FinTech Adoption, Financial Inclusion, & The Next Regulatory Challenges

Introduction to FinTech

Investopedia defines FinTech as: “new tech that seeks to improve and automate the delivery and use of financial services. At its core, FinTech is utilised to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilising specialised software and algorithms that are used on computers and, increasingly, smartphones.”

Ernst & Young’s (EY) definition of FinTech is as follows: “FinTech: organizations combining innovative business models and technology to enable, enhance and disrupt financial services.” EY also states that its FinTech definition also encompasses, apart from early-stage start-ups and new entrants, a reference also to scaling firms, growth-stage firms, and non-financial services firms. The uniqueness of FinTech stems from the nature of its characterisation and the market conduct regulation (of the firms), collectively to which it’s (the FinTech industry) subjected owing to the fact that it manages assets, incomes, wealth, retirement funds, and salaries of people subscribing from all walks of life (for this reason, FinTech’s mass-adoption-rate and financial inclusion matters, to ensure a holistic growth of the financial services industry and its stakeholders).

FinTech: The Past, The Present, & The Future

The Past of FinTech: Developing

The innovative (global) evolution of FinTech dates back to the 1950s when the advent of credit cards was first witnessed. Followed by the deployment of ATM machines in the 1960s, the 1970s saw the exchange trading floors having e-stock trading platforms. The data storage and bank mainframe computers arrived in the 1980s. Then in the 1990s, the Internet and e-commerce models provided the much-needed milieu for mainstreaming online stock brokerage platforms to cater to retail investors. What also followed these developments mentioned above was the creation of refined risk management, trade processing, treasury supervision and data analysis apparatus at the institutional stage to be used by banks and financial services providers. All of the above, coupled with the penetration of smartphone computing across diverse age groups (the service recipient customer segment), developed the required technical infrastructure, thereby facilitating a thriving FinTech ecosystem of today.

The Present of FinTech: Deploying

In its present form, the FinTech environment is enabling digital and innovative deliverance of retail financial services with the introduction of digital wallets, cash-sharing and payment apps, artificial intelligence and machine learning (AI&ML) offered wealth, investment, and retirement planning, alternative investment opportunities (AIOs), and e-lending platforms. We are already witnessing, at the customer serving and institutional levels, the FinTech services are posing a serious threat to the passé banking services. This paradigm change in financial services has allowed millions of underserved and unbanked people to gain access to credit, borrowing, and loans. This means that the average citizen (especially in developing economies) is getting empowered to benefit from the advent of financial inclusion (which, since long, was subject to the tedious credit and loan policies and procedures of the banks).

The Future of FinTech: Scaling (Enabler of Financial Inclusion)

Ernst & Young’s EY FinTech Adoption Index 2017 stated that 50% of the surveyed Indian consumers in their sample claimed to have subscribed to a minimum of two FinTech products in the preceding 6 months. The index also stated that average FinTech adoption rates across emerging markets—Brazil, China, India, Mexico, and South Africa—was 46%; it was 52% in India and 69% in China. The global average of FinTech adoption rate in 2017 stood at 33% (of those surveyed, indicating to be using the FinTech services on a regular basis), according to the index. In the insurance FinTech category, India was leading with 47% adoption rate among the top five markets. Whereas in the other three categories—payments and money transfer, savings and investments, and borrowing—India stood second only to China. In the category of financial planning, India stood below China and Brazil, in the third position. As reported by The National Association of Software and Services Companies (NASSCOM), the presence of India is around 400 companies in the FinTech industry. The magnitude of investment is around $420 million (in 2015). The NASSCOM report also estimates the FinTech software and services market in India will be valued $8 billion by 2020.

FinTech and Financial Inclusion: The Next Regulatory Challenges

The different categories recognised by the International Organisation of Securities Commissions (IOSCO) as forming the FinTech as a whole include: payments, insurance, planning, trading & investments, blockchain, lending, data & analytics, and security have experience massive growth in the recent times. The challenges posed by the advent (and mass adoption) of FinTech on the regulatory front are regarding investment scams, cryptocurrencies under the veil of securities, derivatives, commodities, currency or other assets, systemic risks and central banking, money laundering and taxation.

Technical regulation for artificial intelligence–led tricks to manipulatively acquire money from naive investors or the retired old people, avoiding complying with risk mitigation regulations by using cryptocurrencies to confuse determination of the scale of damage, fishy status of the transaction benefit recipients and dealing purposes, operations beyond geographical boundaries, and the tax evasion, sanctions and other regulatory reliefs offered by distributed ledger technology (blockchain). In the AI&ML powered smart-data-analytics era of the FinTech, even the regulatory monitoring will need to be actionable in real-time, having fast decision-making capabilities, distinguish the risks, if any, posed by the deployment of distributed ledger technologies (DLTs), prevent smart-contract manipulations, have regulations for implications beyond borders, ensuring consumer protection.