In a new World Economic Forum paper, business leaders from around the world urge a societal debate and proactive standard setting around fintech, or financial technology.
But what is fintech exactly? And why does the finance sector demand more clarity about rules and regulations governing its evolution?
Here are five things that will help you get a better understanding of this fast-expanding industry.
What is fintech?
Fintech, the abbreviation for financial technology, is a broad category that refers to the innovative use of technology in the design and delivery of financial services and products. The application of fintech cuts across multiple business segments, including lending, advice, investment management and payments. Many fintech companies harness mobile technologies, big data and superior analytics to tailor products for various customer segments.
Banks are of course major users of technology; however, fintech puts technology at the heart of the financial services offering, fundamentally changing the way in which companies interact with their customers. This proliferation of fintech has had a number of positive impacts for society, including increased competition, a reduction in prices paid by customers and wider access to financial services among the traditionally underserved. And the evolution of fintech has only just begun.
Who is active in fintech?
Both start-ups and traditional finance companies are active in fintech.
These start-ups often don’t look like a traditional bank or insurance company: they typically offer targeted solutions, as opposed to being one-stop-shops for customer financial service needs. Many of these companies are based in tech hubs such as San Francisco, London, New York, Tel Aviv, Singapore and Berlin, and draw on a workforce comprised of traditionally “non-financial” specializations, such as computer science, engineering or IT. Examples of fintech companies include Transferwise, an international money transfer provider; Lenddo, an alternative credit scoring service that leverages social media; and Ripple, an emerging payments network that leverages distributed ledger technology.
Traditional banks, insurers and other large financial institutions have increasingly invested in fintech as well. Some integrate fintech into their existing product and service offerings, while others invest in fintech start-ups or set up their own fintech incubators. As CNBC noted, Citigroup's fintech portfolio is the largest of all banks, with 13 start-ups backed from 2011 through 2015. Goldman Sachs, with 10 start-ups backed; and JPMorgan Chase, with five, represent other Wall Street leaders in fintech boardrooms.
How is fintech regulated?
The question of how fintech is and should be regulated is currently the subject of much debate. As fintech start-ups generally do not operate like a full-fledge bank or insurer, they tend not to be subject to the same regulations that govern more traditional players in the financial system. Not surprisingly, the existing regulatory framework is geared towards supervising more traditional financial services providers who can be more easily categorized as banks, insurers and asset managers.
Fintech providers do not neatly fit into this paradigm. As Bruce Wallace noted in the Wall Street Journal last year, “in addition to the Federal Reserve, you have the Consumer Financial Protection Bureau, the Financial Industry Regulatory Authority, Securities and Exchange Commission, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Financial Crimes Enforcement Network, etc., along with the 50 state regulators. For a financial institution, it’s usually very clear what specific agencies regulate you; it’s not so clear for fintech disruptors.”
As a result, this has led to a concerted effort on behalf of policy-makers to understand these new operating models and to reconsider the existing supervisory framework in light of fintech. The imperative is to strike the right balance between innovation and financial stability.
Time is of the essence, since many of these new companies are rapidly accumulating market share.
How is the World Economic Forum contributing to this topic?
In short, the new paper, prepared in collaboration with Oliver Wyman, proposes four recommendations for the private sector and financial supervisors aimed at safeguarding financial stability and fostering fintech. The recommendations are to:
1. Debate the ethical use of data to clarify the boundaries on the use of customer data for business purposes by actors in the financial system
2. Set up a forum for public-private dialogue on transformation to identify areas where supervisor support is needed to develop technology for enhancing stability
3. Proactively set industry standards to redefine and enforce an approach to good conduct in light of new technology-enabled innovations
4. Monitor and understand fintech innovation in a consistent way to ensure that national supervisors are well equipped to mitigate risks arising from fintech
The proposals were formulated based on inputs from the World Economic Forum’s Steering Committee on the Role of Financial Services in Society, which includes executives from many of the largest financial institutions in the world, including HSBC, UBS, DTCC, Western Union, as well as many economists, fintech start-ups, and regulators.
What can we expect now?
We hope to see these recommendations gain broad support, and to translate into concrete industry and policy measures. The timing for this is certainly right – Bloomberg noted that the report comes “as regulators around the world scrutinize the explosive growth of new technologies”. The report also has the right support, being backed by some of the world’s best financial minds.
The proposed actions also make a lot of sense, according to people familiar with the matter. Andy Haldane, for example, the chief economist at the Bank of England, told the Financial Times that the recommendations were “very sensible ones”. But of course, all that goodwill must at some point move towards concrete measures. The challenge remains to translate similar insights into careful scrutiny and action. For this to happen, we count on all those who have a stake in fintech to do their part in the coming weeks and months.