The regulatory challenge posed by embedded fintechs

The rise in financial products or services embedded within and delivered through non-regulated entities has thrown open a world of possibilities for consumers.

And it’s all happening at a dizzying pace.

Retailers and brands in multiple sectors are leaping on the opportunities fintechs now offer through specialised embedded products. These can both drive loyalty and make their propositions more attractive at the point of customer need.

This could be embedded insurance, enabling your car share service to come automatically with mobility insurance. Or your new camera to come with theft and damage protection right out of the box and included in the price.

Or it could be embedded finance. Last year, for example, JP Morgan took a majority stake in Volkswagen’s payments platform. Similarly, US retail chain Walgreens and InComm Payments have launched Scarlet, a new bank account and debit card.

Buy-now-pay-later (BNPL) offerings from a wide range of retailers, enabled by fintech companies, is another example of the success of embedded finance.

Klarna is a success story worth highlighting. The Swedish payment network and loan giant is now Europe's highest valued fintech startup. It partners with e-commerce retailers to offer point-of-sale (POS) loans to the consumer market. This enables brands to offer innovative credit solutions at the point of purchase, for example, by paying in instalments.

This wider access to better services is all due to open banking regulations and open APIs. They have paved the way for more and more financial service capabilities to be delivered by non-regulated third parties.

But what are the regulatory implications? As more financial-services activity moves from regulated banks to entities and platforms with little or no oversight, so do the associated risks.

Because as services provided by third parties have become broader in scope, the risks have become more complex too.

The evolution of the fintech market is expected to drive greater levels of regulatory awareness and intervention ahead as regulators look to protect customers.

On their shopping list of concerns are all of these: loss of privacy; compromised data security; rising risks of fraud and scams; unfair and discriminatory uses of data and data analytics; uses of data that are non-transparent to both consumers and regulators and harmful manipulation of consumer behaviour.

The phenomenon is giving rise to new regulatory challenges about how the provision of financial services by non-financial companies should be regulated and supervised, how to safeguard data ownership and use, and how to shore up consumer protection.

Plus, the global nature of tech means enhanced cooperation between regulators in different sectors and jurisdictions is now called for.

Most regulations for financial and trading activity were developed before fintech existed.

With the exponential pace of change, policymakers and regulators now face uncharted territory.

Currently, the regulatory answers are very much a work in progress.

So, for regulators, it’s a tough and unenviable call. Looking to manage consumer protection while ensuring a vibrant and growing sector is not stifled will be a fine balance…