Fortune could not have missed noticing that the latest buzzword in financial services and technology is fintech, short for financial technology.
A fintech firm focuses on a specific area of the financial services industry, improves the process via data analytics using big data and then offers the innovative financial product to a global audience via the internet.
Examples of fintech companies in different areas of the financial services industry include peer-to-peer lending via crowdfunding platforms such as Zopa, money transfer solutions such as Transfer Wise and online wealth management services like Wealthfront.
The business models behind these fintech organisations is attracting a number of investors in view of their commercialisation potential. The global investment into venture-backed fintech companies hit a record $4.85bn in Q3 of 2015, according to CB Insights.
This growth is taking place both in Europe and the US. However, the US is the more attractive jurisdiction for the larger, follow on funding rounds. EU Commissioner Jonathan Hill highlighted that “Fintech firms in Silicon Valley have trebled the investment they attracted compared to the previous year”. One of the objectives of Commissioner Hill’s Capital Markets Union is an attempt by Europe to emulate the US in this area.
What about regulation? EU and US financial regulators have their hands full with various legislative texts regulating different areas of the existing financial industry, and fintech business models do not seem as yet to be on the regulators rule book.
On December 10, 2015, the EU Commission published its green paper on retail financial services, which is seen as an attempt by the EU to take a more holistic view of the fintech sector.
In this paper the EU Commission is exploring how fintech companies can address cross border take-up of financial services and financial inclusion.
If we want fintech to become a new niche for Malta, we cannot afford to lose precious time
Some member states are not waiting for the EU Commission. The UK Financial Conduct Authority (FCA), for example, has created a regulatory framework in close collaboration with operators allowing fintech firms to set up in a UK-regulated environment. This has been done through the creation of an Innovation Hub which engages with fintech start-ups to help them understand financial regulation and how it could apply to their business model.
The Innovation Hub provides them with non-binding guidance on their position, whether they need to apply for regulatory approval and how to go about it.
Another positive initiative which the FCA will launch in early 2016 is the creation of a “sand box” which is being defined as a safe space where fintech start-ups can test innovative financial products and business models in the market. These initiatives are providing the FCA with insights on how to tweak their regulatory framework in line with market developments, making the UK an attractive jurisdiction for fintech firms.
This was evidenced during the Innovation in Financial Services session held during the Commonwealth Business Forum.
Should Malta be developing a regulatory regime to attract fintechs? There could be a number of valuable synergies if one takes a closer look.
The fintech revolution may be an opportunity to attune parts of our reputable financial services regulatory framework to the fast-paced realities of the digital world.
A fintech ecosystem in Malta could create valuable synergies with the growing ICT and financial service providers, and Malta could be used as a pilot test bed (i.e. the UK “sand box” model) for a fintech ecosystem prior to launching into the global market.
In developing a regulatory framework to attract fintechs to Malta, the UK is showing us that it needs to be done fast and in close collaboration with these new players in the financial services market.
If we want fintech to become a new niche for Malta, we cannot afford to lose precious time.
Mark Scicluna Bartoli is head of EU and institutional affairs at Bank of Valletta and is also responsible for Bank of Valletta’s EU Representative Office in Brussels.