The one thing which could hold fintech back – comment

Published at Feb 5, 2016, in Features

If you open up the business section of a newspaper, you’ll invariably find writers talking about ‘fintech’ and how it’s going to completely change the game – but that very same buzz could hold back the sector.

What is it? On a broad level, there’s a bit of a clue in the title. It’s financial tech.

It’s become the plaything of the start-up scene over the past two-odd years and has morphed into a technological revolution which could end up undercutting the retail banking and financial services market.

Examples of fintech include online crowdsourcing where companies with an idea but no money can bypass traditional routes of capital such as bank loans and appeal to their potential customer base.

We’ve previously featured this on Finfeed, taking a look at the ability for small-cap resources companies to bypass the lenders and head straight to the open market.

Just as an example, some estimate the regulated crowdsourcing sector raised $65 billion in a year.

At the moment companies are focused on equity crowdsourcing, but fintech throws up the possibility that a canny start-up can come and disrupt the model at any time.

Or, there could be a lender which manages to lend you money at a lower rate than a bank as it has lower overheads than the traditional player.

What if that same lender could analyse your spending patterns to determine whether or not you can afford the loan?

It could potentially take the retail lending market lunch from the banks.

There are even ‘robo-advisors’ cropping up, which are essentially just algorithms which make predictions about how to best invest your money. Subsequently, financial planners are outraged.

After all, taking previous data to make decisions about where to invest money is their turf, and robots don’t tend to take too much in terms of performance fees.

The threat to banks here isn’t so much that they’re failing to evolve, in fact, several traditional institutions are trying to buy their way into the innovation by co-funding fintech start-up hubs.

But here’s the rub – banks are regulated up the wazoo.

While there are very good reasons regulators try and keep a very close eye on what banks are doing and there could be a case made for saying current banking regulations are lax – what’s going to happen to fintech plays?

Can the regulatory side possibly keep up with the pace of innovation in the space? Heck, the law has a hard time keeping up with social media.

If you ask the fintech side though, regulators response has been to treat them exactly the same way as established players – which doesn’t quite work.

Some complain of a regulatory overburden where regulators try to apply laws and regulations designed for banks to small operations.

To be fair, regulators such as ASIC are trying to get their head around the game. Still, fintech players do complain that a dizzying array of regulations in the space applied to them are hard to understand let alone comply with.

While banks are more heavily regulated, they have more resources at their disposal to deal with the regulation.

The challenge for regulators then, is to make sure budding fintech start-ups in Australia aren’t choked by regulation while at the same time ensuring that everyday people are protected from the downside.

It’s clear that the capital is starting to flow into fintech plays, but the challenge for regulators over the next year will be to design a way to enable them to flourish. A lot of this may depend on the banks and whether they see fintech as a threat rather than an opportunity.

In much the same way TV networks in Australia have bought into subscription video on demand services such as Presto and Stan here in Australia, banks could end up being the biggest players in the fintech space.

But, if they start to feel threatened they could wield extraordinary power in shaping regulation, making noise about there being a level playing field for all.

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