It is hard to talk about fintech and regulation without thinking about financial regulators’ mandates and their implications. This raises questions that will form part of the backbone of future fintech regulation: Who can or should provide financial services or products? How can low-cost startup models and the benefits of agility be balanced against compliance costs? How can regulation cover an ever-increasing number of new business models and match the speed of innovation?
Managing and balancing risk with added value
Emerging fintech companies have limited track records, making it difficult to identify their obligations. Does that automatically mean they represent limited prudential and consumer risk? By the same token, does exponential growth create a risk blind spot?
New technology offers regulators a reduced workload and should be taken into account when formulating future fintech regulation.
- Smart contracts — reduced costs
- P2P lending — real-time credit-risk visualization
- Blockchain — obligations under MiFID
- E-money — limited AML issues with cash transactions
- Data transparency — direct audit of financial institutions
Banks as stakeholders have long used regulation as one of the “boogeymen” when explaining and justifying their struggles to keep up with technological innovation. However, the need to deal with regulation and compliance is itself leading to the creation of innovative technology. The simplification of incumbent banking systems and increased data automation will eventually create more opportunities for collaboration and innovation. Unfortunately, banks have so far been caught up in trying to minimize the impact of disruption.
Data is at the forefront when it comes to regulation. For example, why can’t regulators accept an XML file or data feed that could later be used for further analysis, rather than an old Word or text document? Banks have the technological and financial capabilities to launch innovative products but are still held back by regulatory concerns. Why? The concern is naturally well founded: banks operate under regulation that helps them ultimately deflect liability.
Regulation should maintain and foster stability
Regulators could work for the benefit of fintech, rather than against it, through a collaborative process of consultation. Eventually, proposals for regulatory changes might become rules, allowing time for consultation, alteration and republication.
Why shouldn’t intuitive database applications be deployed to analyze and contextualize regulatory information? Banks would have greater insight, giving them time to apply relevant changes. Their compliance teams could take advantage of technological innovation to better analyze and understand processes critical to their competitiveness.
Compliance should not hinder innovation
What should compliance look like for fintech? Will it absorb too much critical management time? Will it be seen as a diversion from the core objectives of the fintech business? Questions surrounding fintech financing, operational and management risk, data security and monetization, and infrastructure will have to be addressed to put a fintech regulatory framework in place. Involving all key stakeholders and establishing the right culture from the outset will pay dividends for the future of fintech.