Opportunities and Challenges For The Regulation System Of The Financial Sector As A Result Of The Development Of FinTech


The emergence of new companies and Business models in the financial technology (FinTech) market has a significant impact on the structure of the financial sector, especially in the long term and leads to new challenges for the current regulation system.


The financial technology market is one of the fastest growing segments of the global financial system. Thus, according to the estimates of the consulting agency KPMG, global investments in financial technologies in 2018 amounted to $111.8 billion with 2,196 deals.

PwC experts define Fintech market as dynamically developing segment at the intersection of the financial services and technology, in which technology startups and new market participants apply innovative approaches to the products and services currently provided by the traditional financial services sector. The FinTech market consists of financial services that are developed by companies using new information technologies. Among the main technologies that underlie FinTEch services, one can single out Big Data, mobile payments technologies (for example, Near-Field Communication (NFC)), distributed registry, etc. Depending on the functionality of the services, the market can be divided into four segments: payments, mobile commerce and settlement of transactions; personal finance management; alternative lending (p2p lending); alternative financing (Crowdfunding and Crowdinvesting).

The methodology of this article is based on an analysis of the current stage of development of the FinTech market using a Gartner hype cycle for emerging technologies, methods of statistical and situational analysis. Gartner hype cycle was developed by the consulting company Gartner and according to this model, financial innovation goes through a cycle that consists of five basic stages:

  • Innovation Trigger. At this stage, the first technological breakthrough is taking place, which attracts media attention and stimulates interest in new technology. At the same time, quite often there are no full-fledged services that have proven their economic efficiency.
  • Peak of Inflated Expectations. After the emergence of a primary interest in technology, more and more specialists are involved in its development. The peak of high expectations is accompanied by a growing number of success stories, which makes investment in financial innovation more attractive.
  • Through of Disillusionment. At this stage, there is a decline in expectations about new technologies, due to a number of reasons. First, investment payback expectations are most often not true, since innovation most often pays off only in the long run. Secondly, the introduction of innovation is associated with experimentation and hypothesis testing so investments in the early stages of innovation development are characterized by a high level of risk. In practice, investors continue to invest only in companies that are able to improve developed products and increase their customer base.
  • Slope of Enlightenment. Projects that were launched in the early stages of technology development and were able to prove their effectiveness, begin to show significant results. At this stage, a more complete understanding of the technologies underlying financial innovation takes place. Corporations that launch pilot projects are actively involved in the development of innovations, but conservative companies are not ready to take additional risks.
  • Plateau of Productivity. At this stage, for companies in the market, the introduction of financial innovation is one of the conditions for maintaining competitiveness, and new companies successfully compete with traditional financial organizations. The criteria by which the return on investment is evaluated are becoming clearer.

As part of a statistical analysis, the dynamics of global investments in the FinTech market and such indicators as the number of mobile wallets in the country and the volume of international money transfers will be considered. The method of situational analysis will allow to identify specific cases of manifestation of certain trends in the field of influence of the FinTech market on the regulation system.

Research Results

As a result of the analysis of the dynamics of global investments in the FinTech market over the past six years (Fig.2), certain conclusions were drawn regarding the stage of development of these financial innovations. Firstly, in 2013-2017, the dynamics of expectations changes, which corresponds to the transition from the Innovation Trigger stage (until 2014), to the Peak of Inflated Expectations stage (2015) to the stage of Through of Disillusionment (2016-2017). Secondly, 2018 is a record year in terms of the amount of investments attracted. However, it is important to note that such a growth was based on three mega-deals that were completed that year – the acquisition of Wordplay Inc. by Vantiv (a $12.86 billion transaction), the attraction of investments in Ant Financial ($14 billion) and Refinitiv ($17 billion). In addition, there is a tendency to increase the share of companies at a late stage of development in the structure of world investments and an increase in the share of large technology companies, the so-called BigTEch companies (Slope of Enlightenment stage).

Slope of Enlightenment and Plateau of Productivity are stages characterized by a more complete disclosure of potential opportunities for the regulation system of the financial sector. The following potential opportunities can be distinguished:

  1. Expanding public access to financial services

The involvement of new population groups in the financial sector is a large-scale trend, which is especially pronounced in the least developed countries. Given the low availability of traditional banking infrastructure (for example, in sub-Saharan Africa, almost 80% of the population does not interact with banks), mobile payments and alternative lending services are actively developing. So, in sub-Saharan Africa, 395.7 million people have mobile wallets, which is more than 60% of the adult population in the region. This factor also affects the development of the FinTech market in Asia and Latin America and can have a potentially strong impact on the size of the financial sector in the global economy, as well as on the effectiveness of the regulation system of the financial sector in developing countries.

2. Improving the efficiency of the provision of financial services and reducing transaction costs for financial intermediaries

First of all, new technologies can significantly increase the effectiveness of international money transfers, which in 2018 amounted to $23.65 trillion.

3. Improving the quality of banking services

A partnership of banks that have experience working with regulatory requirements and FinTech companies has high potential in the field of creating innovative products and improving existing banking products. For example, promising areas are financial advisory and investment management.

4. Increasing the level of security of banking processes

Distributed registry technology and biometric technologies help create a more secure information environment for banking operations. In the case of their massive introduction, there is the potential to increase the financial stability of the banking sector as a whole.

5. Increase in the level of transparency of banking processes

New technologies expand access to client data for various financial institutions (for example, the application programming interface (API), allows analyzing new categories of client data (for example, analysis of social networks, Internet behavior, consumer behavior)). In the long run, this provides a more accurate assessment of the risks associated with customer service, as well as more effective management of these risks.

6. Improving the quality of meeting the requirements of regulators as a result of the development of the segment of regulatory technologies (RegTech)

RegTech services help financial institutions comply with regulatory requirements that are growing. This applies to the processes of reporting, monitoring compliance with consumer rights and standards of combating money laundering. The basic technologies underlying RegTech services are cloud computing, APIs, Big Data, machine learning, artificial intelligence, biometric technologies and distributed registry technology. #the advantages of RegTech services are the ability to automate the analysis of compliance with regulatory requirements, the adaptability of the system to changes in legislation, the potential to reduce the costs of financial institutions and increase the effectiveness of risk management processes. RegTech services include FunApps in the UK, Fintellix in India, Abacus in Europe, Trulioo in Canada. These services help banks outsource the monitoring of compliance with existing regulatory standards, as well as the analysis of cyber security of information systems of banks. Thus, the potential for using RegTech services is not limited only to the area of compliance with regulatory requirements, but can also be realized in the field of risk management of financial organizations. In the future, this can improve the quality and efficiency of risk management and the stability of the banking sector.

Considering the potential impact of the development of the FinTech industry on financial stability in the economy, three main challenges were identified for the financial sector regulation system under the influence of FinTech companies:

  1. Intensification of competition and partnership of FinTech companies with traditional financial organizations;
  2. Entry of BigTech companies into financial services markets;
  3. The formation of a new risk structure in the financial sector as a result of outsourcing of processes for storing and processing customer data;

These challenges can have a comprehensive impact on the current regulatory environment not only in developing countries, but also in developed ones, which requires the development and implementation of a special regulation regime for FinTech companies.

En Dernier Analyse

When analyzing the prospects and challenges associated with the development of the FinTech industry, it is important to consider that, despite a high level of investment and active growth in the number of segments, the scale of the industry is still relatively low compared to the global financial service market. Only in some regions of the world, FinTech services occupy a significant share of the financial market (for example, M-PESA in Kenya and Tanzania, Alipay in China). Nevertheless, scholars, at the Financial Stability Board (FSB) point to the need to assess the long-term consequences of the development of the FinTech industry in order to make timely regulatory changes. Let us consider in more detail the scenarios that can be implemented within the framework of these challenges and opportunities for the financial sector regulation system.

Competition and partnership between FinTech companies and traditional financial institutions such as banks or insurance companies can take many forms. They can enter into partnership, implement joint projects and carry out mergers and acquisitions to increase the efficiency of business processes of traditional financial organizations . This scenario for the development of the FinTech market is one of the most realistic. Traditional financial organizations can use the competencies and resources of young FinTech companies to automate the processes of providing financial services, improve the quality of services provided and diversify their activities to increase competitiveness in the market. Other forms of interaction can be direct and indirect competitiveness in the market. Other forms of interaction can be direct and indirect competition with traditional financial institutions, especially in the field of payments. Ultimately, this leads to a reduction in the level of profitability in the industry. In terms of the level of market concentration, the emergence of new companies offering more competitive services may mean a redistribution of the share among financial institutions in specific market segments, which requires adequate action on the part of regulators.

The level of competition in the industry also depends on the potential of new technologies to reduce current barriers to entry into the financial services market. The need to invest in technological infrastructure, high administrative costs and the important role of reputation determine high barriers of new companies in the financial market. As a result of these barriers, the market structure often has a n oligopolistic type. At the same time, innovations in the FinTech industry can partially change the situation, for example, due to the spread of open banking API practices.

On the one hand, scholars point to the positive impact of a new wave of FinTEch market development on the level of competition in the financial sector due to the emergence of small startups offering unique personalized solutions. On the other hand, companies can seek to maximize the benefits of economies of scale, which translates into higher efficiency in providing financial services when aggregating large amounts of data. In this aspect, a significant risk is the possibility of abuse of power by companies with a monopoly position in the market.

Another challenge is that BigTech companies entering the financial services markets can increase competitive pressure on traditional financial companies. The competitive advantages of BigTech companies are the wide reach of potential customers, high brand loyalty, access to financial resources and customer data to provide more personalized services. Therefore, despite the fact that the current impact of the FinTech industry on the financial sector sector of countries is estimated to be relatively low due to the small size of the industry, the situation may change significantly if Bigtech companies are activated in the financial services market. This process may be strengthened with the further spread of the open banking API practice, as the reduction of access barriers to bank customer data deprives the latter of competitive advantages when implementing a marketing strategy.

Outsourcing of processes for storing and processing client data is a practice that has a multi-directional effect on the competitiveness of traditional financial organizations. On the one hand, according to new trends in banking legislation, banks are required to provide access to customer data within the framework of an open banking API, which deprives these traditional financial organizations of the exclusivity of the rights to own and process customer data. On the other hand, banks can use the possibility of outsourcing the processes of storing and processing customer data to obtain commercial benefits, which is manifested in a reduction in the cost of providing financial services, a more convenient user interface, an increase in the speed of a transaction, and also to more convenient user interface, an increase in the speed of a transaction, and also to improve the quality of credit rating of borrowers due to a greater customer data availability. From this point of view, the development of the FinTech industry can contribute to financial stability in the country by expanding access to financial services for new consumer segments, increasing the efficiency of pricing and lending processes. The positive impact of decentralization and diversification in the industry is also reflected in the reduced likelihood of a systemic financial crisis in the event of a failure of a large financial institution. Despite the fact that the spread of modern technology in the financial sector implies a high degree of interdependence, a great number of independent financial service providers can partially stabilize the market situation when a systematically important bank goes bankrupt and undergoes a rehabilitation process.

Nevertheless, in areas where there is direct competition between FinTech companies and traditional financial organizations, such macroeconomic risk as reducing the profitability of the industry may occur, which will lead to a decrease in the solvency of financial institutions, their investment potential, and, consequently, to weakening lending standards in conditions of the need to increase the profitability of the business.


FinTech market is a new wave of financial innovation, which began to develop in the post-crisis period. Based on the analysis of the dynamics of global investments in financial technologies, it was concluded that this market is moving to a mature stage of formation, at which there is a more complete disclosure of potential opportunities for the financial sector, including expanding access to financial services for the population, increasing the efficiency of financial services and the level of security of banking processes, lower transaction costs, etc.

Three challenges were identifies for the current regulation system of the financial sector as a result of the development of FinTech companies: increased competition and partnership of FinTech companies with traditional financial organizations, entry of BigTech companies into financial services markets and the formation of a new risk structure in the financial sector as a result of outsourcing of storage processes and customer data processing. Each challenge is characterized by a long-term nature of manifestation and is accompanies by the emergence of new risks for financial stability. Despite the fact that the scale of the FinTech market is currently relatively small, there is a potential for increasing systematic risks in the event of widespread distribution of FinTech services in the long term, which requires supervisors to study more deeply the issues of regulating FinTech market and monitor areas such as financial profitability sectors, lending standards and cyber security.


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