Regulating fintech: Allowing for the innovation while protecting investors and consumers

Innovation is the lifeblood of fintech, yet regulators need to be very careful when it comes to how new products, services, and processes are introduced and controlled. How do regulators make space for innovative fintech at the same time as protecting financial markets and consumers?

Fintech comprises all areas of technology and innovation in the financial services space, including payments, trading, data, risk, compliance, business intelligence, currency exchange and peer-to-peer lending. The Republic of Ireland is seen as a European fintech hotspot, with a strong base of indigenous expertise.

The fintech space in the Republic is currently thriving with a huge array of new entrants and existing companies being further developed, says Ian Nelson, head of financial services and regulatory at KPMG. “There are hugely exciting new ventures and also the expansion of existing franchises across the entire field of fintech from AI, which is becoming increasingly influential, to the growth of the payments and digital assets sectors in particular,” Nelson says.

The Republic is flourishing and the quality and depth of the fintech produced and fostered in Ireland is extremely strong, Nelson says, adding that “one area for potential additional investment in Ireland would be migration of a better sandbox environment for the ability for cross-pollination of fintech in a safe space”.

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There are almost too many exciting fintech innovations to talk about, says Nelson, “but in particular the use of Web 3.0 and the continued development of AI into offerings is really exciting, for example in relation to preventing financial crime through enhanced identity searches and other aspects of data protection that are becoming increasingly important”.

One of the most exciting innovations in fintech is not new per se, but we are only now unlocking its true potential, says Maurice Murphy, country lead for Ireland at Revolut. “It’s open banking: and it’s the system that allows people to let firms like Revolut digitally access their banking history,” Murphy says.

“By using open banking, we remove the need to submit reams of paperwork when applying for a loan: we can instantly check someone’s financial health digitally.

“This has allowed us to offer loan decisions in minutes: the feedback we’ve had from customers is that they simply can’t believe how fast and straightforward it was to apply for a loan. And in time this same instant access to data will let us offer a mortgage – from application to decision – in a similar time frame.”

Open banking will increasingly allow companies to ensure that customers are being offered tailored, responsible financial products that are right for them, Murphy says. It’s putting customers in control of their finances – and their data.

“At the same time, we are hugely excited by the rise of what is called invisible banking – using virtual assistants or internet-enabled devices – to help us make everyday transactions even more effortless,” Murphy says.

“We believe this fits perfectly with our approach of simplifying financial services and putting control back in the hands of our customers.”

Regulatory requirements

Regulating fintechs while attempting not to hinder their innovation is a tricky balance, says Nelson, “where there is a clear first-mover advantage in many of the fintech markets, but at the same time a requirement for regulators to be appropriately satisfied that the ventures are in line with the existing license permissions and also appropriate for the nature, scale and complexity of the business from a regulatory point of view”.

“In many cases, this involves really open and continued dialogue with the regulator to keep the regulator informed as to developments,” Nelson says.

“This is best supported in an environment whereby the openness of exchange between the regulator and the regulated entity is fluid.”

Nelson says regulators are increasingly educating themselves as to the complexities that go with fintechs in the context of their systems and operations in particular.

“With the deep skill sets from a technology perspective that exist within many fintechs, regulators are increasingly investing in understanding the risk considerations for fintechs and are now beginning to find more of an appropriate balance in how regulation of fintechs should take place,” Nelson explains.

“Over several years, we’ve seen this come through strongly in relation to the license application process and it is now becoming more mature in terms of the ongoing regulatory engagement.”

Self-regulating

“There’s clearly a desire from the broader investor and customer communities for more regulation of fintechs to offer that further degree of security,” says Nelson.

“However, this is a delicate balance where it should be positioned in such a way as to allow for the innovative spirit not to be diminished while at the same time protecting investors and customers.

“The regulation in the near term will likely be quite heavily focused on anti-money laundering, and also crypto/digital assets,” Nelson notes, adding that there are emerging technologies in this context that are still relatively new and unknown to the regulatory environment that will require “further education and understanding”.

A vital element of innovation is the importance of data-led decisions, says Murphy. “Every product we make at Revolut, and every service we deliver, first goes through a rigorous and intense process of data analysis to make sure we’ve correctly identified customer needs and that our offering will be solving a specific problem,” Murphy explains.

“It’s also extremely important to listen to your customers directly. Because we have such a close relationship with our own customers, we’re able to engage with them to hear their ideas and feedback in an incredibly powerful way.”