Fintech is booming and a host of non-banks are finding ways to compete with the traditional sector. But with that growth comes responsibility and regulators are now turning their eyes to these scrappy upstarts.
In many ways, recent regulatory developments have been a boom for the rising fintech sector. The Payments Services Directive compels banks to share consumer data with other parties if customers request it, while GDPR creates an honest opt-in database of customer details which makes it possible to identify underlying trends and patterns.
The result is a sector which is on the up and up. A report from PwC suggests the Fintech sector has been growing at 41% year on year over the past four years, with growth being turbo charged by stellar performance in the mobile payments sector.
These start-ups offer a flexible, agile and affordable alternative to traditional banks, which has got the industry worried. Fintech can offer things traditional banks struggle to, but among their prime concerns is the suggestion that because they are so new, they are not subject to the same regulatory oversight as established operators.
Regulators are taking note. This month’s eagerly anticipated US Treasury Report on FinTech regulation called for sweeping changes. The current regulatory framework, it suggested, is not conducive to innovation.
“American innovation is a cornerstone of a healthy U.S. economy. Creating a regulatory environment that supports responsible innovation is crucial for economic growth and success, particularly in the financial sector,” said Secretary Steven T. Mnuchin. “America is a leader in innovation. We must keep pace with industry changes and encourage financial ingenuity to foster the nation’s vibrant financial services and technology sectors.”
There are more than 80 recommendations in all, but the standouts include:
- The efficient and responsible use of customer data
- Streamlining the regulatory environment to foster innovation
- Modernise regulations to keep pace with new products
- Introduce sandboxes as safe areas for experimental innovation.
Playing by the rules
In Australia, ASIC has also been active, stating that the time has come for fintech startups to play by the same rules as other financial institutions. They’ve demanded all fintech operators remove unfair terms in their contracts.
Here in the UK the FCA has called for greater transparency in the payments and e-money industries. It is part of a move to give customers more visibility about how their charges are being calculated and to give them the understanding their need to shop around if need be.
Regulators are taking a two-pronged approach. On the one hand they want to encouraging this fast-growing sector, but on the other it has to ensure it plays by the same rules as established players and that customers are protected.
Regulatory sandboxes, such as the global sandbox proposed by the FCA, offer a safe place to try innovations and see how regulations and products may need to adapt to the changing digital market.
This is an incredibly wide sector, encompassing everything from online banking to cryptocurrencies. Understanding how this sector works and develop effective regulation which doesn’t stifle innovation is a difficult balancing act, but it’s one the regulators are working hard to get right.