Technological advancements are making financial services more accessible, fast, and cost-effective. Cryptocurrencies, payment initiation, and banking data-management are revolutionising payments, forcing traditional banks to adapt or lose customer connections. Regulatory changes, such as sharing banking data with third parties, fuel this shift, allowing digital businesses to disrupt traditional payments and tech firms to enter the market. Fintech companies now provide selective services, cutting costs and regulatory burdens. Yet, these developments bring new regulatory challenges and risks.
Firms increasingly value customer data as a key asset, using it for monetisation or leverage. This shift has prompted banks to merge their models with fintech, partnering with tech companies to transform into versatile financial platforms, securely managing customer data. Banks are becoming data-driven platforms, while tech companies venture into financial services.
Trust is vital in financial and data markets, which rely on fiduciary relationships. The EU’s Payment Services framework, most recently PSD2 (Directive (EU) 2015/2366), lets customers manage their data, leading to new data-exchange services. Open banking empowers customers to control their data, enabling efficient third-party services and altering retail banking, especially in payments. Digital payments positively impact GDP, with the UK leading in open banking, influencing other nations, although the US lags due to regulatory complexities.
Regulators are redefining financial institutions’ roles, focusing on cybersecurity, data protection, systemic risks, and consumer safety. The historically unregulated fintech sector now faces varied regulations across regions. Effective regulation balances market competition with integrity. The European Parliament and Commission push for technological neutrality in regulation, ensuring financial stability and investor protection. Regulatory sandboxes and innovation hubs support this balance. PSD2 opens the payment market to non-banks, recognising two fintech services: information and payment initiation, excluding certain banking activities. Banks must share account data within privacy limits. Technological neutrality requires a functional regulatory approach, offering flexibility to new players. Sandboxes help regulators adapt to new technologies, striving for innovation alongside financial stability and consumer protection.
See more on EU data governance for fintech here.
In the US, a fragmented regulatory system, with Federal and state-level authorities operate independently, complicates regulatory oversight, posing hurdles for fintech firms navigating compliance. However, recent efforts like the fintech charter of the Office of the Comptroller of the Currency (OCC) aim to streamline federal regulation. The charter, for which the OCC opened applications in 2018, provides a unified framework for fintech operations nationwide, addressing both issues of consumer protection and cybersecurity.
Singapore’s Monetary Authority (MAS) and the Japanese Financial Services Agency (JFSA) foster fintech innovation through supportive policies and sandboxes, similar to the EU’s approach. These initiatives promote financial inclusion and market competitiveness while ensuring consumer safety and financial integrity. The JFSA revises regulations to maintain its economic and technological competitiveness; an amendment to Japan’s Financial Instruments and Exchange Act is currently being debated in parliament which would subject crypto-asset activities to licensing, fair-trading standards, and a derivative transaction framework.