Fintech's regulation

Fintech’s Regulation

Introduction

The global financial crisis of 2008 has given a great lesson of financial prudence, stability and sustainable growth and afterwards, several financial measures have been taken place across the financial and regulatory institutions. The definition of financial stability has been given by the World bank as “A stable financial system is capable of efficiently allocating resources, assessing and managing financial risks, maintaining employment levels close to the economy’s natural rate, and eliminating relative price movements of real or financial assets that will affect monetary stability or employment levels.” Whenever a financial imbalance arises due to exogenous activities and adverse events, the self-corrective mechanism of a stable financial system absorbs the shock and prevents the real economy from its disruptive effect.

Financial intermediaries play a major role in economic development by providing important financial services to the parties involved. They ensure the effective usage of capital by proper credit allocation at lower cost and addressing incentive problems between borrowers and lenders (Diamond, 1996). The contribution of financial intermediaries in economic growth and development is vastly discussed in majority of the studies (for example, see Pagano, 1993; Levin, 1998; Benhabil & Spiegel, 2000; Hasan, et al., 2009). With the technological development and revolutionary digitization of business operation, a new kind of financial intermediaries emerged and are called ‘Financial Technological Companies (FinTech)’.

The landscape of FinTech’s regulation

Due to innovative products and services offered through the technological platform, the risks inherited in financial transactions have also increased many folds. Cybercrime and money laundering are some of the greatest threats posed by Fintech. The growing popularity of Artificial Intelligence (AI) has made the FinTech ecosystem quite vulnerable (Hazdun, 2022). Hence, regulatory challenges for FinTech are comparatively higher than for traditional intermediaries. Further, Fintech has different natures of operation and complexity across countries and hence, the one-size-fits-all approach is not suitable. Every country has its own set of regulations to control the activities of Fintech and protect the individual’s interest. However, all such regulators have their common goal of achieving financial stability and harnessing the immense potential of Fintech for economic growth and development. A few of the regulations and joint efforts are discussed here.

In India, Fintech is mainly regulated by the following regulatory authorities:

·       Reserve Bank of India (RBI)

·       Security and Exchange Board of India (SBI)

·       Insurance Regulatory and Development Authority of India (IRDA)

·       Pension Fund Regulatory and Development Authority (PFRDA)

Key indicators of financial stability

The stability of the financial system across the world is the result of the collective efforts of many regulatory institutions and here, IMF (2006) has played a leading role in developing key indicators of financial stability. Table 1 shows the major indicators of financial stability in six sectors.

Table 1: Commonly used variable for financial stability

Sectors Measure

Real economy GDP growth

Inflation

Corporate sector Leverage ratio

Foreign exchange exposure to equity

Corporate default

 Household sector Household assets

Household debt

Household income

 External sector Real exchange rate

Foreign reserves

Maturity/Currency mismatch

 Financial sector Monetary aggregates

Capital adequacy

Liquidity ratio

Risk premia

 Financial market Equity indices

Bond spread

Liquidity

Market volatility

      Source: Gadanecz & Jayaram (2009) in IFC Bulletin No. 31

FinTech has diversified business activities and thus, they are not supervised by a single regulatory body. Further, the interdependence of business activities and the complexity of work makes Fintech difficult to the accurate assessment of risk and financial soundness. Thus, FinTech is regulated differently as per the jurisdiction and law of the land. However, there is a consensus among the countries to make the financial and regulatory norms effective and prudent to regulate Fintech on the one hand, and harness the opportunity of digital growth with financial stability and economic development. International bodies and groups support the regulator with border framework and guidelines.

References

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