The unexpected political developments we’ve seen happen in the world over the last year–namely, the election of Donald Trump as the next president of the United States and the Brexit vote to remove the United Kingdom from the European Union have upended a lot of the conventional wisdom around global economics.
How will these new administrations approach the capital markets? How will the markets themselves respond to new frameworks? At the eye of this storm is fintech, which has evolved to a point where regulators and politicians are taking notice; and, it seems, both factors are keen to play an active role in encouraging further fintech innovation.
"With the pressure on both public policymakers and private-sector providers only intensifying in 2017 and beyond, we can expect to see an explosion of ideas and creativity in the further development and deployment of fintech"
So, where does fintech go from here? What are the practical implications of the White House’s latest ’Framework for Fintech’, and the broader potential for government regulation to influence fintech evolution? And, how can private tech providers, and solutions like extranets and the cloud, encourage innovation independent of government action?
Fintech Pressures on the Government
There is no partisan bent to fintech; the Trump administration, just as the Obama administration before it, faces pressure for a formal fintech policy—not because of what the government looks like today, but because of what fintech looks like today.
Consider all of the different areas from where fintech innovation is springing from: consumer-related applications such as, payment or FX platforms; institution-related applications such as the digitization of contracts or post-trade applications; and system-related applications such as digital currencies that can challenge, or even replace, the role of central bank money.
Fintech has grown so quickly, and now looms so large, that federal regulators and politicians have no choice but to pay attention. This isn’t a U.S.-only phenomenon, though; we’re seeing it in the U.K. as well, where the Governor of the Bank of England recently pointed out that regulations provide the space for risk management around new technologies. “As the fintech industry matures, the more that industry seeks to become regulated as it provides them with legitimacy,” says the governor, Mark Warner.
For the U.S., Washington must take steps to ensure that innovation is being encouraged, that the market is remaining competitive in the thought-leader space and that fintech uses–on consumer, institutional and system-wide levels–are safe and transparent.
A Framework for Fintech
The White House’s Framework for Fintech, put forth in the final days of the Obama administration, is a strong step forward on this front. It places an important focus on encouraging work with the private sector to promote both domestic and international solutions, while also ensuring that the solutions developed remain open, or interoperable, enough to ensure positive cooperation and transparency in the system.
The framework proposal also recognizes that the impact of fintech will be felt beyond the consumer space in areas that are important to the enterprise and the stability of the overall financial system. It acknowledges the existence of competition to attract new innovation (for example, in London and Singapore), promotes financial health and inclusion and builds in protections for privacy, cybersecurity and data security.
While the White House proposal is more driven by principle than divulging in the mechanics of how these principles can be implemented, it’s a reassuring message that reflects engagement with different stakeholders in the market.
Building Private-Sector Solutions with the Cloud
Having said that, it is still a principle-driven framework, and the next phase in fintech evolution has to be implementation. As you might expect, this is an area where many different stakeholders can bring value to the table, though that requires a heavy amount of cross-coordination and collaboration.
Established infrastructure providers would be encouraged to work closely with fintech providers to ensure they’re facilitating efficient access to the technology needed to expand into international markets; providing access to new deployment models, like cloud solutions; and enabling efficient means for accessing wide client segments through an ecosystem approach. Market data vendors, both in the U.S. and globally, can also open the door for fintech, providing them with the market data they need for their solutions.
The cloud, in particular, is and will continue to be a key factor in fintech expansion, as it provides the space to experiment with different ideas rather than risk needing to bet the house on the very first trial. At the same time, the explosion in data volumes, the need for flexible solutions and rapid technological improvements made in cloud-based security and performance have made the capital markets more accepting of cloud deployment models. In fact, the implementation of cloud-based models is expected to more than quadruple over the next four years, from 10 percent in 2016 to 45 percent in 2020.
Additionally, the evolution of software-defined networks has helped to extend the on-demand experience to connectivity solutions used to reach cloud-deployed models. Software-defined networking also facilitates the access to new destinations to try out new fintech ideas, without requiring long delivery lead times or tying in users to static network contracts for longer than is needed.
A Fintech Ecosystem
Beyond providing the infrastructure, capital markets users expect their providers to put together end-to-end, managed solutions that can be used to facilitate achieving business objectives. As markets expand, regulation increases and new ideas are applied, there will be a greater need to have access to more and more of these fintech providers.
An example of one such managed solution from connectivity providers is an extranet. Extranets enable an ecosystem approach for adopting fintech solutions, providing a single portal to different services. Capital market participants are increasingly expecting extranets to take their specific business needs into consideration, namely deterministic performance, strict SLAs on delivery and repair times and real-time network transparency.
With the pressure on both public policymakers and private-sector providers only intensifying in 2017 and beyond, we can expect to see an explosion of ideas and creativity in the further development and deployment of fintech.