The Evolution of FinTech and the Interplay of Innovation and Regulation

The Milken Institute Center for Financial Markets’ FinTech program analyzes the impact of FinTech on financial services and products, and contributes to the creation of a regulatory environment that encourages positive development. To provide some structure to the analysis, we have focused our FinTech program to focus on four pillars:

1. Digital Payments: Defined broadly to include everything from digital wallets (e.g., Apple Pay) to payments infrastructure (such as the ACH or FedWire system), digital payments are forever changing how we conduct transactions. In the developed world, the ability to pay reliably, quickly, and securely is often taken for granted. But for many people in both developed and emerging economies, the ability to make timely and secure payments is elusive. This includes the United States, which has seen several high-profile compromises of consumer credit card information. The ability to facilitate reliable, on-time, efficient, and secure payments both domestically and internationally is a major promise of digitizing payments.
2. Digital and Electronic Currencies: Digital currencies are defined as independent, non-fiat currencies (e.g., Bitcoin), while electronic currencies represent fiat currencies transferred electronically (e.g., M-Pesa). The impact that digital currencies will have is uncertain. While some experts believe that currencies like Bitcoin will see widespread adoption and become an independent medium of exchange, others believe its value will primarily exist in how the underlying technologies, such as the use of a distributed public ledger, will affect areas as diverse as fiat money transfer, contracts, and cryptography. Likewise, the use of electronic currency, while not a threat to traditional fiat currency or the role of central banks, can potentially foster greater financial inclusion and transform how numerous types of transactions will occur, from dispensing foreign aid to splitting a pizza.
3. Online Finance and Investment Platforms: Online platforms facilitate numerous activities, including making investments or providing loans to companies seeking capital. While online platforms for investing are not new, the diversity and functionality offered by them, and the disintermediation they are providing, are of increasing sophistication and importance.
4. Big Data: The ability to efficiently use huge amounts of data has major implications for both financial technology and society. The accessibility and usability of customer data outside of traditional credit scoring metrics can potentially open up credit to underserved populations, or allow lenders to provide more accurate pricing of loans. Conversely, there are risks, both to consumers who may not fully understand how much personal information they are revealing as they use FinTech products, and to the companies and their investors – to the extent that new data models do not work as well as more traditional methods in assessing risk.