Striking the right balance within the FinTech Ecosystem
Submitted by Michelle Salandy PhD
There are unavoidable challenges balancing between enabling financial innovation and addressing financial integrity, consumer protection, and financial stability. According to a 2017 study published by the Inter-American Development Bank in collaboration with Finnovista, FinTech can “pose a series of challenges for regulators and financial supervisors, who are tasked with reducing uncertainty associated with the phenomenon”. However, whilst there is the potential for risks such as data privacy, data security, inappropriate marketing practices and cyber-attacks, which can negatively impact consumers and trigger financial instability, fear should never stymie progress.
Modernisation vs Conservatism
Despite the inherent need to be conservative and cautious, over-regulation can stifle innovation. Structural shifts and financial sector reform by policy makers are important components of FinTech integration into the regulatory framework of many economies. Regulation should not be a roadblock to innovation but adjusted to provide a conducive environment where FinTechs can thrive. FinTech regulatory sandboxes and innovation hubs have therefore been established to provide a controlled environment where technological financial innovations can be tested for viability, while ensuring adequate consumer protection and data privacy. Thus, a joint Regulatory Innovation Hub1 and Regulatory Sandbox2 by the Central Bank of Trinidad and Tobago (CBTT), the Trinidad and Tobago Securities and Exchange Commission (TTSEC) and the Financial Intelligence Unit of Trinidad and Tobago (FIUTT) are major developments that will facilitate Fintech. These will not only allow the regulators to understand the structure of new start-ups and the adequacy of the regulatory framework but allow innovative companies to test the feasibility of their innovations in a controlled real-world environment.
Collaboration vs Competition
Whilst competition is understandably a key factor for fair prices, market efficiency and innovation, collaboration should be encouraged. It is through the alliance of sophisticated partners that the foundation for a new generation of digital financial institutions will be laid. According to the World FinTech Report 2020, published by Capgemini and Efma, it is now essential for incumbent banks to consider FinTechs not only as formidable competitors, but necessary partners. Tek Yew Chia, Fintech Leader for KPMG in Singapore has also stated that, “in order to achieve the most from FinTech opportunities, companies in financial services need to treat FinTech innovation as a mainstream activity — and incorporate it within and across their entire organisation.”
1 The Regulatory Innovation Hub (a portal on the Regulators’ websites) will provide the opportunity for entities to receive guidance on the regulatory requirements for proposed financial technology products and services. This portal will be made accessible to the public on all Regulators’ websites from October 2, 2020. (Financial Sector Regulators Joint Media Release 2020).
2 The Regulatory Sandbox which will be launched in two phases, will allow interested entities to test their products and services in a controlled environment, under the supervision of the Regulators. Phase 1 of the Sandbox will be operational upon granting of provisional registration to an EMI. Phase 2 will apply to other Fintechs and will be launched at a later date (Financial Sector Regulators Joint Media Release 2020).