Fintech Regulation – the case of online loans

Fintech Valley Editorial

In which cases is regulation a deterrent to innovation ? In which cases is it a necessary evil ? When is regulation a “must” to protect the economy, the consumer and the market in general ? At Fintech Valley we believe that we need a stronger regulation for the online loans market.

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It is nothing new, and we do not intend to say anything new when we say that innovation moves forward quicker than regulation, and more often than not, regulation slows innovators and new technologies down. Just as it is the case for Finance, new communication technologies evolve incredibly fast whereas legislation stays unchanged for decades.

At Fintech Valley we believe that regulators need to pay more attention to current business models for Fintech companies especially at companies that provide online loans.

Just to quote an example of differences in regulation,

we have reviewed Fintech companies offering credit and loans in the United States and in Europe. There are some clear differences: in Europe, as mentioned in previous posts, Fintech companies highlight the banks that provide services to these companies; in the United States it is not that easy to find this information.

The financial crisis of 2008 (the product of risky mortgages) is a strong reminder of why these kind of products in America need to be reviewed and regulated. Investors now (now in December 2014), just as in the years before 2008, are looking for investments (regardless the risk), that deliver them high returns; and online loans seem to be a good candidate.

Our call for strong regulation is especially destined to Fintech companies that provide credit and loans online in developing countries. Especially in South East Asia.

These companies should not forget that in the decade of the 90’s, the lack of banking regulation lead to a regional crisis and to the devaluation of currencies in South East Asia. Thailand, Philippines, Indonesia and Malaysia were hit especially hard. Local tycoons had a carte blanche to open and create banks as they pleased. They could easily issue loans to themselves and corrupt politicians which at the end lead to a crash in the currencies’ value and sky-high inflation.

A case for strict KYC and credit scoring research for each consumer requesting a loan should be obligatory. Open information about banks and finance institutions behind Fintech companies offering loans should also be mandatory. Additionally, all employees working and providing support to the end consumer need to be finance-literate, to make sure they understand the product they are offering and the risk the user is taking when applying for the loan or credit.

Strong regulation is not always good for innovation in technology. For finance matters it should be the basis, however. The future of Fintech and its solidity depends on it, otherwise the life span of Fintech will be short-lived and all companies will be vilified by the end-consumer, as it is the case with some banks.

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