The regulation of people, activities and processes is being replaced by automation and algorithms. As Financial Technology (“Fintech”) alter the attributes of financial services and market structures, financial regulation must adapt to remain effective. Among other things, Fintech product/service providers are streamlining business processes, which allows customers the opportunity to fulfil their financial wants and needs through non-traditional, user-friendly online channels. This includes a wide range of business activities from the accessing of investment advice to taking out a loan.
As the regulator of the securities industry, the TTSEC has the responsibility to monitor the industry, to understand its potential for development and to encourage innovation to foster that development. Internationally, innovative products, referred to as Financial technology are becoming more prominent, from robo-advisers to crowd funding platforms, technological developments are altering the financial services industry. These changes are creating both opportunities and challenges for entrepreneurs, consumers and regulators. “Financial technology” refers to technology enabled financial solutions. It is often seen today as the new marriage of financial services and information technology. (Douglas W. Arner 2015, pg. 2).
Importance of Fintech
Fintech developments encourage financial inclusion which means that individuals and businesses have access to useful and affordable financial products and services that meet their needs (transactions, payments, savings, credit, and insurance), and are delivered in a responsible and sustainable way (International Monetary Fund & World Bank Group 2018, pg. 12).
Fintech can improve the securities industry of Trinidad and Tobago by providing alternative means to match investors, lenders and borrowers. Fintech product/services can provide a more level playing field and reduce information asymmetry in the securities industry, which will result in retail investors having greater participation in the industry. With the utilisation of innovative solutions, financial and investment advice will be available to the wider community and not only be restricted to high net worth and sophisticated investors.
Developing countries can benefit from the use of Fintech through the creation of alternative sources of capital which can assist in developing businesses and the economy. Diversified funding options will assist small business since Fintech providers can create tailored products/services related to an organisation’s size. Fintech solutions can assist small businesses by providing them with better cash flows, improved working capital management and more stable or secure funding. Fintech solutions can also provide cost effective ways to assist businesses in managing payments, customer relationships, invoicing and inventory management.
In developed countries where most types of financial services are readily available, one of the main benefits of Fintech includes the reduction of costs associated with maintaining ‘bricks & mortar’ branches. Organisations in developed countries also utilise Fintech products/services to obtain or retain competitive advantages by improving efficiency and enhancing customers’ experiences.
Just as the internet empowered people around the globe by providing access to information, Fintech is reducing information asymmetry in the marketplace by increasing transparency and improving customer convenience. Overall Fintech can enhance the efficiency of finance and will contribute to economic development.
Risks of Fintech
The emergence of innovative technologies has led to the development of new risks to the financial sector. Regulators must be aware of these risks and ensure registrants/licensees have appropriate policies and procedures in place to mitigate them. Some of the risks identified by the (International Organization of Securities Commissions 2017) are as follows:
- Operational risk – this risk type is strongly correlated with other risks and results from inadequate or failed internal processes, people, and systems, or from external events. The following can occur due to insufficient policies, procedures and risk mitigation strategies at a Fintech provider:
- Technology Failure – this includes transaction delays due to the poor (or lack of) internet bandwidth, or due to agents’ devices not working which might result in wrong data entry, error in systems’ maintenance, execution failures, delivery failures, and process management failures.
- Human Error – this includes issues such as incorrect data entry and incorrect selections by clients on graphical interfaces. Most errors made by clients may be due to poor process design.
- Market risk – some Fintech products such as cryptocurrencies are subject to high amounts of speculation therefore rates of exchange may fluctuate quite significantly. This has been seen in the variation of Bitcoin prices, where price/market value has decrease by more than 50%.
- Legal risk – regulators may choose to restrict or regulate the use of certain Fintech product/services. This will mean that Fintech providers must now ensure compliance with all regulatory requirements or face penalties.
- Cybersecurity Risk – due to the architecture of technological devices and their susceptibility to malware, unencrypted confidential and personal information, data can be compromised or leaked. Fintech products/services render financial holdings vulnerable to theft through hacking activities.
- Money Laundering (“ML”) Risks – Fintech providers will have to review their business processes, operations, transactions types and customer activities to ensure that appropriate controls are in place to mitigate ML risks.