Presently analysts are watching the fintech space closely to determine who will dominate the race in financial technology. Will it be the incumbent banks or fintechs? Over the past years a number of banks have made inroads to digitise their services, thereby getting closer to their customers either via in-house initiatives, collaboration with fintechs or actual fintech buy-outs. Ultimately, these are all positive steps to increase the accessibility of financial services.
The competition between incumbent banks and small nimble fintechs will continue via the above-mentioned collaborative and competitive approach. However once the big tech players like Facebook, Google and Amazon, who have a global customer base, muscle their way further into the financial services market, it is expected that the online financial services offering will change at an accelerated pace.
The manner in which this market evolves will depend on how regulators will deal with the variety of players offering different financial services to consumers. From a consumer perspective, a fragmented regulatory approach is not the answer. Today the regulatory space is dominated by an old paradigm - regulation is targeted at those offering the service. Thus banks are regulated by banking regulation which today is being driven by the weaknesses identified in the financial crisis of 2008. With the same mind set EU Regulators have kicked off various consultation exercises to explore the best way to “regulate” fintechs in view of their IT and innovative offering.
The Innovation Hub and sand box model adopted by the FCA in the UK is leading the pack on how to oversee the operations of fintechs. The light touch regulation is allowing the FCA to build a better understanding of their business models and how their specific industry is developing, be it in the payments or the peer-to-peer lending space. This targeted regulatory approach may be having an impact on the UK market. A recent FT article highlighted that in the UK fintechs are starting to compete with high street banks in the areas of payments and peer-to-peer lending.
With the fintech market moving at an accelerated pace and regulation, which is always a couple of steps behind, there may be the need for a re-think in our regulatory approach to financial services. Today regulatory actions are generally knee jerk reactions to address a specific weakness in specific players in the market. Whilst this patching up approach may address regulatory loop holes in the short term, it may oversee larger market failures which may be fertile grounds for the next crisis.
The disintermediation of financial services brought about by fintechs may require a paradigm shift in the way we regulate financial services. Adequate protection of the consumer requires the financial services regulation to be driven by financial service offering (i.e. lending, payments, wealth management, fund administration). It needs to encompass all the players offering that financial service be they incumbent banks, small nimble fintechs or big tech companies.
Such an approach would allow the regulator to be more focused and therefore more proactive in regulating the service offering. It would allow the regulator to develop the technical skills in the regulated area and design, through regulation, the latest improvements in that particular offering. This could be the basis for a financial services regulatory framework for the digital age which could have a global appeal and attract new business to Malta. Could this be the basis of a future Maltese financial services regulatory landscape? The time may be ripe for such a discussion.
Mr. Mark Scicluna Bartoli is Executive - EU & Institutional Affairs at Bank of Valletta and is also responsible for Bank of Valletta’s EU Representative Office in Brussels.
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Published on The Times on Sunday 28th January 2018