In what ways do different countries adopt FinTech?

By Puja Sharma

FinTech will likely continue to shape the financial sector in terms of products, business models, and industrial organisation, particularly in emerging markets and developing economies where it has the largest potential to contribute to financial development, innovation, competition, and inclusion, according to “FinTech and the Future of Finance” report by the World Bank.

While FinTech is currently being adopted all over the world, different countries are at different stages of FinTech adoption. Some countries in Africa have emerged as leaders in mobile money, whereas others in Asia have expanded beyond payments services, notably China, with some FinTech companies offering a wide range of financial services with a global footprint (Financial Stability Board 2020).

Wide range of  FinTech-related data and create an aggregate activity index that captures three important dimensions: FinTech firm creation and growth through the availability of early-stage financing; usage of FinTech credit and digital payments, currently the most common digital financial services, especially in EMDEs; and the usage of mobile distribution channels for financial services, a key channel given that mobile and smartphones represent an increasingly important vehicle through which people live their digital lives.

According to the IBS Intelligence report, Increasingly, UK financial services firms are looking at acquisitions and partnerships with FinTechs to boost their services in the digital-oriented, post-pandemic market, as per a report from Lloyds Bank.

The study, Lloyds Bank’s sixth annual Financial Institutions Sentiment Survey, found that 46% of financial institutions plan to extend their relationships with FinTech firms in the next year, compared with only a third of them (32%) in 2020.

“The UK has one of the most vibrant FinTech communities in the world,” Steve Everett, Head of Payments and Receivables, Client Products at Lloyds Bank Commercial Banking, said when commenting on the report. “They are at the forefront of innovation within financial services and, by partnering with them, the UK’s largest firms are showing they are committed to developing new products and services to meet changing client needs through collaboration.”

The research further finds that FinTech activity is typically more subdued in countries with more developed banking systems, potentially because there are fewer opportunities for new fintech entrants to emerge. However, financial incumbents may still have incentives to compete and adopt fintech.

Mobile banking app downloads are higher in countries with more developed banking sectors. Importantly, fintech activity (including nonbank mobile app downloads) is positively associated with deeper capital markets, possibly because this promotes a favorable start-up environment which is critical for fintech entrants. Finally, our results suggest that fintech-specific policies are a necessary, but not sufficient condition to bring fintech activity about–other factors need to be in place as well for fintech activity to flourish.

Modern FinTech firms in India are employing Artificial Intelligence (AI) to boost efficiency, precision, and query resolution speed. The FinTech market is predicted to increase as an outcome of this aspect. Because of the increased usage of AI interfaces and chatbots for efficient customer support, the AI category will give a lucrative potential for growth in the fintech market share.

It is important to recognize that alternative policy combinations can promote innovation and foster FinTech activity, with similar outcomes. For example, in the absence of a digital ID infrastructure (and supporting regulation), countries may adopt tiered and simplified KYC requirements to promote transaction account opening, which could accept alternative forms of identity documentation such as a letter from the village elder. Second, consistent with existing literature, we find that the broader traditional policy environment matters.

This may lead to a general environment that is less permissive to innovation and new entrants while perhaps also offering fewer regulatory arbitrage opportunities for FinTech entrants. The demands on the enabling environment evolve as FinTech activity develops. For example, for basic e-money services to take off, fewer enablers are required than for more sophisticated digital financial services that not only presuppose the smooth functioning of digital transactions but also require more complex, well-calibrated policy frameworks and financial infrastructures. Fintech activity may also outgrow basic consumer protection provisions as more complex consumer data protection frameworks become more important.

Long-term, strategic government commitments to digitise government-to-person transactions and provide digital access to key government services can also act as a critical catalyst at various stages of FinTech development. Finding the right balance between trade-offs at every stage of FinTech development remains essential to promote activity and innovation while keeping excessive risks in check.