Do Regulations in Finance Need to Evolve Faster in Order to Keep Pace with Fintech?
At its core and over the last several years, fintech has successfully been utilized to assist companies and individual users in seamlessly managing their financial operations, the constant innovations and development of specialized software and algorithms that can be used easily via computers and personal smartphones has in turn simplified the access to and not just use of fintech features and capabilities.
Initially, when the term fintech was coined, it often only referred to the backend systems that powered financial institutions, but over the years, new developments in this segment have led to improvements in consumer focused financial services too. Unknowingly or knowingly, fintech has crept into several areas of business and personal life and is widely used in retail banking, fundraising efforts, investment management, education and much more.
In the last few years, fintech has also comprised of innovations that inspire use of new digital currencies, cryptocurrencies such as bitcoin, litecoin, recent years have also seen a rise in robo-advisors within the insurtech segment along with developments in peer-to-peer lending platforms, stock-trading platforms. Innovations by business loan providers namely Kabbage, Lendio, Funding Circle have in turn made it so much easier for startups to secure working capital.
But in order to keep pace with these constant innovations in fintech, not only do business teams and individual users need to stay abreast of the new capabilities and algorithms that are defining how these platforms work and how they can help achieve operational and business goals, these new developments also demand a change within the typical corporate structure and a renewed regulatory infrastructure in order to function seamlessly.
Drawing the line when it comes to emerging tech
Emerging technologies like machine learning, artificial intelligence, predictive analytics, behavioral analysis now help take the guess work out of financial decisions. But these technologies derive their output on the basis of a human’s past behavior by also assessing their current scope. Apps and platforms powered by these technologies learn from human habits and this is how they are further trained to help users with their spending behavior and savings decisions.
While today’s martech and salestech landscape also largely rely on these emerging technologies to breakdown customer intent and behavior, areas like business and personal finance are more sensitive for most. While newer fintech apps and platforms will use the backing of these technologies to understand their user’s or audience’s behavior, having an understanding on where to draw the line so as not to dive too deep into a user’s personal finance needs or actual financial state will have to soon become an area of privacy to consider.
The rise of cryptocurrencies and digital cash
Not every region in the world allows crypto exchanges to function freely. In India for example, the dealing of crytocurrency is still substantially blocked, in several areas across the world, cryptocurrency is not considered a legal tender. But with the rising interest and gaining popularity of these digital cash assets, local bodies have slowly had to redefine their trading rules. With the growing use of digital currencies like crypto there will also need to be a parallel shift in how regulatory authorities measure fraud in crypto trade or investments. Another important aspect will also be to rethink the dos and don’ts for investments in this space: will they be the same as other currencies and bank deposits as per existing region-wise rules? Regulatory uncertainties here make room for entrepreneurs in the space to toy with the norms in order to avoid compliance fees. Unregulated norms in this niche can also open up the pathway to more scams.
The growth of open banking
Open banking is becoming a common concept across the world, recently digital banking app Mode extended their partnership with payment solutions provider Modulr to launch better open banking capabilities. The open banking blockchain backed concept allows third parties to have access to bank data and build apps that help create a connected network between FIs and third-party providers. But with the rise of open banking there can also be a rise in data security concerns. A lack of proper security standards and data protection regulations here can affect users and banks.
New capabilities in InsurTech
Insurtech helps streamline operations in the insurance industry, policy administration and coverage and the general functioning of this space are always governed by local regulations and authorities though, with the impact of new APIs and platforms and third party apps that access financial information from providers and users, regulations too will have to keep up the pace in order to protect the data held by providers and protect the interests of users while also allowing significant new innovations in insurtech without compromising on the two. Insurtech will transform how the insurance industry works, but for the industry to experience a smooth digital transformation regulations will have to be modified to adapt to the new formats and methods being put in place.
Cybersecurity issues and strengthening of cyber security laws
Cyber security laws evolved with the development of internet technologies and as newer transformations and capabilities and online transactions (shopping, exchange of information, etc) were introduced. Given the rising instances of cybercrime, especially during the Covid-19 pandemic when businesses and individuals faced more data security threats while working from home, the fact that the evolution of cyber laws will have to take centerstage is understated. Decentralized data, cloud platforms that are accessible from anywhere all lead to threats and increase the potential of breaches thereby demanding that cyber laws are re-positioned to help those affected action faults and claims faster in order to protect their sensitive information.
Read More: What Helps Drive Innovations in Fintech?
Financial services have always been one of the most heavily regulated segments. Regulation is thereby always going to be a cause for concern for fintechs, as they evolve.
As newer capabilities and features are introduced into financial services regulatory issues have increased. Digitization of data, more automation of processes make systems vulnerable to threats and attacks. Rising instances of hacks at credit card companies and banks are examples of these.
The threat related to misuse of information and important personal and financial data is also pre-existent as easy-to-use applications on personal devices are more frequently used to transact funds.
However, because of the rate at which fintech is evolving and the diversity with which new innovations are redefining various aspects of operations and finance, there can never be a single regulatory approach. Every area will need customized rules to make the most of new fintech capabilities and to protect the end user.