Financial Regulations currently offer arbitrage between disruptive players (and some even skirting regulatory lines) and incumbent financial institutions who use brand legacy as a visiting card. It is a challenge that could potentially hurt when demographic changes mean that younger consumers don’t recognise legacy as a useful value to them. Traditional financial firms have to accept that customer expectations are being influenced by the digital ecosystem, and innovations continue to change the financial services sector. The advantage for the license holder is that the regulator has a positive view and comfort about the promoter of the financial entity—especially entities like banks, mutual funds or insurance firms—as they supervise their operations. At least for now.
This is where the regulator needs to build a talent pool, which can bring in newer competences faster than technology emerges. This is a key challenge, as innovations, markets, and industries don’t necessarily face the bureaucratic processes that the regulators face. Mere incrementalism at the higher hierarchical roles won’t change anything as the culture of these regulatory organisations can’t change overnight. This is why there is a fear that regulators
might be unfair on the newer licence-applicants, as they seem to favour existing ones for their sheer familiarity with them. In addition, with the aim of increased adoption of technology to serve consumers, the traditional licence holders could potentially use all their network, goodwill, and lobby power to stifle or slowdown the non-traditional newer competition.
Mere incrementalism at the higher hierarchical roles won’t change anything as the culture of these regulatory organisations can’t change overnight.
Indian billionaire investor, Rakesh Jhunjhunwala, said, “The world is not going to fall as long as there is confidence in governments and in banking institutions and the financial system.” This is why and where the regulators should desist from taking sides. Trust is an aspect that all stakeholders should have in each other. Fairness and transparency are value that are not expected just from the industry, but also from the regulators. More essentially, the regulators should revisit their own licensing norms, the pace of processing applications, and transparency in their decisions. This can result in a deeper understanding of how consumer interests and financial needs are being shaped.
Technology is an enabler and a disruptive force as well. For instance, just because one does not understand how to develop a PowerPoint presentation, one can’t make then claim that it’s bad to use it or to ban it for their team members . If regulators like the RBI lack a talent pool and competencies to draw from, it could be a slippery slope if the regulators are then forced to outsource technology efforts and digital expertise to third-party advisories who also end up advising the industry participants.
GEMZ & finance
The Baby boomer generation through to the Gen-X generation have been slow or even reluctant in changing their financial-services providers. They played it safe with established financial brands as it meant the safety of their investments. But the young demographic that India has—where 65 percent of the population is less than 35 years of age—is not wedded to the legacy or origin of a
An
understanding of #GEMZ (gig economy, millennials, Gen Z) and their impact on societal fabric, consumption patterns and business model
disruptions is another learning need for regulatory capabilities and capacities. For example,
. This phenomenon, when clubbed with both the disruptive as well as enabling capabilities of technology, would need a deep understanding of financial processes and activities that GEMZ would eventually disrupt. It is
exactly those activities that financial regulators have to regulate and supervise. The 4th Industrial Revolution’s impact makes it a necessity for
activity-based supervision, rather than the comfortable old way of
entity-based one. This would mean that regulators have to be alert, proactive, and nimble. They themselves must use technological supervision for real-time tracking of their sectors.
Having both regulatory and tech “talent side by side, looking together at financial regulation” might be far more useful in getting the best of technologies for consumer impact and consumer protection.
Regulatory tasks become even more complicated as the current financial disruptions also cut across industry boundaries and often extend to multiple regulators. Hence, the financial regulators have to build agile and cohesive working mechanisms amongst themselves, without making casualties of innovation and its allied activities. In such cases, figuring out liability and jurisdiction for any consumer grievance becomes a maze.
The rapid progress in commercialisation of emerging technologies is forcing regulators and policymakers to face the thankless and cumbersome task of simply
keeping up. Instead of the old ‘us versus them’ hierarchical mindset, it needs a drastic mindset shift. Having both regulatory and tech “
talent side by side, looking together at financial regulation” might be far more useful in getting the best of technologies for consumer impact and consumer protection. But the corollary to this is that regulators also have to avoid conflict of interest scenarios by ensuring that those tech expert advisors they seek inputs from are also not investing in the technologies that the industry is lobbying to push for adoption.
Regulators and regulatory supervisors surely need to hire more technology and data sciences talent, both to handle
financial innovation in their sector as well as steer technology for their own supervisory initiatives. This is where the need to move away from hierarchical thinking about age becomes more urgent as tech talent is getting younger by the day.
Data as new financial commodity
The tech giants are also emerging as “TechFins ”, by the way they connect content, consumerism, and commerce.
TechFins are technology companies, who embed financial services offerings to make their own core product(s) more attractive. But their business model does not depend on the business margins in those financial services. This is where the
challenge of regulating them by the financial regulators arises. These tech platforms use
consumer data as a commodity in the digital finance space. Herein lies the issue of
who regulates data governance (and how), data usage norms, data security, and consumer privacy. The number of tech companies, of any vintage or size, that will use data science to deliver financial offerings to consumers, will only increase with time. It will obscure the regulatory border of who is a pure play financier or who is a consumer tech platform offering finance. Financial services will become an FMCG product
.
TechFins are technology companies, who embed financial services offerings to make their own core product(s) more attractive.
Policymakers generally respond to the need for policy upgrade with much slowness. This is a cause for concern, as status-quoism or slower regulatory movement might impact innovation or commercialisation of disruptive ideas, especially if the regulatory systems are not geared up adequately, hence, delaying potential positive consumer impact. Do we need a series of mini-crises in the sector to have regulatory upgrades? Not really. The regulators have to think of regulatory development like apps,
which offer regular app upgrades. Regulators can keep updating their regulations, guidelines, and circulars to keep pace with convergence of technology and finance; there cannot be a perfect and final update in the digital era.
Of course, the
financial regulators have a sincere desire to understand the digital sphere and its impact on their sector. Some of the Indian financial regulators are way ahead of their financial regulatory peers within the country. That is where cohesion amongst them becomes a need, so that cross-regulatory-arbitrage can be avoided.
The regulators want to encourage innovation, while protecting
consumers, and ensure that there are no negative outcomes due to tech-led disruptions. A lot of this is also due to the social nature of our market with its disparities in the economic conditions of various consumer cohorts. This is further amplified when any negative consumer event happens; it is not necessarily only the quantum of finance involved that determines how amplified an action can become. This is where bringing FinTechs under similar regulatory watch as banks, investment firms, and insurance firms will prove useful. Blaming the sectoral participants for using regulatory arbitrage won’t solve anything. But, there again, regulatory supervisors will need to build
real-time digital supervision capabilities to do so.
If regulators are true to these pillars of their existence, then they should stop regulatory arbitrage—even if mostly unintended—that will hurt challengers to incumbent licence hoarders / holders. Regulators should stop being used as business-moat by the incumbents. Sooner rather than later, digital-
yug will play itself out, seeing pure-play digital financiers. India, with its digital stack seems ready for it. Are our regulators?
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
PREV
