Fintech regulation: trends for a new era
Financial authorities will soon begin an unprecedented countdown. In 2018, fintech became an entrenched priority for the financial sector, and a multitude of strategies emerged to address the challenges of digitization. In 2019, financial authorities should take action and implement a global approach to the challenges of the new era. This is the conclusion detailed in BBVA Research’s latest report, ‘Financial Regulation Outlook 1Q19’.
The importance of fintech regulation, as a consequence of digital transformation, is not limited by borders: in Europe, mid-way through 2018, both the European Commission and the European Banking Authority (EBA) published their action plans, establishing a roadmap through mid-2019. Across the ocean, the U.S. Treasury Department produced a report – more than 200 pages long – on non-bank financials, fintech, and innovation. Important changes have also occurred in Mexico with the approval of a comprehensive financial technology law (known as the “Fintech Law”), which intends to exploit the opportunities of digitization in order to make advances in financial inclusion.
As BBVA Research details in its paper, despite the vast differences in local context and climate, these respective reports and laws have established some common priorities:
1. The identification of measures to encourage the development of new business models, while appropriately controlling risks. An example: the cryptocurrency environment. By early 2019, some results have already been seen in Europe. For example, in parallel with the publication of their action plan, the Commission introduced draft legislation to regulate crowdfunding in the EU.
2. The identification and removal of barriers that impede the financial sector's adoption of innovative technologies, such as cloud computing and artificial intelligence.
3. The implementation of schemes to facilitate innovation (regulatory sandboxes and innovation hubs). Recently, European supervisory authorities published a report advising the Commission on relevant aspects related to regulatory sandboxes.
The major challenges
"The challenge has also gotten the better of international authorities, who must find a way to increase cooperation and coordination to respond to the challenges of digitization. Fortunately, numerous international regulators recognized this need toward the end of 2018.” Lucía Pacheco, economist at BBVA Research, affirms. In recent years, various challenges have been identified as the major challenges of the future, and they will remain firmly on the agenda for both the financial sector and its regulators.
- In regard to payments, the major milestone in 2018 was the enactment of the new Payment Services Directive (PSD2), which seeks to foster competition and strengthen payment security in Europe. To this end, it regulates third-party access to customer payment accounts. Third parties will be able to offer account information and payment information services. During the year, authorities have continued working to define the technical details.
- Regulation of data access, use and protection. Last year, there was increased awareness of the value of data as a strategic asset in the digital economy. So much so that it is regarded as necessary to create attractive value propositions for the customer, but at the same time privacy concerns have grown.In Europe, this resulted in two regulations: the General Data Protection Regulation (GDPR), which came into effect in May 2018, and the ePrivacy regulation, which is still under discussion. Privacy concerns also intensified in other regions, such as the U.S. where some states have already begun to update their state-level legislation on the matter.Concurrently, open banking regulations similar to the previously mentioned PSD2, have been expanded, as in the case of Mexico. In the recently approved Fintech Law access to data and the right of data portability are regulated.
- Cybersecurity: the increase in the frequency and sophistication of cyber-attacks in 2018 accounts for the continued work to improve harmonization and international cooperation. Cybersecurity was at the center of the 2018 priorities for the European Commission and European Central Bank.
Competition in the era of big-tech. 2018 saw increased public debate about the role of big technology companies in the digital economy and financial sector. In Europe, the Commission introduced draft legislation in the interest of transparency and fairness to define some of the obligations of big tech companies in their role as proprietors of online services intermediation platforms. This trend is expected to continue in 2019.