The Fintech sector is expanding quickly, with the market size reaching $26 trillion in 2022. Over 90% of smartphone users report making online payments, and the volume of digital payments is expected to grow by more than 100% every year. Thus, the Fintech market is a booming industry promising stable revenue streams to business owners and a seamless user experience for customers.
Fintech Pros And Cons
The advantages that Fintech users receive by adopting innovative services are plentiful:
- Previously underbanked and unbanked people get easier access to finance.
- Tech-savvy users get digital-only financial solutions without the need to attend physical offices.
- Users can conduct transactions without intermediaries and access financial services on the go.
However, together with the bonuses of Fintech apps’ advent and quick spread came the dangers of an innovative model of money management. The need for more rigorous regulation is dictated by the following hazards:
- More information is stored online, which makes it an easy target for hackers and criminals.
- Growing disintermediation of money transfers undermines the transparency principles and creates the threat of money laundering and fraud.
- A lack of digital literacy often makes users the victims of scams.
All these risks call for greater regulation of Fintech companies, which is non-existent in many countries. Here we cover the existing laws and regulations in the industry to help you check whether your apps comply with Fintech regulation compliances. Study the list to get a better idea of the regulatory framework your app needs to navigate.
Why Is Regulation Needed?
Some users and businesses question the need for Fintech regulation, as they see an authoritarian instrument for state control over user transactions in laws and statutes of this kind. However, regulation is also about user protection, which is necessary for all users of financial services.
- Certainty and trust in financial service providers. The regulation establishes order and reliability in the financial markets, enabling Fintechs to attract new users confident in their funds’ protection.
- A means of redress. Regulatory agencies are the primary point of contact for people falling prey to fraudsters; knowing who protects your interest increases the willingness to use financial services.
- A fair market. Fintechs functioning within a specific regulatory framework know that other market players are also limited by these regulations, thus enjoying fair competition and equality of opportunity.
- Law enforcement means. Looser regulation of Fintechs comes with greater AML/CFT risks, while regulations help avoid those hazards.
Types Of Fintech Regulators
Though the Fintech regulation is relatively young, as the market sector itself, there are still different types of regulators assigned the duty of Fintech oversight. Fintech services often span several industries, so their oversight is challenging, typically shared by several regulators. Here is a common list of regulators that can deal with Fintechs in different jurisdictions.
This regulator type is assigned by the government and can enforce legal action via the judicial system in case of identifying grave violations. It’s the most powerful regulator, the ultimate authority to which a user or company can turn.
Private regulatory entities (self-regulatory organizations, SROs) are typically created collectively by market participants for contractual oversight. In some states, SRO membership is mandatory for specific market activities.
As a rule, the market functions as a self-regulatory mechanism, with competitors taking action against the wrongdoings of their counterparts via commercial channels. For instance, poor-quality service naturally drives customers away from a company, motivating them to choose the competitor’s products.
Every country has taken some sort of regulatory measures to minimize the risks associated with Fintech activities and enhance customer protection. Here are the most prominent regulatory frameworks every Fintech business owner should know.
- The USA. Here, the AML regulations are secured by the Bank Secrecy Act and the Anti-Money Laundering Act of 2020. The USA Patriot Act also lays out the obligation for Fintechs to verify user identity and subject all new customers to KYC form completion. The FCRA and GLBA regulations control customer information sharing, storage, and collection processes. Many supplementary acts and laws oversee how Fintechs disclose fees and interest rates, protect consumer interests, and resolve transaction errors.
- The UK. There is no coherent legal framework for Fintech activities in the UK thus far, with the only regulatory agencies of PRA and FCA controlling the online payment activities. Besides, all Fintechs need to get E-money licenses from the state regulator to conduct Fintech activities.
- The EU. The European Union has witnessed a rapid rise in the number of Fintechs before the COVID-19 pandemic, but now the figures are leveling up. The European Securities and Markets Authority (ESMA) oversees Fintech activities, and this general framework is complemented by national regulations in European countries (e.g., AMF in France, FINMA in Switzerland, and BaFin in Germany).
- China. There is no regulatory framework for Fintechs in the country, with all control done by the People’s Bank of China.
Recommendations For Startups
As you can see from this overview, Fintechs are not excluded from the general financial regulatory framework. They need to comply with all common-sense regulations governing the activities of traditional financial institutions. It means that any Fintech needs to provide adequate protection to customer funds and data, give transparent data about its commissions and services, store and share data safely, and solve transaction issues promptly. Thus, when you plan to create a new Fintech project, don’t neglect the importance of compliance; a failure to do so may result in huge fines and a permanent stain on your business reputation.