How to Regulate Fintech Without Stifling Growth

The financial technology revolution is changing the way the global market works. Armed with unparalleled speed and innovation, fintech has completely transformed the formerly exclusive nature of the corporate financial ecosystem. This emergence includes anything from automated payment apps to personal lending and wealth management. Fintech innovation has enabled a new selection of consumer financial access, accelerating economic growth for various user platforms.

However, the growth of fintech also raises some regulatory challenges, particularly regarding how much to oversee consumer protection in a way that doesn’t restrain growth. Regulators struggle to craft policies that encourage fintech while protecting consumers from potential harm. Too little regulation means out-of-control risks; too much regulation may choke off innovation.

The right approach requires an understanding of fintech’s peculiar dynamics combined with flexible and future-minded modes of regulation. Let’s take a closer look at some strategies that strike a balance in discerning the multifaceted nature of modern-day finance.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

The role of fintech innovation

Fintech innovation is on a fast track to creating a boom of digitized economic growth and plentiful job openings. In terms of technology, using blockchain, AI and mobile platforms allows companies to deliver cheaper, more affordable financial services.

For example, leading Indian fintech Paytm has revolutionized digital payments in the country by offering a streamlined payment platform that serves hundreds of millions of users and millions of businesses. It has become an essential business tool in the country’s economy by providing digitized financial access for consumers to manage their finances. The success of Paytm and other developments in the industry demonstrates the power of fintech to create broader financial inclusion gradually; mobile technologies have a huge potential to create access to business sectors that were previously deemed untouchable.

Securing consumer trust

As a result of the increased growth in fintech, consumers have a substantive potential to be subject to gross fraud, data breaches and other unfair practices. For instance, since its birth, peer-to-peer lending, conducted by firms such as LendingClub in the United States, has had to grapple with issues related to borrower protection and transparency, with major concerns about predatory lending threatening the security of its clients. It would be a fair assumption that many consumers would be particularly vulnerable to fraudulent activity without strong regulations.

Another important function of regulation is building trust in fintech. The more confident consumers feel that their data and transactions are secure, the more likely they are to adopt fintech services. Trust forms the bedrock of sustained growth in this industry.

An overview of regulatory models

Most regulatory models try to strike a balance between innovation and consumer protection. A popular option is regulatory sandboxes, which permit fintech firms to test their products on consumers in a strictly limited environment. The U.K.’s Financial Conduct Authority pioneered this concept, which allows companies to innovate freely while regulators review the risks.

Licensing requirements are another prominent strategy; this model ensures that fintech operators meet at least some threshold standard prior to business entry. For example, in the United States, online lending and financial services operator SoFi has licenses in multiple states, guaranteeing its compliance with state-based consumer protection laws.

Another model is self-regulation, in which fintech firms personally regulate their own standards. While this system allows flexibility and can spark innovation, it typically lacks effective oversight ensuring consumer protection. In several cases, self-regulation has resulted in inconsistent manners through which companies address security issues related to consumer data and financial transparency. Typically, this model works best in harmony with others to increase efficiency.

Balancing between over-regulation and under-regulation in fintech has increasingly become a challenge. The onslaught of over-regulation may kill innovation, especially for smaller startups, which often lack the resources to comply fully. For example, in China, the recent government crackdown on the fintech company Ant Group through heavier licensing and capital requirements significantly stemmed the growth of the company and eventually shut down its IPO plans.

Conversely, poor regulation can expose consumers to even greater risks: financial fraud and data security breaches. The collapse of the German payment processor Wirecard emphasizes the true cost of carelessness in regulations. The absence of proper security measures caused the company to manufacture artificially inflated financials, leading to one of the most outrageous consumer and investor scandals to hit Europe.

Shaping the future of fintech

Containing fintech is a matter of finding the sweet spot between security and growth. Mastering the concept of regulation could spark great economic growth, creating jobs that further contribute to the boon of financial inclusion. However, in the absence of regulatory models, many consumers may fall prey to fraudulent activities and data breaches. Approaches currently in place include regulatory sandboxes, licensing and self-regulation, all of which represent flawed, though effective, measures to maintain the safety of clients.

Fintech regulation must become both flexible and forward-looking to match the rapid changes in the business landscape. As this transformation of the financial industry takes place, a new regulatory approach brings with it the potential for lucrative innovation while keeping consumer safety a top priority. Regulators and companies must work together to build trust and maintain steady growth for the industry’s users.

In this regard, policymakers can indeed facilitate the healthy development of the fintech sector through efforts toward balance; growth and innovation must be equally encouraged and appropriately channeled. Fintech, through the use of proper regulatory measures, will achieve higher levels of success while retaining consumer confidence.

Related Content

• How Technology and Agile Are Reshaping Customer Experience in Financial Services
• Fintech Opens New Doors to Alternative Investments
• SEC Sues 2 Major Crypto Exchanges, Attempts to Regulate the Industry: Kiplinger Economic Forecasts