The Startups Creating The Future Of RegTech And Financial Services
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The 2008 global financial crisis represented a pivotal moment that separated prior phases of the development of financial technology (FinTech) and regulatory technology (RegTech) from the current paradigm. Today, FinTech has entered a phase of rapid development marked by the proliferation of startups and other new entrants, such as IT and ecommerce firms that have fragmented the financial services market. This new era presents fresh challenges for regulators and highlights why the evolution of FinTech necessitates a parallel development of RegTech. In particular, regulators must develop a robust new framework that promotes innovation and market confidence, aided by the use of regulatory "sandboxes." Certain RegTech developments today are highlighting the path toward another paradigm shift, which will be marked by a reconceptualization of the nature of financial regulation.
Today, FinTech has entered a phase of rapid development marked by the proliferation of startups and other new entrants, such as IT and ecommerce firms that have fragmented the financial services market. This new era presents fresh challenges for regulators and highlights why the evolution of FinTech necessitates a parallel development of RegTech. In particular, regulators must develop a robust new framework that promotes innovation and market confidence, aided by the use of regulatory "sandboxes."
Regulatory and technological developments are changing the nature of financial markets, services, and institutions in ways completely unexpected before the 2008 global financial crisis (GFC). Financial technology, or FinTech, refers to the use of technology to deliver financial solutions.
The second stage, FinTech 2.0, encompasses the pre-GFC period underpinned by the digitization of traditional financial services, beginning with the first ATM and culminating in e-banking. Since the GFC, the rapidity of technological development and the proliferation of startups and IT firms providing financial services have characterized the era of FinTech 3.0.
FinTech is not a new concept. The term FinTech can be traced to the early 1990s8 and now refers to a rapidly developing evolutionary process across financial services.9 This trend only began to attract the attention of regulators,10 industry participants, consumers, and academics in 2014, as illustrated in Figure 1.
The evolution of FinTech has unfolded in three stages, summarized in Table 1. The first, which we call FinTech 1.0, occurred from 1866 to 1967, when the financial services industry remained largely analogue despite being heavily interlinked with technology. The next period, FinTech 2.0, extended from 1968 to 2008, an era characterized by the development of digital technology for communications and transactions and thus the growing digitization of finance. Since 2009, in the period we call FinTech 3.0, new startups and established technology, ecommerce, and social media companies have begun to deliver financial products and services directly to the public as well as to businesses, including banks.11
The key differentiating factors of FinTech 3.0 are the rapid rate of technology development and the changing identity of the providers of financial services. Startups and technology firms have challenged established financial institutions by offering specific, niche services to consumers, businesses, and incumbent financial institutions.
Adding to rising costs is the increasing fragmentation of the regulatory landscape. Despite attempts to establish similar post-crisis reforms, different markets can have substantially different rules for implementing those reforms. Regulatory overlaps and contradictions are not uncommon, and financial institutions have, unsurprisingly, looked to RegTech to optimize their compliance management.45 The constantly evolving regulatory landscape has also introduced uncertainty regarding future regulatory requirements, prompting financial institutions to invest in improving their own ad