In recent years, the term “FinTech” has been swirling around media reports and economic discourse with increasing frequency. But what is actually meant by the term and what are some of the prognostications of how this new category of technology will impact the financial system as we know it? With FinTech Week here, Sigma is happy to announce that it will be diving into these questions and more with the release of a FinTech Whitepaper in the upcoming weeks. Stay tuned!
The first question, naturally, is what do we mean when we use the term “FinTech?” Indeed, “financial technology” has been around for decades, tracing its roots back to the credit card revolution of the 1950’s. However, more recently, the term “FinTech” combines these two words and is colloquially used as an umbrella term that covers a huge range of technologies such as digital payments, online banking, cryptocurrencies and more. The U.S. Chamber of Commerce defines FinTech as “a broad category that encompasses many different technologies, but the primary objectives are to change the way consumers and businesses access their finances and compete with traditional financial services.”
By nearly all metrics, the FinTech industry is booming. CB Insights reports that the second quarter of 2021 shattered investment records with nearly $30.8 billion in global funding, growing 192% from Q2 2020 and 30% from the first quarter of this year. In fact, Findexable found that out of all unicorns across the globe FinTech companies now represent 20% of total value (up from 15% a year ago). Finally, EY notes that FinTech adoption has been doubling every two years (16% in 2015 to 64% in 2019), with FinTech Magazine adding that the “in 2020, fintechs became essential for business survival during the pandemic.” And these trends are set to continue for multiple reasons beyond COVID.
However, COVID also showed some vulnerabilities in the FinTech community that need addressing. For instance, a report by the University of Texas at Austin’s McCombs School of Business examined red flags in the Paycheck Protection Program (PPP), which disbursed about $780 billion in funds since it began in April 2020. The report found that “FinTech loans are highly suspicious at a rate of almost five times that for traditional lenders”, representing an amount of $76 billion in potentially fraudulent loans. Yet - just like the trends of continued FinTech adoption - the need to address compliance, AML and anti-fraud issues in the industry will continue well after the COVID pandemic.
Regulators have taken notice of the industry and the many different types of technologies that are emerging within it. The World Economic Forum reported last year that, “In emerging market and developing economies, almost two-thirds of regulators see FinTech as an increased priority. Over half of regulators in advanced economies state that FinTech has remained a high priority.” Here in the U.S. this pattern is not unbroken. Bloomberg notes that SEC Chairman Gary Gensler is crafting, “one of the most ambitious agendas in the SEC’s 87-year history”, with much of that agenda’s attention focused on FinTech and cryptocurrency regulation. In fact, it has been reported that Gensler has set up 50 teams involving about 200 just to write rule proposals. Further regulatory action in the FinTech space is just beginning.
Hence, there is a great opportunity for FinTechs and traditional institutions leveraging such technology to get ahead of the curve. In adapting to a dynamic industry, it is key that institutions have dynamic solutions for compliance. Sigma has positioned itself to be part of the solution in the “RegTech” (Regulatory Technology) industry, by providing risk-rating, due diligence and other solutions to those attempting to keep up with the fast moving pace of financial technology. Deloitte writes that “RegTech is more than a buzzword, it is a very real movement that is already having an impact on regulatory compliance.” And Sigma is certainly proud of being a part of this movement and excited to see what the future holds for both industries.
Stay tuned for our forthcoming publications and Whitepaper on this topic and check out our other works to stay up to date with developments in the field as FinTech and RegTech continue to evolve together.