Fintech – Risks, growth, and the regulatory landscape

Regulatory Landscape

Published: 05 February 2020
Author: Sarah Amundsson

Fintech is not a decades-old industry but it transformed the banking industry and shaped the future of global financial infrastructure. It is anticipated to be valued at US$26.5 trillion in 2022 with a CAGR of 6% (MarketScreener). This is because the industry has delivered an unmatched value for consumers, investors, companies, and other stakeholders through its next-generation solutions.

Fintech has delivered valuable solutions for payment, fund transfer, remittances, credit finance, trading, and investments. Fintech is growing limitless and this growth is now getting tarnished due to the involvement of bad actors. A study conducted by ICO advisory firm revealed that a staggering more than 80% of ICOs conducted in 2018 were scams. Having identified increased risk, the regulatory authorities are making efforts to control this risk. 

Risk in fintech 

Fintech is growing and the risk is also high. Risks for investors, companies and financial infrastructure are increasing. 

The financial sector is becoming complex 

The financial sector is becoming complex due to increased collaboration with fintech. The financial sector is connecting with fintech and regtech to overcome the complexity of manual operations. PwC’s Global fintech Report 2017 reveals that 82 percent of financial institutions expect to increase their partnerships with fintech firms within the next five years. 

Fintech is depending on regtech to perform necessary scrutiny. In the first half of 2017, global investment in regtech firms totalled $591 million with 60 transactions and it is on track to surpass records from 2016. KYC/AML screening solutions are a trending product in the rapidly rising fintech sector. It’s because these solutions deliver the next-generation factor that is the golden feather of fintech. 

This complex collaboration is increasing uncertainty and raises the need for laws to control and fill the loopholes in this collaboration. 

Reliance on technology and big data

Fintech is the fruit of technological advancement and depends a lot on it. This dependence increases the risk of cybercrimes, such as data breaches, and financial crimes. Also, a huge amount of data is present on the cloud spaces, so the risk of data loss (data breach) is high. Hence there is a need for well defined and detailed regulations for the fintech sector to manage the risk of investors, companies and global financial stability. 

Herd behaviour 

The hype in the fintech leads to increased investments in this sector. Investors and consumers are unaware of these risks involved in this industry. It increased the risk of financial loss, fraud, and unwise financial decisions for investors. And for companies the risk of investor fraud and data breaches is high. Also, these risks join up and increase the risk for financial infrastructure, the increased addition of unbanked in the financial infrastructure is one of the major risks. Given, the fintech companies don’t perform due diligence on their customers. According to the World Bank, the number of unbanked adults has decreased by 20 percent from 2.5 billion in 2011 to 2 billion in 2014, and fintech is one of the main drivers for this decline.  

Regulation and scrutiny of the rapidly growing industry is necessary to mitigate the risk of another housing bubble or a dotcom bubble. People are unaware of the risks involved in the decentralized fintech services they are adopting quite rapidly in their day to day life. 


What is the regulatory landscape of fintech? 

KYC/AML regulations 

In 2019, FATF gave recommendations regarding virtual assets. The recommendations require the member countries to include cryptocurrencies in the reporting entities. It means they’re required to perform AML/KYC screening on their customers just like financial institutions. 

Also, the 6AMLD of the EU requires the member countries to take necessary measures to prevent the risk associated with cryptocurrencies. 22 predicate offences are described in the law and businesses are required to go the extra mile to eliminate the risk of their business being used for money laundering/terrorist financing. 

Data protection laws

Data breaches are the biggest threat to businesses these days. Thanks to cloud storage and huge data sharing done without any security measures. Equifax experienced a data breach in 2017 compromising the social security numbers and personal financial information of over 146 million consumers. 

GDPR and CCPA are prominent data protection laws. GDPR (General Data Protection Regulation) is the law in the EU and it requires the businesses to tackle customer data with care and to respect the privacy of their customers. A disclosure must be made at the time of data collection and the customers’ data must be shared/sold with their consent. 

CCPA (California Consumer Privacy Act) is very much like GDPR. It also requires businesses to make necessary disclosure regarding the motive and usage of data collection while giving deletion rights to the users. 

Payment protection laws

Fintech generally allows consumers to exercise unmatched swiftness in payment and fund transfer services. Payment time, fee and effort is minimum in fintech. So most people are using it for ease. 

Payment Services Directive (PSD2), implemented in 2018, is designed to strengthen growth and security in the payment ecosystem of Europe. To this end, it regulates third-party access to customer payment accounts. Third parties will be able to offer account information and payment information services. 

To wrap up, fintech has huge growth potential and so far it has not borne any major loss due to lack of regulatory scrutiny. Criminal entities are aware of these loopholes so the exploitation of fintech solutions/services for criminal acts is increasing. The regulatory authorities are drafting regulations based on unique risks associated with the fintech sector.


Sarah Amundsson is a Senior Business Developer at Shufti Pro, an AI-powered identity verification service provider. As an expert in digital identity verification, she helps businesses deploy solutions globally to solve their problems for KYC, KYB and AML.

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