Why The Fintech Charter?

4th Industrial Revolution & Its Impact

We live in an age of shared economy where people are sharing cabs, workspaces, homes, and cars. How does this impact the overall markets? The way consumers are spending, sharing, borrowing has changed drastically. Anything we want or want to learn about has to be a click away. We live in an age where our demands for getting something has to be instant. It is the so-called era of 4th Industrial Revolution which is termed as the “ Machine Age “  by Charles Schwab the founder of World Economic Forum.

By 2020, the number of Millennials will outnumber the baby boomers. Millennials have different views about renting houses versus buying them. How does this impact the housing market?

More students now enroll for online degrees versus going to actual universities. Universities/colleges occupy large real estates. This affects the commercial real estate markets. Borrowers have changed and if terms and conditions at which lending occurs are changed the credit risk profiles need to be calibrated accordingly. Technology will accelerate the delivery. The counter effect of this is partnering of the technology firms into the banking sphere.

2018 and Beyond

 According to the recent discussions, OCC Comptroller Joseph M Otting mentioned 80-90% of Fintech firms that were initially launched to replace banks, now want to partner with banks. Banking is a protected sphere to get an entry into and is subject to a very intrusive regime for regulatory model thus leading to very high costs. Banks are constantly competing for maintaining and growing their consumer base at the same time growing cautiously by effectively managing their risks to the market, regulations as well as internal risks in the interest to protect their consumers and ensure the safety and soundness of their business operations. It is inevitable that Fintech firms partner with the Banks and help enhance the banking technology and operations.

The upcoming Fintech Charter to be finalized tentatively by July end will be to try to get some of the “shadow bankers” into the banking system. There are currently big returns on Fintech but comparatively lesser returns for banks due to capital and liquidity requirements. Fintech charter will aim :

  • To bring outside returns into the banking ecosystem.
  • New sources of capitalization via Fintech firms will now be regulated so as to ensure we are not marching towards overlooking systemic risk that will ultimately lead to another crisis.
  • Fintech charter will encourage other technology firms in the world to do more and foster innovation as well as ensure the safety and soundness at the same time. The costs for Fintech firms will be much lower than being a bank. But most Fintech firms don’t want to be called banks anyway.

The question remains is when the government puts constructs between banks and Fintech firms the markets will always push back towards it. Treating anything like a checklist is very limited innovation and not the best form. The regulations for banks are very prescriptive due to the possibility of systemic risk. Systemic risk is the genesis of everything. Technology has the potential to take away the systemic risk but at the same time introduces a risk of its own. It is thus prudent to have changes in the regulatory regimes to adjust to the evolving society that is powered by technology.