The speed at which FinTech has grown will likely have astounded even its most enthusiastic advocates. VC-backed FinTech investment increased 106% to $13.8 billion in 2015, as a number of startups kicked on to achieve unicorn status.
This news is not positive for everyone, however. The speed at which growth has occurred has presented a tremendous challenge for regulators, as they seek to encourage the sector while at the same time ensuring companies are not allowed to ride roughshod over the rules that prevent banks from exploiting their customers and destroying the economy.
Following the financial crisis, regulators were subject to a large portion of the blame and have since been relatively proactive in taking banks to task, introducing a raft of new regulations that have made compliance one of the most pressing challenges of the decade for the financial services industry. FinTech startups present an entirely different challenge to the big banks, though.
FinTech startups are, by their nature, small and agile. Increasing levels of regulation and introducing more complex regulations can have a significantly detrimental affect on their operations, with many lacking the resources to spend on legal or compliance fees, and the training required in-house to understand the impact on their processes and technology.
In order to best facilitate the regulation of FinTech, a number of countries have introduced so-called ‘regulatory sandboxes’. In Hong Kong, for example, the Monetary Authority, and Securities and Futures Commission CEO, Norman Chan, has recently announced plans for a ‘FinTech innovation hub’ where new financial products and services can be tested and trialled separately from internal banking and finance systems. This also provides a space where guidance is offered to startups around compliance and possible exemptions, which would allow them to operate without regulatory authorizations.
The UK has a similar program in place. The UK regulator has actively set itself up as the gold standard, with many of its innovations being imitated by other regulators around the world. The Financial Conduct Authority (FCA) has understood that regulatory requirements could inhibit innovation, and issued a Barriers to Innovation consultation to lead innovations of its own that offer support and collaboration to encourage learning.
Regulation of FinTech in the US, however, is another story, with a fragmented approach that causes significant confusion about how a firm will be subjected to regulatory oversight, with 50 state regulation and multiple federal regulators adding complication. All of this creates uncertainty and cost - both of which are going to cause them to fall behind their rivals overseas operating under clearer regulatory regimes.
Despite popular opinion, it is not true to say that FinTech wants a clear field to operate in with no regulations at all. Over-regulation can stifle growth, but the FinTech industry needs regulation to maintain the consumer trust it so desperately craves, especially when trust in banks is so low. However, there needs to be a light touch applied that ensures FinTech companies are still able to innovate, and the regulatory framework clearly defined so that it can be easily understood.