economy.
"I don't want to see fintech's positive potential hijacked to become a source of new, more powerful platforms to prey on consumers on a massive scale," said John Williams, CEO of Federal Reserve Bank of San Francisco. “Nor should fintech businesses expect to escape regulation if they perform the same services as traditional financial institutions.”
Williams stated, “If it walks like a duck and quacks like a duck, it should be regulated like a duck.”
Different Countries, Different Approaches
Wealth management firm Canaccord Genuity, with offices in Canada, the U.S., the UK, and Australia, released a report in March 2016 on the state of fintech in the countries where they operate. The observations that they made regarding each country also reflects the positions being taken by each of the countries’ regulators.
Canaccord Genuity found that the UK had higher levels of customer dissatisfaction among traditional banks and the greatest amount of disruption as a result of fintech. The positive growth of the UK fintech sector can be attributed in large part to the favorable attitudes of both the UK government and its financial regulator, the Financial Conduct Authority (FCA).
The UK budget that was announced in March 2015 made specific reference to fintech and the government’s commitment to drive increased competition in the banking market. In order to encourage fintech innovation and to make it easier to gain regulatory approval, the FCA introduced a regulatory sandbox that allows businesses to test new financial products without the fear of disciplinary action from the FCA.
In addition to openly supporting the development of fintech in the country, the UK government also mentioned in its 2015 budget that the FCA would “identify ways to support the adoption of new technologies to facilitate the delivery of regulatory requirements” through regulatory technology, or RegTech. Just as fintech is modernizing financial services, RegTech can do the same for delivering regulatory requirements.
The United States, according to Canaccord, has also seen high levels of disruption due to fintech, but not at the same level as that in the UK. The influence of new payment options from U.S. companies like PayPal and Apple played a major role. The Office of the Comptroller of the Currency (OCC), one of the major U.S. banking regulators, announced at the same time as the FSB that it would establish a framework for regulating fintech.
“We are working on a framework to help us understand and evaluate innovation,” said Comptroller Thomas Curry. “It’s essential that we approach innovation in a thoughtful and responsible way that guards against risk to consumers and threats to the financial system.”
Fintech was found to have had little impact on the Australian market, and Canaccord said that the country “would do well to observe the UK market.” The Australian government has done just that by announcing many fintech-friendly reforms, including a regulatory sandbox based on the UK model and improved access for fintech startups to equity crowdfunding. In addition, the Australian Securities & Investments Commission (ASIC), the country’s corporate, markets, and financial services regulator, has released a draft regulatory guide for robo-advisor services and a guidance document for marketplace (or peer-to-peer) lending.
“Australia needs to make itself fintech-friendly if it wants to set itself up for the next generation of economic growth,” said Jost Stollman, CEO of Australian fintech firm Tyro Payments. “If it does, Australia could become the fintech Hub of Asia, servicing a market of more than three billion people.”
Canada was also identified by Canaccord, along with Australia, as having a weak fintech sector. Although the federal government proposed amendments in 2015 to modernize Canada’s current anti-money laundering (AML) and counter-terrorist financing (CTF) regulations, there has been no specific guidance from industry regulators regarding fintech as a whole.
Despite the absence of clear support for the country’s growing fintech industry, all five of Canada’s major banks have recently either partnered with or invested in fintech companies. Rather than waiting for the government and regulators to respond to fintech, the banking industry has taken the initiative in order to avoid losing its competitive advantage.
However, a report from consultancy PwC warned that increased scrutiny from regulators could affect Canadian fintech.
“Currently as peripheral players, some fintechs are able to navigate without the same burdens,” the report said. “As they continue their evolution, the regulatory environment might evolve to bring constraints that will likely impact their progress.”
Based on this survey of four very different markets, we can see the importance of having strong support from government and regulators in order to build a thriving fintech sector. When the public and private sectors can collaborate, as in the case of the UK, innovation can flourish, and consumers will reap the benefits.
“It’s an exciting time to be working in fintech,” said Jon Jones, President at Trulioo. “Around the world, accelerated growth in technology-enabled innovation is disrupting financial services with increased efficiencies, enhanced customer-experience, and reduced costs and risks. Regulators aim to strike the right balance between protecting consumers and helping fintech’s contribution to creating a better financial system and economy that fosters inclusionary practices.”