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Solution to disruption of financial services industry
No one would have imagined that today people would be able to trade with a new form of digital currency, nor envision small enterprises financing their businesses using peer-to-peer lending. This complex nature of FinTech introduces more risk into the whole financial system.
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A netizen using Uber application with Bandung's Pasupati Bridge as background. (Uber/-)
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pparently, regulators and financial service companies are struggling with the disruption that technology has wrought in the financial services industry.
A group of global finance leaders, including large financial companies and regulators in the US and Europe, recently called on regulators, startups and well-established companies to manage the systemic risk threat that is potentially generated by the rapid growth of FinTech.
The issue also arose in the national context. Chairman of the board of commissioners of the Financial Services Authority ( OJK ) Muliaman D. Hadad stated a plan to form a special unit for supervising FinTech. He also mentioned that the regulation of the new players in the industry would be published by the end of 2016.
There is merit in these moves. Technology is foreseen as creating more disruption in the financial industry by the continuously increasing investment in FinTech. Accenture’s latest report revealed that in the first quarter global investment grew 67 percent year-on-year to US$5.3 billion, with 62 percent of this going to enterprises in Europe and Asia.
The key point of FinTech’s continuous growth is the advantages of technology and innovation that it offers, which provides people with alternative services with easier access and cheaper costs. However, those advantages come at a price.
Innovation in technology and FinTech’s speed of evolution has occurred in an unpredictable way. No one would have imagined that today people would be able to trade with a new form of digital currency, nor envision small enterprises financing their businesses using peer-to-peer lending. This complex nature of FinTech introduces more risk into the whole financial system.
To maintain the stability of the financial system therefore, regulating FinTech is urgently required. Nevertheless, due to its special characteristics, the standard traditional approach in regulating FinTech is far from adequate.
FinTech must be regulated carefully. The regulation must be able to keep up with the fast pace of the disruption that FinTech generates. It also needs to comprehensively overcome the unpredictable and the potential risk evoked by FinTech. However, overregulation or improper regulation will hinder FinTech in its innovation; moreover it will restrict new players from entering the market.
Therefore, we need an appropriate approach to dealing with the disruption of FinTech. The question, then, is how? Quoting the world best military strategist Sun Tzu: “To know your enemy, you must become your enemy”.
The disruption is caused by the application of technology in the industry. The challenge in regulating FinTech, in fact, creates an opportunity to utilize technology to cope with regulation risk, and compliance. As taught by the master Sun, the marriage between technology and regulation might be one of the solutions. Therefore, RegTech is the answer.
The Institute of International Finance ( IIF ) defines RegTech as “the use of new technologies to solve regulatory and compliance requirements more effectively and efficiently”. According to Deloitte, RegTech companies are regularly defined by four characteristics, which are agility, speed, integration and analytics.
The capacity of RegTech companies ranges from automated online reporting and analysis to the use of artificial intelligence and big data analytics to detect systemic risk and behavior of actors in the system. Examples are AlgoDynamix to identify disruptive events in global financial markets and Corlytics to support compliance risk analysis for financial institutions.
As the need to regulate FinTech becomes more urgent, RegTech companies will become a new rising star in the near future. RegTech not only offers solutions to regulators, but also a promising investment for the industry.
Existing financial services companies in Indonesia, such as large banks, must face this challenge as an opportunity. Some have already realized this and participated in support for the development of FinTech. Bank Mandiri, for example, injected fresh capital to the amount of Rp 350 billion ( $26 million ) last January into its startup venture capital, PT Mandiri Capital Indonesia. Meanwhile, Bank BCA held the event Finhack 2016 with the aim of accelerating the digital innovation of FinTech in Indonesia.
This is the appropriate time for the existing players to not only focus on the development of FinTech, but also the potential of RegTech.
The government can also play a role in the expansion of RegTech by providing a suitable atmosphere for RegTech companies to grow. This might be done in several ways, such as providing seed funding and incubators, giving incentives to new RegTech companies and creating a special unit to focus on RegTech development.
Beyond all possible actions, the government needs to collaborate, not only with the industry incumbents but also with the universities. Since the application of technology in regulation might be categorized as frontier research, the government will depend strongly on the participation of academicians and researchers.
In the context of RegTech, research in multidiscipline areas, between computer science and economics, is needed. One example of a most crucial area is data-driven regulation, which is the use of big data analytics in monitoring and forecasting systemic risks in the system. This certainly will require the willingness of government to share sensitive data with universities.
To conclude, RegTech is playing a key role in solving the over-disruptive world caused by FinTech. RegTech is about solving the technology disruption by using a technology regulatory approach. To optimize the RegTech potential, collaboration among the government, startups, industry incumbents and universities is needed.
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The writer, a researcher at the Institute for Development of Economics and Finance ( Indef ), is also a teaching assistant at the School of Computer Science, University of Indonesia. She holds an MSc in financial risk management from UCL.
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