Financial institutions have historically been regulated. This is not surprising if one considers the importance of the financial sector within the economy. Whether for internal or external markets, having a well regulated financial market is a key success factor of how a country’s economy works. Because innovation in the financial sector has been soaring throughout the past decade, the need for updated regulation has increased.
In our blog we have mentioned how regulation is one of the most important aspects of any industry, and FinTech is not the exception. In this post we analyze some of the fundamentals of how FinTech is regulated. Most importantly, we discuss why it matters for app development. In case you are considering developing a FinTech app or already have one, we recommend you continue reading.
A Brief History of Financial Regulation
The subject of financial regulation goes deep into the core principles of economics. Its purpose, after all, is to mitigate financial risks. The economy cannot work properly without financial institutions, so regulation is not something to dismiss easily. The debate on whether markets need to be regulated or not is as old as capitalism itself. The first financial regulations date back to 17th century Europe.
Supporters of unregulated free markets belong to what is referred to as the school of classical economics. In brief, this school of economic thought supports the idea that free markets work because they are able to regulate themselves. In contrast, the regulated market approach states that markets are not able to regulate themselves, so governments need to intervene.
These ideas have been put into question numerous times throughout the years, particularly when financial crises occur. A major turning point in history was The Great Depression of 1929. The magnitude of this crisis changed everything, paving the way for a stronger government role in market regulation. The result has been a strengthening of what is often referred to as Keynesian economics, in honor of John Maynard Keynes, the economist who established the modern basis for how governments need to intervene in the market for it to work properly.
In the end, it doesn’t really matter if you agree or not with this, because, as Nobel laureate Milton Friedman stated, “We are all Keynesians now.” Market regulation is a given in our globalized world, and as a result, the question is no longer if regulation is needed. Instead, it is more important to know ‘how’ the market will be regulated.
Why Financial Regulations Matter
In general, regulation seeks to make the financial system work efficiently through risk reduction and by preventing abuse of power. A more recent approach towards financial regulation also seeks to prevent and control illegal activities. As the world has become more interconnected, so have the possibilities to commit fraud. Besides illegal activities, globalization has required countries to have a unified financial framework under which they can operate. This consensus is the result of important turning points throughout the 20th century that established how the international financial system works.
Regulations can impact what financial institutions can or cannot do, so understanding this becomes essential for any financial business that wishes to stay afloat. It also matters a great deal for companies that want to innovate, as regulations can impede or slow down innovations. Also, consider that not complying with regulations may cause markets to fail and companies to go bust.
Who Regulates FinTech?
This question needs to be answered in a global context and in a country-based context. At a global level, there isn’t a single entity that regulates how FinTech operates worldwide. What exists is mostly a series of international treaties and agreements between countries that establish the fundamentals of how the global financial system works. These norms establish how financial operations can be executed across borders.
Understanding FinTech regulation at the national level poses a greater challenge because each country has its own approach. As a matter of fact, many countries do not even have a specific regulatory framework for FinTech. This results in many FinTech companies adopting the same regulations that apply to traditional financial institutions.
Most regulatory agencies are ascribed to some level of government, but they are independent of government decisions. This is done to prevent high-level government officials from influencing important decisions. Different regulatory agencies have different goals. For example, some entities might control commercial banks’ activities, while others might focus on how financial customers are treated by their banks.
In the U.S. there is not just one regulator. At the federal and state level, a variety of institutions regulate different specific matters. This approach has both negative and positive repercussions. Having many regulators makes it hard for companies to stay up to date or can result in complex regulatory schemes. On the positive side, it allows the sector to reduce risks on different frontlines.
For the case of the European Union, a series of multilateral institutions regulate financial activities, FinTech included. However, every country has a certain degree of autonomy in particular aspects. Belonging to a common market allows European countries to perform financial operations more efficiently than under separate individual systems.
An important reason why many countries do not have FinTech regulations is because regulators usually cannot keep up with innovations. FinTech is growing fast, and governments all over the world seem unable to regulate at the same pace. This is not necessarily a bad thing. An open regulation framework allows companies to innovate better than under strict regulatory control. However, lacking specific regulations for the industry can result in companies abusing their customers, or even worse, in illicit activities.
Why FinTech Regulation Matters for Your App
FinTech companies need to constantly monitor how they are being regulated, and more importantly, they should be always on the look to where the regulation is heading. This entails that FinTech apps should comply with regulations. As you might have guessed by now, not doing so may result in sanctions, or even worse, in unviable business models.
In general, FinTech companies are faced with the challenge of meeting user demands, complying with regulations, and innovating. This sounds complicated, and in fact, it is. Most companies do not have all the expertise needed to make ends meet. That’s where having an experienced app development partner comes into play.
A good FinTech app development partner can be the missing piece to your company’s success. Building great apps that comply with financial regulations is not a responsibility you want to leave in the hands of just anyone. Take for example the case of innovating through the use of Machine Learning. It is a great tool that is helping FinTech companies revolutionize the industry, but a poorly implemented model can be catastrophic for any company and its users. Nobody wants to have an app that calculates poor prediction models.
How FinTech regulations are implemented can have a major impact on innovation. The right partner should be able to discuss with you what app features are appropriate for a given financial service, and how this service can evolve due to regulations. It is even better if your development partner can help you implement RegTech in your app; RegTech is a relatively new approach towards regulation that uses technology to maintain compliance.
FinTech Regulation and App Development
FinTech companies outsource many of their services. They need to make sure that their development partners understand the complex regulatory map. As I’ve already discussed, there are major risks involved in this.
At Koombea we’ve been building great FinTech apps for more than 12 years. Throughout this time we’ve gained some solid experience when it comes to financial regulation. We are capable of helping you navigate the complexities of regulation while at the same time delivering a great app. We work at the intersection of great design, development, and compliance.
As FinTech experts, we understand that users’ data security is key to your business. That’s why one of the aspects that we prioritize is PCI compliance. Throughout all the FinTech apps we’ve built, data privacy and security have always been a priority for us.
Whether you are thinking about developing a FinTech app or already have one, don’t hesitate to contact us.