The following represents the personal opinion of James Callon, an experienced, now retired regulator with over 40 years of Canadian and international regulatory experience.
SHARING A PERSPECTIVE ON CONSUMER PROTECTION ON FINTECH:
The following is a 4-part Blog posting that presents a discussion on the consumer risks regarding the introduction of non-regulated and technology based financial service providers who serves the public
- BACKGROUND:
The financial sector is experiencing substantial promotion / hype of “FinTech” and innovation coupled with demands for regulators to lighten the regulatory burden, or perhaps providing exemptions for the sake of advancing innovation and the potential channel for expanding access to financial services for all consumers (objective of inclusion). It is recognized that certain regulatory oversight / standards may need to be updated and made flexible, but should they be weakened. What is the balance between consumer protection and entrepreneurial freedom to innovate? Given this prelude, the intention of this brief is to simply articulate a consumer protection point of view regarding the introduction of the new wave of technology into the financial sector.[1] - PRELIMINARY CONSIDERATIONS REGARDING REGULATION OF FINTECHS:
- Does the FinTech interconnect with the financial system in any way? How?
- Does the FinTech deal directly with the public? How?
- How financially stable is the FinTech? Who are the backers?
- What are the potential risks? Who could be harmed and what is the extent of the harm and can it fixed? Is there meaningful innovation being proposed that will outweigh the risks / harm that it may cause?
- Do financial regulators have the mandate / authority to regulate the FinTech and its activities?
- Do the regulators really have technical capacity to regulate the risks and mitigate and potential harm done?
- What happens if a FinTech becomes bankrupt, how are customer transactions, funds, data, etc. protected and to what degree? (e.g. refer to articles on Wirecard AG [2])
- FIN-TECH – TECHNOLOGICAL AND INNOVATION ARE NOT NEW:
In the past decades, technological innovation in the financial sector occurred but primarily by and through banks. Banks have introduced, controlled and managed the use of innovative technology for decades including:- the computerizing of their workflow in their retail and back-office operations;
- computerizing their data collection and analysis;
- software for sophisticated credit risk modeling which allowed profitable access to subprime markets;
- the development and extension of sophisticated Automated Teller Machine networks;
- diversity in payment / credit card options;
- on-line banking sales and transactions; access to electronic remittances / transfers;
- etc.
Almost all these past “fintech” innovations have happened in a regulated environment focused on financial stability and protecting the public. One could also claim like the current FinTechs that these innovations have helped address access to banking services, (inclusion).
- NEXT WAVE OF TECHNOLOGY – Internet Based:
Another wave of technology has broadened out to non-bank and internet-based players who have focused on “innovation” in the financial sector that for the most part is focusing on re-engineering retail financial products, services and processes. It is focused on providing faster, cheaper and improved access to consumer financial products and services including lending / credit; facilitating payments / purchases; moving / transferring of money; access to investing opportunities; clearing and recording of transactions and so.
Circumventing the financial institutions: What is different today in terms of introducing the next wave of technology for financial consumers is that it coming from non-bank technology companies. With the advent of the internet and social media, these non-bank companies were given the ability to circumvent the banks and other financial institutions and reach millions of financial consumers directly and at a low cost in order to offer their services. Given the general simplicity and or their online mono-line product and service offerings, they can utilize new, cheaper and more flexible technology as banks and other financial institutions were burden with large legacy and mainframe systems.
Easier access to financial consumers and more advanced technology have allowed for a greater number of non-bank players to offer intermediation services directly to consumers offering faster, cheaper, convenient, better ways of using financial services while banks lag behind with upgrading legacy systems and meeting the regulatory standards applicable to their use of technology, (governance, security and fraud, policies and procedures, redundancy, testing, regulatory audits).
With respect to the backroom of financial institutions, there are also the backroom FinTech players that are focusing their innovations on the financial sector’s back-office business processes such as automation of AML, KYC – customer identification; data aggregation and analytics, the application of block-chain in the settlement process – virtual joint ledgers in tracking processes and transactions; replacing paper and coin based currency with digital currency, and so on. These companies offer financial institutions the opportunity to outsource more and more activities through improved automation, increase productivity, reduced costs and speed for an array of transactions, etc.
So what is the problem?
[1] https://www.ft.com/content/3bf4cec5-eabf-4d98-aed5-abee83837ad8 ; Ant setback signals reckoning for fintech; Patrick Jenkins.
[2] https://www.dw.com/en/after-the-wirecard-scandal-fintech-sector-faces-scrutiny-and-questions-of-trust/a-54956773 ; After the Wirecard scandal, fintech sector faces scrutiny and questions of trust; Arthur Sullivan.
