Technological innovations in financial services are affecting every sector of the financial industry and generating a surge of new applications. This column takes stock of the policy responses to fintech developments in approximately 30 jurisdictions worldwide and proposes a novel conceptual framework – the ‘fintech tree’ – that distinguishes three categories: fintech activities, enabling technologies, and policy enablers. Designing a policy framework for fintech will require finding a balance that maximises its benefits while minimising potential risks to the financial system.

According to a Chinese proverb, when the winds of change blow, some people build walls and others build windmills. Winds of change do blow in the financial system – technological innovations in financial services (fintech) are affecting all parts of the financial industry and giving rise to a steady stream of new applications. These include new approaches to how loans are granted, payments are made, investment advice is provided, insurance is priced, and funds are channelled from those who want to invest to those in need of funding. While fintech may increase efficiency in delivering financial services, widen their range, increase competition and promote financial inclusion, it may also bring challenges – posing risks to consumers, investors, and more broadly, to financial stability and integrity. When designing an adequate policy framework for fintech, financial authorities will need to find a balance that maximises its benefits while minimising potential risks to the financial system – to choose the right combination of walls and windmills.

In a recent paper, we take stock of the policy responses to fintech developments in approximately 30 jurisdictions around the globe (Ehrentraud et al. 2020). Our goal is to give a sense of the different approaches pursued by regulators, and of the challenges and policy trade-offs they face. Building on the work done by global standard-setting bodies and other international organisations, we propose a novel conceptual framework, referred to as the ‘fintech tree’. It distinguishes three categories: fintech activities, enabling technologies, and policy enablers. Fintech activities (e.g. digital banking or robo-advice) can take various forms and be performed in different sectors of the financial industry. Enabling technologies (e.g. artificial intelligence or cloud computing) make innovation possible in the provision of financial services and, as such, form the backbone of fintech activities. Policy enablers refer to public policy measures and initiatives (e.g. open banking or regulatory sandboxes) that support the development of fintech activities and the use of enabling technologies.

Our study finds that authorities pursue a range of approaches when regulating fintech activities. They may put in place fintech-specific licensing regimes that require entities to obtain a dedicated licence before offering their services. Alternatively or complementarily, they may issue requirements that are fintech-specific, modify existing ones, or even forbid certain activities; or, they may clarify their supervisory expectations when applying the existing regulatory framework to fintech business models.  

For digital banking,¹ specific licensing regimes were put in place in only a limited number of surveyed jurisdictions (Hong Kong SAR and Singapore). In other surveyed jurisdictions, deposit-taking institutions have to comply with existing banking laws and regulations, regardless of the technology they deploy. This means that applicants for a banking licence with a fintech business model need to pass through the same licensing process and face the same regulatory requirements as applicants with a traditional business model. Some jurisdictions have launched initiatives to facilitate the establishment of new banks, including digital banks (Australia and United Kingdom). In others, regulators have clarified their supervisory expectations when considering licence applications from fintech companies. For example, in 2018 the ECB issued guidance on how authorisation requirements for credit institutions would apply to applicants with new fintech business models.

For fintech balance-sheet lending,² most surveyed jurisdictions do not have a dedicated regulatory regime, and are subject to a variety of regulatory approaches that in most cases centre on the extension of credit as a regulated activity. The exception is Brazil, which introduced direct credit companies (sociedades de crédito direto, or SCD) as a new type of financial institution whose operation requires a licence from the Central Bank of Brazil.

For loan and equity crowdfunding, many surveyed jurisdictions have issued fintech-specific regulations that apply to both activities (Table 1). Often, crowdfunding platforms need to be licensed or registered and satisfy certain conditions before they can provide their services. Although there may be only one type of licence for both activities, the regulatory framework typically includes requirements that apply to both activities, and requirements that apply to either loan or equity crowdfunding.

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