The FinTech sector continues to grow rapidly. Regulatory considerations need not be a "necessary nuisance" for FinTechs; they can actually be key to a FinTech's success.
First published: 1 October 2020
Author: Adam Turner
Early-stage FinTech startups are often passionate about new technology and its potential to disrupt the financial services sector, but their areas of expertise may not extend to regulatory issues. While it is tempting to treat these issues as an afterthought, it is in a FinTech’s best interests to consider potential regulatory concerns early in its formation, says Gen Advisory founder and managing director Michael Lukman.
“We understand that FinTech entrepreneurs have a lot on their plate and can often be time-poor,” Lukman says. “Even so, regulation doesn’t have to be just another thing on their to-do list."
“An effective regulatory strategy is a key tool for growth and success. But it’s important to consider this early - as opposed to creating a product, achieving scale and only then discovering regulatory hurdles which impact your business model.”
Working constructively with regulators
FinTechs have an obligation to educate themselves when it comes to financial services regulation – which in Australia includes macro and micro-prudential regulation, along with conduct, public interest, and market structure regulation.
“FinTechs need to understand that regulators often have a difficult task,” Lukman says.
“Balancing consumer protection and stability on the one hand, versus innovation and FinTechs’ needs on the other, requires precision."
“In Gen Advisory's experience, it’s in a FinTech's best interests to work constructively with regulators, as mutual empathy and respect are keys to success.”
A FinTech’s key responsibilities
A FinTech’s responsibilities include: ensuring customer protection and product suitability; preventing money-laundering and terrorism-financing; implementing adequate continuity and wind-down plans; respecting customer privacy; and ensuring it does not endanger critical financial infrastructure, among others.
“What FinTechs sometimes don’t recognise is that the regulation is there not just to protect the consumers and the system, but also to protect the FinTech itself,” Lukman says.
“As an example: Newly-established and/or prospective neo-banks may feel that their capital requirements are burdensome. However, these capital requirements are in place to protect the bank itself, as well as its depositors.”
Successfully navigating regulation requires prioritising early assessment of local regulation, engaging in constructive dialogue with regulators, thinking holistically, and considering the relative cost of compliance at scale.
"Precedents can help convince regulators of a FinTech’s business model. FinTechs should consider whether they wish to position themselves as a 'trailblazer' - which might bring first-mover advantages - or a 'close follower', which brings the benefits of innovation while negating some of the costs", Lukman advises.
Michael Lukman is the founder and managing director of Gen Advisory Pty Ltd - a specialised Australian professional services firm supporting ADIs and FinTechs.