Earlier this week PwC (under the DeNovo label) published a wide-ranging report on the evolution of Fintech. The document was the production of many PwC executives covering topics like blockchain, payments, banking and the overall transformation of financial services. In one respect the report is another wake-up call for traditional finance, but it also highlights the potential and challenges for financial innovation. Crowdfund Insider reached out to one of the authors, Aaron Schwartz – who is the Head of Fintech Research at PwC.
We asked Schwartz if regulatory risk was, perhaps, one of the biggest risks in the US. Schwartz explained;
“Regulation is not necessarily the largest risk. It will, however, have an impact on the competitive dynamics of the market and certain areas will likely be less profitable. But regulation will also form new opportunities. In looking at the last several years of FinTech, the growth in venture funding and the number of new FinTech entrants—especially through 2015— demonstrated the speed at which new companies could come to market. This is primarily because technology lowers the barriers to entry and the cost structure of tech companies has changed. Regulation limits the speed at which traditional financial institutions can respond to these newer competitors to the point where greater regulation was arguably desired (by traditional FIs).”
Schwartz is optimistic that some policymakers are coming around to the benefits of Fintech;
“More recently the regulatory landscape has shown signs of change in acknowledging the role that FinTech companies are playing, but it is uncertain at best,” stated Schwartz. “There have been indications that there will not be a lower regulatory burden for newer entrants, but some licensing could change. The uncertain regulatory lines, relative to the recent growth in FinTech, is one reason the financial institution/FinTech cooperative partnership has been a growing trend in 2016. In our 2Q16 recap report, we specifically speak to a strategy based solely around emerging FinTechs.”
Schwartz noted that some other countries had fostered a very conducive regulatory environment for Fintech innovation;
“We expect the evolving regulatory framework to have an impact on the competitive dynamics of the market. Some emerging market countries have proceeded with a very cooperative regulatory nature, which has had been a significant impact on competition and market share. At a minimum, evolving regulation will create new opportunities for both new entrants and incumbents, and just the fact that the regulatory framework could change should be seen as an indication that industry change will also occur.”
Switching gears a bit, Crowdfund Insider asked his opinion about the rising tide of China in the Fintech sector. We asked if the Chinese are poised to play a dominant role in Fintech evolution;
“Yes, China will (or already has) play a significant role in the Fintech evolution. The U.S. Commerce Department recently projected that China would be the second-largest export market for FinTech in 2017, and the largest for payments specifically,” said Schwarz. “China has several attributes that will enable it to play a large role in FinTech. Clearly, the country’s population is a starting point, and while China has made significant strides in formal banking account inclusion (account penetration increased 15% points from 2011 to 2014), 21% of its population still does not have a formal bank account (Worldbank). The limitations of physical access to consumers due to infrastructure is also a factor and considering the decent share (19%) of account holders in the country that already use a mobile phone to access an account at a financial institution; FinTech can be seen as an accepted inclusion and distribution channel.”
The sheer size of the contiguous Chinese market and tsunami of financial service demand is a powerful catalyst.
“Select areas have also seen significant scale, China’s already has the largest marketplace lending market. This market is extremely fragmented and its growth is due, in part, to 1) the large population of independent small businesses; 2) pent-up demand due to lack of access to formal borrowing; and 3) a large supply base via retail investor channels,” explained Schwarz.
The Department of Commerce report from May stated that regulations needed to support a sound Fintech system by both protecting consumers and promoting competition. Commerce also stated there is a danger of the regulatory environment becoming less favourable to Fintech companies. For the moment, the US remains a premier destination due to the “size of its market, availability of technology and vibrant entrepreneurial ecosystem.” But Commerce also states; “If regulations ease for traditional financial services companies or tighten for emerging ones, the balance of growth could change dramatically.”
It will be interesting to see how the Chinese Fintech export model evolves over the next several years.