Fintech firms need to grow up and embrace transparency

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Fintech, as we all know, has been one of the biggest drivers of technological innovation and value creation in the last decade.

Unfortunately, the sector has been trailing for a while now, and the results have been playing out live in our news feeds.

Today it is Binance, under investigation for alleged violations of money laundering and securities laws. Before that we saw the explosion of FTX and a number of much smaller crypto platforms. And before that there was social economy and meme stocks and celebrity NFTs. Neobanks and BNPL providers – seen as trailblazers for the future of consumer financial services – saw their momentum fizzle amid a faltering economy and rising costs, despite billions of dollars in investment. And that’s without mentioning 2022’s stock market crash, which tore through fintech values.

So what now?

This much we know: There remains a great need to continue to transform the global financial system, bring inclusion and opportunity to more people, and position fintech to make the world a better place. As a fintech executive deeply immersed in the next generation of fintech, particularly embedded finance, I am keenly aware of the still untapped potential for change.

In today’s sobering economic environment, we have a golden opportunity to reassess the essence of fintech, to reflect on what we may have sacrificed in our rapid rise, acknowledge our mistakes and engage in critical self-evaluation to promote further change. In other words: It’s time for fintech to grow up.

What does that mean?

Many fintechs have taken shortcuts around regulations, and have found ways to circumvent traditional regulations in creative ways. While this may have initially accelerated fintech adoption, it has outlived its utility or logic. Fintech firms that work directly with consumers and businesses must be directly accountable to regulators at both the state and federal levels.

Having fintech firms working with consumers and businesses that are not directly accountable to the regulator, avoiding the traditional licensing process and the ongoing oversight and audit involved, is simply irresponsible and dangerous. Too many degrees of separation between the public officials responsible for keeping the system, businesses and consumers safe creates many points of failure and thus many opportunities for bad actors.

Today’s fintech innovator can no longer bypass regulators. We must embrace the regulators and must be fully licensed and regulated directly. But at the same time, we cannot tolerate innovation-sapping bureaucratic processes that are too heavy for innovators to bear. There should be new and improved processes that relate to the times and the speed of innovation.

“Regulation must catch up with innovation.”

It’s not me; it is US Treasury Secretary Henry Paulson in 2008, in the midst of the growing financial crisis.

If fintechs legitimately want to continue to drive and benefit from change, they need to enter into a productive dialogue with regulators and help rewrite the regulatory rules of the financial industry to adapt them to our times. Smart fintech leaders need to get out in front of this transition, as they are in the unique position to use a forward-thinking approach and a deep understanding of technology to accelerate any change.

For fintechs, embracing financial discipline is no longer a choice, but a necessity. Until recently, with investment fueling more investment and providing easy growth, there seemed to be no pressing need to prioritize long-term sustainability and viability. The boom-boom years of cheap money made financial discipline and the development of robust financial models nice to have, because let’s face it, it seemed like the money would never stop flowing.

But as the world economy hit its current speed bump, we saw fintech entrusted with storing and moving money falter or fail, and it became abundantly clear that as the fintech industry matures, it must embrace responsible fiscal planning, invest more in oversight, establish sound business models and exercise prudent consumption practices. These pillars of business prudence are critical to fostering the growth of a more stable industry—one that not only attracts customers, but also earns their trust.

Fintech startups and established companies must move beyond the paradigm of short-term gains and rapid growth to prioritize building a viable, scalable and adaptable business architecture. By doing so, we can position ourselves as true leaders in the financial industry, attracting not only fleeting customers, but establishing lasting relationships built on trust and value, pillars of stability in the sector.

Fintechs’ mission, their penchant for cost-effectiveness and their underlying technology all point the way towards the ultimate goal: a transformative shift where customer trust and loyalty is ingrained in the very fabric of business.

Transparency in fintech can become a strategic differentiator, but requires us to go further than meeting regulatory requirements and industry standards. Fintechs must gain a competitive edge in transparency by adopting a proactive approach to clear, accessible and relevant information about their services, products, fees, data handling and management practices, including their use of AI. By doing so, fintechs can build a foundation of trust and credibility, allowing customers to make informed decisions while fostering a long-term relationship, not only building trust with existing customers, but also attracting new ones who prioritize transparency and value ethical behavior.

Fostering and promoting transparency will shape the fintech industry’s culture, values ​​and long-term sustainability. The customers’ trust and loyalty can, and must, become the cornerstones of the business model. And as transparency becomes the catalyst for a paradigm shift, to a future where customer-centric and ethical behavior is deeply ingrained in the fintech ecosystem, the potential rewards will ultimately benefit the financial industry, its stakeholders and, mostly, its customers.