Report: Analog Regulations Built for the Traditional Banking Space are not Conducive to Fostering Innovation in Financial Services


The digitization of finance is upon us. Fintech is rapidly changing all aspects of the financial services sector but different countries are adapting at different paces – regulation is largely why.

Jackson Mueller, writing for the Milken Institute, hosted several roundtables earlier this year to engage with Fintech industry participants and learn from their experiences. The resulting report is a must read document.

Mueller notes that Singapore and the UK were the early leaders in Fintech innovation as the respective governments determined it was of strategic importance. With government backing, Fintech flourished.

Today, many countries have seen the light and are pursuing Fintech following in the paths of the trailblazers.

But there are many challenges for this transformation that is occurring at a breakneck speed. And as Mueller says;

“analog regulations built for the traditional banking space are not conducive to fostering innovation in a financial services industry turned digital.”

Everyone is Doing It

Some regulators have embraced change. But this is quite is difficult. The report explains that;

“Regulatory officials simply do not have the capacity to stay abreast of the technological advancements and shifting business models in the financial services space Industry stakeholders can only be as innovative as their least innovative regulator.”

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In brief, there is a regulatory bottleneck.

If there is no concerted and singular policy initiative the hurdles can be enormous.  Mueller bullets out intrinsic challenges to the existing regulatory ecosystem:

  • Fear of failure has resulted in some regulators taking a go slow approach instead of being proactive. When things go wrong – who gets the blame?
  • Complexity in Fintech requires new skills. Regulatory agencies are typically populated with people entrenched in well defined processes. There is a lack of proper skills and staffing.
  • Internal culture may not be willing to adapt. Changing processes is always a challenge. A cohesive policy strategy is missing.
  • Fintech innovators may struggle to engage and communicate with a regulator. Fear of engagement harms us all

The Fintech Sandbox, first launched in the UK, is an excellent tool but not a panacea. If you think about the evolution of the Sandbox it now appears to be a natural step. If you have no idea what the startup is doing, bringing them into the regulatory fold is a perfect solution. Knowledge sharing is mutually beneficial. As of June, there were approximately 15 Fintech Sandboxes around the world according to the paper. Expect more to follow.

But Mueller correctly states that Sandboxes need to evolve;

“…if sandboxes are merely being implemented to allow firms to test their assumptions, are we actually moving the ball forward toward enacting right-sized regulatory policy fit for the realities of the 21st-century economy?”

Having a Sandbox is NOT just about allowing a Fintech startup to experiment but it is about regulators initiating rulemaking  to embrace beneficial change.

Changes call for innovation & innovation leads to progress.

Yes, some countries are blazing trails in Fintech and the list of countries pursuing a Fintech Hub status is growing. Without acknowledging the elephant in the room that the US is not at the top of this list (even though it is the leading global financial center) is telling about the regulatory morass elected officials have allowed to persist. Some would say metastasize.

Not embracing change due to fear of failure or entrenched bureaucratic norms is not acceptable. As Mueller explains;

“the pace of technological change necessitates a rethinking of current regulatory structures, no matter the various trials and tribulations that officials will face in attempting to evolve decades old frameworks to reflect the present-day financial services industry and the innovations coming from within and outside of the market.”


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