Is Pakistan’s Financial Ecosystem Prepared for FinTech Innovation?

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The FinTech innovation in the corporate and economic world is undeniable. It has proved itself to be so despite the suspicions and uncertainties that follow. The developing cycle it has adopted throughout the world allows us to discern that it is here to stay. And whether we have the ecosystem prepared for it or not, it will compel the system to produce the bread and butter for it.

These ideas are advance yet modish. So, there is no surprise is learning that the laws and regulations have not augmented to perfectly respond to the FinTech development. The existing regulations are tailored to the banking and finance system that antecedes the digital revolution. Consequently, the regulators are only struggling with fitting a glove on to FinTech which isn’t stitched to its size, hence, the complications faced, are innumerable. In April 2018, an online lender in Massachusetts was fined $ 2 million by the Massachusetts Division of banks for making more than 46, 000 loans in the state without acquiring a state license. This operation was not carried out under FinTech regulations but the small loan laws of Massachusetts. The confusion doesn’t settle here; the federal and state regulatory bodies are operating simultaneously on a situation that the two have not conceded upon. The challenge for the FinTech industry is not just what to follow but where all to seek compliance from. The situation has also resulted in FinTech following its own mantra “It’s better to ask for forgiveness than permission”. And it is an understandable approach in the business world because an idea for these risk takers has greater worth than complying with the law and regulations. Or, for that matter, even non-compliance that may result in penalties. Nevertheless, it’s a risk, no matter how we glorify a businessman’s ability to take one. No one is in it for setbacks and the environment would be friendly by a measure for these initiatives if there were more comprehensive regulations in place.

Where the regulations being applied to FinTech within a country is not conveniently discernible, it undoubtedly is a task for them to extend interjurisdictionally. The discrepancies in the mentalities and approach towards these innovative ideas can be witnessed from within regulatory authorities to varying jurisdictions. In the United Kingdom (UK) for example, the regulators are actively involved in promoting competition and the introduction of innovations like FinTech help the cause, fulfilling the market needs that have not been catered to by conventional banking and finance mechanism.

The regulatory failures have already caused many FinTech innovations to pack-up or pay substantial amounts as penalty. In order to evade this, the FinTech companies are increasing consulting regulatory authorities which is further compelling the regulatory agencies to accelerate the process of introducing and interpreting regulations to be fit for the FinTech industry. In December 2020, the Securities and Exchange Commission of Pakistan (SECP) granted approval for the launch of first ever Peer-to-Peer (P2P) Lending Platform. This allows individuals to obtain loan directly from other individuals, without a financial institution playing its role as the middleman. Earlier the Chairman SECP, Amir Khan also stated that the Commission has instituted various reforms to develop a comprehensive and coherent industry policy to share regulatory thinking and promote a conducive FinTech environment in Pakistan, and the regulatory sandbox initiative is part of this agenda.

The United States of America (USA) federal regulatory agencies have taken initiatives to design and facilitate communication between Fintech innovators and financial regulators. The Consumer Financial Protection Bureau (CFPB) initiated Project Catalyst in order to encourage consumer friendly developments for consumer financial products and services. This project is conducting in several research collaboration with companies that are testing financial products and services. Moreover, the Commodity Futures Trading Commission (CFTC) introduced LabCFTC for the agency to directly engage with the FinTech industry. This can aid the Commission in appreciating the developing technologies. The core components of the Lab are achieving a guide point, a dedicated point of contact for FinTech innovators to engage with the CFTC, learn about the CFTC’s regulatory framework and obtain feedback and information on the implementation of innovative technology ideas for the market.

The Office of the Controller of the Currency (OCC) created the Office of Innovation to function as the central contact and clearing house for requested information relating to innovation in the federal banking system. The Office of Innovation has four main agendas; outreach and provide technical assistance to establish and continuing dialogue with banks, financial technology companies, and other non-bank parties and technical assistance, the coordination and facilitation to implement a process to streamline and coordinate innovation related decisions to ensure transparent and timely responses to inquiries, to provide awareness and trainingthat improves the skills and knowledge of OCC staff, andresearch that assesses the landscape and trends in financial innovation.

The US regulatory agencies are also actively tackling the obstacle of discrepancies by creating and promoting channels to share information with one another to provide more coordinated response to FinTech innovators. In 2010, the Federal Reserve Banks of Atlanta and Boston created the mobile payments industry working group to facilitate discussions among industry stakeholders, about how a successful mobile payment system could evolve in United States. This group also functions as an interagency collaboration mechanism through biannual meetings between industry stakeholders and relevant regulators.

These attempts by both parties, the FinTech industry and the regulatory agencies, to understand each other better and accordingly create a conducive work environment is reassuring for the stakeholders. This stage in the development-cycle of FinTech industry can be delicate and best dealt by seeking expert opinion.

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