FinTech: Considerations on How to Enable a 21st Century Financial Services Ecosystem
Innovations within the financial services industry are changing how firms deploy and users interact with financial services and products. The proliferation of digital platforms across multiple financial verticals is uprooting traditional financial norms and processes. Advancements in computing power and mobile technology, for instance, are providing firms, both new and old, with additional opportunities and alternate approaches to meet the digital demands and realities of a 21st century global economy.
The speed and breadth of innovation, propelled by venture capital interest and billions of dollars of investment over the years, continues to pose challenges to regulatory authorities worldwide. Not only do regulators face the difficulty of staying abreast of the unprecedented changes occurring across the financial services ecosystem, but also in coming up with forward-looking approaches that balance the need for innovation with the need for oversight and protection.
As innovation in the financial services space continues to push up against legacy regulations, certain countries around the world have sought to create a more enabling environment for financial technology (FinTech) firms to develop and proliferate. While some countries continue to blaze trails on the FinTech regulatory frontier in their own way and for their own reasons, regulatory authorities are coming across various hazards along the way towards developing more tailored, responsive frameworks that can adjust and respond to the frenetic pace of change. To address such challenges, a few regulatory bodies have sought to leverage a sandbox (i.e. a safe testing environment whereby regulators and innovative firms are able to engage to enhance their understanding of the product and service and how the current regulatory structure applies). Although there are real advantages that a sandbox can provide to both the regulator and the regulated, the perceptions of a sandbox need to change as does its current construct.
In this paper, the Milken Institute Center for Financial Markets explores the trails being blazed by certain countries around the world and the limitations and challenges regulatory authorities face in responding to change. In addition, the paper includes some considerations for regulators and policymakers, based on numerous interviews and private roundtable discussions, as they begin or continue to chart their own paths in developing appropriate responses to the pervasive changes occurring within the financial sector.