Fintech, Overcoming Friction and New Models of Financial Regulation

The development of new technologies by financial service providers is not new; banks, for instance, have always utilized technology to improve front- and back-office operations. The historical significance of fintech does not derive from the use of technology per se, but the leveraging of the distinct properties of digital technologies by non-traditional actors to offer consumers a better experience of financial services. More specifically, the goal of overcoming ‘friction’ in the user experience is here identified as the core feature driving many recent developments in a fintech context. This chapter explores the implications of such an account for incumbent financial institutions and regulators. From the perspective of incumbents, this new emphasis on the consumer experience requires banks and other financial institutions to organize-for-innovation. New capacities and a shift in mindset are needed to deliver a different kind of user experience, and two effective strategies for incumbents are explored. First, adopting more decentralized forms of organization and governance—what we refer to as ‘decentralized ecosystems’—that are better placed to innovate and overcome friction. Second, adopting a more strategic approach to venturing, i.e., purchasing start-ups from the fintech sector and integrating their innovations into incumbent operations. From a regulatory perspective, this requires a greater willingness on the part of regulators and other policymakers to foster experimentation in financial services. As such, the goal of regulation needs to shift from a traditional focus on managing systemic risk to more dynamic models that seek to facilitate responsible innovation and the delivery of a better-quality user experience. This can be achieved, for example, by state regulators working together—partnering—with incumbents and start-ups in the financial service ecosystems of the future via regulatory sandboxes and other similar schemes. Regulatory developments in Asia and Europe provide some evidence that policymakers recognize the need for such a shift in emphasis. However, doubts remain about whether they have gone far enough in pursuing this goal and that the full benefits of the fintech revolution have been realized.