Rise of FinTech: Their Social Responsibility and the Dilemma, Regulators are Carrying On
“Try again. Fail again. Fail better”. That is the mantra of a success of all new startups.
In India, still a big part of society has no access of financial system, we always heard people talking about financial inclusion. Ideally either capitalist of communist all believes that the value of financial institution is in how it is evolving and supporting our economy by creating fairer, more transparent and more inclusive financial services.
If we talk about FinTech, they are also part of the financial system and must take care of the responsibility a Finance Institution needs to have. Thankfully the common understanding is that all tech based revolution by which these innovators are bringing such as cloud-based technology, Access via mobile phones, intelligence in the form of artificial intelligence (AI), and the always-on interconnected web, will help to transform financial services and facilitate the ability to provide current accounts to the currently unbanked, encouraging movement of talent and people and a diverse workforce.
FinTech, as we seems are not a one time show and unlike E-Com and some others would not going to be a flash in the pan. FinTech can continue to drive innovation which benefits consumers, the economy, and wider society.
These FinTech sooner or later are going to create new forces for society at least when to a surprise for all of us that digital is moving at a faster pace than social anthropology, at least in India and similar societies. But same time there is a need to have advance preparations and to give people the skills they will need to succeed within FinTech, particularly as robotics, AI and cognitive automation which are going to replace all traditional lower-skilled jobs. These technologies as Artificial Intelligence, robotics and cognitive automation posing major challenges to the workforce and businesses will need to ensure these technologies are used in a way that truly augments, rather than diminishes or overwhelms, today’s workforce. History have a great example at least the destructions brought by Industrial Revolutions. FinTech therefore, have the opportunity to progress society both through job creation and financial inclusion, providing social and economic opportunities for the economy. FinTech are also driving competition, giving consumers greater choice and answering customer needs through technology-enabled innovation.
On top of the direct economic effect, one has to consider FinTech’s wider broader economic impact from lowering the lower cost of credit or insurance, improving the level of financial inclusion and reducing financial transaction costs across remittances, payments and investments. Regulators who are primarily envisage with the responsibility to regulate this emerging business, at least in India, have a very simple route.
“If it moves, tax it. If it keeps moving, regulate it and if it stops moving, subsidize it”.
Remember what they are doing in Agriculture and elsewhere. At least this time it is not going to be an easy Job.
If we believe the news reports, despite the Reserve Bank's call for caution to people against the use of virtual currencies, a domestic Bitcoin exchange claims it is adding over 2,500 users a day and has reached five lakh downloads. Zebpay, an app-absed Bitcoin exchange, claims it has had five lakh downloads on the Android operating system and is adding more than 2,500 users every day.
It’s an example as how the regulators are wrangling with a difficult question: How to create rules for this new sector to keep the public safe—without squashing innovation. And on another side FinTech—firms continue to hold the promise of disrupting the world of traditional lending by, among other things, slashing costs and using big data to assess risks.
Reserve Bank while issuing cautionary notes wasn’t at all wrong at least when this industry may prone to missteps along the way. The few examples for FinTech globally include the proliferation of Ponzi schemes and all with the growth of P2P lending, the use of bitcoin for illegal purchases and investor misleading.
Nonetheless, since the industrial benefits are beyond reproach, the ball will go in the regulator’s corner to curb the excesses, streamline the judicial framework and establish the rules of the road for the multi-faceted and rapidly ascending FinTech industry.
There is clear recognition worldwide that regulation is needed to ensure long-term and sustainable growth. At the end of last year, the Office of Comptroller of the Currency (OCC), a division of the U.S. Department of the Treasury, proposed to create a federal charter for non-deposit banking products and services – a major change for a country with state-by-state financial regulation which could lower barriers to entry for companies looking to innovate the financial services industry, India can learn at least from them. What they need to ensure is to give a clear communication to the industry.
Although it may appear obvious, it is critical for the regulator to engage with the FinTech industry in gaining an optimal understanding of the needs of the industry. It’s in everyone’s interests to have a unified set of standards on anti-money laundering (AML) and know-your-client (KYC) information disclosure as well as collection practices. Furthermore, incorporating FinTech regulation together with mainstream financial services firmly places the former into the center of regulatory attention. Obviously the industry is only one of the voices, but in the environment of rapid technological and economic change, it makes sense to get first-hand information. This may help the regulator to prioritize and focus on solving strategic issues.
In India or elsewhere the FinTech umbrella covers multiple industries: consumer and corporate lending, insurance, payments to name a few. In our experience it makes sense to functionally compartmentalize the regulation.
The Government thankfully looks actively seeding, sponsoring and promoting “hard infrastructure” for the new breed of financial services companies at least in promoting payments, settlement, identification and data access system (BHIM APP).
While creation of the infrastructure is clearly needed, there is lower hanging fruit for driving industrial competitiveness available to regulators globally. First and foremost it is key to empower the citizens to take ownership of their data held by large incumbents including mainstream financial services (banks, insurance companies) and telecom companies. The way to do this is through the mandatory sharing of this information to third parties, obviously with the explicit consent of the ultimate data owner. While on the one hand it enables the latter to monetize the data and get access to more competitive offerings, this also enables the FinTech firms to focus on what they do best: deploy cutting edge technologies and data analysis in targeting market inefficiencies.
Introduce 5-year road maps
Regulatory uncertainty acts as a major overhang, preventing the industry from developing. First and foremost this uncertainty stops the flow of capital into this industry creating a massive earning multiple compression. This further prevents the reinvestment of capital due to the increase in uncertainty. It’s important to emphasize that in the FinTech world global players with technological know-how have option over geographical expansion. All else being equal, these companies will always invest in the countries with the most transparent rules of the road. This implies that the countries that take an ambivalent position are in a precarious position of losing out.
The future of the FinTech industry will not be shaped by market adoption and technological advances alone. The role of the government in fostering FinTech and steering it in the direction.
