Although technology has been used in the financial industry for many years, FinTech has only gained traction in the 21st Century. The use of the term ‘FinTech’ is thought-provoking and created a space for further innovation in the financial industry. As such, it is important to understand the basis of FinTech and its possible regulatory and legal issues.
FinTech is a term that refers to financial technology. It is the application of new technological advancements to products and services in the financial industry. This growing industry affects both consumers and businesses. FinTech operates in relation to-
- Banking: Mobile banking has developed to meet the demands of consumers by providing digital access to bank accounts and online transacting. A further development includes Neobanks- virtual banks without physical locations.
- Payments: It is now easier to make digital payments, to make use of money transfer services and contactless payments.
- Cryptocurrency & blockchain: These technologies can work complimentary to FinTech services. See “Expounding Blockchain Technology ” for more information.
- Investments & savings: The manner in which individuals can invest and save has shifted dynamically with the rise in investment and savings apps.
- Lending & financing: There is more transparency related to credit facilities. Applying for loans and financing can take place online and consumers can request credit reports more frequently.
- Machine learning & trading: The development of Artificial Intelligence has resulted in technology that can analyze data and recognize financial trends and risks.
- Insurance: There are many innovations in insurance (‘InsurTech’) including more automated processes, expanding coverage, online policy handling and tailored insurance.
The Benefits of FinTech Services:
FinTech is effortless, secure and scalable. Individuals and entities can transact without physically going to the bank and ultimately it boosts e-commerce. A few main benefits of FinTech include-
- Crowdfunding platforms: Enhances relationships with customers and allows certain entities and individuals to receive support without raising money from conventional investors.
- Social change: Takes into account demographic and social needs by granting individuals access to microfinance and digital lending platforms.
- Robo-advising: Provides algorithm-driven recommendations and suggestions as well as customized portfolio management with little human supervision.
Legal Issues Related to FinTech:
FinTech poses legal challenges and risks within existing and overlapping legal fields. The main legal issues regarding FinTech services include-
- Data protection and cybersecurity: FinTech companies process great amounts of data. Therefore, they must ensure compliance with data protection laws and enforce cybersecurity measures. Related to this is the question of security when using biometric authentication and fingerprint recognition whether physically in the bank or virtually accessing banking apps.
- Blockchain technology and smart contracts: Legal issues applicable to blockchain technology and smart contracts similarly apply to FinTech Services. See “Expounding Blockchain Technology” for more information.
- Governance aspects: Regulatory issues that arise relate to the accountability for breaches of law and regulation – who is held liable? Particularly in the instance of robo-advisers. There are also taxation challenges regarding the applicability of existing tax frameworks to a digitalized economy. Furthermore, there must be compliance with financial services regulations which raises questions of how this will be achieved. Lastly, it must be determined who owns the Intellectual Property rights regarding innovations in FinTech.
The development of FinTech services creates a financial industry that is convenient, efficient and provides easy access to consumers. The expansion of mobile payment apps, digital platforms and the use of cryptocurrency and blockchain results in flexible and fast financial services. Additionally, better financial inclusion is enabled. FinTech greatly affects e-commerce and global economic growth. Due to the overlaps regarding legal regulations and related issues, it may be wise to consult a legal professional to assist with navigating FinTech.
Author: Caitlin Naidoo, Centurion Law Group