The past few months have been turbulent for fintechs. With tanking economies, falling investment interest and an extremely long crypto winter, change has become a familiar state of being.
But, as the industry continues to mature, more changes are expected – this time in the form of regulations that will seek to stabilise and secure fintechs by building trust in the space.
Here, we take a look at the top four fintech sectors set to experience new regulations.
Cryptocurrency and DeFi regulatory changes
Since US President Joe Biden formalised his intentions to regulate cryptocurrency and the decentralised finance space in 2022, much debate has been aired about exactly how such a task could be done without compromising the privacy and autonomy of the space, which have made it so successful with investors.
James Corcoran, Chief Growth Officer of KX, explains the quandary. He says a common worry in the industry is that, once the regulators and additional technology get involved in the crypto ecosphere, innovation will slow down.
“Regulation is inevitable – the IMF has said crypto assets are no longer niche and regulators need to catch up. The European Central Bank has urged eurozone countries to harmonise different rules around crypto regulation before EU-wide laws come into force at the end of 2023. The US is also pushing for more regulation, with the US Treasury encouraging new laws to address crypto regulation gaps.”
He continues: “When you strip everything back to its bare essentials, the fundamentals behind trading crypto are similar to how traditional financial markets operate. Introducing regulation will bring greater stability, security, and efficiency, which it can be argued will lead to more – not less – innovation, competition, and choice. Better oversight and governance will also further strengthen its role as an additional form of currency, silencing the doubters who say it is like the Wild West.
“Ultimately, it’s all about giving choice and security to both existing players and new market entrants.”
More regulation of incumbents in the digital space
As cyber threats soar and security becomes an increasingly front-of-mind consideration, traditional financial institutions are finding themselves out of touch with the latest innovations, technologies and regulations required to secure their systems. Jurijs Borovojs, CTO of Transact365, explains that 2022 has been particularly turbulent for traditional financial institutions.
“On one hand, we’ve seen large legacy institutions punished for a lack of compliance and due diligence; as was the case with Citi Group’s £12.5mn fine for a lack of effective monitoring of trading activity and the £63.9mn fine for HSBC, which had underperformed in its anti-money laundering due diligence.”
But he points out that traditional financial institutions have come to the aid of countries with increasingly unstable economies – most notably, the Bank of England’s intervention after the sterling price plummeted following governmental tax cut announcements.
“Businesses and customers are struggling to maintain trust in traditional finance forms. For these institutions, it’s important they rebuild this trust quickly or risk increased alt-fi market penetration. Had alternative finance forms like cryptocurrency remained more consistent in 2022, we may have already seen a sharp uptick in alt-fi adoptions. That being said, the crypto sector has rebounded well, opening new opportunities for growth, awareness and increased trust from people whose faith in trad-fi institutions has waned.”
He adds: “These dynamics directly impact the consumer, who is stuck between a rock and a hard place over who to trust when placing their assets. The stakes are particularly high in 2022, with the cost of living crisis present in the UK, meaning wise investment and security are of the utmost importance.”
Anti-fraud regulations for the banking space
As part of a drive to prevent increasing rates of fraud within the financial space, the UK – the world’s second largest fintech hub – is exploring the introduction of a national fraud strategy.
In response to the Labour party’s calls for a national fraud strategy Daniel Holmes, SME Fraud Prevention at Feedzai, explains that such a move is needed because fraud losses continue to increase year-on-year.
“Money lost to fraud and scams has long been cited as a risk to national security, but now more than ever, as we enter more economic hardship, it is becoming clearer that the impacts on consumers themselves are just as devastating.”
He continues: “Banks typically receive the majority of the burden when it comes to regulatory change, but the bill proposal shouldn’t overlook the fact that there are many other parts of the payments and digital ecosystem that play a key role during a scam.”
Holmes goes on to explain that the latest Payments Systems Regulator (PSR) regulation announced in October is a positive step in the right direction, as the proposed changes will force banks to work as a collective more than ever before.
“If the proposed regulation makes its way into reality, consumers will benefit from enhanced liability protection, meaning they are out of pocket less often. Additionally, banks will have to fundamentally rethink their approach to monitoring not only payments leaving their bank, but also payments that they receive.”
Buy Now Pay Later (BNPL) to adhere to new rules
The largely unregulated BNPL space has been navigating stormy waters of late. With inflation driving up costs of living, the post-pandemic economy is seeing more people turn to loans, and
BNPL is expected to feature prominently as consumers reduce their immediate spending and turn to it as a mechanism for essentials.
By mid-2023, providers will face harsher regulatory procedures. The new directives will necessitate BNPL providers carrying out in-depth credit checks on consumers to ensure that they can afford to take out loans. Furthermore, lenders must also be approved by the Financial Conduct Authority.
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