04.03.2018

The role of financial innovation and its regulatory experience.

The global financial market is undergoing fundamental changes in recent decades – innovative financial technologies are impressing with the scale of invasion into the sphere of Finance, replacing old conservative services and products with new, mobile, convenient and fast solutions.
FinTech - a well-established concept in the field of Finance, implying all financial innovations, new business solutions and services introduced in the market by large and small companies, and improving the efficiency of financial services.
According to KPMG, for the first half of 2017. global investments in Fin Tech  amounted to $ 12 billion, where the leading countries are China, the US and Europe. Bright examples of the leading FINTECH companies are PayPal, SnapCard, Adyen, Token, Yandex-Money, Qiwi-wallet, etc.
Impact of Fin Tech  on the banking system.
Today, the banking system is going through a significant era of global transformation under the influence of Fin Tech,  which means changing the needs of customers eager for more affordable and convenient financial services "here and now". For them is especially important the ability of promotion and introduction of innovative technologies with the aim of improving profitability, quality of service, and, as a consequence, strengthening its financial position. Also, competition from non – financial companies-Telecom operators, Internet service providers, social networks, payment systems-is increasing. Thus, the introduction of new technologies is vital for today's banking system.
In addition to direct economic benefits, high-tech financial solutions have a positive impact on:
* increasing competition in the market, which in turn stimulates the development of new solutions and lower prices for products and services (decrease of tariffs on lending, insurance and remittances);
* cost optimization of financial institutions (customer service and transaction costs);
* improving financial accessibility for a part of the population that does not have access to the banking system (via digital mobile services);
* increasing the transparency of the economy and eliminating its shadow side (the possibility of in-depth analysis of operations and broad information about the client's activity). It is very important to note one of the revolutionary solutions of the last few years, which had a significant impact on the breakthrough in the financial sphere – Blockchain technology, which became the basis in the birth of Bitcoin.
Regulation: good or bad?
Evolution does not always imply success – faults and failures cannot be avoided every time. During the period of development, there are already cases of the use of Fin Tech  in illegal, up to criminal, purposes around the world, such as financial pyramids (in China), crypto-currencies for illegal trafficking and money laundering (in Japan, Russia), as well as scandals with deceit of investors (Lending Club, USA).
This raises the issue on the regulation of financial technologies to avoid such risks. Moreover, their development depends heavily on regulation, which is the key instrument of the state. Thus, the well-known pioneer in the field of financial regulation technologies is the UK, which launched on its market the so-called "regulatory sandbox".
"regulatory sandbox" is a special regime for new financial technologies that allows you to test your products and services in a controlled environment without the risk of violating financial laws.
It is also specific that the initiator of its creation is always the regulator and in advance determines the restrictions (e.g.: region launch, the number of customers, volume of transactions) and strictly monitors compliance with consumer interests.
Following the UK, Singapore, UAE and Australia introduced this regime in their markets. Having understood the benefits of this innovative regulatory experience, other countries, including Russia and Ukraine, have begun to apply it in their financial sectors. So what are the attractive advantages of this "sandbox"? It:
*decrease of legal uncertainty and risks for market participants;
* Development of new adequate rules and regulations after observing the testing;
* Speedup introduction of new solutions to the market;
* improving access to investment;
* maintaining control by the regulator.
Since the rapid growth of financial technologies cannot longer be stopped, it may make sense for financial institutions, together with the regulator, which mainly acts as a buffer protecting consumer rights and minimizing the risks of companies and other stakeholders, to study the experience of the UK and create an attractive safe environment for testing their new ideas and growing successful and useful products and solutions in "sandbox". And What would it give?:
* clear rules of the game (to some extent, protection against illegal players);
* correction of the market entry threshold (can give advantages to those who entered it first);
* improving access to investment.
Of course, almost any regulation is aimed at reducing the number of players, so it is easier to control them, but then the competition is lower, the quality of the product is lower. Therefore, the regulation of financial technologies should not oppose financial technologies and banks, on the contrary, the cooperation of financial technologies with traditional players of the financial market can benefit not only them, but also end users who will have access to better services. Understanding the potential and possible benefits, many banks and other financial institutions are already thinking about the inclusion of cooperation with financial technologies-startups in the IT-development strategy.
The publication was prepared within the framework of the world Bank Group,
Global practices in Finance, competitiveness and innovation
Project on Electronic and Digital Financial Services
 
The project is funded by:
 UK Department for international development and the government of Switzerland through the Swiss state Secretariat for Economic Co-operation

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