Over the last decade, ‘FinTech’ has become the buzzword of the financial sector, linking finance and technology together. This comes as no surprise when considering the revolution underway in the field as the two become increasingly interconnected. However, with the ingenuity of FinTech increasing in trendiness, both businesses and consumers are starting to wonder whether the breakthrough is too good to be true. In this article, I explore whether this is the case- are the potential risks of FinTech more significant than we think?
FinTech is where technological innovations are used to support and enhance financial services. Now at first, this may sound too complex for the average consumer, but in reality a large proportion of FinTech includes popular products you’ve already heard of such as online banking, crowdfunding and blockchain. Since the 2008 Financial Crisis, the FinTech industry has displayed incredibly high growth rates that only escalated during Covid-19 and the need for online banking when social distancing. As a result, FinTech has gained worldwide attention and predicted fortune, with the industry’s revenue projected to reach 188 billion euros by the end of 2024. Many believe Fintech’s projected success alone must speak volumes to its clear benefits, and certainly this is often the case. However, as the fundamentals of finance state, with heightened returns comes heightened risks: FinTech is no exception.
Parallel to the rise of Fintech, tension between contemporary and traditional finance has risen too. As FinTech’s transparency, efficiency and reduced costs attracts an increasing number of consumers, legacy banks are falling behind. In fact, the extent to which FinTech companies pose a threat to established financial institutions is already alarmingly apparent: some FinTechs have launched takeovers of legacy banks altogether, with one example being the acquisition of the Mexican bank ABC Capital by Argentinian FinTech Uala in November 2021. As a result, the traditional finance industry has realised that it must either integrate new technologies into their firms or face a very bleak future, with 82% of traditional finance institutions expecting to increase FinTech partnerships in the next 3 to 5 years However, the question on many experts’ minds is whether this move is too little, too late, as legacy banks continue to struggle against the popularity that FinTechs are accumulating.
You may be wondering what the issue is with legacy banks being replaced by smarter, more consumer-friendly startups. After all, isn’t change inevitable in an environment as dynamic as finance? While this is certainly the case, the concern for many with FinTechs is that the risks attached to the changes that they cause are not regulated or evaluated properly. Historically, FinTechs have been keen to clarify that they are not financial institutions, and as a result they are not limited by the regulatory requirements that are applied to banks. While this allows them the flexibility that much of their success is dependent on, it also creates more room for unmitigated risks which left undetected could harm consumers.
Indeed, the lack of adequate FinTech regulation is a serious concern, enough so that authorities are beginning to notice. In June, the Financial Stability Board published a report that identified ’10 supervisory and regulatory issues’ for the authorities to investigate further. The report included issues such as evidence of increased third-party fraud for consumers switching to FinTech, with the startups being accused of providing inadequate cyber security for their online platforms. Some critics have even gone as far as to brand FinTechs as irresponsible due to their negligence when it comes to minimising consumer risk in their lending practices. For example, many blame FinTechs for an increased risk of product unsuitability for consumers, as FinTechs, through their lower prices, offer increased access to riskier and more abstract financial products that consumers lack the financial experience to understand or use properly.
FinTech’s lack of adequate regulation and unsuitable lending practices may ring alarm bells when considering its similarity to the conditions of the 2008 financial crash. With legacy banks that are threatened by the autonomy of FinTechs beginning to invest in similar technology, many have begun to fear that consumers will only become more vulnerable to the risks that follow. However, if managed appropriately, FinTech can continue to grow, innovate and foster opportunities that many could not access before. As Luxembourg Finance Minister Pierre Gramegna stated, ‘FinTech is not only an enabler but the driving engine’ for a bright future in financial services. However, what is needed for it to remain bright is the enforcement of intuitive regulation that maximises returns for consumers while minimising the risks.