Fintech had a watershed year in 2020. Firms raised a
record-setting 97 mega rounds (rounds of US$100 million or more in size), and
fintech products across the globe are seeing all-time-high signups and
engagement.
It is no surprise then that this rapid growth has led to
increased regulatory scrutiny for fintech. However, few outside observers could
have anticipated the intensity with which regulators would respond,
particularly in the US and China, and the serious repercussions of their new
restrictions.
Chinese regulators shocked investors when they halted Ant
Financial’s record-breaking IPO only days away from its listing, and
subsequently slapped a record $2.8 billion dollar fine. This marked a paradigm
shift in behavior from previous government proceedings. The "Great
Firewall" policy that once gave local firms an advantage over global
competitors, may very well be overshadowed by the “Great Breakup.”
From now on, regulators were going to play a heavy hand at
enforcing potential violations on new regulations guiding online lending, data
ownership, and anti-competitive practices. Indeed, we witnessed this recently
with Chinese regulators picking their next target: Meituan, a lifestyle and
delivery app company, to conduct a formal investigation.
Guo Shuqing, Chairman of China Banking Regulatory
Commission, summarized the new regime, stating, nearly a year ago: “Facing the
rapid growth of fintech, [...] we will encourage innovation while enhancing
risk control, so as to address new problems and challenges.” Heeding this call,
regulators ordered Meituan along with a group of over 30 other internet
companies to rectify anti-competition or risk punishment. Meituan perhaps was
too late to act, but regulators are keen to show it is ready to take action.
It is not simply the world’s leading economies that are
initiating forceful responses. Emerging markets such as South East Asia, MENA,
and Sub-Saharan Africa (regions that have had some of the fastest growth in
fintech adoption in recent years) are following suit.
Indonesia, considered a top emerging ecosystem second only
to India, made headlines when it announced revisions to POJK 77 regulations for
online lenders. These new regulations make it harder for new players to enter
the market and manifest in greater oversight of existing companies. There are
signs that unsecured alternative credit providers such as “buy now, pay later”
(BNPL) firms will be their next target.
Outside of Asia, Africa has been remarkably progressive in
its roll-out of data protection frameworks, with nearly half of the continent’s
54 countries adopting a variant of the European Union’s GDPR, most prodigiously
in Nigeria.
Governments are not only increasing regulation of fintech
companies, but they are also actively building new technologies that seemingly
compete with them. One technology that has seen significant upturn in activity
is Central Bank Digital Currency (CBDC), a digital cash replacement and store
of value that functions much like paper currency. Issued by central banks, CBDC
is centrally controlled, and it does not require decentralized ledgers the way
that many blockchain-based cryptocurrencies do.
Furthermore, CBDC can be enormously beneficial to end users
and governments by promoting greater financial inclusion (e.g. they can be
distributed directly to merchants and consumers free of charge), and offer
better real-time monitoring of the money supply, respectively. Digital Currency
Electronic Payments (DCEP) is one such currency that was rolled out in four
pilots in China. Unlike existing e-wallets, DCEP and other CBDCs do not charge
merchants a fee for use, in a move that many feared could significantly
undermine the market share of private fintech companies.
At the outset, these new regulatory initiatives and
government-led projects appear to be a threat to fintech companies, especially
those in emerging markets. However, there are significant positives to these
developments. Clearer guidelines and regulatory enforcement bring a greater
degree of legitimacy and predictability to emerging markets, long deemed as too
“risky” for investment. Local and foreign investors will have more confidence
to deploy capital, and consumers will be more trusting of these companies if
they feel their rights are protected.
Furthermore, this shift will widen opportunities for
innovation, especially in regulation technology (regtech). Consumers want
easy-to-use tools that enable them to control what data companies are
collecting from and keeping on them. Moreover, they wish for credit solutions
that promote fair access at scale and do not unfairly disadvantage or mislead
them. Multinational corporations require tools that simplify compliance as the
number and complexity of rules across various jurisdictions grow. There is a
nearly endless stream of opportunities that can arise as the market and
regulation continue to evolve.
Government-led projects may compete with existing fintech
products in some cases, but for the most part, these initiatives are unlikely
to pose a threat to private fintech companies. Fintech platforms are sticky and
have both user and data network effects, making them hard to supplant.
Moreover, governments rolling out their own fintech initiatives have
demonstrated a willingness to work alongside existing fintech companies. In
China, DCEP can leverage Alipay and WeChat’s infrastructure when implementing
its own digital wallet. In the UAE, the success of early versions of the
eDirham rollout would not have been possible without the support of private
institutions.
As top fintech companies increasingly approach the size and
reach of traditional financial institutions, government regulation will
continue to increase. To maximize their chances of success, fintech players
should work closely with regulators and a broader stakeholder base on solutions
that go beyond simply meeting the requirements of the law.
However, regulators too need to better balance the need to
promote innovation and work with the private sector. Particularly in emerging
markets, regulators have built goodwill and credibility with the private
sector, but today risk growing the divide. Authorities must demonstrate how
regulation promotes greater innovation and positively impacts internet groups
over the long-term. Only then will fintech deliver upon its promise of creating
a safer and more inclusive future of finance.
Click here for the
original article.