Will the risks materialise in the Fintech world?
Last month it was announced that Wirecard – the giant German e-payment company is “missing” EUR 1.9 billion from its books…
The financial market is currently undergoing accelerated processes against the background of increasing uses of digital platforms in general and payment platforms in particular.
There are three main drivers to this process:
The first is ”Technological innovation” - For centuries the banks were the main intermediaries in the financial markets, however in the last decade, non-banking, disruptive, Fintech companies have begun to flourish, mainly in the payment and credit markets reflected in multiple payment services and mobile wallets that emerge like mushrooms after the rain – apple pay, Alipay, Ant financial, WeChat etc.
New technologies that overcome the issue of money laundering and customer identification coupled with changes in consumer behavior to drive this trend - Young people are no longer afraid to transfer and receive money online and have stopped coming to branches.
While digitization has many advantages such as: speed, diversification & sophistication, better services, streamlining etc. it has also several risks that one needs to adhere such as: operational risks, fraud, data security, compliance and AML risks.
The second trend is “Disintermediation” – meaning a bypass of banking activity - manifested in the entry of Internet giants such as Amazon and Facebook into banking activity and even the issuance of new coins such as Libra.
And the third trend is “De-regulation” - which is reflected in easing the regulatory restrictions on the financial market to enable competition or to encourage the financial markets, such as the recent ease in Dodd Frank reforms act.
The benefits of digital platforms is clear - speed of response, advanced underwriting tools through network monitoring and sophisticated tools, innovative products, openness to new populations, and so on.
On the other hand, in the Fintech world, which has only existed for about 12 years, and which is only partially supervised and has not yet experienced a serious fall or crisis, there is a fundamental question of risk management and realization - now the risk models and internal inspection of those players will be tested and verified.
Optimal management of credit and payment systems requires not only advanced technological knowledge – i.e the Tech leg, but also deep business understanding of all risks surrounding the payments and credit eco-systems (risk management of credit, market, compliance, fraud etc.) – i.e the Fin leg.
It is my belief that only with the right combination of Fin and Tech experts a strong and stable Fintech Company can sustain – such company will know how to prepare to be immune to business crises and macro-prudential events.
By Yair Kaplan, July 15, 2020
Mr. Kaplan is a finance and payments senior advisor, formerly deputy CEO of Cal - Israel Credit Cards, has held a variety of senior positions in the financial institutions in Israel and at the banking supervision division