Fintech is still relatively new. It’s fast growing. It’s global. And it has the potential to hurt consumers on a massive scale if not properly regulated.
Industry growth is needed to challenge incumbents to innovate, lower prices and provide a better service to customers. Over-regulation is as much a risk to the sector as under-regulation.
How can regulators balance these concerns? Sandboxes might be the answer.
In the world of computer science, sandboxes are security mechanisms used to execute untested programs or code, without risking harm to the host machine or operating system. They provide a controlled environment in which programs run with restricted network access, eliminating the risk of contagion to the wider system. This ‘virtualization’ helps programmers spot bugs, malware and dysfunctional behaviour.
But what do sandboxes have to do with fintech?
Adam Farkas, Executive Director of the European Banking Authority, recently spoke positively about the use of ‘regulatory sandboxes’ as a force for good. He cited the FCA’s Regulatory Sandbox as a leading example of a ‘safe space’ in which fintech businesses can test products, services and business models in a live environment while ensuring that consumers are appropriately protected – a process that’s being closely monitored by other financial authorities.
It’s apt that terminology from the computer science lexicon is cropping up in fintech regulation. The parallels with the pharmaceutical industry are also clear to see.
Clinical trials provide pharma and regulators with real world data that helps balance patient protection with drug development and business growth. This way of working acknowledges that it’s necessary to take risks to encourage innovation – provided they’re tempered with a rigorous approach to supervision.
Regulation is often viewed as a headache by management teams, who want to get on with the job of growing their business. But the core purpose of any company – to deliver value to its customers – depends upon a stable, transparent market. If sanctioned correctly, regulation helps protect the interests of consumers and fintech companies alike, creating a bigger market for products and mitigating against competitive advantages across geographies.
There is no such thing as risk-free regulation. Reactive regulation certainly doesn’t work. It can be disastrous – as we discovered during the global financial crisis. Disruptive behaviour by the fintech industry demands disruptive regulation, and the FCA is striking the right balance with its proactive approach.
Fintech needs to be regulated on a global scale and the FCA sandbox provides a blueprint for how it can be done. Regulation should facilitate orderly roll out of financial technologies across jurisdictions, whilst remaining proportionate to systemic risks. This balancing act requires transparency and visibility for regulators – which means access to accurate, comprehensive data.
Crowdsurfer is helping to solve this problem for crowd finance, with the industry’s most comprehensive data and analytics. Our ‘Track’ feature is an important tool that helps regulators and central bank officials – including personnel at the Bank of Finland – monitor the crowd finance industry and get a better view of the market in which they operate.
We’re proud to be working with regulators around the world to help them monitor and respond to the rapid growth of the fintech industry.
Visit our website to learn more about using Crowdsurfer Pro to discover, track and analyse funding marketplaces.