Financial Regulators Need to Keep Up With the Evolution of Fintech

Context: Financial regulators need to keep up with the technological evolution of fintech companies to address threats of price discrimination, market domination, and instability to violations of privacy.

Challenges faced by Financial Regulators due to the rising FinTech:

• Operational risks: Where a single company channels payments for the entire country.
  • E.g. the M-Pesa company in Kenya channels payments for the majority of a country’s population, and its failure can crash the entire economy. 
  • Thus, it becomes necessary to ensure the protection of customer data and not just financial data but also other personal data to which Big Tech companies are privy.
• Consumer manipulation: Big Tech firms, because of their ability to harvest and analyze data on consumer preferences, have an enhanced ability to target the behavioural biases of their customers.
  • There exist a moral hazard where these biases can cause some borrowers to take excessive risk.
  • E.g. Chinese regulators now require the country’s Big Techs to use their own balance sheets to fund 30% of any loan extended via co-lending partnerships.
• Price discriminations: While the governments have laws and regulations to prevent discrimination on the basis of variables like race, gender etc., regulators will have to effectively distinguish between price discrimination based on group characteristics and price discrimination based on risk.
  • As Big Tech companies’ with artificial intelligence-based algorithms replace loan officers, the variables will be changing continuously with the arrival of new data points.
• Issue of bias: The data used to train the algorithm may be biased, and the training itself may be biased, with the AI algorithm ‘learning’ to use the data in biased ways.
  • Given the black-box nature of algorithmic processes, the location of the problem is rarely clear.
• Risks to the competition: Banks and fintech firms rely on cloud computing services operated by Big Tech firms, rendering them dependent on their most formidable competitors.
  • By providing a range of interlocking services, they can prevent their customers from switching providers (described as consumer lock-in).
  • While the regulators have responded with open banking rules that require financial firms to share their customer data with third parties once customers consent, these measures are not enough.