Collaborative Regulation: How FinTech Companies Can Work with Regulators for Mutual Success

Despite FinTech having been around for quite some time in one form or another, this technology has proven challenging for regulators to keep on top of. This is not altogether surprising when one considers the incredible rate at which the industry has grown over the last few years; new businesses, new products, and new risks turn up all the time and will likely continue to do so. For example, in the UK alone, the number of FinTech companies increased by over 600 between 2020 and 2024, jumping from 2,550 to more than 3,168.

Regardless of the difficulties it presents, FinTech regulation is absolutely essential — and not just for customers. While these laws are primarily put in place to protect consumers, they benefit FinTech companies as well, namely by driving fair competition and ensuring financial stability across the sector. This article will explore how these businesses can work with regulators to the benefit of all.

FinTech and Operational Risk

Companies across all industries should have an appreciation of the risks involved in running a business, and FinTech operations are no exception. From cyberattacks and outages to data handling and consumer protection to firm governance and compliance — financial technology presents us with a veritable minefield of potential dangers and pitfalls. Proper management of these risks is also of the utmost importance.

Consider the example of Santander. In December 2022, the FCA fined the bank £154 million for repeated anti-money laundering failures between 2012-2017. These failures included poor handling of anti-laundering systems and failed attempts to address issues that came about as a result, creating a severe financial crime risk. Santander agreed on an early settlement and received a fine reduction of 30%, ultimately paying a £107.8 million fine instead.

As we can see from this example, risk management and compliance go hand-in-hand. This highlights the importance of rules and regulations within FinTech, an industry full of all sorts of dangers.

The Role of Regulators in the FinTech Sector

The purpose of FinTech regulators is to watch over the industry and see to it that firms comply with all relevant regulations and guidelines, thereby ensuring these companies operate in a safe, responsible manner. These laws are put in place for the protection of consumers, institutions, and the wider economy, while also providing a safeguard against financial crime. By setting such firm foundations, regulators manage the inherent volatility of the FinTech industry, allowing companies to innovate and explore safely.

In addition to promoting innovation, FinTech regulation encourages competition by levelling the playing field and ensuring that competing firms all follow the same rules and meet the same challenges. By the same token, these bodies also promote business growth; by adhering to relevant laws and regulations, FinTech companies show themselves to be reliable, which helps to foster trust. This, in turn, makes it easier for them to grow and expand into new global markets.

How Collaborative Regulation Can Enable Mutual Success

By enabling the free exchange of resources, knowledge, and experience, collaborative efforts between businesses and regulatory bodies can help pave the way for progress, allowing for the development of innovative new solutions in the realm of financial technology. In fact, in a recent paper, the World Economic Forum reported that more than 60% of FinTech startups claimed that regulatory collaboration would have the biggest influence on their overall growth.

Regulatory sandboxes are a great example of collaborative regulation at work. Otherwise known as innovation hubs, these platforms allow for real-time testing of new products and technologies in a controlled space overseen by a regulator. One such initiative is the FCA’s Regulatory Sandbox. Introduced less than a decade ago, this programme has already had a demonstrable impact on the UK’s FinTech industry, helping many startups find their feet in the market. Participants have praised this initiative for providing an easily accessible, cost-effective route to regulatory authorisation, as well as promoting trust between firm and regulator.

Access to such initiatives also leads to an increase in capital, according to a report published by the Bank for International Settlements. More than fifty countries around the world have launched regulatory sandboxes of their own; in an attempt to chart their impact on the financial landscape, BIS evaluated their efficacy, using the FCA as a case study. Their research revealed that companies saw an average increase in capital of 15% after entering the initiative, with the probability of raising capital going up by half. Additionally, sandbox entry was shown to lead to a much higher survival rate, as well as increased patenting activity.

On the continent, efforts of collaboration have also aided in the development of key regulatory frameworks, with FinTech companies and regulators coming together to create standardised protocols in open banking. An example of this is the EU’s Revised Payment Services Directive (PSD2), which helps to ensure interoperability, privacy, and security in the payments industry.

Research published in the Journal of Economic Behavior and Organization has shown that the introduction of PSD2 has had a positive impact on FinTech, as the PayTech market has seen a greater number of entrants since its adoption. Immediately after its introduction, there was a 70% increase in the amount of newly incorporated start-up businesses. After the initial hype, this decreased by about 36%, but still remained at a higher level compared to before PSD2 came onto the scene.

Conclusion

The importance of compliance in the FinTech industry cannot be overstated. In addition to protecting both consumers and service providers, regulators exist to promote fair competition and business growth through the implementation of laws and guidelines. Adhering to these rules is, therefore, the safest and most sensible option and the most beneficial.

With that being said, as advantageous as compliance might be, collaboration with FinTech regulators offers even more benefits to businesses. For one thing, these bodies can allow companies to test out new products in a controlled environment, helping them to innovate and develop without taking unnecessary risks. They can also provide useful information and guidance regarding compliance, assisting firms through the all- important regulatory authorisation process. Finally, such collaborations have been shown to increase capital and provide startups with more opportunities to enter the market.

As FinTech continues to grow, so will the need for regulation. In the end, the companies that can meet this challenge will be the ones willing to collaborate with regulators, taking advantage of their knowledge and expertise.