The financial technology sector has expanded significantly over the past ten years. According to Research and Markets, the global market, which was estimated to be worth $7.3 trillion in 2020, is expected to grow at a compound annual growth rate (CAGR) of 26.87 percent through 2026 due, among other things, to increased investments in technology-based solutions, favorable government regulations, and the increasing adoption of internet of things (IOT) devices.
According to the Global Fintech Adoption Index 2019, before the coronavirus (COVID-19) pandemic, FinTech acceptance doubled every two years. It increased throughout the crisis, rising from 16 percent in 2015 to 64 percent in 2019. The pandemic changed everything, and FinTech played a key role in making digital transfers possible.
The pandemic changed the game, and FinTech played a key role in making digital payments possible as consumers quickly shifted to contactless and online purchasing. There will be new possibilities as the global economy moves from “responding” to “recovering.” With greater exposure to regulatory requirements, penalties, and legal action likely to follow the industry, how can Financial Technology then make the most of their special assets and skills to profit in the post-COVID-19 era?
Over the past ten years, a number of factors have helped to advance fintech. Nearly all of our daily activities have altered as a result of technological advancements. FinTech companies have stepped in to gain footing where established financial players have struggled to keep up with changing customer habits.
As technology has advanced, entry barriers have decreased, forcing conventional financial institutions (FI) to adapt or risk falling behind. The COVID-19 pandemic has only accelerated the development of FinTech, according to Dorothy R. Auth, a lawyer at Cadwalader, Wickersham & Taft LLP. FinTech is the logical progression of how financial services will develop. “FinTech will speed up and streamline operations. If they do not incorporate it into their systems, blockchain in particular will be a disruptive force and threaten conventional banking, says Dr. Auth.
Many banks already collaborate with FinTech start-up companies to improve their service options. Financial institutions are becoming aware that customers are becoming less brand loyal and more interested in speed, accuracy, transparency, and new technology. According to the Swiss Finance Institute, the daily average rate of FinTech app downloads rose from 29.2 percent to 32.8 percent during the COVID-19 pandemic.
In the digital era that follows COVID-19, it will be vital to adapt to market demands. Gabriel Lakeman, an associate at Latham & Watkins, notes that over the past 12 months, “we have seen sustained rapid growth in the FinTech industry.” “COVID-19 has continued to have an effect on the development of payments systems on the payments side. The ecosystem for cryptocurrencies has significantly expanded thanks to new technical developments.
“Numerous banks are already collaborating with FinTech companies to improve their service options. Financial institutions are becoming aware that customers are becoming less loyal to brands and more interested in speed, accuracy, transparency, and new technology.
Decentralized finance is a prime example, according to him, as trading volumes on DeFi platforms have increased considerably, interest in DeFi protocols has grown, and non-fungible tokens (NFTs) are creating new opportunities for monetizing intellectual property.
Alongside the exponential growth of the business, the regulatory landscape for FinTechs has also evolved in recent years. Sonia Struthers, an associate at McCarthy Tetrault, claims that “we have seen greater regulatory certainty and scrutiny, increased institutional adoption, and market consolidation.” “Securities regulators have taken enforcement action and clarified how securities rules relate to trading in crypto-assets. For instance, the Canadian Ontario Securities Commission has been very busy in enforcing the regulations governing the trading of crypto-assets.
The new Canadian Retail Payment Activities Act, which will apply to “retail payment activity,” was approved in the payments sector, she says. “The Advisory Committee on Open Banking issued its final report, recommending the implementation of an open financial system within 18 months. Cryptocurrency funds have been booming in Canada ever since the first exchange-traded fund (ETF) for bitcoin was approved.
The FinTech sector in Canada has been consolidating, as bigger companies expand and introduce new products. FinTechs should be concerned about greater exposure to regulatory requirements, sanctions, and legal action even though the industry’s outlook looks positive. As regulators begin to take a more active role, especially in the retail and crypto spaces, Mr. Lakeman contends that “legal certainty is a key issue for market participants.” “Proposed new regulatory frameworks give early participants the chance to define their positions and, in the long term, may offer more legal certainty.
“However, in the interim, there has been an increase in regulatory action through enforcement and supervisory intervention, which has raised the degree of legal uncertainty. To support innovation and guarantee consumer protection, regulators must maintain a close working relationship with the business, he says.
The playground strategy
The Financial Conduct Authority (FCA) in the UK has shown that it is committed to fostering innovation for the benefit of customers. Since 2016, it has operated “regulatory sandboxes,” which let businesses try novel goods, services, business models, and delivery systems on actual customers in a secure setting while being supervised by the FCA. According to Sushil Kuner, a principal associate at Gowling WLG, “These sandboxes have been enormously successful and led to regulators globally adopting sandboxes of their own.” For many businesses, the authorization procedure and the path to market could be sped up by testing products under the watchful eye of the regulators.
The Global Financial Innovation Network (GFIN), which aims to establish a global sandbox, was officially introduced in January 2019 by a global coalition of financial regulators and related organizations. As Ms. Kuner explains, “the GFIN, chaired by the FCA, aims to offer a more effective way for innovative firms to engage with regulators, helping them navigate between countries as they look to scale new ideas and debut in new jurisdictions.”
In the FinTech industry, where products, services, and business models can operate cross-border in numerous jurisdictions, the ability to perform a cross-border test is crucial. She continues, “As part of a program of work to help firms and regulators overcome some of the challenges that moving to a net-zero economy will raise in the area of sustainability and climate change, applications are currently open for the FCA’s ‘Green FinTech Challenge’ and the ‘Second Digital Sandbox’.” Regulators can promote innovation in this field by supporting more programs like these and the FCA’s Techsprints, which host workshops with businesses, academia, and other professionals to find creative answers to problems in the financial services sector.
Keeping the regulatory load in check
A partner at Cassels Brock & Blackwell LLP named Alison Manzer claims that there are two different facets to regulation in the FinTech industry: First, the use of FinTech as a means of ensuring compliance with the industry’s present regulations, and second, the regulation of activities that are not currently subject to regulatory oversight. According to her, the sector can benefit from the evolution of regulation of activities currently subject to regulation, such as anti-money laundering (AML), by adjusting to accept digital solutions to the regulatory requirements. “Growing the sector and safeguarding the currently regulated activities will be made possible by adjusting compliance standards to accept the FinTech solutions being created.
“Reducing the regulatory burden on FinTechs will help prevent overreaching the compliance requirements by recognizing what is specifically a digital approach characteristic rather than adding financial services activities to the regulatory framework. Because an activity shifts to digital delivery, it may not inherently require regulation, she continues.
It will be crucial for FinTechs to achieve proper regulations going forward. According to Dr. Manzer, “the approach to effective regulatory compliance can vary between the portion of the sector that is offering applications to support regulatory compliance and those that are operating in a sector that is or becomes regulated.” “However, both require a framework for evaluation that starts with an understanding of the aspects of the FinTech service that represent the policy concern, which is typically the protection of customers, depositors, or the financial system.”Monitoring in that way minimizes the need for retrofit to meet the details of regulation while allowing adaptation of the product to meet regulatory interventions on a real-time basis.
The global conversation highlights the pressing problems and the industries that must get ready to act, she continues. There will be many difficulties in the future, especially in fields like AI, which will be essential to developing new FinTech solutions. According to Ms. Kuner, “one significant area that regulators will likely concentrate on is the governance around AI and ensuring that AI is working to deliver good outcomes for both consumers and markets, with a clear understanding by organizations of how decisions made by AI solutions are being reached.”
Opportunities in Canada
According to Dr. Manzer, present trends in Canada are consistent with the global strategy for enhancing the digital aspect of financial service delivery. It is anticipated that this will continue, with Canada strongly backing international approaches to the use of technology in the sector and its regulation, according to her. Ms. Struthers concurs. In Canada, she claims, “ongoing innovation and institutional interest in the FinTech sector remain strong.” “More businesses are starting to offer cutting-edge services, such as banking as a service and integrated finance.
We also observe that investors are paying more attention to the effects of environmental, social, and governance (ESG) factors. The International Sustainability Standards Board has chosen Montreal, Canada as its second location, and the CSA recently announced that disclosure of climate-related information will be subject to regulation. We anticipate that this will result in future scrutiny of the FinTech sector through this perspective.
Additionally, a number of regulatory notices issued by the Canadian Securities Administrators (CSA) have made it clear that companies that facilitate the trading of cryptocurrency assets may be governed by securities laws. As a result, according to Ms. Struthers, “we anticipate increased regulatory scrutiny in Canada as compliant players take additional steps to become or maintain compliance, and non-compliant players engage in conversations with regulators, examine their business models, or leave the Canadian market.”
The future route
The pandemic has had a significant effect on financial services, as well as many other facets of the global economy. Since the outbreak, FinTechs have had to develop their leadership, navigating, and disrupting skills in a period of significant change in the financial services industry. Consumers are gravitating toward FinTech services as a result of increased reliance on technology to satisfy their financial needs. The industry is expected to continue transforming the financial landscape as the world starts to move beyond the pandemic.