Any innovation that has some negative side effects is sure to attract regulatory attention, such as:
- Anything that benefits few at the expense of the majority, either now or in the future.
- Anything that creates a big risk or a systemic risk to the financial system, and to the nation.
- Anything that violates domestic law, particularly KYC and AML.
- Anything that violates international law.
- Anything that makes it difficult for the regulator to achieve its objectives.
- Employees cheating the system to achieve targets and bonuses.
Regulators are likely to come down with a heavy hand in such situations. This puts a tremendous onus on fintechs and financial organizations to keep their compliances up to date. This also impacts business planning in a big way, particularly for fintechs.
See, fintechs thrive on finding a niche and exploiting it to the hilt, rather than facing the competition head on. Since they focus on a niche, either it will appeal to a small set of potential customers, else it will appeal to a wide set of customers, but in some small manner. Most large spaces have already been taken by established players. Many fintechs are not customer facing but rather backend facing. For them, there are growing compliance costs relating to security, privacy, data management, etc.
As fintechs add more products and take part in newer financial spaces, the burden of compliance will also rise. Compliances mandates come not only from regulators, but from BFSI partners as well.
The rising compliance costs diminish fintechs’ technology advantage, which calls for a strategic re-think.
Are there other companies or sectors that have valuable strategy lessons for fintechs. The EV sector is worth studying because Telsa and BYD have made a mark for themselves against established competitors like Ford, Toyota, BMW, etc.
Tesla and BYD succeeded not by adding new features and designs, but by transforming the very bottom of the technology stack of the car – its energy and propulsion system. They replaced the engine and fuel with electric motor and battery and took it to a certain level of sophistication; thereby they transformed the car and make it widely appealing, to customers and to regulators (governments). They did not innovate the AC or the dashboard or the seats or the lights – much of what many fintech do is akin to such changes rather than to changes in the core technology. Leveraging AI or blockchain or voice or video or some other core technology, when used with the right business strategy, can throw open grand new avenues like they did for Tesla and BYD.
If the benefits are great, it could appeal to customers, and to regulators, paving the way for greater success.
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