Fintech is shorthand for ‘technology in financial services’. The technology of Fintech makes financial services easier and more efficient.
Disruption is a trend that describes how rapid change and innovation in a market eventually displaces the incumbent. For example, think of how outsiders Amazon disrupted traditional bricks and mortar book shops, or how Uber has revolutionised how we order and ride in taxis.
Across the board, Fintech is disrupting a number of areas in the financial sector, such payments, lending and the stockmarket. But what are the key payment areas Fintech companies will be focussing on? And how will regulators and traditional banks respond?
Fintech and NFC mobile payments
In the not too distant future tapping a mobile phone or other connected device, like Apple’s wearable smart watch, against a terminal will be the norm when paying for goods.
British and Irish stores are already introducing technology to accept contactless near-field-communication (NFC) mobile payments from customers, through services like Apple Pay. A device with a NFC capability allows a customer to tap their device against a terminal to pay for everything from a cappuccino at the local café to a public transport ticket.
Opportunity with online payments
Online payments are another area subject to rapid change. As recent news headlines involving Ashley Madison and TalkTalk show, the convenience of having credit card details stored by online vendors to make our future purchases quicker comes with the risk of having those stored details stolen by cyber-criminals.
When any personal data is stored by a seller this carries a degree of risk. Even if the vendor encrypts the data, it can be stolen or hacked. There is a big opportunity here for Fintech companies to develop secure online payments.
An example is a contactless payment mechanism for online purchases where the payment is verified there and then through the user’s device. The payment technology could use fingerprint or another form of interaction between the website and our smart device at checkout. This technology would include an important security feature where the user’s payment data is only used for the purchase and then deleted from the vendor’s systems. While this idea presents the risk that the fingerprint or biometric data could be stolen, it is the direction smart Fintech companies will be taking.
Big banks vs. Fintech disruption
As the global financial crises in 2007-08 illustrated, no bank is ‘too big to fail’. However, as the international financial sector is so large and complex, governments, and the world in general, still require large institutional banks. This means that Fintech is highly unlikely to cause disruption to an extent where only start-ups and new to market finance solutions exist.
Despite this, Fintech is, and will continue, to disrupt the traditional banks and financial services sector. What may happen is traditional banks mimicking the service offerings of Fintech companies. They may also reducing their charges and rates for common services such as international transactions and overdrafts that they have previously held a monopoly on.
It is also conceivable that we may see banks following the approach of major technology companies like Google (Double-click), Facebook (Whatsapp) and Amazon (Audible), by acquiring their upstart competitors who complement their strategy in one way or another.
Role of regulators
We live in a competitive global marketplace. Governments of countries that host major technology and financial hubs, like London, New York and Silicon Valley are competing to attract the best talent and investment. Closer to home, the Irish Times reports that firms such as Realex and Stripe are turning Ireland into a Fintech hub and a hotbed of Fintech innovation.
In my view, a regulator must be cautious when trying to apply the same rules to a Fintech company as it applies to the bricks and motor financial institutions it regulates. Two of the main complaints from Fintech companies are the cost of having to comply with financial services regulation and the fact that compliance is resource intensive. A start-up will not have the same resources or history of engagement with regulators and lawmakers.
The task for regulators is therefore to find a harmony between two competing interests. On one hand they need to regulate Fintech companies to safeguard customer’s money. Fintech enables the democratisation of finance but it also means that ‘cowboy’ peer-to-pear lenders or ‘fly-by-night’ online payment systems could take advantage of vulnerable consumers. On the other hand, in the global marketplace, a regulator will not want to stifle innovation or be seen as too heavy handed by potential foreign directors investors.
Conclusion: ways regulators can encourage innovation
Early engagement and communication between regulator and Fintech company will become critical in building a constructive two-way relationship. For example, if a regulator is willing to facilitate meetings ‘off the record’ and provide indicative guidelines this will smooth the path considerably for both parties. Introducing some form of Fintech-specific streamlined regulatory requirements that are tailored for the unique challenges of Fintech would also be helpful.
Another way regulators can encourage innovation is to incorporate some form of ‘transition-in’ period to allow the Fintech company to get up to speed with the rules. From a technical perspective smart regulators will introduce ‘innovation sandboxes’ to allow a Fintech company and its programmers to experiment with innovative products without the fear of being ‘pinged’ by the regulator.