Startup City Magazine

Over-Regulation & Compliance Issues Hinder FinTech Development

By Monica Eaton-Cardone, Co-Founder, Chargebacks911

Monica Eaton-Cardone, Co-Founder, Chargebacks911

Headquartered in the U.S., Chargebacks911 proffers management solutions by helping online businesses prevent chargebacks, minimize loss, mitigate risk, recover lost revenue, and enhance the customer experience.

The financial technology industry is one of the most exciting frontiers in the finance sector. New innovations in FinTech promise to shakeup the industry in a big way. Of course, that’s assuming those innovations aren’t quashed by over-regulation.

A survey conducted in 2015 among top financial services CEOs showed that 86 percent of respondents were concerned that overregulation would limit their company’s growth prospects. Much of this worry is ultimately rooted in uncertainty regarding the regulatory environment going forward. Currently, nearly 50 percent of traditional financial companies and over 40 percent of FinTech firms cite regulatory uncertainty as a key challenge, placing it among the top 3 issues for both groups.

Fear throughout the FinTech industry isn’t necessarily misplaced. Other industries have already suffered at the hands of reactionary government regulations that stifled innovation. Take for example newly imposed regulations for self-driving, or autopilot, cars. Immediately following a fatality associated with a self-driving car, the government created a 15-point safety inspection process. Although thousands of people die on U.S. roads each year and millions are injured, this one incident associated with developing technology evoked drastic action. And in other parts of the world, the FinTech industry is already seeing interference.

In January, 2016, the Chinese government went as far as to suspend the registration of new business licenses for finance-related organizations. The Peoples’ Bank of China led this initiative, claiming the move would protect investors in the wake of the scandal surrounding P2P lending platform Ezubo, as well as the company’s ensuing collapse. Chinese officials acted after Ezubo was revealed to be an apparent Ponzi scheme,one which ultimately cost more than 900,000 investors a total of $7.6 billion.

This move blocked the formation of new FinTech startups in China, while benefitting established players in the market like Alibaba and TenCent. Not only do experts consider this policy biased, but they also point out that it could stifle innovation throughout the entire market. This may make for greater long-term sustainability, but at the same time it discourages the disruption which drives rapid growth.

Currently, FinTech experts are noting the new enthusiasm for robo-advisors, which many believe will make lower-cost investments increasingly attractive to customers.

This could play to the benefit of FinTech, as per a new survey by Blumberg Capital, 75 percent of American consumers believe FinTech services give consumers greater control over their finances. Customers want the benefits FinTech offers, and financial institutions want to adapt and provide those technologies to continue growing.

However, while growing consumer interest seems like a positive thing at first glance, we must consider the ramifications of broader exposure of FinTech services. Consumer interest in new technology typically feeds back into ever-mounting regulation on that technology, which means FinTech is likely to see a great deal of new regulation soon.

How Can FinTech Insulate Itself from Excessive Regulation?

Because FinTech will continue to grow and change, regulation needs to adapt to the new reality. This doesn’t mean that regulations should ‘just get out of the way’after all, few people would suggest that the answer is a total deregulation of the financial services sector. As it stands now though, our ability to develop and adopt new FinTech innovations will only continue to fall out of sync with regulators’ ability to apply useful oversight.

Fortunately, there are steps FinTech firms can take to make tomorrow’s regulatory environment clearer and less stringent.

Justify New Technologies

While the value of new FinTech services may be apparent to the firms which create them, the value is not always so clearly-evident to the public. Therefore, it’s the industry’s responsibility to promote the utility of innovative technology, and to be the foremost champion of each new technology’s benefits.

Be Straightforward

FinTech firms need to be consistently candid and forthcoming about what new technologies can and can’t do. When it comes to the details of robo-advisors and other developing technologies, firms need to be very conscious not to promise more than is realistic and very strict about never over-hyping a new service.

Impose Self-Regulation

To avoid external regulation, FinTech will need to be self-regulating. Many fields such as the entertainment industry impose self-regulation, and this strategy has worked well for decades to make stricter, governmental regulation unnecessary.

Monitor for Compliance

A failure to comply with regulations creates a non-standardized environment that is damaging to everyone involved. Regulations without compliance create unbalance and open the doors to the exact problems the regulation was intended to prevent, which damages the reputation of the entire industry.

In most cases, increased regulation isn’t what’s needed. The industry simply needs consistently applied standards with unified compliance.

At present, FinTech is working against the grain. The issue is not that regulation is inherently bad; rather, that the regulatory environment regarding FinTech development is cumbersome, unresponsive, noncompliant, and is getting in the way of innovation. Until the FinTech industry enjoys some measure of unilateral clarity and standardization, these rules will continue to be a hindrance to FinTech growth.


Current Issue

Featured Startups

Murali Kashaboina,Founder & CEO,Entrigna


Murali Kashaboina,Founder & CEO,Entrigna

Prashant  Karmalkar,Founder & Managing Partner,Circular-Angle

Circular Angle: Bringing in Integrated HR Consulting to a Fragmented Offerings Market

Prashant Karmalkar,Founder & Managing Partner,Circular-Angle

Neil Savant,Managing Director,Falcon-Control-Systems-Automation

FCSA: To Make India an In-house Automation Equipment Producing Nation

Neil Savant,Managing Director,Falcon-Control-Systems-Automation