Will FinTechs sacrifice the pawn of innovation to win over the queen of regulation?
Will FinTechs continue to play the long game?
Hi everyone,
What ties technophobia around AI in current times to the Galileo affair of 1633?
A mistrust of invention and nonconformity.
Human history is littered with examples of fears – or even the outright repression – of ideas that do not fit with prevailing preconceptions of the times. The need for order and control often overwhelms the very human tendency to adapt, innovate, and learn.
Speaking of things that are hard to understand, no one knows what FinTech is anymore.
The segment was extremely difficult to define in the first place; there has never been a universally accepted definition of FinTech.
FinTechs are dynamic. They adapt easily to the demands of their circumstances.
Some of the earliest “category-defining” FinTech companies have themselves failed to define what they do. They have evolved to meet the changing demands of the markets they serve.
For instance, the Swedish FinTech giant Klarna started out as a payment method, and later pivoted to provide checkout services to e-commerce platforms. It traverses three categories – payments and transfers provider, payments service provider, and lender.
Yes, these categories have different implications in different countries. But the fact remains that only one thing can be said about FinTech with absolute certainty – there is plenty of room for shapeshifting across categories through constant innovation. And this often makes it difficult to govern the sector.
Regulation, product differentiation, and the customer experience sunset
The lack of a unified codification of FinTech has forced a staggered, piecemeal approach to regulation by the RBI. This is evident in the fact that the regulator has rolled out guidelines retroactively. Here are a few examples:
RBI’s guidelines on recurring payments that raised limits for e-mandates to Rs 15,000.
RBI’s ban on loading PPIs with credit lines
RBI’s overarching guidelines on digital lending
This often means that FinTechs have had to reconsider their entire product offering or business models almost overnight!
But here’s the thing – this approach to regulation creates a flywheel effect on FinTech innovation. Innovation necessitates regulation, which in turn begets more innovation.
User experience as the hotbed of competition
This phenomenon both feeds into and runs parallel with the cut-throat competition that already exists in the FinTech segment. And user experience has been the ground on which this contest has played out over the last few years.
User experience design not only makes the interface delightful and easy to use, but also fosters trust. In fact, customer experience not only differentiates FinTechs from one another, but also from traditional banks that are going through a trust deficit.
However, the playing field for customer experience has been levelled. FinTechs have already invested in, realised, and exploited the value derived from customer experience. In fact, even legacy banks have joined the CX race, exhausting any opportunity to gain an edge over competition for FinTechs.
Valuable as it may be, user experience design has taken a back seat. FinTechs now worship a new, far more stoic pantheon of gods to win against competition (and beat regulation to the punch).
FinTech Players have realised that to break out of the vicious cycle of constantly innovating in response to regulation, they must go back to the basics. As a result, FinTech innovation is happening in the most boring places –
Banks-first
The RBI regulates FinTech largely by proxy – it issues instructions to regulated entities like banks and NBFCs, and by extension, influences their partnerships with unregulated FinTechs. Trends suggest that FinTechs are sliding closer to the regulator. For example, consumer FinTech heavyweights like Cred and Slice have acquired or merged with regulated entities over the past year.
For B2B FinTechs, the brief has never been clearer. They have always existed to build for REs, and the growing sectoral affinity towards regulation means that they might have been on to something. Business-facing FinTechs are deeply integrated into the systems of REs. This means that even though they might not build the flashiest features, as long as they adhere to their regulated customers’ IT policies, they will automatically toe the regulatory line.
More substance, less style
FinTechs are starting to shift focus to the fundamentals of the product and business. Products are being refurbished not to bedazzle, but for utility. And a lot of this depends on compliance – players are investing in building more auditable internal processes, third-party partnerships to round off the compliance needs of their RE clients and partners, and beefing up their legal teams.
Over the last year, demand for legal and compliance specialists has increased considerably. There was a 6X jump in movement of managing director-level professionals alone in financial institutions. These developments result from a focus on zero tolerance and regulatory adherence from company boards.
Conclusion
Those of us who are optimistic about tech and innovation often tend to see into the future, rather than be limited by the constraints of the present. But even the most progressive of technologists must play the long game.
I like to think we can tread both paths – I’m all for innovation but do believe that when it comes to people’s money – there's nothing like too much caution. FinTechs can build sophisticated tech products for regulated entities that prioritise compliance imperatives. These are the players that will win more deals, grow their business, and stick around to be able to innovate more.
After all, even Galileo renounced his historic discoveries before the status quo, but continued working on a body of work that changed the course of scientific thought.
Cheers,
Rajat