International Journal of Economics and Business Administration

Volume VIII, Issue 2, 2020

pp. 136-154

Ideas for a Regulatory Definition of FinTech

Submitted 14/12/19, 1st revision 09/02/20, 2nd revision 15/03/20, accepted 02/04/20

Ramona Rupeika-Apoga1, Eleftherios I. Thalassinos2

Abstract:

Purpose: The aim of the paper is to develop the approach to a legal definition of FinTech.
Design/Methodology/Approach: In this paper we evolve possible approaches of FinTech
legal definition, investigate existing approaches at the international level and examine the
policies applied at the national levels. Document analysis, as a form of qualitative research,
was used in this study.
Findings: We found that in most countries the legislation does not specifically address
fintech companies, and the legal framework equally regulates the activities of traditional
service providers and fintech operators. In our opinion, no specific legislation for FinTech
companies needed, each type of activity provided by a financial or technology company is
subject to a specific legislation/regulation with primary focus on services and products
provided as payments, insurance, investments etc.
Practical Implications: The term FinTech is freely used by policy makers, regulators,
companies, researchers, academics and the public, both nationally and internationally.
According to international organizations such as the IMF, the World Bank and the OECD,
FinTech offers the opportunity to accelerate economic growth and expand financial
affordability/inclusion in all countries. Some countries are increasingly striving to become
global or international regional hubs for FinTech and are working hard to develop
interagency government strategies with a supportive legal environment.
Originality/Value: There is still confusion about the nature and dynamics of FinTech among
politicians, scientists and practitioners, as well as about the legal framework of this area.
The value of this article is to clarify and propose an apprach to definition of FinTech by
combining different approaches in a very original and innovative way.

Keywords: Definition of FinTech, characteristics of FinTech, regulatory arbitrage.

JEL Code: G20, G23, N20.

Paper Type: Research study.

1 University of Latvia, Latvia, [email protected]

2
University of Piraeus, [email protected]
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1. Introduction

For the last decade FinTech companies are emerging and gaining a good market
share of the financial services sector. Mobile applications, social networks, machine
learning, distributed ledger technology, cloud computing, big data analytics and
artificial intelligence increase our access to financial products and services, while
raising new risks to financial stability and integrity (Jedrzejowska et al., 2019;
Thalassinos and Thalassinos, 2018; Solovjova et al., 2018). The spread of FinTech
technologies can be seen to a large extent in the emergence of FinTech hubs - cities
where start-ups, talents and funding are gathering. Since FinTech introduction in the
US and the UK about 10 years ago, it has spread around the world now. New
FinTech hubs are emerging, indicating that the space is far from fully developed, and
that there are many new ways in which start-ups and their technologies continue to
change financial services.

For centuries, cities have competed to become financial centres; today they are
competing to become FinTech hubs. While centres such as London, New York, and
Silicon Valley are widely recognised as dominant FinTech hubs, other
centers/countries are interested to become if not global, then at least regional hubs of
this fast-growing market. For instance, Australia, Switzerland, and China are
showing good progress in recognising their financial centers of Sydney, Zurich, and
Shanghai, as global market players. In addition, emerging markets, including Brazil,
Israel, and Canada, are expected to play a larger role in the global FinTech
ecosystem in the future. According to Business Insider report these centers even
being in the early stages of development due to supportive regulatory policy could
become significant FinTech market players in the near future (Business Insider,
2018).

Also, smaller countries such as Lithuania, Estonia, Latvia, Malta, Belarus, Gibraltar,
Luxembourg are competing for the international regional hubs roles. Their success
depends on many factors, as access to finance and human resources and the attitude
of national regulators, how open and flexible they are etc. Countries that did not
have potential to be traditional centers see an opportunity to boost their economies in
this new, only in the process of formation, FinTech market. This fast-developing
market structure may boost efficiency and competition, at the same time challenging
financial stability and integrity (Grima and Thalassinos, 2020; Thalassinos et al.,
2015; Rupeika-Apoga et al., 2018).

Differences in the legal environment can lead to regulatory arbitrage, and instead of
creating a stable global financial system, tensions arise regarding the deregulation of
the legal environment in order to attract or maintain the activities of FinTech in their
jurisdictions, so called a “race to the bottom”. National authorities/Regulators
around the world are trying to balance competing priorities while ensuring market
stability. The first problem they face is how to determine which companies respond
to FinTech characteristics and need a favourable legal environment, and which ones
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are simple/traditional financial service providers. In this paper we investigate the

definition of FinTech provided by leading international organisations and national
authorities of main FinTech market players as USA, UK, China, Singapore,
Australia, Switzerland and the EU.

The main challenge of determining FinTech is its versatility and the fact that this
phenomenon is in an active stage of development. Meanwhile, national authorities
must provide the legal basis for this rapidly developing market not tomorrow, but
yesterday. A growing number of jurisdictions are working on a legal basis for
defining specific forms of FinTech innovation. Many international and regional
groups are currently exploring various aspects of FinTech in accordance with their
mandates. The regulators from the USA, China, UK mostly work on payment area
and lending, such as crowdfunding and peer-to-peer lending. Some supervisors, for
instance the USA, Singapore, Japan, Hong Kong, Australia and Canada, have
developed FinTech centers/hubs. Many works or already established regulatory
sandboxes that provide for temporary easing or updating of regulatory requirements,
for instance the UK, the USA, Australia, Switzerland, Singapore, Hong Kong,
Malaysia, Thailand, and the United Arab Emirates. Regulatory sandboxes help
FinTech companies to test innovative financial products in real life, without going
through the complete authorization and licensing process, but for a limited time.

To investigate the definitions of FinTech introduced by international financial

organisations and leading economies national legislation we use the document
analysis, which is used to analyse the documents as a data source in qualitative
research (Bowen, 2009; Wach, Ward and Jacimovic, 2013). Document analysis tries
to examine documents giving an interpretation of the nature, objects, subjects and
motives indicated in the documentation. In social science studies, this approach
promotes an impartial and consistent analysis of written policy.

2. The Framework of FinTech at International Level

There have been calls for increased international cooperation and guidance on how
to deal with the fast growing FinTech market and several international financial
organisations as IMF, WBG, FSB and others took active part in preparing policy
agendas (legal framework).

2.1 International Monetary Fund (IMF) and World Bank Group (WBG)

In 2018 IMF and WBG launched the Bali FinTech Agenda (BFA), with a primary
goal to consider how technological innovation is changing the delivery of financial
services with consequences for economic efficiency and growth, financial stability,
inclusion and integrity. BFA defines FinTech as “the advances in technology that
have the potential to transform the provision of financial services spurring the
development of new business models, applications, processes, and products” (IMF,
2018). The BFA is a response to calls from IMF and WBG members to expand
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international cooperation and provide recommendations on creating a favourable

global regulatory environment for FinTech. The Agenda has informative nature to
support awareness, further training and ongoing work.

The main conclusion of IMF and World Bank Group policy paper “Fintech: the
Experience so far” (IMF, 2019) is that while there are important regional and
national differences, countries make extensive use of FinTech capabilities to
accelerate economic growth and integration, while balancing risks to stability and
integrity.

2.2 Financial Stability Board (FSB)

The FSB was established in 2009 as a result of G20 meeting and has taken a key role
in facilitating the reform of international financial regulation and supervision. The
FSB explains FinTech as “technology-enabled innovation in financial services that
could result in new business models, applications, processes or products with an
associated material effect on the provision of financial services ” (Financial Stability
Board, 2019). In 2017, the FSB published “Financial Stability Implications from
FinTech”, classifying FinTech activities which focuses on the services provided,
rather than suppliers or technologies used as:

➢ payments, clearing and settlement;

➢ deposits, lending and capital raising;
➢ insurance;
➢ investment management;
➢ market support. (The Financial Stability Board, 2017)

This classification originated from the work of the FSB Financial Innovation
Network (FIN), which is based on the classification of the World Economic Forum
(2015). In 2015 the World Economic Forum published the report “The Future of
Financial Services” exploring the transformative potential of new entrants and
innovations on business models in financial services. This project offers answers to
the question “Which new innovations are most effective and relevant for the
financial services industry?” As a result, 11 key clusters of innovations based on
how they impact the core functions of financial services were identified (Figure 1).

As can be seen from Figure 1 the WEF approach to define the FinTech is based on
financial market functions that meet client needs. Technological solutions and tools
are changing, while core clients’ needs remain relatively unchanged. The Figure also
provides main innovation clusters, focusing on the key trends driving disruption in
financial services business model.

According to the FSB research (The Financial Stability Board, 2017), many national
authorities have already adopted legislation or are in adopting process to respond to
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140

FinTech, but the scope and scale of the changes differ significantly, depending on
the size and structure of the national financial markets.

Figure 1. FinTech classification by functions and innovation clusters (the authors

created based on WEF report (World Economic Forum, 2015)

2.3 The Organisation for Economic Co-operation and Development (OECD)

Also, the OECD has been actively involved in determining the nature of the FinTech
phenomenon. In the paper “Financial Markets, Insurance and Private Pensions:
Digitalisation and Finance” the OECD attempts to overcome the limitations in the
definitions and categories developed so far. It defines FinTech as “innovative
applications of digital technology for financial services” (OECD, 2018). By
criticising definitions given by the WEF, the US National Economic Council, the
FSB, the International Organization of Securities Commissions (IOSCO), the EU
and the Hong Kong Monetary Authority (HKMA), stated that “fintech involves not
only the application of new digital technologies to financial services but also the
development of business models and products which rely on these technologies and
more generally on digital platforms and processes”(OECD, 2018). OECD identifies
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new technologies and digital processing in financial services and main financial
activities and services (Table 1):

Table 1. Applications of new technologies to financial services (OECD, 2018)

Digital Financial Activities and Services
Technology

Advisory &

Communic
Investment

Operations
Lending &

Insurance
& trading
Planning
Payment

services,

Security
services

Agency

funding

ations
Distributed Ledger X X X X X X X X
Technology
Big Data X X X X X X X
the Internet of X X
Things
Cloud Computing X X
Artificial X X X X
Intelligence
Biometric X X
Technologies
Augmented/Virtual X X X
Reality
Source: (OECD, 2018).

Although the OECD paper authors agree with the WEF's approach that core needs of
customers remain relatively unchanged, they argue that it is vital how these needs
are met. In accordance with the OECD approach, it is not enough to classify FinTech
according to the functions of the financial market, but it is also important to identify
the technological tools used to provide financial services and associate the services
with technological solutions or tools.

2.4 The International Organization of Securities Commissions (IOSCO)

In collaboration with G20 and the FSB, IOSCO develops, implements and promotes
compliance with internationally recognized standards for securities regulation. The
IOSCO defines FinTech as “a variety of innovative business models and emerging
technologies that have the potential to transform the financial services industry:”

➢ Innovative FinTech business models usually offer one or more specific

financial products or services automatically using the Internet.
➢ Emerging technologies such as cognitive computing, machine learning,
artificial intelligence, and distributed ledger technologies (DLT) can be used
both for new and traditional members, and can also significantly change the
financial services industry (International Organisation of Securities
Commissions, 2017)
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In the IOSCO Research Report on Financial Technologies (FinTech) are described

eight FinTech categories:

➢ Payments;
➢ Insurance;
➢ Planning;
➢ Lending and crowdfunding;
➢ Blockchain;
➢ Trading and investments;
➢ Data and analytics;
➢ Security (International Organisation of Securities Commissions, 2017).

These categories of FinTech meet the basic needs of the client and are based on the
functions of financial markets.

2.5 The Bank for International Settlements (BIS)

The Basel Committee on Banking Supervision (BCBS) uses the Financial Stability
Board’s (FSB) definition of FinTech (BIS, 2018). According to BCBS, the
regulatory authorities in many countries have not officially defined FinTech, partly
because of already available definitions, for instance, such as the FSB’s, or that it is
too early to offer a definition for a rapidly evolving phenomenon. Those who define
FinTech see them as a company that provides innovative services, a business model,
or a new-technology start-up in the financial industry. BCBS believes jurisdictions
may have to identify specific products and services in order to establish a specific
approach for possible regulation.

3. The National Definitions of FinTech

3.1 National Economic Council, White House, USA

In the USA, there is no specific regulatory framework for FinTech that is subject to
any single federal or state regulation. Depending on the activities of the FinTech
provided, the company may be subjected to laws and regulations both at the federal
and state levels. Fintech will be regulated like any other company if it provides
services that are regulated activities, for instance, at the state level consumer lending,
money transmission and virtual currency licences, at the federal level consumer
lending laws and anti-discrimination laws.

The National Economic Council (NEC) shortly defines FinTech as “innovations in

financial technology”, but broadly “a wide spectrum of technological innovations
which impact a broad range of financial activities, including payments, investment
management, capital raising, deposits and lending, insurance, regulatory
compliance, and other activities in the financial services space” (National Economic
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143

Council, 2017). The NEC advises its policy makers and regulators to study best
practices abroad, although each practice is not suitable for each jurisdiction, the
exchange of ideas and best practices can help harmonize policies and regulations and
promote safe innovation around the world.

USA regulation of financial markets is fragmented because of different legal

framework in federal and state level, making the creation of one unified sandbox for
the country very complicated. The first sandbox was launched in Arizona in 2018,
allowing starups, entrepreneurs and even established companies to test their
innovative financial products or services in regulatory friendly environment in the
state of Arizona. Innovative financial product or service means a financial product
or service that includes an innovation (State of Arizona, 2018). The legal
explanation of innovation is “with respect to providing a financial product or
service or a substantial component of a financial product or service, the use or
incorporation of new or emerging technology or the reimagination of uses for
existing technology to address a problem, provide a benefit or otherwise offer a
product, service, business model or delivery mechanism that is not known by the
attorney general to have a comparable widespread offering in this state” (A.R.S.
section 41-5601, 2019).

According to Arizona Revised Statutes (A.R.S.) “any person may apply to enter the
regulatory sandbox to test an innovation” (A.R.S. section 41-5603, 2019), including
as existing Arizona licensees and non-licensed businesses. Although the term
FinTech is used on the Arizona Attorney General’s homepage, in the context of the
FinTech sandbox, the term “FinTech” is not used in the legal document of A.R.S.

In July 2018 U.S. Treasury published the Executive Order 13772 on Core Principles
for Regulating the United States Financial System: “A Financial System that creates
Economic Opportunities Nonbank Financials, FinTech, and Innovation” on
promoting financial innovation. Although, this report is devoted to FinTech and
emphasizing that financial services are significantly affected by rapid advances in
technology, rapid digitization of the economy and surplus of capital to facilitate
innovation, the term FinTech is not explained. In this report FinTech is defined as
“financial technology” and FinTech firms as “technology-based” firms (U.S.
Department of Treasury, 2018). The Office of the Comptroller of the Currency
(OCC) in its document “Considering Charter Applications From Financial
Technology Companies” determines FinTech companies as “companies that offer
innovative technology-driven products and services” and may be eligible for a
national bank charter (The Office of the Comptroller of the Currency, 2018).

At the end of 2018, following the positive example of the UK, the Consumer
Financial Protection Bureau (CFPB) has launched a unified regulatory sandbox to
promote FinTech development. The Bureau’s Office of Innovation issued a “No
Action” letter to Upstart Network, a consumer lending platform that leverages
artificial intelligence, machine learning, and alternative data sources to price
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consumer credit and automate borrowing. Two sandboxes the Compliance

Assistance Sandbox and the Trial Disclosure Sandbox, were created, however,
official documents framing the activities of the sandbox (CFPB, 2018a; 2018b) are
not using the term “FinTech”.

3.2 The United Kingdom

In the UK, there is no specific regulatory framework for FinTech enterprises that are
subject to UK financial regulation. FinTech will be regulated like any other company
if it provides services that are regulated activities, such as “traditional” financial
services, for instance, payments or lending, or “alternative” financial services, for
instance, crowdfunding. The Financial Conduct Authority (FCA) does not define
FinTech other than “financial technology” but provides structure/guidelines for its
nature. First, FinTech must be innovative. The FCA claims innovation should has
“genuine potential to improve the lives of consumers come to market across all
areas of financial services” (Financial Conduct Authority, 2019). In 2019 the FCA
defines following areas of financial services providers:

➢ Banks, building societies and credit unions;

➢ Claims management companies;
➢ Consumer credit firms;
➢ Electronic money and payment institutions;
➢ Financial advisers;
➢ Fintech and innovative businesses;
➢ General insurance and protection;
➢ Investment managers;
➢ Life insurers and pension providers;
➢ Mortgage lenders and intermediaries;
➢ Mutual societies;
➢ Sole advisers;
➢ Wealth managers (FCA, 2019).

The improvement is seen whether through products that better suit customers’ needs,
better access or lower prices. In addition, the FCA states that innovation must be
offered by various players, both in terms of the type of company and the people
behind the development. In the report about “UK FinTech” Treasury of the UK in
collaboration with E&Y defines FinTech “as high-growth organisations combining
innovative business models and technology to enable, enhance and disrupt financial
services” (Treasury of the United Kingdom and Ernst & Young, 2016). This report
also identifies key features and emerging areas of FinTech innovation (Table 2).

As can be seen from Table 2, this classification of FinTech is based on the main
functions and tools that help to satisfy customer needs. Woolard (2017) (Executive
Director of Strategy and Competition at the FCA) said at the Innovate Finance
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145

Global Summit: “As long as firms are developing innovative products, services and
solutions that offer better outcomes for consumers, we’re open for business”.

Table 2. Innovation characteristics and emerging areas of innovation (Treasury of

the United Kingdom and Ernst & Young, 2016)
Banking and Credit and Insurance Retail Investment
payments lending investments management,
and wholesale banking
pensions and capital markets
Integrated payments P2P Telematics Engaged investing
developing

Contactless payments lending Social Visualisation tools

Rapidly

P2P payments Crowdfun insurance Algorithm advice

Money management ding Wearables
tools
Identity management Open data Internet of Smart contracts
innovations

Financial inclusion things

Off-rail payments Autonomou
Future

s vehicles
Blockchain
Source: (Treasury of the United Kingdom and Ernst & Young, 2016).

In particular, the United Kingdom has developed an innovative policy strategy to

improve the country’s competitiveness as a global destination for FinTech. In 2014,
the FCA launched the “Project Innovate” with the goal of encouraging innovation
in financial services for consumers by supporting innovative enterprises through a
range of services. One of the activities is the regulatory sandbox, that allows
enterprises to test innovative offers in the market with real consumers. The sandbox
is open to authorised firms, unauthorised firms that require authorisation and
technology businesses that are looking to deliver innovation in the UK financial
services market (FCA, 2019). According to the FCA any company can be seen as
FinTech if it interested to deliver innovation that is either regulated business or
supports regulated business in the UK financial services market.

In 2019, with the active support of FCA, the Global Financial Innovation Network
(GFIN) was launched - an international network of regulators working together to
share knowledge and create an environment in which companies can experience
cross-border solutions. Of the 12 founding members, GFIN quickly grew to cover a
network of 35 organizations.

3.3 Singapore

Singapore is the leading FinTech economy in the ASEAN region and is recognized
worldwide as a good example of a balance between FinTech support and restrictive
rules. As in other countries, also in Singapore, there is no specific legislation
framework for FinTech companies. FinTech companies must acquire the right
licenses that match their business models, while certain FinTech business models
can need multiple licenses based on the service(s) they offer. FinTech firms are
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146

mainly financial institutions, primarily regulated by the Monetary Authority of

Singapore (MAS), but latest trends include the rise of non-financial tech players in
FinTech area. One of the MAS tasks is to foster FinTech innovation and make
Singapore an international hub for FinTech. Singapore’s ambition is to be a Smart
Nation, and financial sector is seen as one of its integral parts.

In 2016 MAS lunched the FinTech Regulatory sandbox. According to the guidelines,
the applicant can be a financial institution, a FinTech firm, professional services firm
partnering with or providing support to such businesses or any interested company
that can experiment with innovative financial services in a production environment,
but within a clearly defined space and duration. The emphasis is on the use of
innovative technologies to provide financial services that are regulated or may be
regulated by MAS (MAS, 2016).

Additionally, to complement the current regulatory sandbox in 2019 was launched

the sandbox express. The sandbox express, at the first stage, covers the following
activities regulated by MAS:

➢ carrying on business as an insurance broker;

➢ establishing or operating an organised market;
➢ remittance business.(MAS, 2019b)

According to the MAS Financial Sector Technology and Innovation (FSTI) Proof of
Concept (POC) scheme, that provides funding support for experimentation,
development and dissemination of nascent innovative technologies in the financial
services sector, two types of companies are eligible for application:

➢ a financial institution with MAS licence within banking, capital market,

financial advisory, insurance and money changing & remittance businesses;
➢ a technology or solution provider (artificial intelligence, APIs,
blockchain/distributed ledger technology (DLT), cloud, cybersecurity,
digital ID & e-KYC and regtech) with at least one financial institution that
is licensed as a partner (MAS, 2019a).

This program supports two activities:

➢ Projects aimed at developing a new concept for solving industry-wide

problems using technologies or business processes;
➢ Tests aimed at the final response of regulatory uncertainty regarding the
risks and benefits of replacing outdated processes with innovative ones.

The Singapore government is actively cooperating at the international level with the
authorities and regulatory bodies of other countries, both at the global level, for
example, is a member of GFIN, and at the regional level, as a member of the
ASEAN Financial Innovation Network (AFIN).
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3.4 China

There is no specific legislation framework for FinTech companies in China. In 2015,

China's central regulators and industry regulators jointly published Guiding
Opinions on Promoting the Healthy Development of Internet Finance (Guiding
Opinions). This is China's first comprehensive government Internet-Finance
regulation. The concept of Internet Finance was created thanks to the interest of
China to promote the “Internet Plus” strategy in all sectors and, thus, has unique
Chinese characteristics. Nevertheless, Internet Finance concept is similar to FinTech
concept and both can be used to describe new technologies in financial services. In
accordance with Guiding Opinions Internet finance consists of:

➢ Internet payment;
➢ Online lending;
➢ Equity crowd funding;
➢ Internet fund sales;
➢ Online insurance services;
➢ Internet consumer finance (PBOC, 2015).

Chinese government provides supportive legislation framework for FinTech

business, for instance, assisting financial institutions, Internet enterprises and e-
commerce enterprises in building innovative Internet platforms, selling financial
products and effectively expand the supply chain operations of e-commerce
enterprises for the above-mentioned categories. Additionally, Chinese policy
includes preferential taxation policies for FinTech business, for instance, the
reduction of corporate income tax from 25% to 15% or even exemption from it and
government grants. In general, Chinese legislative environment was quite flexible
comparing with other countries, but disruption and failure in the FinTech sector is
pushing government to apply more strict requirements for the industry regulation.

Also new types of FinTech activities have appeared in China, such as the provision
of risk management services driven by big data and artificial intelligence, as well as
blockchain technology and services business. FinTech business in China is regulated
by various administrative measures and guidance, with main supervisors as China
Banking and Insurance Regulatory Commission and People’s Bank of China.

3.5 Australia

Also, in Australia, there is no specific legislation framework for FinTech companies.

FinTech companies must acquire the right licenses that match their business models.
Broadly it includes financial services and consumer credit licensing, registration and
disclosure obligations, consumer law requirements and anti-money laundering and
counter-terrorism financing requirements. Generally, a business must obtain an
Australian financial services (AFS) licence or Australian credit licence (credit
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148

licence) from Australian Securities and Investments Commission (ASIC) before it

can release a new financial product or service or engage in a credit activity.

According to the Australian Government FinTtech is “all about stimulating

technological innovation so that financial markets and systems can become more
efficient and consumer focussed” (The Australian Government, 2016). The
government in 2015 has launched the National Innovation and Science Agenda
(NISA) in order to provide the right political parameters for improving the business
and financial environment. In addition, Australian Securities and Investments
Commission (ASIC) Innovation Hub provides practical support for FinTech and
RegTech businesses. According to the ASIC FinTech are new, innovative
businesses. For instance, in Australia’s regulatory sandbox, it is possible to test
products and services without holding a licence, if the business can rely on ASIC’s
FinTech licensing exemption, provided under ASIC Corporations (Concept
Validation Licensing Exemption) Instrument 2016/1175(ASIC, 2017) and ASIC
Credit (Concept Validation Licensing Exemption) Instrument 2016/1176 (ASIC,
2016a).

The FinTech licensing exemption, which facilitates the testing of new FinTech
services for providing advice and dealing in or distributing products (other than
acting as a product issuer), applies in relation to:

➢ listed or quoted Australian securities;

➢ debentures, stocks or bonds issued or proposed to be issued by the
Australian Government;
➢ simple managed investment schemes;
➢ deposit products;
➢ some kinds of general insurance products;
➢ payment products issued by ADIs (an authorised deposit-taking
institution—a corporation that is authorised under the Banking Act 1959,
including: banks; building societies; and credit unions (ASIC, 2016b).

Anyone is entitled to apply for exemption from a FinTech license to provide

financial services if they are not prohibited from providing financial services and are
not licensed for Australian Financial Services.

3.6 Switzerland

In Switzerland, the legal framework relates to FinTech in accordance with the

principle of technology neutrality, applying the same regulation to companies using
traditional or innovative technologies. FinTech may be regulated by Swiss Financial
Market Supervisory Authority (FINMA) or by self-regulatory organisations,
depending on the business activity:
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➢ company accepting public deposits will be regulated by Banking Act (Die

Bundesversammlung der Schweizerischen Eidgenossenschaft, 1934);
➢ financial intermediary, involving payments, individual portfolio
management or lending activities by the Anti-Money Laundering Act (The
Federal Assembly of the Swiss Confederation, 1997),
➢ investment funds management by the Collective Investment Schemes Act
(The Federal Assembly of the Swiss Confederation, 2006);
➢ securities by the Stock Exchange Act (Die Bundesversammlung der
Schweizerischen Eidgenossenschaft, 1995);
➢ insurance by the Insurance Supervision Act (Die Bundesversammlung der
Schweizerischen Eidgenossenschaft, 2004);
➢ other Acts can be applied as Consumer Credit Act or Data Protection Act
etc.

In July 2019, the Swiss parliament introduced a new licensing category: FinTech
companies, which apply to all business models that accept public deposits of up to
CHF 100 million, without actually participating in any lending operations, that is,
without investing or paying interest on deposits. Additional requirement is that an
institution with a FinTech licence must be a company limited by shares, a
corporation with unlimited partners or a limited liability company and must have its
registered office and conduct its business activities in Switzerland (FINMA, 2018).
The purpose of the new license is to promote innovative business models, so the
approach to licensing should not be based on a specific type of static business model.
FinTech companies, depending on the structure of the business model, can act as
providers of payment services, or as a depository of cryptocurrencies or as
crowdlenders etc.

In 2019 the Swiss Government and Parliament continue to work on regulatory

sandbox, changing the provisions relating to the sandbox, allowing the non-banks to
invest deposits received up to CHF 1 million within the sandbox. But operating in
the so-called interest rate differential business is prohibited and remains the privilege
of the banks (FINMA, 2019).

3.7 The European Union

Until now, the EU, apart from UK, has lagged far behind the leading FinTech
economies such as the USA, China, Singapore and Switzerland. Also, according to
the Institute for Financial Services Zug FinTech hub ranking in 2018, only
Amsterdam (5th place) and Stockholm (7th place) were present in the top 10 global
FinTech hubs list (IFZ, 2019). The FinTech report of the European Parliament
mentions that more than half of the top 10 FinTech companies are located in the US,
China and Israel, and Europe needs rapid innovation to remain competitive
(European Parlament, 2017). This is one of the reasons why the EU is trying to be
proactive and the European Commission in 2018 adopted the FinTech action plan
for the development of a more competitive and innovative financial sector in Europe.
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The main purpose of the plan is to increase supervisory convergence toward

technological innovation and prepare the EU financial sector to benefit from new
technologies. The definition provided by the European Commission in the FinTech
action plan is following: “FinTech — technology-enabled innovation in financial
services” (European Commission, 2018). The EC uses the definition provided by
international financial organisation, the Financial Stability Board, to explain more
detailed what FinTech is, paraphrasing it slightly. “FinTech is a term used to
describe technology-enabled innovation in financial services that could result in new
business models, applications, processes or products and could have an associated
material effect on financial markets and institutions and how financial services are
provided” (European Commission, 2018).

According to EU Parliament definition FinTech should be understood “as finance

enabled by or provided via new technologies, covering the whole range of financial
services, products and infrastructure” (European Parlament, 2017). It also includes
InsurTech, and RegTech. The EU institutions are working to create a more future-
oriented and innovative-friendly regulatory framework covering digitalization and
creating an environment in which FinTech innovative products and solutions can
quickly spread across the EU to benefit from huge single European market. The idea
underlying this is to simultaneously reduce regulatory requirements for the FinTech
sector without compromising financial stability or protecting consumers and
investors. For instance, the Payment Services Directive (PSD2), that came in force in
2018, is a step forward more supportive legal environment.

All new EU-legislation should be based on the “innovation principle”. The EP

emphasizes that, in order to prevent regulatory arbitrage in Member States and legal
statuses, legislation and supervision should be based on the following principles:

➢ Same services and same risks: the same rules should apply, regardless of the
type of legal entity concerned or its location in the Union;
➢ Technology neutrality;
➢ A risk-based approach, taking into account the proportionality of legislative
and supervisory actions to risks and materiality of risks (European
Parlament, 2017).

Positive results are already visible, according to the CBI Global FinTech report for
the second quarter of 2019, Europe surpasses Asia as the second largest market for
FinTech transactions and financing in the first half of the year 2019 (CB Insights,
2019).

4. The Proposed Approach

Different definitions of FinTech have been used by international bodies and national
authorities. Nevertheless, the most common used FinTech definition during high-
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151

level international meetings as G-20, IMF and WBG meetings are based on Bali
FinTech Agenda paper (2018) and World Economic Forum report (2015).

Analysing the FinTech framework provided by leading international organizations,

we come to the conclusion that the general definition of FinTech is quite similar and
is based on two conditions. The first condition is the application of new/innovative
technologies to financial services. The second condition is the development of new
business models, applications, processes or products based on new/innovative
technologies. However, how to determine which technologies are new and
innovative and leads to new and innovative business models and product
development is unclear. All organizations analysed agree that the main attention
should be paid to the needs of customers, which are basically unchanged and allow
us to classify FinTech based on the services provided in accordance with the
functions of the financial markets. Some organizations, such as the IMF, WB, FSB,
argue that technological solutions/tools to meet customer needs are secondary, as
they are more volatile than core needs of customers. While the OECD proposes to
define customer needs and technological solutions on the same, primary, scale.

General national definitions of FinTech are based on framework provided by

international organisations; FinTech firms must leverage innovative technology
while providing financial services. For instance, the Central Bank of Ireland
describes FinTech as “the use of technology to deliver financial services and
products to consumers” (Central Bank of Ireland, 2019). This may be in the field of
banking, insurance, investment - everything related to finance. In general, this
complies with the definition given by WEF, defining FinTech considering the
functions of the financial markets that meet the needs of customers.

Nevertheless, there is no specific legislation framework for FinTech companies,

except recent FinTech licence in Switzerland. FinTech is generally regarded as any
other traditional financial service provider and is subject to the law in accordance
with the services provided, and not by type of a company. Mostly FinTech firms are
financial companies, that are licenced and regulated according to their business
models, or sometimes it can be technology companies that provides financial
services.

Moreover, technology neutrality remains the guiding principle, meaning that

business operations with similar characteristics are subject to the same regulation
regardless of the innovativeness of the technologies used. However, the synthesis of
advanced technologies and financial services has led to the emergence of new
business models, applications and products that need to be regulated. A new legal
framework emerging for crowdfunding investments, crypto assets, block chain
information services, initial coin offerings etc. Governors are working on the design
of a new financial market architecture. For instance, in Switzerland from 2020
comes in force two major financial market laws; The Financial Services Act (FinSA)
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and the Financial Institutions Act (FinIA), to create uniform competitive conditions
for financial intermediaries and improve customer protection.

In general, we can characterize FinTech by focusing on the services, suppliers or

technologies used, however, the last word for the client, the needs of customers, and
the basic customers’ needs based on the functions of financial services remain the
same. In our opinion, no specific legislation for FinTech companies is needed, each
type of activity provided by a financial or technology company is subject to a
specific legislation/regulation with primary focus on services and products provided
as payments, insurance, investments etc.

In 2020 we can define the following main activities areas of FinTech:

➢ Lending (crowdlending, alternative underwriting platforms);

➢ Distributed ledger technology (crypto/blockchain);
➢ Personal finance (tools to manage personal finance as accounts and
payments);
➢ Wealth Management (Robo advisor, social trading, investment and wealth
management platforms);
➢ Capital Markets, (sales and trading analysis: big data, machine learning,
artificial intelligence);
➢ Payments (mobile payment, online payment, card developers, payment
processing);
➢ Money transfers (international money transfer and tracking software);
➢ RegTech (risk, regulatory compliance and audit);
➢ Insurtech (online sales, data analytics for reinsurers);
➢ Real Estate (mortgage, financing platforms).

The proposed categories are not final and provide only a general description of
FinTech covered areas.

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