Fintech: Harnessing The New Wave Of Technological Innovation

Fintech: Harnessing The New Wave Of Technological Innovation

In an article on LinkedIn, Christine Lagarde, Managing Director at International Monetary Fund, stressed the importance of simple and fast cross-border payments.

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In an article on Linkedin titled “Fintech: Capturing the Benefits, Avoiding the Risks”, Christine Lagarde, Managing Director at International Monetary Fund, stressed the importance of simple and fast cross-border payments.

“In a few years, cross-border payments and transactions could become as simple as sending an email. Financial technology, or Fintech, is already touching consumers and businesses everywhere, from a local merchant seeking a loan, to the family planning for retirement, to the foreign worker sending remittances home”, wrote Lagarde.

The article of the IMF Managing Director referred to a 49-page report exploring the need for cost efficient cross-border payments that are expected to impact businesses and customers around the world. The advances in digital technology, artificial intelligence, big data, biometrics and distributed ledger technologies  are already transforming the financial services industry. But what are the main opportunities and challenges that can harness them?

Catalysts of the fintech (r)evolution: the regulator, customer demand and changing regulation

In the new research “Fintech and Financial Services: Initial Considerations”, IMF reviews developments in Fintech, while assessing their impact on various financial offerings. More specifically the way innovative technologies are expected to affect the type of services financial companies offer, their structure and business relationships. Additionally, the role of the Regulator is discussed with a focus on the possible impact of regulatory decisions and the challenges they must resolve in order to create a legal framework in a constantly innovating industry that will guarantee the requirements of the consumer for safety, trustworthiness and privacy.

The obvious advantages for consumers such as faster, low cost, user-friendly and more transparent global financial services are obvious. Younger generations such as Millennials demand an instant and convenient financial services but elder generations like baby boomers still trust the bank branch and the employee that provides a personal contact.

“Using an economic framework, the paper discusses how fintech might provide solutions that respond to consumer needs for trust, security, privacy, better services, and change the competitive landscape.” (IMF, “Fintech: Capturing the Benefits, Avoiding the Risks”, p.5).

In other words, Fintech could possibly offer an array of exciting possibilities in the area of financial services such as:

  • Cheaper and faster cross-border payments and transactions that bypass traditional banking institutions.
  • Automated credit scoring that allows consumers to pay more competitive interest rates on loans (by the use of artificial intelligence and big data).
  • Enhanced market efficiency and selling of investment assets when pre-defined market conditions are met (by the use of “smart contracts”).

These changes will reshape and may even disrupt the traditional banking industry. Intermediaries such as banks, messaging services companies, and correspondent banks clearing and settling transaction are to face powerful competition and will therefore need to rethink their business models.

Middlemen will reportedly become less relevant due to the rise of new technologies that provide innovative ways of identity and account verification.

“Overall, the financial services sector is poised for change. But it is hard to judge whether this will be more evolutionary or revolutionary” (IMF, “Fintech: Capturing the Benefits, Avoiding the Risks”).

However, how will regulatory authorities respond to these rapid changes?

Regulation challenges

As discussed in the IMF report regulators need to be “nimble, experimental, and cooperative”. They need to ensure that risks to stability and integrity, including cyberattacks, money-laundering and terrorism financing, can be effectively managed. At the same time, the goal is to avoid stifling innovation.

Exploring these points, IMF highlights several suggestions:

  • Regulators may need to complement their focus on entities with increasing attention to activities
  • Governance needs to be strengthened
  • Policy options to support open networks could be considered

As the fintech sector is reshaped by new ways of serving customers, companies look for ways  to generate interactive and personalised relationships with their customers that would require traditional financial institutions to collaborate with them.

Regulations should build trust based on the stability and security of networks and algorithms, since technology advancements in the financial industry are expected to bring also risks like compromising customer identities and creating new sources of instability in the industry as the services become increasingly automated. International collaboration is expected to be key in clarifying the legal status and ownership of digital tokens and assets.

In her article Lagarde concluded that “As our research shows, adapting is not only possible, but it is the only way to ensure that the promise of Fintech is enjoyed by everybody.”