Governments globally are recognizing the emergence of financial technology (fintech) as a means to deliver social and economics outcome more effectively and efficiently.
To some, governments seem to be allowing fintech startups free rein while saddling traditional financial services with ever-increasing regulatory burdens. To others, government support is necessary for the healthy development of the fintech sector, which can potentially revolutionize financial services products, services and delivery mechanisms worldwide, as well as deliver social and economic outcomes more effectively and efficiently.
How can governments strike the right balance — and how can fintech and financial services industry players alike shape this ongoing conversation?
Looking at developments worldwide, it is clear that there is no consensus on how or where government support should play into the evolution of the fintech sector and, in turn, its role more broadly within the financial services industry and national economy. For example, the UK government has focused on supporting the fintech sector through financial incentives such as grants and tax incentives, including a recently announced £2 billion government investment in businesses conducting technology research and development. In Singapore, the Monetary Authority of Singapore (MAS) established a dedicated fintech office with funding from across government entities to drive the development and promotion of Singapore as a fintech hub, and has recently announced the easing of regulations surrounding venture capital investment in early-stage startups.
Not only do different governments have divergent views on the proper role of legislation and regulation with regard to fintech innovation, but considerable points of divergence can even be seen between some countries’ federal regulations and those applied at the state, province or territory level. This is particularly evident in the US, where the complexity, lack of regulatory uniformity across states and varying state legislation can pose significant roadblocks for fintech companies. States like California and New York are strong fintech hubs due to loan programs, tax credits, grants and more, while many other states lag behind.
Variations in countries’ approaches to policy and regulation will always exist; however, the current diversity in approach may speak more to uncertainty surrounding the impacts and implications of new technologies than it does to differences in political ideology. Regardless, it is clear that governments internationally believe that fintech is key to the future of the financial services industry, and that their support is necessary to guide the sector’s development for the good of consumers, businesses and the global economy.
At its most basic level, the role of the industry remains the same, regardless of the presence of new technologies: to provide access to necessary financial services to individuals, businesses and other organizations. Yet, while the core goals remain the same, the mechanisms by which these goals may be achieved are undergoing significant transformation. Governments are now asking the same questions that are on the minds of many financial services executives: What are the risks and benefits of these technologies, and how can we embrace and encourage change without courting disaster?
By supporting and promoting fintech, governments are broadly looking to achieve four core goals:
In working to achieve these goals, much of government activity worldwide is understandably focused on modifying existing regulatory frameworks and enacting new legislation where there are acknowledged gaps or shortcomings. This can range from providing class exemptions and introducing new regulations such as PSD2, to providing guidance around areas such as data management, blockchain and robo-advice.
Yet changes to policy and regulation only come following periods of learning and consultation. To support this activity, government actions can be broadly described by the ‘three Es’:
Outside of regulation, government actions designed to attract capital — such as attractive taxation policies and providing access to government grants — can also have a significant impact on fintech’s development. For example, Singapore recently announced a number of new incentives specifically designed to attract venture capital (VC) investment into their local technology ecosystem, including fintech VC support.
In addition, policies surrounding the mobility of talent and attracting skills through work visas can also help or hinder local entrepreneurial activity. As an example, passporting, visas and the availability of talent to support technology and financial services companies in the UK and the US have been areas of growing concern since Brexit in the UK and the new Trump administration came into office in the US.
Finally, governments themselves are large procurers of technology capabilities and there are opportunities for them to engage with fintech companies to help government in areas such as data and analytics, digital identity, payments and transactional banking. More progressive governments will be opening up data, in a safe and controlled manner, for startups to innovate and create new forms of value.
Government influence is an important factor in the financial services industry. However, while legislative and regulatory change is needed not only to support and promote fintech but for the health of the industry as a whole, some would argue that this support can go too far, providing fintech startups with an unfair competitive advantage.
A careful balance must be struck, with regulations providing necessary protections and encouraging startup innovation without hindering the development of traditional institutions’ products, services and platforms. This is why the input and feedback of all industry players is critical during this time of change. Active engagement with government, whether through formal feedback mechanisms such as advisory committees or more ad hoc opportunities and conversations, can help shape the future of the industry for the benefit of all stakeholders.
Unlike VC investors, government’s involvement in fintech or any industry shouldn’t be in ‘picking winners’ or backing particular ideas. Rather, government should work to promote both startups and established entities within the sector, help to invest in education and research, enable appropriate infrastructure and explore opportunities for engaging fintech companies themselves. The insight, guidance and feedback of industry specialists is key to achieving these goals.