The emergence of both BigTech digital platforms and BigFinTechs (BFTs) over the past 20 years reflects fundamental changes in economies and societies around the world. Driving this change is the impact of digitization and datafication, two processes that sit at the heart of the Fourth Industrial Revolution. Digitization and datafication offer tremendous potential for network effects and economies of scope and scale, which have duly emerged in the context of the platform economy and more recently in the context of finance. We identify this new period as Fintech 4.0 in our latest paper here.
Fintech 4.0 is the era of digital finance platforms.[i] The era emerges clearly upon two consequential events: Facebook’s proposal of Libra in 2019 and the halting of Ant’s initial public offering in 2020, which would have been the largest IPO in history. These two events mark the culmination of long-term trends of digitization and datafication, highlighting the potential and transformative reality of the “platformization” of finance. BFTs—like digital platforms and the platform economy more generally—are emblematic of this era, portending both promise and peril for societal impacts, particularly in relation to the UN Sustainable Development Goals (SDGs). As part of the Dialogue on Global Digital Finance Governance, led by the United Nations Development Programme and the UN Capital Development Fund, our team considered the various aspects of BFTs—their evolution, role, and governance—focusing on the ways that BFTs can be governed to maximize positive SDG impacts while minimizing negative ones. In the final paper of the initiative, we propose a principles-based approach to BFT governance in order to maximize positive impact on sustainable development, as reflected in the UN SDGs.
BFTs are impactful because of their innovative ability to connect users to financial services and applications in ways that traditional financial institutions have not. In credit markets, for instance, it was estimated that these firms lent nearly US$600 billion in 2019 at the global level, and that they were particularly important lenders in China and several emerging markets for the unbanked, underbanked, and other financially excluded groups. This is astonishing when one considers that BFTs typically started their journey operating in fields outside of finance, such as e-commerce, social media, and mobile telephone networks. Yet, therein lies the challenge of governing these cross-sectoral, platform-based entities: their activities engage with regulation across multiple fields, including data protection, competition and antitrust, telecommunications, and finance. Moreover, given BFTs’ cross-border constitution, it can be difficult to devise regulation that is coherent in both scope and approach with the necessary collaboration among regulating authorities. This challenge can be particularly acute in developing countries that lack the resources to govern BFTs and their complex operations.
Given this complexity across subject matters and regulatory scope and competence, we argue for adopting a flexible approach to regulation – a principles-based approach. Principles, as opposed to rules, provide guidance for normatively good conduct that minimizes negative impacts while promoting positive outcomes. Moreover, principles have greater flexibility to accommodate innovation, which is important in the context of Fintech 4.0, all while providing the necessary guardrails that can mitigate against negative risks and externalities.
Based on an extensive process, we developed five key principles to govern BFTs:
- Ensure foundational financial regulatory objectives
Financial regulation is built upon four key public policy objectives: financial stability, consumer protection, market integrity, and fair competition. As BFTs provide financial services and enter financial markets, it is imperative that regulators and policymakers remain focused on these foundational objectives, particularly with new actors that are not native to the financial sector.
- Develop reflexive and iterative regulation
Policymakers and regulators need to adopt an approach to regulation that is both reflexive and iterative. This is underlined by two realities of BFTs: first, the technology that they employ, such as AI, big data, cloud computing, and distributed ledgers, is developing rapidly; and second, the societal capacity (regulators, consumers, and infrastructure) to engage with that technology in developing countries varies widely. Consequently, regulatory interventions will need to be targeted, with mechanisms that allow for rapid review and adaptation, such as innovation hubs, regulatory sandboxes, and transnational regulatory networks.
- Foster responsible, long-term oriented actors
The relative underdevelopment of regulatory institutions in developing countries means that they can be prone to weaker governance and rule of law issues, as well as conflict and fragility. To rely on BFT home state regulation to guide and oversee BFT activities in such contexts presents several challenges. As such, it is worth considering the direct application of transnational standards of responsible business conduct on BFTs operating in those contexts. This is applicable to both substance, e.g. the UN Guiding Principles on Business and Human Rights, and process, by implementing due diligence and reporting practices.
- Ensure oversight and enforcement
Given the complexity of BFTs and their activities, oversight and enforcement mechanisms should be deployed at various governance levels: the entity, national, international, and transnational levels. Pertinent to consider at each level are the two guiding features of form and function. By form, we mean various jurisdictional relationships e.g., intra, inter, and regional; and by function we include operations such as third-party audits. In so doing, we are urging authorities to consider what they are trying to achieve, how they should organize themselves to do so, and who will be important in helping them do so. Authorities should not be afraid to engage actors from the private sector, civil society, or international organizations to achieve this.
- Instill an express commitment to sustainable development
To enhance the responsible conduct of BFTs and to better support the attainment of the SDGs, governance frameworks and initiatives should require a board-level commitment of BFTs to incorporate the SDGs into business plans and models, particularly when operating in developing countries. Board-level engagement is important for two primary reasons: first, it enables action by individuals with the authority to commit resources and drive the agenda; and second, it communicates to stakeholders that the company takes the matter seriously. In the drive towards sustainable development, concerted and collaborative action by all stakeholders is pivotal.
Implementing the Principles
While there are varying pros and cons to implementing regulatory instruments at individual governance levels and of a “hard” binding or “soft” voluntary nature, we suggest that BFT governance be developed at all levels—national, regional, and international—and be guided at the international level. An international regulatory standard developed by a consortium of international organizations adept in BFT activities and the SDGs, such as the International Monetary Fund, the World Bank, the Bank for International Settlements, and the Financial Stability Board, could outline the general principles of BFT governance. In this way, the existence of a general international framework will help to alleviate the problems of regulatory fragmentation and extraterritoriality by providing general regulatory policy directions while leaving leeway for national and regional regulators to tailor their regulations to national and regional needs. This flexibility for national and regional regulators should be considered in light of the need to promote varied and appropriate collaborations with other supervisory actors and authorities. Moreover, with this leeway, regulators should seek to embed the principles into BFT values and operations. Only by embedding an understanding of both opportunities and risks can countries, regions, and the international economic system maximize benefits while minimizing the risks of BFTs.
Kuzi Charamba is a Postdoctoral Fellow at the Asian Institute of International Financial Law, University of Hong Kong.
Ross Buckley is the Australian Research Council Laureate Fellow and KPMG Law – KWM Professor of Disruptive Innovation at the University of New South Wales.
Douglas W Arner is a Professor of Law at the University of Hong Kong
Dirk A. Zetzsche is a Professor of Financial Law at the Universite de Luxembourg
This post is adapted from their paper, “A Principles-based Approach to the Governance of BigFintechs” available on SSRN.
The views expressed in this post are those of the authors and do not represent the views of the Global Financial Markets Center or Duke Law.
[i] It builds on earlier periods of electrification (Fintech 1.0 from the first transatlantic telegraph cable in 1867), digitization of traditional finance (Fintech 2.0, from the automatic teller machine (ATM) and handheld calculator in 1967), and the emergence of new technologies and entrants such as Fintechs, Techfins, and BigTechs (Fintech 3.0, marked by the iPhone and M-Pesa in 2007, the 2008 global financial crisis, and blockchain in 2009).