Fintech and International Financial Regulation

The shock suspension by Chinese regulators of Ant Financial’s $37 billion initial public offering points to a tougher and more complex compliance environment for fintech firms going forward. As Ant was preparing to launch its blockbuster offering—with over five million investors subscribing just in Shanghai and demand for Ant’s shares hovering at around 870 times the number of shares on offer—regulators suddenly called a halt to the fanfare. While the specific reasons for this action remain unclear, Ant’s outsize footprint on the Chinese financial system might well have prompted the decision. In other words, with around 730 million people using Ant’s Alipay digital payments platform, and handling around $16 trillion in transactions, Ant was perhaps less a tech company than an actual financial one. To underscore this point, commentators also took note of Ant’s sprawling impact on the consumer loans market, where its expertise in data analysis and automation has resulted in the disbursement of around $270 billion in loans outstanding. Regulatory concern about Ant’s business model—and whether it ought to be classified as a tech or financial firm—exemplifies the hard tradeoffs facing policymakers tasked with overseeing fintech firms: how are they best to manage the goals of encouraging innovation, protecting investors and markets and do so in a way that is clear and predictable? When tech companies attempt to innovate in financial markets, how can regulators harness their expertise without imperiling financial stability?

In Fintech and the Innovation Trilemma, Chris Brummer and I argue that when seeking to balance the goals of innovation, market integrity and rules clarity, regulators can, at best, only achieve two out of these three objectives. When trying to encourage innovation using clear rules (eg broad permissions), authorities will likely undermine market integrity; conversely, in protecting markets through straight-forward rules (eg bans), innovation becomes harder to realize. Attempting to achieve both market integrity alongside innovation will likely require a complex rulebook. As shown in the case of Ant Financial, fintech poses a special challenge for the trilemma. Firms use complex, artificially intelligent algorithms, powered by new and unfamiliar types of data. A host of non-traditional tech firms are now major players in the financial system. Fintech thus makes information asymmetries sharper. With a more diverse grouping of fintech firms, regulation can be especially difficult to calibrate where its burdens fall on non-financial innovators that may lack the experience and deep pockets to absorb them.

In my new paper, Fintech and International Financial Regulation, I build on this earlier argument to suggest that the system of global financial rulemaking, deeply honed in the wake of the 2008 Crisis, faces a particularly thorny challenge to adapt its workings to fintech. In other words, the trilemma becomes even more complex when its lens is trained on international financial regulation’s (IFR) response to cross-border fintech. At first glance, international financial regulation should be well-placed to craft workable standards for innovative digital finance. Coordinating through the Financial Stability Board, expert bodies like the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, post-2008 rulemaking has resulted in a robust and well-used system of standard-setting, surveillance and soft enforcement of global standards. But fintech looks set to throw a wrench in these workings. First, crafting clear standards on an already complex subject area (eg on the oversight of AI or big data in fintech) faces long odds as these have to navigate divergences in local domestic regulation and administrative processes. This heightens negotiation costs between countries. Secondly, fintech has risen to variously respond to deep economic needs in different countries, building political and policy pressure on home regulators to protect its workings where these represent essential services. Ant Financial and WeChat Pay in China have, for example, transformed the domestic digital payments and consumer finance environment. They have succeeded where the traditional machinery of state banks has seemed to struggle. By contrast, historically developed financial markets like the United States have seen slower fintech penetration, perhaps reflecting the existing and longstanding reliance on banks and credit cards. This dynamic can make standard-setting tough. Countries with the greatest use and reliance on fintech are likely to have the least incentive to impose high compliance costs on fintech products and services. Thirdly and relatedly, international financial regulation standard-setting has to adapt its rulemaking to markets that are in varying stages of disintermediation from banks and traditional financial firms. Whereas heavily bank-based economies may be willing to accept new rules, others that look to non-bank service providers like Ant or M-Pesa may be more circumspect. With fintech responsible for introducing a more varied cohort of firms disintermediating traditional finance, newer, smaller, non-financial companies may lack the expertise and deep pockets to implement new rules reflecting international regulatory standards.

In concluding, the Article suggests ideas for navigating the challenges posed by the trilemma for cross-border fintech. As digital finance becomes mainstream, responding to it represents a defining stress test of the post-2008 international regulatory architecture.

Yesha Yadav is a Professor of Law at Vanderbilt Law School.