Banks today face competition from an array of fintech startups
Think outside of legacy banking ways... Fintech companies offer speed of service and with increasing levels of sophistication. With right government support, more can get done. Image Credit: Supplied

A majority of Third World countries suffer from credit constraints and long-term investment gaps.

New financial technologies and digital services will help mitigate risks related to financial stability, cybersecurity and data protection, and merits consideration by policymakers. Fintech is driven by the rise of innovation by non-bank entities to promote a client-centric and interactive approach into financial and banking systems.

It aims to deconstruct the walls that have surrounded the traditional financial system by providing faster service platforms that are more diverse and stable. Many fintech start-ups offer optimal services that combine speed and flexibility.

COVID-19 was a wake up call to switch from traditionally deployed financial services to more sustainable finance and technology. Fintech also started to fill the financial inclusion gap by providing services to the unbanked, enabled by new business models. This includes mobile money and e-wallets, crowdfunding (P2P lending and equity crowdfunding platforms), alternative credit scoring, cross-border remittances and payment technologies.

Make access to cash easier

Agricultural, for example, face various issues, such as sustainability, limited distribution channels, lack of funding, or delays in delivery due to belated transactions. Fintech and the digital marketplace can be utilised to foster the sustainability of agriculture’s business process, improving the funding (e.g., crowdfunding) and distribution (e.g., digital payment system) channels. All involved stakeholders - farmers, landowners, investors, and consumers - can then be connected with a digital platform that promotes transparency, empowerment, resourcefulness, and public engagement.

With digital finance, it’s vital to process the most relevant data and have easy access to it in a singular layer so that decisions are quicker, more dynamic and smarter. Time and again, fintech boosts financial inclusions by making payments more transparent and secure. Innovative credit-scoring methodologies are used by obtaining more relevant data, and customers play an active role in this process. Hence, transaction verification is faster and more efficient through digital identity solutions, leading to operations being made efficient through the adoption of cloud-computing technology.

Dial down unpredictability

According to studies that examine the impact of technology on the finance landscape, fintech is innovative but inherently unpredictable. Customers can still be slightly hesitant to adopt and use it, affecting its growth.

Uncertainty is more critical in fintech than in traditional e-banking because its transactions are more complicated. Therefore, the challenge for policymakers will be to keep a level playing field that strikes the right balance between fostering innovation and preserving financial stability and consumer protection.

Publicly, regulators’ role is to assess risks, issue rules, and perform the required examination and supervision for a healthy ecosystem. Most regulatory environments are not designed and updated for fintech technology.

Another significant challenge is that fintech companies operate across borders and face restrictions on storing and transmitting data, especially with regulations designed to protect domestic incumbents.

Connect regulatory dots

Fintech companies are a good liaison between financial service providers and the relevant departments within regulatory entities, making processes a lot more efficient. They help run sandboxes and innovation hubs that result in the creation of new policies and programmes and spur more innovation in the sector.

There is a dire need for upskilling and capacity building due to the rapid growth of technology-driven financial services and organisational culture that nurtures innovation among regulators. By building upon their technical skills, government can keep up with new fintech business models and modulate them accordingly.

Overall, incentives and a policy framework have to be put into play to allow for increased innovation. Regulators should consider providing sandboxes without an extensive list of directives.

With defined roles and responsibilities through a governance model, policymakers need to understand the market’s applicable risks and rank them to control and manage them. Additionally, effective reporting and communication in regard to risk management methodologies can be put in place for future betterment.