"As more businesses incorporate financial technology into their offerings, such as cryptocurrencies and other embedded finance solutions, regulation will form around what’s already built and working well."
Any highly regulated industry’s relationship with innovation is complicated, and financial services are no exception. The fintech revolution is happening as we speak, making financial services fast, reliable, cheap and accessible.
However, too many well-proven solutions are still not in mainstream use, even years after their creation. Despite all the innovations in financial services, much of the industry still struggles to deploy those innovations in its core business offering.
Blockchain technology first arrived in 2008. Fourteen years ago. Whatever your thoughts are on cryptocurrencies, blockchain has the potential to be a fast, cheap and secure method for storing and transferring data, including operating digital currencies.
Some financial institutions like JP Morgan are exploring blockchain technology as part of their infrastructure or creating tokens and coins as a part of their larger strategy. But it’s still far from a core part of their technology or service offering. So what’s stopping businesses from putting their whole weight behind it?
Electronic signatures are another innovation that is yet to be fully embraced in finance, despite existing for over 20 years. E-signatures make it possible to authorise documents digitally, without printing, physical signing, scanning and uploading. It’s a simple technology and has huge potential to streamline financial services.
However, in some countries, e-signatures are still not accepted for financial services, or physical documentation is needed alongside digital, basically killing the benefits of e-signatures in the first place.
E-signatures’ validity and security have been promoted by the European Union (EU), and they’re used on EU publications the various member states sign off on. Despite this, the various departments, regulators and organisations of the same member states are dragging their heels.
This lack of adoption, whether it’s blockchain or e-signatures, is down to two main reasons.
Firstly, financial services are expensive to build and deploy. It takes a lot of time and money to get a service live and keep it running. Any change to a live platform, especially when meddling with the core, comes with some risk. Suddenly changing a core infrastructure when a new technology is released is a huge undertaking.
That raises the bar that new tech has to clear just to get a foot in the door. The benefits of the innovation need to be immediately visible and far-reaching. This is rarely the case, since new tech seldom has a track record that can support its case.
Secondly, it’s not always clear where new technologies stand from a regulatory perspective. Finance is like aviation, they’re both industries where safety comes first. There is a huge amount of regulation surrounding both, which makes it difficult to do things differently or move fast.
This is compounded by variations in global financial regulation. If you operate in five markets and are expanding to another three, your appetite for new technology will be set by the most conservative of those eight regulators. Any concerns about how a regulator will respond to new technology makes adoption harder, no matter how great the opportunities are.
So should we all be blaming the regulator then? Absolutely not. The regulator is there to protect your business and your customers. It is seldom the real obstacle preventing the adoption of new technologies.
The real obstacle for widespread adoption is usually an internal one. Even in a smaller business, there is a chain of people in the decision-making process who will have reasons, whether operational or regulatory, for not wanting to adopt a new technology. All of them must have their concerns overcome.
Considering the challenges in adopting new technology, many business leaders may think, why rush? What’s my reward?
Well, one of the main rewards for early adoption is a faster product-market fit. The earlier you experiment with new technology, the quicker you can iron out any challenges with it and make it work for your customers. Your team develops greater expertise with that tech, so as it evolves, your business can take advantage of it.
What’s more, being early to implement new technology can actually be beneficial from a regulatory standpoint, as you are the pioneer and can be vocal about your expectations as well as advise on the upcoming regulations. You have a better chance of making regulation work for you.
As more businesses incorporate financial technology into their offerings, such as cryptocurrencies and other embedded finance solutions, regulation will form around what’s already built and working well.
Taking a “wait and see” approach may feel comfortable, but it won’t reduce the risk of losing out.
So, how do businesses best bridge the gap between innovation and adoption and keep up the pace as the industry develops?
Eyes on the regs: Regulation plays a big role in convincing decision-makers to adopt new technology. Remember that regulators will often set principles, not specific rules, giving companies some flexibility on how to approach the regulation. Make sure you have someone in your organisation who knows the regulation well and stays abreast of any updates.
Be bold: There is a fundamental difference between being bold and impulsive. You shouldn’t implement every shiny new tech. But to stay ahead of the curve, there will be times when you need to commit to a project that isn’t a guaranteed success. There’s no other way.
Start small: It’s not necessary to go through a complete overhaul when experimenting with new technology. Choose one use case and see how it goes. Learn from it, adapt and expand.
More generally, having a strategy in place for innovation lets you take a systematic approach to identifying and implementing new technologies.
With strong regulation on the horizon and breathtaking innovation across all sectors, financial services will improve greatly in the coming decade. Businesses must now decide whether to lead that change or chase it.
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