Regulators Look Set To Be The Year's Biggest Tech Disruptors (With More To Come)
Governments are not only increasing regulation of fintech companies, but they are also actively building new technologies that seemingly compete with them.
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.