Fintech is a portmanteau that reflects the connection between two worlds—financial services and technology. Since banks and insurance companies are fintech’s main playing fields, these two sectors must become more efficient and acquire the technological solutions that will help them fulfill their roles. Fintech promises to bring innovation to existing players, but also threatens to disrupt conservative industries and replace them with new models and players.
The connection between these two components of fintech is a strange and challenging one, in light of the fundamental differences between them. Technological solutions are provided by startup companies that, by nature, are small organizations driven by the need to work quickly and efficiently, due to the short time-to-market and the requirement to sell and recruit capital. On the other hand, the MVPs in the financial services sector are large, hierarchic organizations characterized by sluggish bureaucracy that negates rapid decision-making and agility in implementing innovative solutions.
Regulation and Fintech
Fintech companies operate in a regulation-intensive environment, and this is their main challenge, because regulations essentially define their ventures and their feasibility. On the other hand, in most of the technological fields that startup companies engage in, the challenges are innovation, competition, and the business model. Regulation is less of a challenge, if one at all.
The dominant role of regulation in the fintech sector is unique. Therefore, gaining in-depth knowledge of the synergies between regulation and fintech is critical during any analysis of a fintech venture’s prospects. And the venture must know how to maintain compliance with the various regulations in order to succeed.
By their very nature, financial services are subject to a wide range of meticulous regulations. The types of regulations that affect fintech include banking regulations, insurance regulations, and the prevention of money laundering, as well as privacy, consumer, and securities regulations. The various regulatory categories in the financial services sector follow and are adapted to the structure of the traditional market, with each sector being closely governed and controlled by its own set of regulations and regulatory authority.
In many instances, fintech strives to resolve the problems created by existing regulations, but it also must keep in mind that its operations are subject to those same regulatory systems. Already at the stage of defining the product and service a fintech venture wishes to launch on the market, it must familiarize itself with the relevant regulations. It then must find solutions that comply with the regulatory conditions, as well as that enable it to obtain approval from the relevant regulatory authority.
There are numerous dimensions to gaining familiarity with the regulations. First of all, similarly to every startup company, fintech ventures are also striving to go multinational and operate in a variety of countries. The problem is the regulations in one country are different and sometimes contradict the regulations in another country. The differences are in language, laws, and even approach. This means that the learning and compliance process is multi-dimensional and, in essence, an unending task.
If this were not enough, another problem is that regulations are drafted based on the structure of the conservative market—banking regulations for banks, insurance regulations for insurance companies, and so forth. On the other hand, in many instances, fintech ventures disrupt the structure of the traditional market. This disruption, by its very nature, creates new connections and approaches. As a result, fintech companies find themselves in a minefield of differing, overlapping, and contradictory regulations.
However, the regulatory challenge is not just difficult, but also a main foundation for creating value.
Any fintech venture that has already become well-versed in the subject, and has adjusted its solution to the various regulations, creates a real advantage over existing and new competitors. The entry barrier to this sector is not only the development stage, but rather the strength of the regulatory solution. In essence, regulatory knowledge actually becomes intellectual property.
For example, the banking sector is characterized as a regulation-intensive sector. The banking supervisor’s regulations relate to various aspects of banking corporations’ operations, including licensing, corporate governance, various regulations relating to capital adequacy and banks’ capacity to assume various risks, consumer regulations relating to banks’ relations with their customers, the prohibition of money laundering, and more. Any fintech venture seeking to interface with the banking system, to provide it services or replace some of the banks’ roles, must be well-versed in the relevant local regulations and ensure its compliance with them.
Clearly, the greater the challenge, the greater the potential.
Privacy and Fintech
During the coming year, a quantum leap in privacy-protection and information-security regulations is expected in the business sector. New and enhanced regulatory systems are expected to come into effect throughout the world. These are headed by the European GDPR, which deals with privacy protection and will take effect in May 2018. As a result of these processes, the issues of privacy and database protection against cyber risks will have an impact and a presence on the technological agenda in the coming years.
Fintech ventures create solutions that make use of sensitive personal information. As such, the ventures are engaging in fields that are exposed to privacy and database issues. Basically, all financial services involve the collection and saving of sensitive personal information. Electronic mail addresses, phone numbers, personal details, financial information, marital status, special identifying details, workplace, family members, and more are collected as part of the process of getting to know the customer in order to provide him with services, advice, and an identity.
The systems collect, save, store, process, and transfer highly sensitive information.
But they are also exposed to attacks and challenges from all sides. The exposures, in instances of intrusions, are not limited to sanctions that may be imposed on a company by the regulatory authorities, but also include a potential mortal blow to the company’s reputation and civil suits being filed by individuals on the grounds of infringement of privacy.
In light of this, the fintech sector must adopt high standards of privacy protection and security. Fintech companies are required to create privacy-protection and information-security regulations for the enormous volume of information they collect, at standards on par with the customary international practices.