Bitcoin, block chain, robo-advisors – the faces of FinTech are multiform and dynamic and so is the regulation that applies to “FinTech space”. Depending on your business model, your FinTech business may be caught by a bunch of regulatory rules you better are aware of in order to not let regulation stop you.
What is FinTech?
If the sharing economy was the big financial revelation of 2014, then the buzz in 2015 has undoubtedly been generated by the explosion of Financial Technology, or ‘FinTech’. The Singapore Fintech Consortium, which describes FinTech as being “the delivery of innovative financial products and services through the application of technology, to make financial systems more efficient”. This succinctly brings together the three core concepts that constitute the essence of FinTech: the focus on financial products, the pivotal use of technology in the overall process, as well as the marked improvement over incumbent processes.
The main financial sectors for FinTech
According to a May 2015 report from CBInsights (a data analytics provider to the venture capital industry), there have been four specific financial sectors that have drawn the majority of investor funds from venture capitalists:
- Global payments;
- Personal finance management;
- Marketplace lending;
- Bitcoin, and more generally the block chain technology.
The first and biggest impacted sector is the global payments industry, in which FinTech has created numerous innovations to develop areas within both personal banking and business banking, such as forex, remittance and wire transfer services, and range in size from start-ups to established businesses. According to BNY Mellon’s October 2015 report “Innovation in Payments: The Future is FinTech”, moreover, the retail payment industry is seeing the most profound transformation from FinTech, where the forex market in particular is being seriously influenced by new non-bank players.
Personal finance management is second in size and closely following the payments sector. Personal finance services such as, financial advisory, portfolio management and brokerage have all experienced innovative progress through the emergence of FinTech. The most notable examples of FinTech companies in this field have removed much of the opacity from the investment process through the provision of a comparatively simple online system, which can purportedly formulate a diversified portfolio for a customer in a few minutes. These companies try to improve transparency in the investment process by effectively eliminating much of the inefficiency associated with the traditional investment world.
Third, Marketplace lending is another major area of FinTech growth over recent years, where online lending companies are providing the marketplace to allow borrowers and lenders to do business. The financial crash of 2008 created an ideal scenario for lending FinTech companies to flourish. Mass layoffs in the finance industry have meant that numerous qualified finance professionals have been available to initiate start-ups, while the drying up of credit has meant that many small businesses, homeowners and borrowers have found it increasingly difficult to access funding through the traditional lines. The increasing demand for alternative financing methods, therefore, has allowed the FinTech industry to rapidly develop and in doing so, it is now challenging incumbents to improve upon the price and quality of their services. FinTech companies active in market place lending have identified a client base which has been overlooked by larger banks.
Last but not least, the block chain technology has the potential to be a true game changer. The first use case based on this technology, the much vaunted Bitcoin, has received possibly the most attention of any FinTech initiative since it began life back in 2008. 2015, meanwhile, is on course to wrap up as one of Bitcoin’s finest years. The digital currency is internet-based and self-regulating, and its use of crypto technology removes the need for an independent banking intermediary to provide security for a payment transaction between two parties. Instead, the transaction is direct between the two parties involved and relies on many copies of the ledger being distributed and reconciled among the network of Bitcoin users (known as ‘miners’) across the world. The immutable ledger technology, known as the block chain, verifies the transaction data securely: Every time a transaction is made and currency is transferred, another unique ‘block’ is added to the ledger’s chain for the network to see. The technology is perhaps currently even more exciting than its first use case, Bitcoin, as the block chain technology can potentially be used to track anything with an intrinsic value (for example, a retailer can track the production of a good through the entire supply-chain process), thus having substantial utility beyond the finance industry. However, should financial markets begin to adopt private block chains whereby the ledgers are only accessible to a chosen few, questions will be raised regarding to how effectively such markets are being regulated.
FinTech – A curse or a blessing?
‘Disruption’ has possibly been the most commonly used term to describe the impact of FinTech on traditional models of finance. Indeed, banks are beginning to realize that their size and increasingly risk-averse culture is making it challenging to develop at the same pace as start-ups. In response, a number of them are partnering with FinTech firms.
Moreover, new entrants to the banking industry market are now able to establish themselves using the Bank in a Box model, whereby FinTech firms provide such new companies with the platform to negotiate the often complex, labyrinthine process involved. Considerations for new banks such as budget, timelines and regulatory compliance are supported by such bank in a box companies.
FinTech is not an unregulated space
As diverse as FinTech are the regulatory requirements that might apply to undertakings operating in this area. It is no surprise that innovation in finance, a heavily regulated industry, is closely monitored by regulators. Also FINMA has declared FinTech as a focal point and launched a specific website providing information about the regulatory aspects of FinTech. Moreover, FINMA is constantly working on enhancing the regulatory framework for FinTech services, an example being a new circular regarding anti-money laundering due diligence requirements which is expected to enter into force in March 2016.
Do you have or are about to establish a FinTech company or is your company providing FinTech financial services? Do you have a business idea and are you looking for the right partners to bring your efforts to success? From a regulatory point of view it is crucial to evaluate at an early stage the opportunities and risk of a business model. Depending of your business (idea) and the business model you may be caught by a bunch of regulatory rules you better are aware of in order to not let regulation stop your business. In particular, your business may be subject to anti-money laundering regulation or authorisation requirements. In any case, such assessment of a business model should be made before starting business operations.
It should be stressed that FinTech is still in the early stages of development as an industry. Definitions and concepts, as well as the resultant industry analysis, will continue to evolve as more innovative ideas come to fruition within the industry. Regulators are watching the developments in FinTech closely and so does KPMG.