The Rise of Financial Technology (Fintech) Innovation and the Future of the Banking and Financial System. A Comparative Analysis of the Fintech Legislative and Regulatory Frameworks in the United States, Europe, and the United Kingdom | Stanford Law Schoo (2024)

Research project

Investigator:
Diana Milanesi

Abstract:
The past few years have witnessed unprecedented developments in financial technology (“fintech”), including innovation in mobile payments, digital currencies, blockchain and distributed ledger technology, peer-to-peer lending, and marketplace lending. Most fintech innovation has arisen (and further fintech innovation is expected to arise) outside the traditional financial and banking system, largely driven by non-bank entities, including venture capital-backed fintech startups and emerging companies, as well as non-traditional providers (e.g., Oracle and Apple). These non-bank entities can experiment in an unregulated (or relatively lightly regulated) environment and often focus their operations narrowly on the provision of a particular set of new financial and banking services.

Fintech innovation driven by non-bank entities is progressively deconstructing the walls that have long surrounded the traditional financial and banking system and is causing a radical shift by challenging conventional value chain, business models, and market positioning. Significantly, fintech innovation is changing costumers’ experience and expectations by promoting a more client-centric and interactive approach to financial and banking services. In addition, recent developments in fintech offer new opportunities for client value creation by enabling smarter understanding of clients’ needs and the design of new personalized products and services. Analytical tools that collect and integrate structured and unstructured data are now available to support process optimization, risk management, and strategic decision-making. Moreover (and perhaps most important), by leveraging the widespread reach of data networks and smartphones, fintech innovation is gradually expanding access to liquidity and financial and banking services to a broader segment of the global population.

Fintech innovation driven by non-bank entities puts pressure on banks and other regulated financial institutions to embrace new technologies and develop similar capabilities. Banks around the world are taking significant steps in this direction, including large investments in client services and customer reporting using digital channels, creation of internal dedicated digital teams, and increases in budget for digital change and innovation. On the other hand, a new spirit of cooperation is also developing. A number of leading banks are now re-thinking the way they interact with the fintech industry, by engaging with fintech incubators, launching their own fintech programs, establishing their own investment funds and/or providing fintech startups with innovative forms of collaboration and partnership (e.g., “in-residence” programs).
The rise of fintech innovation has drawn attention of financial regulators. Hence, notwithstanding the opportunities discussed above, developments in fintech can also create and augment a number of risks and complexities in terms of privacy, personal information and data treatment, customer protection, transparency, and cyber-security. For these reasons, regulatory oversight of fintech is increasingly tightening. Financial regulators are now trying to encourage developments in fintech by providing an environment where innovation can thrive, while simultaneously protecting markets, consumers, and investors.

As the fintech ecosystem matures, banking and financial regulatory regimes are also evolving swiftly. Financial regulators are now evaluating existing rules and are considering the adoption of new regulation to better address both the opportunities and challenges presented by new technologies. In particular, financial regulators in the United States, Europe, and the United Kingdom have recently enacted, or are in the process of enacting, a number of policies and rules specifically targeting fintech innovation. The disruption and evolution in banking and financial services caused by fintech innovation has heightened the need for these new policies and rules to be both thorough and forward thinking.
Regulatory oversight and regulation are, thus, critical factors for the growth of the fintech ecosystem and could significantly affect the extent and speed of its future developments. The research project will delve deep into this point by analyzing and comparing the rapidly evolving fintech legislative and regulatory frameworks in the United States, Europe, and the United Kingdom. Building on the findings of this comparative analysis, the research project will, then, examine proposals of new regulation that could facilitate more safe pilot-type, small-scale fintech innovation and could enable more effective supervision of the way risks from fintech innovation are identified and addressed. The research project will, then, conclude by discussing initiatives aiming at promoting ongoing and more effective dialogue between fintech industry and financial regulators, as well as more effective cross-border coordination of fintech regulatory oversight.