Fintech and Disruptive Business Models in Financial Products, Intermediation and Markets — Policy Implications for Financial Regulators

Abstract

A recent Financial Times survey indicates that the financial services sector (in mainstream terms) is concerned about the disruptive potential of several digital-based technologies as applied to financial services, such as blockchain, big data and robo-advisers. Not to mention that we have already of late witnessed the emergence of high frequency algorithmic trading, novel consumer payment devices, online crowdfunding and peer-to-peer lending. Financial technology, which seems to be ushering in an order for upheaval, is defined by Price Waterhouse Coopers as "a dynamic segment at the intersection of the financial services and technology sectors where technology-focused start-ups and new market entrants innovate the products and services currently provided by the traditional financial services industry." Nevertheless, financial technology is not a new concept and should be understood in broader terms. From the development of stock exchanges that facilitate corporate fund-raising to the development of wholesale money markets, financial technology is financial innovation intertwined with legal technology to change the way finance is conducted, oftentimes as a form of disruptive innovation. "Disruptive innovation" in Bower and Christensen's framework refers to the creation of new markets and value networks that eventually disrupt existing markets and value networks, displacing established market leaders and alliances. Financial technology has a history of many culminating moments of disruption. The current wave of "fintech" specifically focuses on the embedment of digital technology into financial technology, different aspects of which have, to larger or smaller extents, also required innovation in legal technology. By contextualizing "fintech" against the broader historical backdrop in financial technology, this Article intends to offer high-level perspectives in order to frame the understanding of the disruptive potential of fintech and the implications for financial regulation. Using the framework of disruptive innovation in a widely understood sense, the Article focuses on potential revolutions of products, intermediaries or markets and the regulatory implications of such. This Article will not examine particular areas of fintech in detail, but will instead draw from a range of examples and their key features. The disruptive potential of fintech will be discussed to highlight market themes and changes in legal technology and regulatory implications, in respect of (a) financial product development, (b) financial intermediation interfaces, and/or (c) financial markets and value networks. In this way, we can critically appreciate to what extent and in what respects fintech is disruptive, and whether its disruption is relevant to financial regulatory objectives. This overview Article, which provides a framework for analyzing the disruptive potential of fintech and regulatory implications, is envisaged to be an anchor for more specific pieces that examine particular areas of fintech in more detail. We believe that such a high-level perspective is necessary so as to introduce a more coherent blueprint for regulatory thinking and design, avoiding silo-based and narrowly reactive approaches to increasingly complex financial innovation. Part I of the Article sketches the nature and development of financial innovation-outlining the drivers, achievements and dark sides of financial innovation. It critically suggests a framework of "disruptive innovation" for understanding the regulatory implications of financial innovation. Financial innovation could be a flash in the pan or introduce enduring change, so the first indicia for regulatory implications could be the "disruptive" nature of the financial innovation concerned. We introduce a framework for regulatory thinking and evaluation of "disruptive finance"-in terms of the nature of the "change" observed, its "substitutive potential" and its "structural impact." Parts II, III, and IV then discuss these aspects as applied to selected fintech innovations in financial products, services and markets. Part V concludes.

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