Relatively unheard of before the beginning of this decade, the word "fintech" (financial technology) has swiftly established its place in everyday language and made it into the Oxford Dictionary. In fact, Bloomberg acknowledged that this term was everybody's buzzword during the World Economic Forum held in Davos in January.
But what is fintech? Fintech mainly denotes the fusion of financial services with information technology, which is principally driven by greater connectivity, accessibility of online data, and more communication devices in the hands of today's consumers.
The main innovations developed by sprouting start-ups, amid this unstoppable hybridisation of technology and finance, range from digital payments, crowdfunding and peer-to-peer (P2P) lending, automated wealth management, cryptocurrencies, block chains and distributed ledgers, to big data and cloud computing, robo-advisors and online factoring.
In a certain sense, fintech is simply the next step in the digital revolution which has cascaded into various aspects of our daily lives.
In the same way that technological firms such as Facebook, Twitter and Instagram have allowed us to change the way we connect with people through the creation of online social media and in the same way that Amazon, e-Bay and Alibaba have transformed the way we shop, technology is now also impacting our daily financial transactions.
Fintech firms such as Transferwise and Lending Club are creating online market places, removing barriers and allowing financial transactions to take place without the need to include traditional banks or other financial institutions.
Existing institutions are aware of the threat fintech firms pose to their future and are incessantly striving to ride the technological wave and to invest in those novel ideas which are constantly redefining the realm of investment services and financial markets. Institutions are strategically luring tech entrepreneurs into the cut-throat world of finance for cost reduction and most importantly better performance and effectiveness of their services. The relevance of these efforts is even more crucial now that that there is a young generation of consumers asking for more transparent and innovative alternative solutions to their financial needs.
The catch-22 for most fintech companies is to try and adapt their business model to be in line with the applicable licensing requirements and regulatory conditions, especially those taking the plunge into the retail business. The operations of the typical service provider in the financial industry are being dramatically redefined and therefore the applicable regulation and licensing requirements must evolve to keep up with this transformation.
The future of the financial industry is rife with exciting and disruptive innovations which are attracting the interest of regulators worldwide.
Financial watchdogs are constantly trying to set up a fitting environment to house these market developments while safeguarding the stability of the current regime and protecting the interest of the investors. Their ultimate test is to strike the balance between adopting a progressive and tailor-made regime to nurture these technological advancements and maintaining the conventional framework, so as not to destabilise the industry and weaken the investors' confidence in the system.
These emerging, alternative forms of financing raise several legal and regulatory issues.
Despite the fact that the current Maltese legal framework caters for some of these issues (arguably in a piecemeal fashion), enabling Malta to be at the forefront of the industry, it must consider reassessing the current framework to mould a bespoke structure to cater for these developments, rather than stretching the contours of longstanding rules.
Other jurisdictions are quickly taking initiatives to establish themselves as fintech capitals of the world and Malta should likewise aspire to such status. We have a good mix of technological and financial regulatory know-how in this country which would make it a pity to miss out on the revolution taking place.
This article was published in The Business Observer (7 April 2016).
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