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Benefits and challenges of innovation in the financial sector - New trends in the financial sector

Fintech: game changer of financial services?

By Van Vroonhoven Merel - Chair, Authority for the Financial Markets (AFM), the Netherlands


Fintech appears to be the buzzword in the financial markets. Some might state that fintech will cause a true revolution; that it will transform or disrupt finance like never before. As a conduct of business supervisor we observe that changes caused by fintech are most predominant in processes. It concerns mainly the distribution of products and services, and the back office of financial firms.

The change in market structure is driven by both the supply side, the Fintechs, and the demand side, consumers and investors. The increase of big data in combination with new techniques, such as artificial intelligence, will make it possible to structure processes far more efficient. Think for example about investment analysis, investment advice, estimating credit and insurance risks, and for the sale and distribution of financial products. In addition, more advanced identification, authentication and encryption techniques make it possible to pass over traditional links in the chain.

The efficiency of chains by disintermediation and automating processes creates opportunities for new players and new business models. Traditional banks and other financials have to face the fact that their business models are being challenged by new players such as Fintech companies. Fintechs have the advantage of being relatively small and flexible and are more able to constantly adapt their models. The same goes for crowdfunding; this phenomenon makes it possible for SMEs to lend and expand by getting funds directly from the public through crowdfunding platforms.

From the consumer perspective, technology offers better and more efficient ways of communicating and engaging consumers. For example, think about instruments such as mobile apps that give consumers more and more useful information about their financial situation. And innovation also offers consumers more and more diverse platforms where they can buy and compare financial products and services; they no longer depend on the opening hours of the bank-office around the corner.

In short, technological innovation creates opportunities. Yet, we as supervisors have to be honest; the legal framework, most legislation and the way most supervisors conduct their business is predominantly driven by traditional ways of thinking. But how do we interpret a ‘duty of care’ when the advice is given by a self-learning IT-system which makes use of data from different kinds of (public) sources? How do we keep the delicate balance between the use of customer-data by financials and the privacy of customers? And how can we make sure that cybersecurity is properly addressed?

Technological innovation creates opportunities.

These developments require supervisors to make new interpretations of existing regulations. The AFM sees it as the biggest challenge to formulate an answer to problems of the past, but also an answer that also enables us to tackle the challenges of today and tomorrow. One way of doing this is by investing in expertise and knowledge, shift our focus and time from the large and traditional banking to new players and think from a broader perspective.

At the AFM we therefore started a specific program to build up our expertise in Fintech, so that we can also carry out our regulatory duties in that area. Our goal is to prevent unnecessary barriers and high costs, while at the same time maintaining a level-playing field. We also invest in knowledge on cybersecurity and IT. An important requirement for the EU regulatory process is to keep away from single-perspectives; the silo-based approach is simply not effective when regulating capital and retail markets.