The challenge of regulating Fintech

Fintech companies are growing at an incredibly fast rate. Not only are there more fintech companies in general, but existing fintech companies are increasing their services to offer more payment options, more financing software and greater marketing support. Despite this, the fintech sector remains the wild west of government regulation, with exemptions and benefits for them to grow their businesses. This is not always a bad thing - it has nurtured a healthy fintech market that offers better, more user-friendly solutions. However, with fintech giants like Afterpay, Xero and Lodex surging in value, there are calls to regulate fintech companies more closely. Below, we outline the rise of fintech, what tighter regulation would look like and how fintech company owners and investors could be affected by a change.

The rise of Fintech

In the past ten years, fintech companies have taken over people's personal and business finances. As the industry has progressed, there has been a visible shift from mega-corporations like Apple and Google into the financial services space, with them purchasing fintech companies and developing their own services, like Apple Pay.

For startup fintech companies, the lack of regulation creates an opportunity for them to get their feet off the ground, but for large corporations, it creates a gap in regulation and increases their power over the market. Alongside this, more and more everyday citizens utilise fintech services and companies in their personal and business lives. This is because they are consumer-friendly, and rely on having a strong user network (i.e. payments through Xero require both the payer and payee to utilise the platform). This is something that further advantages large corporations who are expanding into fintech. If we take Apple as an example, the recognisability of their brand and ease-of-use of their Apple Pay service gives them huge control over the market, without the repercussions that come from strict regulation.

Of particular importance, fintech companies are beginning to compete with banks. Large fintech companies and large banks offer similar services, sell competing products and collect consumer data. The main difference is that banks are tightly regulated and scrutinised. Fintech companies are not.

What would tighter regulation look like?

To foreshadow what fintech regulation could look like, we must first break down how banking regulation works in Australia. The 2017-2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry brought about major reform. Due to this, banks are now subject to strict oversight from the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). On top of this, there are now further requirements for banks to qualify as Authorised Deposit-taking Institutions (ADIs). Data collection by banks is regulated closely by the Financial Sector Collection of Data Act 2001 (Cth). Whilst fintech companies are not completely excused from the law, ASIC has a number of exemptions - such as a fintech licensing exemption - that allows for the development and trial of new technologies without having to worry about owning an Australian Credit License (ACL). It is these very technologies that have often gone on to take the market by storm.

Regulators are then forced to weigh up the pros and cons. Greater regulation would provide more fairness when managing financial services and it would put a cap on how powerful fintech companies are able to be. However regulation that is too tight would stifle fintech companies before they get off the ground and would disproportionately target small, innovative startups.

At the very least, it is likely that Australia will adopt what the Bank for International Settlements suggests in their review of ‘big tech’ and impose ‘open-banking’ on financial services offered by fintech companies. Open-banking is a system where companies are required to make their customer data available to regulators and make it easier for consumers to stop using their services. This differs from how most fintech companies currently operate, where their data is hidden and customers have less opportunity to disengage from the company.

What this means for you

The blend of the financial services and technology industries has meant that many new companies do not neatly fall under one of Australia’s regulatory bodies. However, this is subject to change. If you are the owner of a fintech company, make sure you stay up to date on Australia’s changing laws on how your business should operate. If you are an investor, then watch this space. If you are simply a consumer of fintech products, then not much is going to change, but expect fintech companies to continue innovating and developing, even if that happens under a more watchful eye.

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Jamie Larson