How should fintech approach regulation?

Some would argue that regulators have often been slow to keep up with the pace of technological change. But, with a growing spotlight on financial services, more regulation of the fintech industry is on its way.

As Europe has seen with PSD2, regulation can actually help to open up a path for innovation. That means it’s not something that fintechs need to fear, especially if they take a proactive approach.

But at what stage of your business should regulators become involved? These are key concerns, according to Auxmoney co-founder and CEO Raffael Johnen.

“One of the decisions for every part of the value chain is whether we are regulated ourselves, or whether we work with a service provider that is regulated and that basically extends the regulation on to the fintech,” he said.

“Over time, you find out that the economics will be more attractive to buy your own licence,” he continued. “You have more flexibility to build products because you don’t operate under the limitation of banking as a service provider.”

Regulate from within or take it in-house?

Working with an established financial institution, such as a bank, is an attractive proposition for an early-stage company, as a lot of the regulatory infrastructure is already in place.

“Ultimately, for banks and for credit institutions, this is really the highest standard when it comes to compliance and governance framework,” said Iana Dimitrova, CEO at OpenPayd.

I think it’s really important that a lot of the regulators coming into this also communicate and work with people working on crypto technology.

– Okezue Bell, founder at Fidutam

The temptation to see regulators as the opposition is fundamentally self-defeating. Fintechs and regulators ultimately have the same goal: ensuring economic growth.

“It’s thinking about the problem you’re solving,” said Iana. “How is the technology going to work, making sure that you can cater for this from a tech product security perspective? And then what is the path to profitability? Because, ultimately, what matters is the economic growth. This is why regulators are there.”

But, as Okezue Bell, founder at Fidutam, explained, regulators need to do more to understand emerging technology.

“I think it’s really important that a lot of the regulators coming into this also communicate and work with people working on crypto technology,” Okezue said. “They’re evolving so rapidly that a lot of trust isn’t being built … and so it’s becoming difficult for them to understand what to regulate. So then they just start cracking down on the system itself.”

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