Understanding the Risks of Fintech
The term “fintech” is undefined, and its scope is unclear.
Lithuania recently announced a tender for a private blockchain as part of its
developing fintech strategy. This raises concerns for risk, compliance, and
regulators in that country. @ Read More: antioxidantllife
From necessity to virtue
Lithuania’s population is some three million, and its
banking market has been dominated by some traditional Scandinavian banks whose
offerings have proven to be limited. Marius Jurgilas, a board member at the
Bank of Lithuania, said opening the market to greater competition was essential,
and technology provided a way to do so. A range of more innovative products
would better serve Lithuanian consumers. Jurgilas also said fintech is opening
up investment by venture capital firms, which has not traditionally been a
source of funding in Eastern Europe. This is appropriate because venture
capitalists will have an appropriately high-risk appetite. Although the initial
need was for better, more competitive banking services, Lithuania has realized
that E.U. passporting provisions could enable services to be offered from
Lithuania to E.U. member states.
Definition
Mantas Katinas, managing director at Invest Lithuania,
defined “fintech” consistently with Jurgilas; it is the activity of smaller
companies using technology to secure:
Sigitas Mitkus, director of the financial markets policy
department at the Lithuanian Ministry of Finance, also highlighted consumer
benefits in all social sections, whether B2C, B2B, or B2G. Jurgilas noted that
while fintech is spawning a new type of firm, in the longer term, it amounts to
the evolution of finance: fintech is changing banking, so banks will increasingly
become fintech firms. The Lithuanian fintech market
Categorization of fintech solutions @ Read More: technoologylimited
Katinas said there are now more than 100 fintech companies
established in Lithuania, most of them local; however, entrepreneurs from other
countries are also attracted to Lithuania, with Asia showing particular
promise. Katinas identified three types of fintech solutions:
The views and opinions expressed in this paper are those of
the author and do not necessarily reflect the official policy or position of Thomson
Reuters. EXPERT TALK Understanding the Risks of Fintech 2 Mitkus said fintech
solutions are being created in digital identification, mobile applications,
cloud computing, big data analytics, artificial intelligence, blockchain, and
forms of distributed ledger technology (DLT). Jurgilas said most of the
innovations so far concern payment and transaction services. These are the
foundations of the financial system. In time, fintech can be expected to enter
other areas of finance, such as asset management.
Practical examples
The market continues to develop, but Katinas pointed to some
innovations that are already changing the Lithuanian market:
New risks
Market change and disruptive technology inevitably lead to
new risks. Their novelty suggests they may be challenging to identify by the
firms that create them, other market participants, customers, or the regulator.
The firm must identify the risks as the party responsible for the product.
Katinas pointed to some risk mitigations already in place. For example, P2P
lending platforms provide a significantly higher return than bank deposit
accounts. The correlation of risk to return suggests these investments should
carry a higher risk. Katinas said a regulatory limit prevents consumers from
investing more than 500 euros in one P2P loan. In addition, the central bank
requires the platform to deposit money with it. The Lithuanian regulator has
identified several risks: @ Read More: technoologyanalytics
Speed: A fast transactional pace is one of the benefits of
fintech; however, this requires firms to adapt processes, such as fraud and
regulatory reporting, that will match this speed. Some firms need to keep up
with this expectation.
Katinas said that fintech centers mitigate risk by their
very nature. The concentration of business in the jurisdiction should create a
depth of understanding between market participants and regulators about potential
threats.
Risks to consumers
Consumers must be fully aware of the risks inherent in new
products, mainly where the risks may be new to the retail market. Consumers should be encouraged to consider the correlation between risk and
return and the eternal truth that there is generally no such thing as a free
lunch.
Unregulated business and regulatory scope @ Read More: technoologyengineers
The structure and scope of the regulatory regime have arisen
for historical reasons unconnected with fintech. Currently, some areas of
fintech activity are regulated while others are not. The lack of commonly
applied standards in unregulated businesses may contribute to risks. Katinas
said cyber security is a crucial risk for fintech firms and might benefit from creating
enforceable regulatory standards.
