Legal regulation of financial technologies (FinTech): differences from the traditional banking sector

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Sakharuk Anatolii

Lawyer

Ukraine / Kyiv

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Publication date: 29.05.2024

Legal regulation of financial technologies (FinTech): differences from the traditional banking sector

Financial technologies (FinTech) are significantly changing the financial services landscape, offering innovative solutions that often differ from traditional banking products and services. Accordingly, the legal regulation of FinTech has its own peculiarities and differences from the regulation of the traditional banking sector. Let us consider the main aspects of FinTech legal regulation and their differences from traditional banking regulation.

Key aspects of legal regulation of FinTech

Legislative regulation

1. Specialized laws and regulations: Some countries have adopted specific laws regulating FinTech companies. For example, the EU has the Payment Services Directive (PSD2), which aims to regulate electronic payments and open banking.
2. General legislation: FinTech companies are also subject to general laws, such as consumer protection, anti-money laundering and anti-terrorist financing laws, personal data protection laws, etc.
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Licensing and registration

FinTech companies may require special licenses to provide financial services:

1. Licenses for payment services: Required for companies that provide electronic payment services, money transfers, etc.
2. Licenses for credit services: Issued to companies engaged in online lending or crowdfunding platforms.
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Risk management and consumer protection

1. Cybersecurity: FinTech companies should implement measures to protect data and prevent cybercrime.
2. Protection of personal data: Compliance with the requirements of personal data protection legislation, such as the GDPR in the EU.
3. Transparency: Providing clear and understandable information about services, tariffs and conditions.
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Differences from the traditional banking sector

Innovative technologies and business models

1. Technology platforms: FinTech companies often use innovative technologies such as blockchain, artificial intelligence, machine learning, and big data, which differs from traditional banking systems.
2. Decentralization: Many FinTech solutions operate on decentralized platforms, which reduces dependence on central authorities and institutions.
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Regulatory approach

1. Flexibility: FinTech regulation is often more flexible and adaptive to rapid changes in technology than the rigid regulatory frameworks of the traditional banking sector.
2. Sandboxes (regulatory sandboxes): Many countries are introducing the concept of regulatory sandboxes, where FinTech companies can test their products and services in a controlled environment with fewer regulatory restrictions.
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Licensing and supervision

1. Specialized licenses: FinTech companies may need different types of licenses depending on the nature of their services, while traditional banks usually have a universal banking license.
2. Supervision and control: FinTech companies may be subject to the supervision of different regulatory authorities depending on the type of services they provide, while traditional banks are generally supervised by the central bank and specialized financial regulators.
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Capital and liquidity regulation

1. Capital requirements: Traditional banks are subject to strict capital requirements set by the Basel Committee on Banking Supervision and national regulators. FinTech companies typically have lower or no capital requirements, depending on their business and jurisdiction.
2. Liquidity: Banks must meet liquidity requirements to ensure that they can meet their obligations. For FinTech companies, such requirements may be less stringent or even absent, depending on the specifics of their services. You may be interested in the following articles: legal advice, legal advice, document analysis, legal analysis of the situation, written advice, verification of documents by a lawyer, lawyers documents, online legal advice, online lawyer, legal opinion, legal opinion of a lawyer, lawyer online.
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Risk management

1. Risk assessment: Traditional banks have well-developed risk management systems, including credit risk, operational risk, market risk, etc. FinTech companies may use the latest technological solutions to assess and manage risks, but their approaches may be less formalized.
2. Stress tests: Banks conduct regular stress tests to assess their resilience to different economic scenarios. FinTechs are generally not required to conduct such tests, although regulators may require similar assessments for large or systemically important FinTechs.
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Interaction with customers

1. Customer experience: FinTech companies often focus on creating a convenient and intuitive user experience using mobile apps, chatbots, and other innovative solutions. Traditional banks are also implementing digital services, but their approaches may be more conservative.
2. Access to services: FinTech companies often provide services via the Internet, which allows them to reach a wide audience, including those who do not have access to traditional banking services. Traditional banks typically have physical branches, which can limit their accessibility to some customers.
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Conclusion.

The legal regulation of financial technology (FinTech) differs significantly from that of the traditional banking sector. These differences are driven by the innovative technologies used by FinTech companies and the need for a flexible regulatory approach that allows for rapid adaptation to changes in the financial environment. At the same time, it is important to ensure reliable consumer protection and financial stability, which requires effective coordination between regulators and market participants.