Fintech firms are infiltrating all areas of financial services, from payments platforms, lending, capital raising, investment, advice, insurance to capital markets.
Fintech firms, which are essentially disruptive digital finance models, can help lower barriers to entry in financial services. They are also reducing transaction costs, addressing issues of information asymmetry, empowering consumers and facilitating international linkages. All these contribute to the regulatory goals of efficiency and fairness.
Around the world governments have responded positively to the new models, recognising the benefits of driving competition, and increasing access to markets, especially in areas such as small business finance. Models such as peer-to-peer lending and Crowd Sourced Equity Funding (CSEF) have been welcomed in the US, Europe and the UK. Governments in the UK, Canada and New Zealand have either implemented or are finalising the implementation of regulatory regimes to support CSEF. In the US, the enactment of the Jumpstart our Business Start ups (JOBS) Act, which referenced the importance of online funding for start-ups and other companies to raise capital, was pivotal for CSEF globally.
But facilitating the practical move to market of new digital finance companies is a challenge for both the fintech firms and regulators.
Young fintech companies with limited resources face a significant hurdle navigating the maze of regulatory licensing and compliance requirements. Much of this has been developed for far more mature and larger organisations. On the other hand, regulators struggle to balance openness to innovation and disruptive technologies with protecting the interests of consumers, investors and the privacy of individuals.
The United Kingdom has led the way in many respects. The Financial Conduct Authority has established a network called Project Innovate which supports industry innovation to improve consumer outcomes. The UK fintech industry also has its own industry body, Innovate Finance, to support technology-led financial services innovators. In Australia, it’s the Australian Securities and Investments Commission that’s tasked with licensing and monitoring fintechs. This needs to be done with a keen eye also on the need to enhance competition in the system and build confidence in the new models to ensure participation by both investors and consumers.
To assist in this process ASIC has developed an “innovation hub”. This is a single point of entry to the system for innovators seeking to gain regulatory approval and thereby make it easier for them to navigate the regulatory system.
The innovation hub can be linked to a growing realisation that collaboration is required between financial sector innovators, consumer groups, academics, relevant government agencies and regulators to deal with complexity and examine opportunities from a system-wide perspective. Accordingly ASIC has also announced the establishment of a Digital Finance Advisory Committee, with representation from the fintech community, consumers and academics. The focus is on streamlining ASIC’s approach to facilitating new business models with common application processes, including applying for or varying a licence and in granting waivers from the law.
These initiatives represent a significant departure for Australian regulators for two key reasons. First, our regulatory agencies have tended to retain a low-risk, conservative approach to regulation. On an international basis, this stood us in good stead throughout the global financial crisis, when our regulatory agencies were recognised internationally for their prudent approach. But this had increasingly become a barrier to innovation.
Second, this is a highly collaborative approach, something that is generally not a hallmark of Australian business. The lack of collaboration has been a weakness of our system in generating interaction between researchers, innovators, corporates and regulators and we have been amongst the least collaborative of all OECD countries, to our cost. Bringing together these parties through the Digital Finance Advisory Committee, and fintech hubs such as Stone and Chalk, could lay a foundation for more sustainable financial services innovation.
Opening the way to greater financial innovation is especially important in an economy with such a highly concentrated financial sector. Ultimately the ability of key agencies to adapt and adjust risk levels to accommodate disruptive technologies will impact on both the domestic and international competitiveness of Australian finance sector, to the benefit of Australian consumers and businesses.