The fintech sector is so used to being publicly lauded that this week’s comments by the governor of the Bank of England will have come as a shock.
Despite claiming London as the fintech centre of Europe and exulting its potential, Mark Carney made clear fintech’s rise could disrupt the established financial sector – raising the prospect of higher risk and therefore necessary new regulation. The head of the Bundesbank said something similar this week.
Fintech pioneers will be feeling the sting of Carney’s sharp smack – intended or not – for some time. He did what they fear most: linking them in the public mind with risk. Like transport and food, finance is a sector where everyone wants to play down the prospect of risk. People do not want to be reminded that their actions might have potentially negative consequences. Politicians will be heeding his words.
Clearly, Carney was not talking about all financial technology, which has the ability to make institutions work better and reduce their costs substantially. For example, artificial intelligence looks set to transform banks’ backroom operations and many argue blockchain technology will make payments quicker and safer. He appeared to be referring to businesses in the sector that seek to replace services banks have traditionally offered: lending and investing.
Most businesses hate regulation and lobby hard against it. This is particularly true in finance. Fintech firms are currently happy with the relatively light regulatory framework provided by the FCA, which has gone out of its way to help the sector grow – for example, with its so-called regulatory “sandbox” for providers to test new products.
But fintech is one of those areas where businesses should not only welcome a tighter regulatory framework but seek to shape such an approach now. They know the risks that their own businesses are exposed to and the risks to the wider sector. They should highlight those to politicians and regulators themselves.
At the moment, fintech firms have built a reputation not on sustained success – because it is early days – but on hope and the glamour that being challengers in the tech sector inevitably brings. Politicians want to be associated with such brands; the media love anything new.
It would be an exaggeration to say this is a reputation built on sand: many fintech firms are creating and marketing great products. The sector attracts massive investment for good reason. But it is a reputation built on foundations that will not withstand a major crisis – precisely because few people will tolerate much financial risk.
Former Financial Services Authority chairman Lord Turner has already raised concerns about the medium-term viability of peer-to-peer lenders and specifically the ability of businesses that have been funded in this way to pay back investors. Others have warned about the obviously significant risk of cybercrime. There are no shortages of concerns.
Because of its massive profile, even a minor crisis in the fintech sector will have significant effects – potentially putting off vast numbers of current and prospective consumers and investors. Politicians will ask how this was ever allowed to happen post-2008 and demand a massive regulatory reaction. More than most, therefore, fintech firms are all in it together. They should seek to minimise risk wherever they can and ask themselves whether they should be pressing the FCA and others for more not less regulation. One bad apple could be a massive problem.