Over the last decade, FinTech – broadly defined as the use of new technology and innovation to compete in the marketplace of financial institutions and intermediaries – has disrupted the financial services sector in several ways (Chishti and Barberis, 2016; King, 2018; McMillan, 2014; Sironi, 2016).
Over the last decade, FinTech – broadly defined as the use of new technology and innovation to compete in the marketplace of financial institutions and intermediaries – has disrupted the financial services sector in several ways (Chishti and Barberis, 2016; King, 2018; McMillan, 2014; Sironi, 2016).
First, new technologies have allowed incumbent financial service providers to offer a range of new services that remove intermediaries in order to make transactions more effective and less prone to error (Haycock and Richmond, 2015). In this way, financial services are decentralized and made flatter. Most obviously, there is the growth of so-called mobile banking that allows customers to perform a wide range of transactions online. Networked access to financial services facilitates quicker access to all manner of transactions from checking financial status, making payments, and withdrawing and transferring funds. “Behind the scenes” activities of financial institutions are similarly transformed. This involves, for example, the use of Big Data to deliver a more efficient service, but it also allows firms to use technology to manage legal risks more effectively.
The fallout from the 2008–9 Financial Crisis resulted in vast swaths of new banking regulation (Sironi, 2018). One effect of this additional regulatory burden has been the increased use of technology to help banks comply with new regulatory requirements. Sometimes referred to as “Regtech,” this involves using technology to comply with regulatory requirements (Arner et al., 2017). There are several areas of compliance and reporting where technology can have a significant benefit, such as anti-money laundering requirements (e.g., know your customer requirements), risk data aggregation, and real-time transaction monitoring.
Second, FinTech has also facilitated the emergence of tech start-ups that offer an alternative source of financial services (Pratskevich, 2019). In particular, “app-based” companies are emerging everywhere. They challenge and disrupt incumbents, such as traditional banks, by supporting a range of financial services, for example, marketplace lending platforms, equity crowdfunding platforms, insurance services, algorithm-driven “robo-advisors” offering smarter, more personalized financial advice, as well as blockchain-based crypto-currency and payment systems.
For Millennial consumers, in particular, these alternative service providers (“challenger banks”) are attractive (West, 2018). Banks have traditionally failed to respond to the perception that banks are untrustworthy, profit-driven machines, associated with a selfish and unsustainable version of capitalism. If traditional financial institutions don’t meet these needs, then Millennial consumers simply move to younger, new providers that can.
Finally, FinTech leverages technology to improve access to financial services for individuals that have traditionally been excluded, in particular in emerging economies (Blakstad, 2018; Buckley and Webster, 2016; Realini and Mehta, 2015). Driving this change is the global proliferation of smartphones. Smartphone penetration is expanding quickly around the world, with 6.1 billion users expected by 2020. Many start-ups are now leveraging that global reach and providing access to various financial services (most obviously, credit) in markets in Africa, South America, and South-East Asia. The range of services that are offered is expanding, as locally based start-ups proliferate.
From even the briefest of surveys, it is evident that FinTech is disrupting every aspect of financial services. The FinTech revolution has proven enormously disruptive for two groups of actors, in particular, namely incumbent financial service providers and regulators and other policymakers.
Incumbents face new and aggressive competition from young, agile start-ups that leverage digital technologies to deliver a smoother, more customer-focused experience. However, incumbents also face competition from larger, well-established technology companies that see opportunities in the financial sector. As such, the traditional silos between financial service companies, technology companies, and media and telecommunications companies have broken down as lines between financial services firms and other types of business become blurred (Price Waterhouse Cooper, 2014). This disruptive competition exposes inadequacies in traditional business models and practices and has compelled incumbents to innovate.
The arrival of these two groups of non-traditional actors into the financial services sector is a big part of the disruption for policymakers. Regulators and other policymakers face various new challenges in designing and implementing a regulatory response to the technology- driven changes in financial services. As technology “eats the world,” it creates a plethora of new business opportunities, but it also creates tremendous challenges that require some form of state regulatory intervention. In a world where agility is essential, and “technology is faster than the law,” governments are often sluggish and disconnected (Fenwick, Kaal, and Vermeulen, 2017). This creates potential new risks, most obviously for the consumers of financial services, but also for the integrity of the financial system as a whole.
The structural importance of financial services, particularly banks, in the operation of a developed capitalist economy has traditionally justified high levels of state intervention and regulation to ensure that banks and related actors do not undertake excessive risk. Historically, banks have been regarded as a unique form of business. On the one hand, they should be run privately for profit. On the other hand, however, they also perform a public utility-type function in that they provide credit, and this credit is vital to the health of the economy. A sophisticated regulatory system emerged to manage this risk and balance these different goals. In the context of FinTech, however, the risks are often uncertain or unknown, fall outside existing regulatory schemes, or both.
Writing in the 1980s, the legal theorist Gunther Teubner famously identified a “regulatory trilemma” facing all regulators in late capitalism (Teubner, 1986). Teubner argued that any regulatory intervention faces three types of risk: the risk of the regulatory action not working, (i.e., the regulation misses the target or is otherwise ineffective); the risk of breaking the thing it seeks to regulate, (i.e., the regulation removes any incentive to engage in the activity that is being regulated); and the risk of undermining the law (i.e., the regulation undermines the doctrinal integrity of the law and legal system, more generally). The “trilemma” that Teubner described can be re-formulated as a question: How can we ensure that any regulatory intervention is effective, responsive, and legally coherent?
This seems to be a particularly pressing problem in the context of FinTech. It is essential that any regulatory action is effective – that consumer interests and the integrity of the financial system as a whole are adequately protected. Moreover, it is vital that regulation isn’t overly burdensome and “kills” innovation, leading to an exodus of start-ups and talent to other jurisdictions that offer a “friendlier” regulatory environment. In a global economy where the transaction costs of relocating a business are reduced, regulatory competition is an important consideration. Finally, regulation needs to be consistent with other features of the legal system and the existing capacities, “know-how,” and experience of regulators.
In developing answers to this regulatory trilemma in a FinTech context, it is important to acknowledge that state actors operate at a significant informational disadvantage (particularly when compared with the disruptive FinTech firms and large technology companies) and lack the capacities, resources and experience to keep up with the fast-moving actors that dominate the sector. Under such conditions of information and resource disadvantages, new and more innovative approaches need to be found. The chapter describes several such approaches and the different considerations that inform such approaches. Regulation matters, but it is only by embracing new approaches that a regulatory environment can be developed that fosters the responsible and safe deployment of financial innovation. Bad regulation seems likely to kill innovation and place a country at a significant economic disadvantage.
One way of approaching the regulation of FinTech is to think about the desired end state: What would we like the sector to look like in the future? What organizational structures seem most likely to deliver sustained and responsible innovation, and, based on this desired end state, what regulatory approach seems most likely to facilitate and encourage such businesses?
What seems apparent is that incumbent providers cannot ignore the disruption. In a financial services context, incumbents have found themselves confronted with an unprecedented combination of new pressures as a result of this shift. Crucially, all of this disruption involves technology at some level. These new challenges include developing more customer-friendly services to attract more customers and deepen relationships with existing customers to retain them; rethinking distribution models and internal organization; responding to disruptive competition from “challenger” banks and new entrants to the market (start-ups but also corporations from other sectors, most obviously the technology sector); rebuilding trust with all stakeholders, especially customers; and managing new regulatory, capital, and security risks (Price Waterhouse Cooper, 2014). The crucial point here is that all of these challenges require engagement with digital technologies. Technology facilitates the delivery of better services and forms the crucial infrastructure for managing costs and risks. As such, digital technologies have now become the primary engine of change in every aspect of financial services. Organizing-for-innovation is no longer optional.
So, how then can incumbents respond to this new challenge? In other work, we have developed the argument that the most innovative companies in the world have responded to the unprecedented pressures and challenges of doing business in a digital age by reinventing themselves as more open, inclusive and “flatter” ecosystems (Fenwick and Vermeulen, 2015; Fenwick and Vermeulen, 2019a; Fenwick and Vermeulen, 2019b). The suggestion is that the closed, hierarchical, modern company – which has dominated the global economy for the last two centuries–is ill-equipped to respond to the challenges required by the FinTech revolution. We are living through the beginning of the “end of the corporation,” at least companies organized as closed, hierarchical systems that operate as proceduralized bureaucracies.
The most well-known theory for explaining the failure of large corporations to innovate is Clayton Christensen’s The Innovator’s Dilemma (1997). Christensen’s argument was that, over time, all organizations inevitably develop habits and procedures for making decisions and allocating resources. In larger organizations – like modern corporations – such systems tend to be highly formalized. The result? Corporations get locked into decision-making and resource allocation models that focus on existing products and services. When they see something new – even if they have a strong sense that it will disrupt their industry – they are too focused on existing products or services to adapt.
Corporations thus have an inherent tendency towards tunnel vision in which, by looking to satisfy their existing customers, they fail to notice how the world is quickly changing around them. This was Christensen’s key insights and the basis of the innovator’s dilemma. A corporation that had been innovative once often struggles to innovate the next time. Corporations may be very good at what they do, but that focused excellence is what kills them. It is not that bureaucratic procedures are inherently wrong – they may be an effective mechanism for serving existing customers and managing complexity in a large, possibly transnational organization – but such practices push companies to keep doing what they have done before. But that maintenance of the status quo leaves them open to disruption from more innovative rivals.
To respond to this dilemma, new ways of organizing business have developed, and understanding the unique features of these alternative business forms and thinking about how to design a regulatory environment to facilitate these new ways of operating a business have become crucial tasks for all businesses, as well as policymakers.
As such, we should no longer think in terms of traditional corporate structures. Company boundaries have become more open. Traditional corporate organizations with their fixed roles, static procedures, closed departments, and hierarchical relationships between different groups of stakeholders are all changing as companies adapt to a new operating environment.
To make sense of this change in how firms organize themselves in a digital age, the concept of a business “ecosystem” can provide an alternative. In brief, such ecosystems combine the following features (Fenwick and Vermeulen, 2015):
In an age of hyper-competitive, technology-driven markets, every company needs to consider reinventing itself as an ecosystem of this kind. Such ecosystems are better placed to deliver that kind of innovation necessary to succeed in a technology-driven economy.
An important option for incumbent financial service providers – particularly for more conservative incumbents that struggle with “intra-preneurship” (i.e., internal innovation) – is to engage in open collaboration with external partners (particularly tech start-ups) to develop and reinvigorate their services. The best companies realize that their future will be determined by developments in technology and that “learning” from technology start-ups is often the most effective way to achieve this objective, especially when incumbents lack the capacities for technology-driven innovation.
One way to achieve this is for incumbents to acquire or invest in start-ups, i.e., corporate venturing (Fenwick and Vermeulen 2016). The crucial point is that incumbent providers must be open to the possibility of obtaining knowledge and technology from an acquired start-up firm. The aim of such acquisitions is not assimilation, in that a start-up is simply absorbed into a larger corporate identity. Instead, the objective of a more open style of partnering is a dynamic relationship in which opportunities for mutual learning are emphasized.
It is in this sense that we can talk (as was done in the Financial Times) of incumbent providers “borrowing the Start-up Genie’s Magic” (Newton, 2015). This contrasts with an earlier style of corporate acquisition in which assimilation was emphasized, and any learning was conceptualized as one-way (i.e., from corporate to the acquired entity). An open, inclusive, and fluid ecosystem-style organization can help larger, established firms in meeting the complex (and unprecedented) business challenges of delivering a different kind of financial service.
This new style of partnering can be beneficial in the case of financial institutions as they look to respond to the disruptive challenge of FinTech. Banks, for instance, already engage in such partnering-for-innovation, and examples can be seen everywhere (Macheel, 2019).
For example, many banks have now established partnerships with FinTech companies. For example, J.P. Morgan Chase, has partnered with OnDeck to offer fast approval and funding of small business loans. Another FinTech company, Prime Revenue, provides supply chain ﬁnance through a cloud-enabled platform to banks, including Barclays. Spain’s second-largest bank BBVA has actively engaged in FinTech acquisition. They became a major shareholder in British start-up Atom Bank and acquired Holbi, a Finnish based FinTech innovator, specializing in small business payments. Visa’s acquisition of Plaid can be understood similarly. Many banks now see “FinTech partnering” of this kind as a core competency that they need to develop to stay relevant and competitive (CB Insights, 2019).
These developments have led some observers to talk of a “great new era of FinTech partnerships” between incumbents and more innovative start-ups (Tweddle, 2018). According to this line of thinking, banks need to become consumers of innovative FinTech because they cannot deliver such services by themselves.
On the other hand, FinTech start-ups are often narrowly focusing on a specific problem or issue and the development of one particular solution. This creates a potential “win-win” in which larger banks benefit from the specific new product or service developed by the start-up, and the start-up can benefit from the reach, network, and infrastructure of the incumbent bank.
Nevertheless, for such partnering-for-innovation to work effectively, incumbent banks need to re-evaluate existing practices. For example, they need to strengthen their mechanisms for assessing their current internal capabilities, develop robust systems for evaluating potential partners, devise mutually acceptable financial arrangements, and ensure adequate testing capabilities for deploying new technologies (both, initially, on a small, experimental scale and later, when full-scaled implementation is planned, on a larger scale).
This is not always easy for incumbents, and there are skeptical voices about the feasibility of such an approach (Shevlin, 2019). The enormous cultural differences between incumbents and start-ups lead some observers to conclude that it is difficult for incumbent banks to partner-for-innovation in this way. According to this line of thinking, the challenges of the external environment are too significant, the expectations of consumers are too high, and the banks do not – as things stand – have the internal capacities or resources to implement this new partnering-for-innovation and ecosystem style organization (Beaumont, 2018).
Nevertheless, such skepticism about the kind of partnering outlined here seems to push against the approach of more and more incumbents in the sector. More and “better” partnering, rather than less, appears to be inevitable, given the trend towards the “unbundling” of banking that we will discuss below. Of course, this raises profound challenges for incumbent financial service providers that have become accustomed to working entirely “in-house” using settled internal procedures. And, for sure, such partnering in an open ecosystem means giving up a certain degree of control. However, the benefits in the long term of such partnering, sharing of know-how, and co-creation seems to justify any risks.
Moreover, it is hard to see a better alternative for incumbent financial service providers than operating as a more open and inclusive ecosystem. Most obviously, it maximizes opportunities for incumbents to innovate and ensures that such innovation is “hard-wired” into the organization and, over time, its culture.
Traditional accounts of the role of, and justification for, regulation in financial services have focused on risk management. A crucial difference between financial service providers and other businesses is the regulatory environment in which they now operate. Moreover, the level of regulation is much higher for banks, particularly post-2008. This complicates efforts to borrow some of the FinTech “genie’s magic,” and a shift in approach by regulators may also be required, particularly if the goal is delivering more innovative products and services.
Two considerations have dominated the post-2008 regulatory environment for financial service providers: first, ensuring a higher degree of consumer protection, particularly for retail clients, investors, and depositors (i.e., the micro-prudential aspect of regulation) and second, ensuring financial stability by minimizing systemic risk (the macro-prudential part of regulation). The 2008–9 Financial Crisis exposed shortcomings across both dimensions, and these failures triggered a significant process of regulatory reform and the imposition of stricter regulatory requirements.
Moreover, a legacy of the 2008 crisis has been a shift in perceptions of innovation, at least on the side of regulators. Before 2008, innovations in financial products or services were generally perceived in favorable terms. This perception resulted in a “light-touch” approach to the regulation of innovations in financial services. However, since the crisis came to be blamed, in large part, on such innovation (so-called “financial weapons of mass destruction”), the regulatory trend shifted in the opposite direction (Tett, 2010). Innovation came to be seen in more negative terms by policymakers (not to mention the public), who were keen to avoid any repetition of the disruption of 2008–10.
The timing of the emergence of FinTech has, therefore, proven enormously challenging for regulators (Zetzsche, 2017). Regulators have been placed in the awkward position of having to balance the post-2008 regulatory objectives of consumer protection and managing systemic risk with the promotion of innovation. From the perspective of regulators, it is easy to conclude that FinTech creates both micro- and macro-prudential risks or, at least, uncertainties, and managing these uncertainties is highly complex.
However, as memories of the last financial crisis fade, the relationship between banks and regulators has shifted to a new stage. As discussed above, most financial institutions already engage in the proactive management of regulatory risk through expanded compliance departments (Fenwick, 2016). Banks have better integrated the two post-crisis objectives of regulation into their daily operations, and, in consequence, the regulatory agenda has shifted. Against the background of these changes, new regulatory approaches are now possible and desirable.
One clear example of a shift in regulatory thinking is the post-2016 UK experience. Traditionally, five big banks – Barclays, HSBC, Lloyds, Santander, and Royal Bank of Scotland – controlled over 80 percent of the retail current account market, offering near-identical products that remained unchanged for several decades. People would pick a bank, typically when they entered the labor market and would stay with them for life. However, in August 2016, the UK Competition and Markets Authority issued a ruling ordering to the nine biggest UK banks to allow licensed start-ups direct access to their data (see www.openbanking.org.uk). Account-holders needed to provide consent, but if they did, then all data in their current bank accounts – for example, utility bills, mortgage payments, etc. – could be made available to FinTech start-ups, who could then utilize that data to deliver innovative new financial products and services.
To do this, Open Banking Limited, a non-profit organization, was set up to develop application program interfaces (APIs). These protocols transfer data automatically from one piece of software to another (Camerinelli, 2017). What makes these APIs potentially game-changing is that they can take the current account data and let software developers create new products that use this data in new ways.
A simple example would be an app that collected an individual’s financial information together from several sources – several different bank accounts, for instance, and allowed that individual to manage their financial affairs from one app on their phone. The ability to access data on multiple bank accounts might not seem immediately game-changing. However, the thought behind Open Banking is that start-ups will take the data and develop innovative new services that no one has yet thought of. The expectation of the Open Banking movement is that innovative entrepreneur-founders will leverage the potential of this data to deliver more innovation.
The European Union introduced a similar set of financial services reforms in the Payment Services Directive 2 (PSD2) in 2015 and which will come into full effect in late 2020 (Price Waterhouse Cooper, 2016). The aim of the PSD2 was to develop the European single market in banking by forcing European banks to open up their data via APIs. PSD2 created two new types of licensed entities that can use this data, either for payments or other services. This created a unique opportunity for non-bank organizations to provide payment initiation and account information services, creating greater competition, and more choice for consumers.
Security is ensured under PSD2 by the introduction of Strong Customer Authentication (SCA), which requires that when customers access their payment accounts online, two of three mandatory authentication measures must be used, so-called two-factor authentication (or 2FA). These SCA measures are: Knowledge, something only the user knows (e.g., a password or a PIN); Possession, something only the user possesses (e.g., a token, code, or key); Inherence, something the user “is” (e.g., a fingerprint, biometric, or voice.)
Other countries are monitoring these trends towards open banking. Japan’s Banking Act, for example, was amended in June 2018 to promote open banking. Around 130 chartered banks in Japan have plans to open-up APIs by the end of 2020 (Creehan and Tierno, 2019).
Incumbent banks were initially skeptical of these developments. For example, it was reported that slightly over 40% of European banks failed to meet the PSD2 deadline in March 2019 – the banks were supposed to provide a testing environment to the third-party providers. However, the smarter banks recognized the value of partnering with FinTech firms in the way described in the previous section to minimize the business and regulatory risk of the new world of open banking. As such, the PSD2 represents a critical case study in how regulatory interventions might “nudge” incumbents into partnering-for-innovation and creating the open and inclusive financial service ecosystem of the future.
A related option – often preferred by the FinTech companies themselves – is for the government to give much higher weight to those actors that are driving technological innovation and its dissemination, namely the technology companies, in designing the regulatory framework. Stated slightly differently, the technology companies believe that to make a partnering- for-innovation strategy work, regulators need to become more active players in the open ecosystems described above. However, is this a sensible strategy? Or is it a case of putting the animals in charge of the zoo?
There is something to the idea that governments should outsource to companies the task of designing regulatory policies suitable for a digital age (Kaal and Vermeulen, 2017; Malan, 2018). Disruption has become one of the main issues for any business, markets are changing fast, and new competitors enter the stage all the time. Under such circumstances, business models must continuously evolve. As a result, companies are obliged to take emerging technology seriously to remain relevant. One effect of such an environment is that technology companies have greater access to better information about the impact of technology. Increasingly, companies are better equipped than states to take a leading role in the design of regulation.
Moreover, new digital technologies empower the customers and employees of such companies in new ways. The voice of these stakeholders must be considered for such companies to survive. For instance, in many cases, employees are no longer satisfied with being “cogs” in a corporate machine but want to be treated as active stakeholders. In the context of the Gig Economy, for instance, such employees have become entrepreneurs themselves. They will speak up or, in a worse case, “exit” when they do not support a company’s policies or actions (Kessler, 2018). Advocates of this type of outsourcing see such stakeholders as an essential check on how technology companies behave and how they approach the issue of designing a regulatory framework.
However, what is perhaps even more important is that the consumers of tech products and services have become much more critical, at least compared to an earlier industrial phase of capitalism. In technology-driven markets, consumers are not just consumers anymore. They have become an essential stakeholder in the ecosystem of the firm and its governance. This functions as a constraint on the behavior of larger firms. It is becoming more dangerous for them to abuse their market power, as such abuse will risk user migration to rivals and, in the medium-long term, damage to the brand and a decline in a firm’s fortunes (Fenwick and Vermeulen, 2019a).
Such risks are particularly acute for firms that operate a platform as a crucial part of their business model (think Amazon, Airbnb, Facebook, or Uber) because platforms are dependent on the network effects created by having as many users as possible, and their business will suffer if users desert the platform (Reddy, 2018).
Of course, there are risks. Even if technology companies have good intentions, they may have difficulties proposing effective regulatory schemes because their interests are not well-aligned within the company. A recent example is Google’s failed attempt to set up an ethics council to examine developments in artificial intelligence (Levin, 2019).
So, what is the role of government in a digital age? If the delegation of policymaking and regulation to the private sector might lead to the “capturing” of the policy process and policy by established tech companies, what would be a better alternative? The government still has an essential role to play. However, a bureaucrat-led approach to policymaking has had its time. A new, more dynamic approach that is responsive to the need for innovation must be implemented.
One option that is being utilized in the context of FinTech regulation is to place greater emphasis on policy experimentation. Here, we do not refer to (rather traditional) consultation models in which the market is invited to respond to and provide limited input to policy and regulatory proposals, but more radical approaches that emphasize the testing of innovation in real-world settings in order to collect data that can then inform regulatory design (Bennet-Moses, 2013; Black, 2012).
For example, in April 2016, the UK Financial Conduct Authority (FCA) announced the introduction of a “regulatory sandbox,” which allows both start-ups and established companies to roll out and test new ideas, products, and business models in the area of FinTech (Financial Conduct Authority, 2018). This model has proved very influential, especially in an Asian context where a number of countries have implemented similar schemes (Fenwick et al., 2020).
The aim of this sandbox is to create a “safe space” in which businesses can test innovative products, services, business models, and delivery mechanisms without immediately incurring the normal regulatory consequences. In practice, this means that relevant rules and regulations are temporarily suspended and do not apply to a particular firm. With the sandbox, the regulator aims to foster innovation by lowering regulatory barriers for testing disruptive innovative technologies, while ensuring that consumers will not be negatively affected. In exchange, regulators are given access to the most cutting-edge data, thus closing the informational asymmetries discussed above.
What makes the regulatory sandbox attractive is that, insofar as technology has consequences that flow into the everyday lives of citizens, such technology will be open to discussion, supervision, and control. In this way, public involvement in regulatory debates can help to create a better sense of legitimacy.
Arguably, the most significant tangible benefits to sandbox firms are the contacts formed with the regulator and the market credibility that participation in the regulator’s sandbox gives them vis-à-vis customers and financiers.
Skeptics argue that regulatory sandboxes create a “two-tier” system of start-ups, where those that are selected in the sandbox are given an unfair advantage over rivals, including incumbents. The credibility gains, as well as the lighter regulatory requirements, could undoubtedly prove advantageous. Moreover, one could also question if regulators have the necessary capacities to determine whether a business should be included within a sandbox scheme or not. Indeed, such judgments would seem to presuppose that regulators engage in a more open dialogue and engagement with a broader group of start-ups operating in the FinTech space. This could be achieved through more regulatory dialogue, for example, “innovation hubs” set up by competent authorities to enable firms to engage with the authorities on FinTech-related issues and seek clarification on licensing and regulatory requirements.
Regulatory sandboxes have been adopted or considered in many other jurisdictions and data-driven regulatory design, in a broader sense, is an increasingly popular approach. As different countries compete to attract innovative start-ups, the issue of the regulatory environment becomes increasingly important. After all, the regulatory situation will be a crucial consideration for any firm when deciding its base. In a technology-driven, global economy, those jurisdictions that fail to engage with new technologies and don’t put in place rules and regulations that are attractive to founder-innovators risk being left behind.
As such, we must also introduce ecosystem thinking into regulation, and companies, banks, start-ups, and governments must all work together in partnership with the various stakeholders to ensure that vital interests are protected while facilitating innovation. There is already some evidence of such a shift. Regulators acknowledge their informational disadvantages and are participating in more events – training courses or hackathons – to close this gap. Moreover, regulators are building new collaborative relationships with actors in the private sector to understand and develop technologies. There is greater outsourcing of legal work and cooperation with public–private partnering to create new technologies, such as blockchain. Finally, the introduction of sandboxes and recognition of the importance of innovation suggests a growing awareness of the need for a different kind of approach.
Of course, national governments and other regulators must set “smart” boundaries for the risk they are willing to take that are agreed with regulated entities. However, within these boundaries, they must allow and encourage freedom and innovation. This does not mean that within these boundaries, a free-for-all should be allowed. Instead, within carefully negotiated limits, it is all about building and maintaining trust amongst all participants via constant dialogue and sharing of information. In this respect, trust must be earned from all the stakeholders that are involved and affected by new technologies.
As such, community-driven regulatory design is a version of policy experimentation. The crucial factor here is the changing context. In the context of the digital revolution and the new pressures it has created, there is a unique degree of openness and visibility both within society in general and within the emerging ecosystems. The check on regulatory capture is the new visibility that digital technologies have created and the dependency that open ecosystems have on remaining committed to the values of a free, open digital culture. If the check on power is visibility, transparency, and the demand for authenticity, then the key to ensuring these values are maintained are those infrastructures that facilitate speech, for example, social media.
The government needs to take on a vital role in the development of the financial service ecosystems of the future. As such, they can help establish the trust that is necessary for such ecosystems to flourish. However, this means that everyone in the government needs to embrace “going digital.” Regulators and other policymakers need to think more about the meaning of technologies, what they can do for us, and how they can help us to build a better future. Doing nothing or restricting innovation are worse options. This goal of fostering innovation often means rejecting and replacing old, formalized ways of doing things, such as hierarchies, legacy processes, and settled procedures. Instead, “going digital” will lead to looser connections and relationships, and more flexible forms of organization and operation. As such, regulators must re-learn what it means to interact, transact, and become visible in a digital environment. They must build their brand, and government officials must learn how to think more like entrepreneurs. Being creative and innovative in this way will ensure that “going digital” creates more opportunities than it eliminates for everyone. And this includes incumbent financial institutions and the new FinTech firms that are innovating in the sector.
After all, there is no turning back. There are good reasons to believe that the impact of next-generation technologies – particularly developments in artificial intelligence and automation – will be more significant than what we have experienced already. Digital technologies will clearly play a central role in the financial services of the future, but for these innovations to be successful requires government to become more “tech-savvy” and do more to enable everyone to engage with technology in a socially responsible manner.