Securing the Future of Financial Technology against Cybercrime
The influx of global investments for financial technology (Fintech) in the past year reached an all time-high of 27.4 billion US dollars.[1] As a disruptive technology, Fintech forced many businesses to study ways to adapt to this highly innovative industry.
As with any kind of development, this growth is not without any problem.[2] Coupled with increasing mobility and ease of transactions, is the steady increase of organized cybercrime syndicates. To address the perils faced by the Fintech sector, regulators across the globe have been focusing on developing policies to safeguard businesses and consumers against possible threats and circumvention of laws.
The 2008 financial crisis has ushered in efforts to put in place reforms in the financial sector. A decade hence, what might have been seen as breach proof policies seemed to be outdated, if not just ineffective in deterring violators and cybercrimes.[3] Fintech has also experienced one of the most dramatic changes in recent history with services ranging from mobile payment applications to artificial intelligence and big data.[4] Such exponential growth is perceived to have adverse effects to the financial industry itself if corresponding laws and regulations are not properly implemented and observed.
What is Fintech?
Viewed by scholars as rather an underspecified term, FinTech is broadly used to define the convergence of technology-based solutions with the financial services. It is regarded as the “new breed of companies that specialize in providing financial services primarily through technologically enabled mobile and online platforms.”[5] Operating under this definition, Fintech is seen as one of the essential features of today’s financial market.
Three major Fintech tools have since emerged – asset management, crowdfunding, and virtual currency.[6] The rise of robo-advisors in the asset management industry is seen as a strong competitor of the traditional asset managers. Providing a wide range of services, start up Fintech firms on asset management operate online and are largely data-driven, utilizing algorithms for investments.[7] The comparative advantage of these firms is two-fold: its innovative interaction mechanisms and its ability to lower costs. In the US, Fintech companies such as Betterment, Wealthfront, and Folio boast huge portfolio returns over savings on retirement, college, and others through various strategies derived from investor’s data. Information gathered pertain, but are not limited, to sensitivity risk, investment horizon, and other existing investments of the user.[8]
The potential of Fintech industry in boosting capital-raising is equally promising. Crowdfunding has become one of the most viable segment in the financial market for entrant start-ups. Causing a major disruptive behavior, Fintech has shown to create impact over debt and equity financing.[9] Fintech has paved the way for accessibility of financial tools for consumers and business alike.
Meanwhile, virtual currency has been making a buzz for the past 5 years. But with no global regulator in sight, cryptocurrency has prodded regional regulators to be more vigilant on curtailing any form of misuse or threat. International Monetary Fund Managing Director Christina Lagarde has warned business leaders about the possibility of cryptocurrency to be used for money laundering and terrorism financing.[10] Such threat should serve as an impetus for countries to strengthen their respoective Anti-Money Laundering laws and Combating the Financing of Terrorism standards. Lagarde advises leaders to keep an open mind about crypto assets and Fintech more broadly, not only because of the risks they pose, but also because of their potential to improve people’s lives.[11]
The Fintech scene in the Philippines has its own share of success particularly in providing services to micro, small and medium sized enterprises. The Fintech ecosystem in the country include services on remittance, lending, capital-raising, blockchain, credit rating and analytics, payroll and HR, alternative finance, payments, and mobile wallets.
Regulatory Framework in the Philippines
In response to the demand for Fintech services in the ASEAN region, Bangko Sentral ng Pilipinas has expressed commitment to continuously design the regulatory framework for Fintech industry. Strongly pushing for financial inclusivity, regulators intensified oversight on Fintech and other innovative alternatives.
BSP has created a new unit under the Financial Supervision Sector alongside cybersecurity called the Financial Technology Sub-Sector (FTSS). FTSS has two offices: the Payments and Settlements Oversight Department and the Core Information Technology Specialist Group.[12] BSP recognized the growing trend between banks and Fintech companies to partner up in order to deliver electronic payment mechanisms. Digital transactions are gaining large acceptance and strong reception among Filipinos who view them as viable alternatives to banking. With remittances still remaining as one of the primary drivers of the economy, BSP considers this as the best time to invest in resources for making these transactions more efficient.
Regulatory Approaches in the Midst of Cybersecurity Breaches
As one of the latest and unconventional technology in the market, Fintech has posed new challenges and questions that regulators have to accept and to ponder on. Addressing large scale Fintech breaches has become a business priority given the high expectation towards banks and financial business to have top notch security in relation to the protection of sensitive data.[13] The Equifax breach in 2017, one of the biggest data breaches in recent history, has compromised 143 million accounts in the US and 400,000 in the UK. The fiasco brought suits to the company causing its leaders to step down. In the long-run, critics warn that the breach is seen to greatly impact how courts will take cognizance on data breaches.
The EU has recently sought out measures to ensure that further breaches will be prevented. Stringent policies that pose hefty fines are rolling out such as the General Data Protection Regulation (GDPR) urging strict compliance from companies that handle personal data of European citizens.
Given the perceived complexity of Fintech, sophistication and research is needed to address security harms without necessarily compromising its convenience and viability as a market tool. As a starting point, Fintech products are now being modelled against the backdrop of secure and safe financing alternatives that the public can patronize.
Adapting with Start-ups and Adopting Laws
Rapid growth of Fintech firms have created a ripple effect towards the financial sector particularly the conventional banking system. As an emerging force to reckon with, Fintech has become a major player that regulators, policy makers, and conventional financial services have tried to understand.
There are many ways in which existing and new Fintech start-ups can adapt and survive in the financial market. Among which are ensuring strong internal compliance and observance of regulatory policies.[14] On the flip side, to cope with the latest Fintech developments, regulators must equip itself with technical understanding in order to timely implement policies suitable for a fast-paced environment. The IMF has recognized that the short-term pain of disruptive technology can turn into long-term gain by putting in place smart policies. The so-called digital revolution of the 21st century, has made an impact on the monetary policies. Overall, a cashless society entails a deliberate effort from governments to provide infrastructure to secure businesses in terms of reliability and availability to the public.[15]
Fintech as a Pro-Consumer Tool
Ideally, Fintech is viewed as a medium of justice and equity. With Fintech’s incalculable developments and its seemingly path dependent character, scholars have remained cautious in completely defining its scope and limits. Nonetheless, policymakers and regulators were advised to observe the nuances of specific Fintech services offered in the market. Given that highly advanced technologies employed by Fintech firms are also vulnerable to potential risks such as system breaches and organized crimes, optimizing Fintech services has a lot to do with balancing of interests. Alongside promising features of Fintech, the efficiency and effectivity of the legal landscape must not only gear towards the promotion of investment and innovation but also towards a creation of consumer-driven policies.
[1]http://predictions.theactuary.com/2018/02/28/global-fintech-investment-hits-all-time-high/
[2] Jeremy Kidd, FinTech: Antidote to Rent-Seeking, 93 Chi.-Kent L. Rev. 165 (2018)
[3] William Magnuson, Regulating Fintech, 71 Vand. L. Rev. 1167 (2018)
[4] https://www.cnbc.com/2017/10/02/fintech-everything-youve-always-wanted-to-know-about-financial-technology.html
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] https://www.imf.org/en/News/Articles/2017/06/21/sp062217-working-together-to-fight-money-laundering-terrorist-financing
[11] Christine Lagarde. A Regulatory Approach to Fintech. Finance & Development. A Quarterly Publication of the International Monetary Fund. June 2018.
[12] http://www.bsp.gov.ph/publications/speeches.asp?id=616
[13] https://digitalguardian.com/blog/top-10-finserv-data-breaches
[14] Christopher G. Bradley, FinTech’s Double Edges, 93 Chi.-Kent L. Rev. 61 (2018)
[15] Stefan Ingves. Going Cashless. Finance & Development. A Quarterly Publication of the International Monetary Fund. June 2018.