Throughout the course of history, change has happened and then the law has regulated it. This situation has often led to challenges and, indeed, open conflict. These challenges are increasing in direct proportion to the speed of change. This is probably most obvious when it comes to technology and, in particular, the world of fintechs.
Fintechs versus the establishment
Fintech just means financial technology. There is nothing to stop established financial services organizations from using it. In fact, they increasingly do. Their challenge, however, is that they are often encumbered by legacy systems.
This means that they are faced with the decision of whether to try to integrate them or whether to try to build something new. Either way, they will usually face difficulties and expenses on their route to progress. Younger fintechs, by contrast, are totally unencumbered by the weight of legacy systems.
Similarly, traditional establishments tend to want strong reassurances that something is actively legal before they do it. If they aren’t sure, they’ll tend to try to work with regulators and lawmakers to get clarity before they go ahead. Fintechs, like other disruptive companies, will tend to work on the basis that unless something is clearly illegal, it’s fair game.
This doesn’t always work out for them. On the whole, however, the strategy of getting the public on your side first and then worrying about the regulators later (if at all) does seem to be fairly successful. Quite bluntly, if the public clearly wants something, regulators generally have to respect that. On the other hand, it is still their job to keep businesses in line.
The challenge of regulating fintechs
The issue with fintechs is rarely what they do and often how they do it. In a financial context, the main concerns tend to be around the speed with which they generally operate. On the one hand, this is great for a smooth, convenient, user experience. On the other hand, it can leave minimal time for either careful thought or rigorous security checks.
What’s more, it may not be immediately clear who, if anyone, regulates any given fintech. Alternatively, it may be very clear that nobody does. That said, the powers of regulators can be extended to include them. In fact, it can be very much in the best interest of fintechs, particularly established ones, to work with the regulators.
Regulators and lawmakers may be slow and their service is far from perfect. Even so, the fact that they can hold companies to account gives customers some level of reassurance. This can be particularly valuable in areas such as finance.
Looking at Klarna
Klarna may be the poster child for everything good and bad about fintechs. On the one hand, it offers customers a seamless way to access the convenience of instalment payments. This also, clearly, benefits merchants.
On the other hand, its speed limits its opportunity to implement either robust affordability checks or effective security. What’s more, at least some of its advertising has been very questionable, to put it mildly.
The fact that Klarna is now being put under regulatory control means that it’s going to have to address all three points. Changing its advertising should be fairly easy. It will, however, be very interesting to see how, or indeed if, Klarna manages to improve both its credit controls and its security without compromising on its speed.
Alternatively, both Klarna and the people who use it (merchants as well as customers) may have to accept that the breaks need to be put on the service, at least for the time being. This may reduce its popularity. In the grand scheme of things, however, this may be a price everyone has to accept.