Abstract:
“FinTech”, a contraction of “Financial technology”, refers to technology enabled financial solutions. It is often seen today as the new marriage of financial services and information technology. However, the interlinkage of finance and technology has a long history and has evolved over three distinct eras, during which finance and technology have evolved together: first in the analogue context then with a process of digitalization of finance from the late twentieth century onwards. Since 2008, a new era of FinTech has emerged in both the developed and developing world. This era is defined not by the financial products or services delivered but by who delivers them and the application of rapidly developing technology at the retail and wholesale levels. This latest evolution of FinTech, led by start-ups, poses challenges for regulators and market participants alike, particularly in balancing the potential benefits of innovation with the possible risks of new approaches. We analyse the evolution of FinTech over the past 150 years, and on the basis of this analysis, argue against its too-early or rigid regulation at this juncture.
Introduction :
“Financial technology” or “FinTech” refers to the use of technology to deliver financial solutions. The term’s origin can be traced to the early 1990s and referred to the “Financial Services Technology Consortium”, a project initiated by Citigroup to facilitate technological cooperation efforts.1 However, it is only since 20142 that the sector has attracted the focused attention of regulators, industry participants and consumers alike. The term now refers to a large and rapidly growing industry representing between US$12 billion3 and US$197 billion4 in investment as of 2014, depending on whether one considers start-ups (FinTech 3.0) only or the full spectrum of applications, including traditional financial institutions (FinTech 2.0).5 This rapid growth has attracted greater regulatory scrutiny, which is certainly warranted given the fundamental role FinTech plays in the functioning of finance and its infrastructure. FinTech today is often seen as a uniquely recent marriage of financial services and information technology. However, the interlinkage of finance and technology has a long history. In fact, financial and technological developments have long been intertwined and mutually reinforcing. The Global Financial Crisis (GFC) of 2008 was a watershed and is part of the reason FinTech is now evolving into a new paradigm.6 This evolution poses challenges for regulators and market participants alike, particularly in balancing the potential benefits of innovation with the potential risks. The challenge of this balancing act is nowhere more acute than in the developing world, particularly Asia.7 This article analyzes the evolution of, and outlook for, the FinTech sector and considers the regulatory implications of its growth. It does so by first considering the interlinked evolution of financial services and technology, in particular information technology. The FinTech environment is then explored in the broader evolutionary context, which is necessary to understand its current status and possible future development (sections 2 to 4). The evolutionary analysis is then used to develop a topology of the FinTech landscape today (section 3), focusing on the impact of the GFC of 2008 and related post-crisis regulatory developments. Section 5 considers the example of the developing world, particularly Africa and Asia Pacific, where FinTech developments have become a central feature of financial market development. Section 6 highlights the necessity for regulators to interact pro-actively with industry so as to perform and uphold their mandates, in particular through the development of “regulatory technology” or “RegTech”. The final section seeks to provide a framework to understand how a balance between financial technology and regulation can be achieved.
FinTech:
New Term for an Old Relationship At the broadest level, FinTech refers to the application of technology to finance. This definition gives rise to three specific observations. First, FinTech is not an inherently novel development for the financial services industry. Indeed, the introduction of the telegraph (first commercial use in 1838)8 and the laying of the first successful transatlantic cable in 18669 (by the Atlantic Telegraph Company) provided the fundamental infrastructure for the first major period of financial globalization in the late 19th century. This period is usually seen as running from around 1870, with the laying of the transatlantic cable and other similar connections, to the onset of the First World War. Subsequently, the introduction of the Automatic Teller Machine (ATM) in 1967 by Barclays Bank10 arguably marks the commencement of the modern evolution of today’s FinTech. The impact of the ATM led Paul Volcker, former chairman of the US Federal Reserve (1979- 1987), in commenting on the role of financial innovation in the GFC of 2008, to famously say in 2009:The most important financial innovation that I have seen the past 20 years is the automatic teller machine, that really helps people and prevents visits to the bank and it is a real convenience.
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