Financial technology (FinTech) aims to improve and automate financial services. Using specialized software and algorithms, FinTech enables companies, business owners, and consumers to manage their financial transactions and processes better. At the same time, FinTech promises to increase efficiency, expand its scope, increase competition, and encourage financial inclusion in delivering financial services.
The Landscape of FinTech Regulation
The FinTech industry is still growing at a young and extraordinary pace, making the financial regulators around the world uneasy to understand these new technologies and how they fit into the existing regulatory framework. However, regulators are aware of the need for innovation, so they try to support and promote FinTech activities by creating regulatory virtual spaces.
On the other side, they do not want the existing risks, especially cybersecurity and fraud, to increase with the growth of FinTech. New payment systems and instruments can compromise market integrity and, ultimately, the monetary policy; new products may be sold incorrectly to consumers who do not understand their risks or cannot afford to meet them. Apart from cybersecurity and fraud, developing risky areas can also include blockchain, Distributed Ledger Technology (DLT), and crowdfunding. As a result, regulators must find the right balance between competitive advantages. FinTech can provide the risks inherent in integrating these technologies with existing business models. Therefore, Financial services are among the most heavily regulated sectors in the world.
Types of Working Policy of the FinTech Regulation
Regulators strive to deal with all these challenges in a range of jurisdictions. However, it is still debated whether these policy actions will be sufficient to maintain a regular modernization of the financial industry. FinTech-related policy measures can be usefully divided into three groups:
- Direct organizers of FinTech activities: It concerns regulating activities such as digital banking, Robo-advice, and payment services.
- Those who focus on using new technologies in the delivery of financial services: regulations involving new rules or guidelines for market participants to use technologies such as biometrics or artificial intelligence.
- Those who specifically promote digital financial services: Arrangements that enable policy initiatives such as digital identities, data sharing, and innovation centers.
Why Is The Fintech Regulation Important?
The concerns of FinTech regulators have focused on investment fraud, securities of cryptocurrencies, systemic risk regulation, central bank functions, money laundering, and taxation. In addition, regulators are concerned about the possibility of artificial intelligence (AI) making money through deception. However, just accepting laws is not enough to control FinTech. Regulators will need to be much more proactive at this point than ever before.
New technologies help new players perform activities traditionally run only by strictly controlled institutions. Therefore, arrangements should be made to prevent migrating commercial activities from migrating between businesses seeking mild regulatory control.
Regulators' Response to FinTech
There are several financial ecosystems in the world, all with varying degrees of complexity and regulatory frameworks. Given this diversity, there will be no one-size-fits-all approach that will work in every country or satisfy all stakeholders in each state. Different regulatory agencies can also have different mentalities when it comes to innovation, and these mentalities will play a significant role in how they react to FinTech. Nevertheless, many regulatory agencies will remain part of technology and life. If consumers use financial services in new and innovative ways, it is up to them to adjust and adapt to these new technologies.
To sum up
FinTech companies, currently operating with very little capital, are prone to severe regulatory risks that can drive them down and make large institutions dependent. Therefore, accurate estimation of the FinTech regulatory environment will be vital for both practitioners and investors regarding marketing, data protection, capital requirements, and many other regulations. Therefore, FinTech regulations are essential, and changes are expected in the coming years.