‍

The fintech industry has made incredible progress in the past few years. In the pandemic alone, we all witnessed an evident upsurge in the adoption of fintech by people globally. Because of the gigantic scope of technology, the fintech sector has attracted countless professionals and experts, who continue to work relentlessly to create innovative fintech solutions for customers and businesses.

With the rise in demand and the adoption rate of fintech, the number of fintech startups has grown astonishingly.

Fintech hubs like Silicon Valley, London, and Singapore have uncountable startups offering various fintech services to customers all over the world. The extent of innovation and dynamism in the industry calls for strict regulations.

Because of the ever-evolving nature of technology, compliance and regulatory standards have become a mandate for operating in fintech. With so many players in the market, there is a persistent possibility of risks like money laundering, hacking, etc., that could lead to immense damage. Therefore, the need for a robust regulatory system is a must.

More than anything, it is the scope of technology that is used and abused by criminals to beat the regulatory structure of the industry. To curb and mitigate the risks involved in fintech, all players in the industry would need to consistently work together to streamline processes and set up efficient systems.

‍

‍

The Risks Involved

Fintech is an increasingly dominating industry that is gaining popularity quickly. With businesses and customers adopting fintech practices all over the world, the possibility of data and information falling into the wrong hands, increases. The most commonly occurring risks involved in fintech are:

‍

Money Laundering

Money laundering practices have been quite prevalent in the past and are still going on in the present age at a big level. Fintech enables the easy and quick transfer of money, especially transactions that require cross-border activities. If there is some level of leniency in the regulatory system, it could lead to the transfer of power from regulators to the people, leaving scope for anonymous and unverified transactions. 

‍

Quick Transfers

Fintech allows very fast transfers and transactions. Big amounts can be transferred across borders in a matter of seconds. This speed can also be used as an advantage by criminals. By quickly transferring big amounts from one account to another, there is the possibility that the trails created by these transfers outpace the regulations and scrutiny by the authorities. 

Criminals target “money-mules”, who are vulnerable customers like elderly or disabled people, who would not have the resources or the robustness to manage their financials very efficiently.

‍
‍

Customer Identities & Data Privacy

As fintech operations and functions exist online, it leaves some space for anonymity that is exploited by criminals and hackers, where they can conduct transactions online by breaching companies’ customers’ data and filling in their information. 

Criminals can also hack into company systems if there are regulatory lags and can steal personal and financial information of the customers or the company, putting everything at risk.

‍

Bad Loans

Another risk involved in fintech is bad loans. With verification processes being conducted virtually, there is a huge possibility of people manipulating their data to get loans from banks, which then turn into bad loans. These bad loans make the entire system vulnerable and unstable.

‍

Risk Management

With an innumerable number of players functioning in the fintech sector, the role of regulators has become indispensable. It has become absolutely essential for regulators to prioritize handling and mitigating the risks involved in fintech. Risk management is a vital tool for fintech companies that they should invest in. By following regulations and meeting industry standards, the possibility of risk exposure lessens. 

Due to the changing landscape of the fintech industry, the need for robustness is essential. It is crucial for the regulations system to match pace with the level of innovation existing in fintech. 

With a proper risk management system in place, the safety of customers and businesses can be ensured. The well-being of customers, market integrity, and financial stability depends on risk management. Fintech companies should follow some practices that could help them sustain stability and security in the market like:

‍

Due Diligence

Conducting proper customer due diligence and verifications brings integrity and stability in the market. Adequate verifications, along with strict KYC (Know Your Customer) can help curb many problems.

‍

Monitoring Transactions

Fintech firms should also invest in regulatory systems that help them closely monitor all transactions being conducted through them. Every purchase, every transfer, regardless of the amount should be tracked, which would help bring a level of transparency and trustworthiness in the industry.

‍

Following Regulations

Abiding by regulations and compliance at the country and international level is crucial for fintech companies. The regulatory system is also continuously evolving alongside fintech. This requires robust changes according to the changes in fintech. For companies to keep track of and comply with all regulations, it is advisable to invest in reg-tech, which would make their systems much more efficient.

‍

‍

Cryptocurrencies in Fintech
The future of cryptocurrencies in the fintech industry is a question many of us would like an answer to. But before jumping to the future, let us first explore cryptocurrencies and their synthesis with fintech.

‍Cryptocurrencies: What are they?

Cryptocurrencies are digital currencies that are not bound by government regulations or any central authorities. These currencies use Avant Garde technology to function. Stored in blockchains, they are easily transferable and highly secure and can be used for miscellaneous purposes.

The restricted role of government authorities in regulating cryptocurrencies doesn’t make them insecure for use. These currencies function in a decentralized system and are verified using blockchain technologies. 

‍

Blockchains

In layman’s language, blockchains are digital records that are majorly used for storing information about cryptocurrencies. These are decentralized ledgers, which exist in a peer-to-peer network and are open for public use. 

These ledgers contain every detail of every transaction that has ever been executed pertaining to cryptocurrencies. This public ledger is maintained in a decentralized manner, i.e., it is not governed by any centralized agencies. The level of transparency involved in blockchains ensures incredible security, as every action can be tracked and detected.

‍

Cryptocurrencies in Fintech

The buzz surrounding cryptocurrencies is here to stay. For some, the concept of decentralized currencies is reason enough to splurge, while for others, cryptocurrencies have become an investment taboo. 

Being decentralized, these currencies are immensely valued by people residing in countries where the centralized currency is volatile. A good majority of people cave into more stable options like cryptocurrencies that remain unimpeached regardless of their country’s economy.

Apart from people hailing from unstable economies, there are approximately 1 billion people who own and use smartphones but have no traditional bank accounts. Such unbanked individuals create a pool of potential cryptocurrency customers. 

Benefits of Cryptocurrencies in Fintech

‍

Efficient Money Transfers

Being set up in a decentralized platform, cryptocurrencies make money transfers easier and more efficient than traditional banks. These currencies can be used to transfer regular or even large sums of money in a matter of seconds. Traditional banking methods or even the process involved in online banking requires feeding in the information or adding beneficiaries, which take some time to get approved. Such cumbersome procedures can be completely avoided in the crypto spectrum.

‍

‍More Secure Payment Systems

Any payments that are processed using cryptocurrencies are executed through blockchain technologies. This technology records every activity of every crypto coin, making the entire system very secure and safe. The element of transparency exposes all records, leaving no scope for manipulation.

‍

Cryptocurrencies Vs. Fintech

An extremely powerful couple, cryptocurrencies and fintech are both creating a massive disruption in the way we have known and seen our world for many years. Both these elements got conceptualized a few years ago. 

Although fintech has witnessed a mass adoption, especially during the pandemic, cryptocurrencies are yet to attain such a level of popularity. Having said this, the valuation of both components conveys a more remarkable story. 

In 2021, a cumulative valuation of the top 100 fintech firms revealed a staggering USD 1.82 trillion. Meanwhile, the valuation of the top 100 cryptocurrencies stood at a stupendous USD 2.44 trillion. Having received much lesser acceptance by the masses, the cryptocurrency market has swelled incredibly, soaring higher than the fintech market.

Such unbelievable figures compel us to wonder about the potential cryptocurrencies possess. 

‍

The Final Word

A new age technology, cryptocurrencies are gaining momentum quite fervently. According to a report, 94% of financial experts believe that cryptocurrencies have a sparkling future in the financial industry, owing to the leverage of decentralization that they offer. Blockchain technology has not only attracted immense attention from the government but it is also being followed very closely by the banking sector.

Having a secure, open, and quick setup, blockchain technologies offer much better freedom along with safety. It is for these reasons that cryptocurrencies have so deservingly been in the limelight.

‍

‍

The evolution of the internet since globalization has witnessed very dynamic changes. The advent of smartphones especially has been the root of the transformation of the internet. Studies have shown that in a minute, more than 4 billion users access the internet for various reasons like shopping, searches, social media, and fintech-related activities.

The upsurge in the use of the internet and its accessories has led to an upheaval in the financial sector. People worldwide are forcibly having to stay cautious 24*7 about their data and personal information staying protected with the appropriate parties.

Cyber security is an essential unit in the fintech industry surrounding the security and safety of customer and company information and data. The number of cyber-attacks on fintech providers has grown aggressively; data and information being priceless assets in today’s world are the key incentives for hackers or malevolent parties. Anybody having access to personal and sensitive information has invaluable leverage against the vulnerable party. 

Ranging from company financials to customer information, all fintech firms have access to very detailed, comprehensive, and critical data. This puts the fintech companies at great risk of getting hacked. Any lag in terms of data protection and privacy could not only result in financial damage but can also defile the company’s reputation completely.

‍The Benefits of Cyber Security

‍

Regulatory Compliance

Because of the relentless growth in the fintech sector, a very robust and evolving regulatory framework has been set up at the international level. It has become mandatory for all fintech firms that meet some specific requirements created by the General Data Protection Regulation (GDPR) to comply with the regulations and guidelines outlined by GDPR. Such regulations are extremely stringent, and any lag from the company can even lead to its closure. 

‍

Financial Data Protection

Financial information is sensitive. To tackle issues concerning financial data protection, the Payment Card Industry Data Security Standard (PCI DSS) has mandated fintech companies to comply with certain policies and standards to ensure additional security. For fintech companies, such policies and regulations create directive pathways to follow, making it slightly easier for them to provide data protection and security. However, such stringent and mandatory practices also demand more resources and investments from the company, as cyber security becomes an unavoidable and independent department that goes along the way.

‍

Company Reputation

The majority of the data that any fintech company acquires from its customers is very sensitive. Any oversight in this respect can jeopardize the company’s future. Hackers and evil parties are always on the lookout for companies that either have failed to follow the regulatory guidelines adequately or have mistakenly left any lags. Such gaps in the company can damage its reputation catastrophically and eventually put its future at risk.

‍

Cyber Security Issues in Fintech

Since the onset of fintech, the partnership between traditional financial institutions and fintech services providers has multiplied rapidly. Such partnerships obligate easy transfer of data and information between the two parties. If either of the party fails to monitor and regulate their procedures, it could lead to multiple complications. 

According to one study, less than 50% of fintech firms invest in security and data protection. More than 90% of fintech companies at one point had failed in identifying the root causes of data breaches in their systems. Approximately two-thirds of the fintech had stored data in an unencrypted format, compromising the level of security even further. One-fifths of the passwords chosen by customers to login into their fintech portals could be hacked and revealed because of a lack of proper authorization and regulations. 

Such studies have continuously highlighted the foul side of the sudden upsurge of fintech. With personal and financial data floating on the internet, it is a matter of immense concern for all customers. 

During the pandemic, the fintech industry got propelled to a broader reach, where people had to adopt alternatives to customary banking methods. Because of so many people becoming aware of fintech and adapting to the changing environment of the financial world, the strictness in the regulations and standards has escalated, bringing some decorum to the dynamic interplay of fintech.

‍

Main Underlying Reasons for Cyber Threats

The main reasons identified after studying several individual fintech cases and scenarios are:

1. Unsafe Market Practices – Before the introduction of fintech, people all over the world had become accustomed to basing their transactional and financial affairs on trust and integrity and payment was mostly dealt in cash. With the emergence of smartphones combined with the increase in the number of middle parties involved in one transaction, the number of opportunities for hackers has grown. People leaving their accounts logged in, sharing their one-time passwords on phone, or even sharing their credit/debit card information over the phone have spiked the percentages of hacking.
2. Rapid Automation – With more people valuing fintech services and the convenience that comes along with them, the need for automating simple processes has gone up. Streamlined operations put the entire system at risk if the automation doesn’t take cyber threats into account. Keeping up with fintech regulations, while staying dynamic in their services is a challenge many fintech firms face.
3. Competition – The rapid increase in demand for fintech services has resulted in intensified competition levels. Fintech startups all over the world are trying to bring down their cost and increase their services. This catapults the system into the unstable ground. To lessen costs, firms try and cut down on their investments, including security. Apart from this, innovation is cruising globally empowering new startups to come up with innovative ideas and technology, which is immediately floated in the market, without any exhaustive testing of its data protection and security gaps.

 Such monumental issues need strictness and obligatory regulations and policies to bring back the lost balance. The fintech environment is ever-changing, and with such dynamic evolution, it becomes highly imperative to put some restraints and bind uncontrolled factors from causing serious damage. 

 Cyber threats have been on a rise in the past few years, but cyber security has now become an essential practice that has successfully lessened the number of opportunities hackers and malevolent agents get to exploit the system. With such stringent measures becoming mandatory for new and old fintech firms, the fintech market is finally settling into good shape.

‍

‍

Stimulated by people’s quick adaptation to smartphones and computers, the wave of fintech has been propelled further by the pandemic. This industry came out as the true winner during the pandemic, by escalating its influence and impact on the everyday lives of billions of people worldwide.

‍Top Global Fintech Hubs
Since the onset, the United States of America has been the global leader in the fintech industry. The number of fintech unicorns, other companies, and startups has risen astronomically, not only in the US but all across the world. The fintech sector has disrupted the usual ongoing in all other sectors by changing the face of financial services. 

The Silicon Valley in the San Francisco Bay Area, US, has been declared the bed of technological developments in different industries. With more than 200 fintech startups, the place tops the list of world fintech hubs.

The city of London in the United Kingdom is the second world leader in fintech hubs. Dominated by the financial technology market, the city now has close to 200 startups, revolutionizing people’s perception of fintech. 

New York is the third world leader vis-a-vis global fintech hubs. The city has always been accepted as the financial capital of the world, because of its dominance in the financial market and the advent of fintech in New York only seems like a natural course of its mark. 

The fourth city-state to reach the top five list of fintech hubs is Singapore. With more than 70 startups providing financial and trade services globally, Singapore has reeled in the attention of the world. 

The fifth city to make the cut is Los Angeles, in the US. With lower employment costs compared to New York and the Silicon Valley, and talent pouring in, this city has earned its supremacy in the fintech industry. It has more than 60 startups rendering it pivotal in the fintech industry.

Three-fourths of the fintech activities worldwide are mainly dispersed across US and Europe. Together these places account for more than 1600 fintech firms, playing the lead role in the industry. Fintech activities are not constricted to these dominants, as they are growing at an expeditious rate worldwide, with countries like Germany, Japan, and India reporting a stupendous growth chart.

‍

 Biggest Fintech Players

‍

USA

Visa and MasterCard, also known as the originators of fintech, are still global leaders. With a market valuation of more than $400 billion, Visa stands to be the world leader in fintech. It is closely followed by MasterCard, which has been valued at $350 billion. Even though these companies hold mighty valuations, their service categories don’t necessarily make up mainstream fintech.

Fintech firms like Intuit, PayPal, Square, and Chime have been the real fintech players in the United States. 

With a valuation of over $100 billion, Intuit is the largest fintech services provider in North America. PayPal is a cardinal fintech player, which has become the voice of fintech for companies and individuals all over the world by providing e-payment and e-transfer platforms and services. It has been estimated at a little less than $100 billion.

‍

UK

Being a global fintech hub, the UK has developed a fintech army disrupting traditional banking methods. Companies like Checkout.com and Revolut, with individual valuations of approximately $40 billion, are taking the country to the center stage of fintech.

‍

China

The largest conglomerate of fintech resides in China – Ant Financial. The company majorly falls in the open banking category, with a number of subdivisions like AliPay, which are leading the world in terms of innovation and turnover. With a staggering estimate of more than $300 billion, the company is the largest fintech player in the world.

‍

Others

The key players in the rest of the world are housed in tiny pockets like Stripe in Ireland, Gojek in Indonesia, Klarna in Sweden, Nubank in Brazil, Grab in Singapore, and at least a hundred more. 

The instant revolution that is being experienced by the world in the fintech industry is incomparable. With the sudden surge in adoption and demand for fintech services and products, it has become an indispensable industry that is changing the way the financial sector functions.

The true potential of technology has just started grabbing our attention and one cannot possibly fathom how far we can go from here.

‍

‍

Digitalization of the financial sector has been on the frontline news in the past few years. With a steadily rapid momentum, the world of fintech is expanding and prospering unimaginably. Finance and banking have been at par with health and medical sciences vis-a-vis essential services. The introduction of technology in all these sectors has occasioned an explosion of growth opportunities.

‍The Growth of Fintech

Digital finance has enormously disrupted traditional banking and financing methods. It has enabled banks and financial institutions to provide more customer-centric services without the need for physical branches majorly. Customers are not required to be present at the institutions physically for services that are available online. The magnitude of convenience experienced by people worldwide has prompted the success and expansion of fintech globally.

With more and more people realizing the power of e-banking, e-payments, easy credits, etc., it has become imperative for big banks and businesses to include fintech as part of their services. With hundreds of legitimate businesses offering competitive services, people can make use of the new customer-driven tactics that have been adopted by most fintech firms.

Because of the outreach combined with the convenience offered, the adoption rate of fintech has grown exponentially in the past few years. The pandemic especially compelled businesses and customers to explore online options that were otherwise not available or were limited. For instance, Russia has witnessed a 26% fall in the number of physical branches of banks in the past four years. 

Not only has financial digitalization impacted businesses, where small and large businesses are becoming more fintech-inclusive, it has also affected the relationships that customers share with banks and financial institutions. User-friendly interfaces and simple procedures have become basic customer requirements.

‍

Adoption Trends of Fintech

The growth of fintech globally only resounds the trend that there are millions and billions of consumers adapting to the age of digitalization. The number of smartphone users is one of the primary underlying reasons for such a steep line of success. Conducting transactions or availing of banking services has become so quick and easy that customers have started enjoying this convenience that comes along with digitalization. 

Data protection and privacy are prerequisites that digitalization has to ensure. Although the system is not fool proof and there still are reported incidents of cyber-attacks, account hacking, money laundering, etc., the level of regulations and security that even small fintech startups have to follow is high. This makes the system quite secure, where customers can freely execute their everyday operations without persistently worrying about errors. Digitalization of finance is equipping financial data and information with technology. The margin of errors substantially goes down when there is minimal ambiguity and all data has concrete subsets; this adds to the trust and goodwill of digitalization, where customers have reassurance of error-free and quick processes.

Many surveys conducted on customer behavior and incentives have identified a few factors that have had the most impact on the digitalization of finance. These are:

• User-friendly interfaces
• Very fast-paced
• Easy and simple processes
• Secure systems
• Peer adaptation
• Reputation
• Offers and discounts
• Word-of-mouth

The advantages of convenience combined with security and peer-approval have enabled such a mass adaptation of financial digitalization. 

‍

The Role of Generation Z

Gen Z is also known as “digital natives” because of their innate abilities to understand technology. Having been born in the digital age, our newest generation has got the opportunity to use and adapt to digitalization like no other generation. Financial digitalization too has found strong support in this generation. The Gen Z has been the pillar that has bridged the gap between a digital world and the older generations. 

 The power of financial digitalization has been a global revelation. Fintech companies need to focus on strengthening their customer base and improving their reach to build a better foundation. To achieve this, startups and companies can work on a few areas which can help them develop a bigger and more powerful niche.

‍

‍Financial Knowledge

Improving financial literacy is one of the subsets of adapting to digitalization. With better literacy in terms of financial news and information, people can be in a better position to make decisions and choices. Introducing new digital concepts is going to raise questions and doubts, which can be minimized if financial knowledge is readily available and provided to people.

‍

Spreading Reach

Technology does not need to stay within urban boundaries. There is immense scope for fintech expansion in areas which are not entirely inclusive yet. By spreading their reach in semi-urban and rural areas, fintech startups and firms can tap excellent opportunities as the majority of the population resides in these places all over the world. 

‍

Closing Words

The scope of financial digitalization became evident during the pandemic when people had started exploring alternatives to traditional banking and financial systems. The ease of use and convenience immensely appealed to the masses. The adaptation of digitalization happened quickly and smoothly, which only prompted its adoption further. Prerequisites like customer-centric services, readily available sources and information, and quick turnarounds have evoked the fintech revolution.

‍

‍

The fintech spectrum is developing rapidly every day. As more and more companies join efforts in amplifying this wave, the more imperative it is for regulators to take control. After the global crisis of 2008, people realized the sanctity of monitoring and regulating inflows, outflows, and all other finance-related activities, which otherwise could cause substantial damage. 

Technology has become the key to the expansion and growth of businesses in all sectors. In finance particularly, the corroboration of technology has challenged conventional methods to the extent that there is no going back for many of us. In times like these, where there are ongoing rapid developments, new challenges, and thousands of new participants, the need for regulations and monitoring has only intensified.

The first step in determining regulatory best practices is understanding the intent and objectives of these regulations.

Objectives of Regulations

Consumer Protection

The main objective of regulating any activities and practices is to protect the participants from unforeseen scenarios. The financial crisis of 2008 was a result of the gap in monitoring the everyday activities of people. Since then, companies, investors, and people have observed caution and made financial regulations an absolute priority.

Financial information is highly-sensitive in nature. Unsupervised actions vis-a-vis financial dealings can lead to catastrophic consequences. 

‍

Financial Stability

Digitalization of finance has prompted the system to become more decentralized, which was not the case with conventional methods. Since independent companies are innovating and digitalizing the financial space, the possibility of skewed information only grows. With so many participants functioning in a decentralized manner, the protection of both consumers and investors becomes a priority. Skewed data and information can lead to considerable financial instability, which can be easily evaded by placing adequate regulations.

‍

Market Integrity

One of the most important underlying factors enabling financial dealings is trust. Integrity is a key-attribute that potentially defines how healthy a system is. Introducing strict regulations and policies would intensify the effectiveness, but it would still leave some scope or gap for infiltration like frauds, money laundering, etc. To minimize this space, regulators need to incentivize market integrity by levying heavy penalties for outliers. 

Fintech is rapidly evolving with fierce momentum. The regulatory objectives outlined for fintech firms should be crystal-clear to enable appropriate assessment of activities and the risks involved.

‍

 General Regulatory Principles

The dynamic energy surrounding fintech can have both positive and negative consequences. While dynamism allows tremendous scope for innovation or, more appropriately put- “finnovation”, such unbalances also lead to more risks and frauds. In the digital finance context, basic policies should remain uncomplicated and supported by the majority. When the basics are clear and agreed upon, it leaves minimal scope for volatility and turbulence. Three primary areas are emphasised most that help increase the effectiveness of these principles:

‍

 Legal Boundations

The primary focus of regulations is to bring lucidity, in terms of legal obligations. All economies, involving digitalization of the financial sector, have legal terms which exclusively outline the scope of activities start-ups and companies can engage in. Clarity of such laws and permissions is essential in mitigating ambiguity. 

Other than clarity, the regulatory system governing fintech laws has to ensure that it remains robust. Fintech has caused a disruption in conventional finance practices by bringing in innovative technology, new business models, unimaginable ideas and more, which involves working with different market participants like investors, regulatory institutions, international laws, etc.

Even though big challenges pour in at every step, fintech regulations should be outlined clearly and adequately, to bring all aspects of fintech to a similar level.

‍

Technology Neutrality

Being neutral when it comes to innovative technology is crucial for regulators. It is impossible and even unwise to try and compete with the ever-changing world of digitalization and to assess and monitor all kinds of technological developments occurring in this space. The regulations should target their focus on the outcomes and the applications of technology. Ascertaining the usefulness, safety and security is more important, as a first step than to assess every upgrade or alteration that occurs. 

Also, when regulators are unbiased, it leaves the doors open for innovation. Backing a particular type of technology can often lead to an unintentional change of perceptions. Regulations need to balance themselves on the narrow path between accelerating innovation and redundancy resulting because of over-monitoring.

‍

 Proportionality

Factors like the size of a company, its business model, complexity and the nature and scope of its activities, determine the kind of regulations that would be suitable for its performance and functionality. Many fintech start-ups focus on only one aspect of banking like investments, e-payments or e-transfers. Levying all banking regulations on such businesses would result in their stunted growth. So, it is crucial for regulators to consider such factors that would help define the scope and extent of business operations.

‍

 Final Words

Regulations have often been compared to guiding lights which direct businesses towards the right path. All developments emerging in the fintech space are governed by their regulations. Other than mitigating issues like data protection and cyber security, these regulations also help define the path that new and old participants can take to reach the desired results. The fintech disruption has affected billions of people and households. The magnitude of possibilities is enough to understand the role regulations play in sustaining the entire system.

‍