Could regulation stifle fintech innovation?

Patience Panashe

More of an enabler than a threat, fintech seeks to make financial services more relevant to a changing society by empowering customers. These companies reimagine financial services from the bottom up to offer systems and frameworks that create wealth for all stakeholders, including innovative routes to market, employment creation and further economic value creation.

While growth brings innovation and more futuristic business solutions to modify the financial services industry landscape, the rapid increase within the fintech sector has been to address individual consumer needs.

Regulatory concerns

Despite these positives, one key concern for the sector are regulatory concerns. Questions that come to mind are who should oversee the sector’s regulation? Should the fintech sector be regulated as finance or technology? What regulations apply to fintech companies from a compliance point of view? How best can the legal framework afford the same protection to fintech companies for their innovation and contribution? Should a new regulator be created?

In our opinion, regulation is the biggest impediment to the sector’s growth because the regulatory authority for the industry is currently undetermined. Most companies self-regulate in accordance with the financial service sector laws, with the emphasis on compliance and consumer protection. For the long term adhering to financial services sector regulations could create confusion, and the risk of adhering to inapplicable laws could impede innovative growth.

Protecting the underdog

Most of the rules and regulations formulated for the financial services sector were put in place during the pre-internet, e-commerce and mobile money era. Because of this, rule makers are playing catch-up and are often reacting instead of proacting on how the sector should be regulated. In as much as compliance and customer protection is being prioritised; a more focused regulatory framework needs to be developed that is aimed at not only protecting consumers but also encouraging and supporting industry players to innovate and improve on the sector based on existing and future market needs.

In addition, protection of smaller, emerging companies is another critical regulatory factor. Innovation could be stifled by strategic acquisitions and organisation takeovers implemented by larger, deep-pocketed organisations after identifying these smaller entities’ potential. Such reactions could limit the innovative potential of the sector. Legislation should, therefore, include a focused competitive element that protects the underdog within the interest of the ultimate stakeholder (the customer).

Interpreting the law

Another challenge for fintech companies is organisational regulatory understanding. Traditional financial institutions have the resources to employ sizeable compliance and risk teams that can interpret set laws and operate within their confines; including coming up with solutions they can leverage to work with these rules to their advantage. Interpretation of these laws is difficult for the smaller teams that run fintech companies. An immediate solution for these entities is to outsource this function to a law firm. This will in a way protect these firms from non-compliance issues. However, the cost implications could be significant and impact growth and progression of these firms with more resources being committed to regulation instead of being channelled towards further innovating within the sector.

The regulator should, therefore, spend a bit of time coming up with regulatory codes that are robust enough to protect the consumer but easy enough to interpret, understand and implement. The regulator needs to commit a significant amount of resources to do this, ensuring the framework covers all bases and contributes to its progression. Aspects that need to be considered include patenting, trademark and copyright issues.

A question that immediately comes to mind are what platforms from a fintech standpoint should be considered open source and which ones should be proprietary? In addition, what are the allowable proprietary tenures within the interest of serving both the consumer and the innovating business?

Initiatives

From a positive standpoint, the South African Reserve Bank (Sarb) recently committed to the establishment of a financial technology programme with the aim of strategically assessing the emergence of the industry in a structured and organised manner; and also how to regulate it in a progressive manner.

Their goal is to track and analyse fintech developments and assist policymakers to formulate enabling frameworks that are innovation driven and future-fit.

Similarly, Project Khokha will experiment with distributed ledger technologies to find out more on how to regulate the sector. These initiatives are steps in the right direction as they intend to address critical fintech issues in a progressive manner.

Going forward, more needs to be done from a regulatory building standpoint including engagement of the private sector, academia and consumer representatives. Feedback from these stakeholder groups could further assist the come up with progressive, inclusive and all-encompassing fintech, regulatory framework.