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Keys for Sustainable Growth in Fintech Regulation

Growth in Fintech Regulation

The US government’s philosophy on regulation was once concisely stated by Ronald Reagan in the following way: “If it moves, tax it. If it continues to move, control it. Subsidize it if it stops moving. Using the UK as an example, Statista estimates that the financial technology market was worth $24.5 billion in the first quarter of 2021. It is safe to conclude that the industry is booming. In addition to the direct economic impact, one must take into account fintech’s broader economic effects, which include growth in fintech regulation inclusion and lowering transaction costs for investments, remittances, and payments as well as lowering the cost of credit and insurance.

Of course mistakes will happen in every industry over time. The spread of Ponzi schemes in China along with the expansion of P2P lending, the use of bitcoin for shady transactions, and investor misinformation at Lending Club, which led to the founder of the company’s demise, are just a few examples of fintech globally. The onus is on the regulator to rein in the excesses, streamline the legal system, and set the ground rules for the multifaceted and quickly growing Fintech industry because the economic benefits are indisputable.

The need for regulation to promote long-term and sustainable growth is widely acknowledged. A major change for a nation with state-by-state financial regulation, the Office of Comptroller of the Currency’s (OCC) proposal to establish a federal charter for non-deposit banking products and services at the end of 2016 could lower entry barriers for businesses looking to innovate the financial services sector. But Bank of England Governor Mark Carney has emphasized the necessity to provide a comprehensive infrastructure to accommodate the burgeoning sector. Having worked directly in the regulated financial services sector in countries like Brazil, the EU, and Central Asia, I am certain that there are a number of initiatives that can be taken to accelerate the expansion of fintech globally.

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1. Clear communication with the industry

Although it might seem simple, it is crucial for the regulator to interact with the fintech sector in order to fully comprehend the demands of the sector. Although the industry is obviously just one voice among many, it makes sense to obtain first-hand information in a time of fast technological and economic change. The regulator may be able to prioritize and concentrate on resolving strategic issues as a result.

2. Share regulatory functions

The sharing of regulatory responsibilities must be maximized. Several industries are included under the fintech umbrella, including payments, insurance, and consumer and business loans. Using functional compartmentalization to separate the regulation makes sense in our opinion. For instance, the same division of the consumer protection bureau or central bank that oversees consumer lending by banks could oversee related technology activity. From the standpoint of synchronous norms for consumer protection, this makes logical. Everyone benefits from having a single set of guidelines for information disclosure about anti-money laundering (AML) and know-your-client (KYC) procedures as well as collection methods. Additionally, combining fintech regulation with traditional financial services puts the former squarely in the center of regulatory attention.

3. Focus on creation of new infrastructure

Every government ought to aggressively support the “hard infrastructure” that Mark Carney refers to as being needed by the new generation of financial services firms. Even shared business investment in this kind of infrastructure is frequently too much of a burden, even though any nation may profit from it. Payments, settlement, identification, and data access should be the areas of attention. Aadhaar, an Indian biometric ID system with over one billion enrollees—or the majority of the nation’s adult population—is without a doubt one of the best examples of sovereign strategic thinking on the topic in the world. By actively promoting financial inclusion, this enormous undertaking, together with the nation’s recent crackdown on hard currency in the economy, can truly alter the lives of hundreds of millions of its residents.

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4. Share the use of existing infrastructure

Although building the infrastructure is undoubtedly necessary, regulators worldwide have access to lower hanging fruit that might help boost industrial competitiveness. First and foremost, it is essential to give citizens the power to take control of the data that big incumbents like telecom providers and traditional financial services (banks, insurance firms) hold about them. This can be accomplished via compelled disclosure of this data to outside parties, presumably with the owner of the data’s express consent. Fintech companies are allowed to concentrate on what they do best: use cutting-edge technologies and data analysis to target market inefficiencies. On the one hand, this allows the latter to monetize the data and get access to more competitive solutions. The PSD2 directive in the EU, which compels banks to make the vast amount of transactional data available to third parties via API, serves as the best illustration of data sharing. This initiative is undoubtedly admirable, and regulators everywhere ought to adopt it.

5. Introduce 5-year road maps

The industry cannot advance because of the significant overhang that is regulatory uncertainty. First and foremost, this uncertainty prevents capital from flowing into the sector, leading to a significant compression of the earning multiple. Due to the increased uncertainty, this further discourages capital reinvestment. It’s critical to stress that in the fintech industry, technologically advanced global businesses have the option to forgo geographic expansion. If everything else is equal, these businesses will always choose to invest in nations with the openest traffic laws. This suggests that nations with equivocal positions are at risk of suffering consequences.

Market adoption and technology advancements alone won’t determine the direction of the fintech sector in the future. The government’s role in promoting fintech and guiding it toward sustainable growth is crucial.

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