Entry-Level Barriers to FinTech

By Anagha Vinod

Technological innovation has changed the world drastically. FinTech, which is short for financial technology, means embracing the novel digital technology for the efficient delivery of financial services. The services offered not only include payment and borrowing but also crowdfunding, cryptocurrency, robo advising and insurance. This has helped in fostering financial inclusion as more and more people started adopting the method of mobile payments considering its convenience. The FinTech industry includes start-ups and some of the big companies in the world. These companies have taken a strong root in countries like India and China. Despite all these, FinTech also has its flip side. It is important to determine how much the industry should be regulated and how high should the barriers to entry be.

The main factors which influence the market structure can be categorised into two viz., supply factors and demand factors. Most of the barriers to entry come under the supply factors which include technological innovation, licensing and supervisory regulations. The demand factors include changing customer expectations. The issues of malpractices, mismanagement, uncertainties, provision of credit to undeserving applicants and privacy breach, etc make it important to restrict the entry of firms into the market. The emerging trends like behavioural banking can help tackle these issues. Lowering the barriers can help these companies as the industry is small and growing. FinTech is perceived as more socially responsible and of greater social value than conventional banking, especially by the digital natives and millennials.

Another threat or hurdle which is holding back the entry of these firms is the competitive impact of BigTech firms. BigTechs are different even if they are a part of the FinTech industry. The major BigTech firms like Alibaba, Tencent, Baidu, Google, Amazon, etc enjoy name, recognition and trust with a large and established customer base. They have access to innovation, whereas the emerging FinTech companies do not even have access to proper funding. Big companies deliver services at a lower cost so that they can use the data obtained for other businesses too. It is difficult for small FinTech companies to operate in such a situation.

The existing barriers to entry mainly include regulation, funding, technology and establishment of trust. Regulation is a tool for dampening competition. Countries like Germany, the Netherlands, the US and Australia have strict regulations on credit provision by FinTech companies. Restrictive data protection regimes are coming up all over. Other regulations include systems and control for risk assessment, lending restrictions and prescribed capital and liquidity requirements. Insufficient funding, due to the lack of angel investors, is a major obstacle for these companies. The level of technology also differs in different regions. Another concern is how developed the infrastructure is. The right size and the cost effectiveness of technology are hence important. Most of the companies limit themselves from entering into the market as establishment of trust and reputation takes time due to the existence of traditional banking institutions and the BigTechs. What they can do is partner up with these institutions in service delivery. This can help the entrants in widening their customer base and reducing their regulatory compliance burden.

A total of 125 FinTech start-ups were launched in India in the year 2018. The RBI has promoted the Unified Payment Interface, Bharat Bills Payment System, digital payments, P2P lending and use of automated algorithms to provide financial advice. In India, opportunities for these companies are expanding. But the industry was negatively affected by the Supreme Courts’ decision to strike down Article 57 of the Aadhar act which enabled sharing data with private entities and the introduction of the Personal Data Protection Bill which urged the FinTech companies to upgrade their infrastructure from a data privacy and client onboarding perspective. The Indian government has introduced various schemes like Jan Dhan Yojana and digital India to encourage the growth of FinTech ecosystem in India. But, the examples of companies like LendingClub, TrustBuddy and Ezubao which became infamous for data manipulation and Ponzi schemes make policymakers sceptical about reducing the entry-level barriers to the market. There are also different views regarding FinTech being a bubble in this era of Artificial Intelligence and Machine Learning which only time will tell.

(Anagha Vinod is a Research Intern at Centre for Public Policy Research. Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research)