Fintech Toolkit: Smart Regulatory and Market Approaches to Financial Technology Innovation

61 Pages Posted: 8 Jun 2020 Last revised: 16 Jun 2020

See all articles by Dirk A. Zetzsche

Dirk A. Zetzsche

Universite du Luxembourg - Faculty of Law, Economics and Finance; Heinrich Heine University Dusseldorf - Center for Business & Corporate Law (CBC)

Douglas W. Arner

The University of Hong Kong - Faculty of Law

Ross P. Buckley

University of New South Wales (UNSW) - Faculty of Law

Attila Kaiser-Yücel

Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH

Date Written: May 11, 2020

Abstract

Finance has been transformed by digitalization and datafication over the past five decades. The latest wave of technology in finance (Fintech) is re-shaping the sector at an unprecedented pace. This digital financial transformation brings about structural changes, with positive and negative effects, likely even more in the high-potential markets of the Middle East and North Africa.

Fintech can stimulate competition and product variety with positive outcomes for societies and economies. The fundamental changes taking place in the financial system, however, call for the design of adequate approaches to Fintech innovation. An ecosystem is required that allows innovation balanced with financial inclusion, financial stability, market integrity and consumer protection.

This toolkit presents novel regulatory and market approaches policymakers, regulators, and development professionals can adopt to enable safe Fintech innovation.

Regulatory frameworks will determine the future of Fintech. Following principles from global good practice (mainly activity-based, proportional, and technology-neutral regulation), regulatory approaches in sequenced stages help to create pathways for innovative Fintech firms.

First, regulators ought to identify and modernize unsuitable regulation based on a regulatory impact assessment that determines whether legacy rules remain useful.

Second, proportional regulation, reflected in provisions for market stability and integrity depending on the extent of risks underlying the regulated activity, create supportive pathways for new, particularly inclusive non-bank financial services.

Third, an Innovation Hub with experts of the regulatory authority is best suited to guide Fintech firms through the regulatory maze, yield valuable insights into market innovations, and assess possibilities of dispensation.

Fourth, testing and piloting regimes allow to apply leniency in a wait-and-see or test-and-learn approach to assist innovative firms. Authorities can further decide to tolerate innovations by licensed institutions and possibly by start-ups by extending on a case-by-case basis waivers or no-action-letters which declare certain activities as permissible or suspend certain rules.

Fifth, a regulatory sandbox, which standardizes the scope of testing and piloting, allows regulators to create a tightly defined safe space for granting dispensation from specific regulatory requirements for innovative firms that qualify.

Sixth, restricted licences allow feasible innovative firms to further develop their client base and financial and operational resources in a controlled manner.

Seventh, a full licence is essential for innovative firms as size requires and permits. Over these stages, as regulatory rigour and costs increase so tend to do Fintech firms’ maturity and ability to cope with risks and compliance, while maintaining a level playing field for licensed entities.

Demand and supply side factors will eventually propel innovative entrepreneurship and Fintech growth. Market approaches to Fintech innovation combine the support of financial and digital literacy in the population, cybersecurity capacities in the sector, acceleration programmes and investor-friendliness in the business environment, and technology clusters or digital centres in public-private- academic partnerships.

Sequenced reforms that are informed by global good practise, responsive to the local context and that contribute to regionally consistent frameworks, are policymakers best pick in support of an enabling ecosystem for Fintech. Concerted efforts will enable innovative financial service providers to tap the market and scale as well as Fintech to be beneficial for financial inclusion, competition and economic development across the region.

Keywords: fintech, regtech financial inclusion, SDGs, sandbox, innovation hub, financial regulation

Suggested Citation

Zetzsche, Dirk Andreas and Arner, Douglas W. and Buckley, Ross P. and Kaiser-Yücel, Attila, Fintech Toolkit: Smart Regulatory and Market Approaches to Financial Technology Innovation (May 11, 2020). University of Hong Kong Faculty of Law Research Paper No. 2020/027, Available at SSRN: https://ssrn.com/abstract=3598142 or http://dx.doi.org/10.2139/ssrn.3598142

Dirk Andreas Zetzsche (Contact Author)

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

Luxembourg, L-1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/research_unit_in_law/equipe/dirk_andreas_zetzsche

Heinrich Heine University Dusseldorf - Center for Business & Corporate Law (CBC) ( email )

Universitaetsstr. 1
D-40225 Düsseldorf
Germany
+49 211 81 15084 (Phone)
+49 211 81 11427 (Fax)

Douglas W. Arner

The University of Hong Kong - Faculty of Law ( email )

Pokfulam Road
Hong Kong, Hong Kong
China

HOME PAGE: http://hub.hku.hk/rp/rp01237

Ross P. Buckley

University of New South Wales (UNSW) - Faculty of Law ( email )

Sydney, New South Wales 2052
Australia

Attila Kaiser-Yücel

Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH ( email )

Germany

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