Strategy Note /
Global

The key regulatory challenges fintechs face

  • Data protection is the biggest regulatory obstacle for EM fintechs, followed by capital requirements, deposit insurance

  • Capital requirements, KYC/AML are key for small fintechs. Data protection, deposit insurance are unicorns' big hurdles

  • Credit underwriting guidelines and investor disclosure requirements tend to hamper incumbents more than they do fintechs

The key regulatory challenges fintechs face
Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Tellimer Research
19 January 2021
Published byTellimer Research

In this 9-page report, we look at the key regulatory hurdles faced by fintechs and incumbents. We also separately analyse the regulatory obstacles for fintech unicorns, and highlight key differences in the challenges they face relative to the broader fintech population. Our findings are based on the results of proprietary surveys that collected detailed responses from 101 fintechs and 50 incumbent firms across seven emerging markets (Brazil, China, Indonesia, India, Kenya, Mexico, South Africa).

Our key findings

  • Consumer/data protection is the top regulatory challenge cited by fintechs. Other important regulatory hurdles include capital requirements and deposit insurance regulations.

  • Looking at our survey results by country, consumer/data protection is the biggest regulatory obstacle for fintechs in all markets except China (where capital requirements and deposit insurance rules top the list of concerns). For fintechs in Brazil, India and Mexico, capital requirements are also a key hurdle.

  • By product, consumer/data protection regulations are a key hurdle for fintechs operating in the payments, lending and investech segments. Insurtechs and blockchain fintechs cite capital requirements as a key regulatory challenge.

  • Turning to our survey of listed incumbents, the top regulatory barriers are largely the same as for fintechs, ie consumer/data protection regulations and capital requirements, along with rules governing partnership agreements.

  • By country, incumbents in China, India, Indonesia and South Africa cite consumer/data protection regulation as their top challenge, while those in Brazil are most concerned about taxation.

  • By incumbent sector, capital requirements are a key challenge for financial sector companies. Telecom and technology sector firms cite consumer/data protection regulation as their main regulatory hurdle.

  • On a relative basis, fintechs are more affected by consumer/data protection regulations and capital requirements. For incumbent firms, credit underwriting guidelines and disclosure requirements are more important challenges.

  • Unicorn fintechs are more concerned about consumer/data protection rules and deposit insurance. Non-unicorn fintechs find capital requirements and KYC/AML regulations more of a hindrance.

Top regulatory hurdles cited by some of our surveyed companies

Source: Tellimer Research

Overview

As we highlighted in one of our earlier reports, regulation is one of the main hurdles to fintech growth; here, we delve deeper into the impact of different types of regulations on both fintechs and incumbents. Consumer/data protection regulations are the top regulatory challenge that fintechs face; this is because data is the key driver of value for many fintech business models. Other important regulatory issues are capital requirements (given that most fintechs prefer capital-lite business models) and deposit insurance rules (which may again reduce fintechs’ balance sheet flexibility and add to financing costs).

By country, consumer/data protection regulations are the top challenge for fintechs in most of our surveyed markets, except for China (where capital requirements and deposit insurance top the list of concerns). Also, fintechs in Brazil, India and Mexico regard capital requirements as a key hurdle, while those in Indonesia are more concerned by deposit insurance rules. By product, consumer/data protection regulations are a key hurdle for fintechs operating in the payments, lending and investech segments. Insurtechs and blockchain fintechs cite capital requirements as a key regulatory challenge.

Turning our attention to listed incumbents, they also cite consumer/data protection rules as their top regulatory barrier. This could be because incumbents hold massive database and are now working more actively to utilise this resource to generate create competitive advantage. Other important regulatory concerns for incumbents include capital requirements and rules governing partnership structures. By country, incumbents in India, China, Indonesia and South Africa cite consumer/data protection regulations as a key challenge, while those in Brazil are most concerned about taxation rules. Investor disclosure requirements are a major challenge for Mexican incumbents. By incumbent sector, capital requirements are a key challenge for financial sector companies, while telecom and technology incumbents cite consumer/data protection regulation as a key hurdle for growth.

On a relative basis, fintechs place more emphasis on consumer/data protection regulations and capital requirements. For incumbents, credit underwriting guidelines and disclosure requirements are more important challenges than for fintechs.

Comparing unicorn fintechs with their less highly valued peers highlights some interesting contrasts. Unicorns are much more concerned about consumer/data protection rules and deposit insurance while non-unicorns find capital requirements and KYC/AML regulations are more relevant challenges to their growth.

Fintech regulatory hurdles: Consumer protection, capital requirements and deposit insurance

Consumer/data protection requirements. This is the top regulatory concern mentioned by fintechs. Rapid expansion of fintech products and services has created new risks for consumers, particularly as they may rely on alternative datasets, such as geolocational information. Fintechs will typically seek to collect and leverage huge volumes of consumer data. Accordingly, privacy and security are important issues, particularly given the ever-present threat of data breaches, leaks and hacks. For example, in November 2019, Kenya enacted comprehensive data protection legislation: to protect user data, require user consent to share data with third parties, and to govern how locational data is collected. Fintech companies that regard consumer/ data protection regulation as a major hurdle include Tala (lending, Kenya), Kueski (lending, Mexico), and Yeahka (payments, China).

Capital requirements. Fintechs tend to favour-capital-lite business models; any regulations that challenge this approach can have a serious impact. An example of such regulation is the Reserve Bank of India’s eligibility criteria for P2P lending platforms, which include a minimum capital requirement of INR20mn (US$0.3mn). Fintech companies citing this regulatory hurdle include Zenda.la (insurtech, Mexico), Zebpay (blockchain, India) and Openpay (payments, Mexico).

Deposit insurance. This challenge is cited more frequently by fintechs active in payments and lending. Since digital wallet accounts are one of the most frequently used financial products for low-income customers, they play a key financial inclusion role in emerging markets. This is drawing the attention of local regulators, who are understandably concerned about protecting customers’ balances. Fintech companies affected by this regulatory hurdle include Duanrong (lending, China), WeChat Pay (payments, China), Geru (lending, Brazil) and Gojek (payments, Indonesia).

Major fintech regulatory hurdles

By country, consumer/data protection regulations are the top challenge for fintechs in most of our surveyed countries, apart from China. Fintechs in Brazil (eg TerraMagna), India (eg SanKash) and Mexico (eg Klar) also regard capital requirements as a key hurdle, while those in Indonesia (like Cashlez) are also concerned about deposit insurance regulations and rules governing partnership agreements. Chinese fintechs cite capital requirements (eg Jimubox) and deposit insurance (eg Ant Group) as their main regulatory challenges.

Main fintech regulatory hurdles

By product, consumer/data protection regulations are key hurdle for fintechs operating in payments (eg Snapscan), lending (eg Konfio) and investech (eg Zerodha) segments. Insurtechs (like Cermati) and blockchain (like The Sun Exchange) cite capital requirements as their key regulatory challenge.

Main fintech regulatory hurdles

Incumbents' regulatory hurdles: Consumer protection, capital requirements and deposit insurance

Turning to listed incumbents, such as India’s Bharti Airtel and Kenya’s Safaricom, the top regulatory barrier for them is again rules concerning consumers/data protection – this could be because incumbents are focusing actively on utilising the extensive data they hold to create a competitive advantage. Other important regulatory concerns include capital requirements (as highlighted by Nedbank Group in South Africa) and rules governing partnership agreements (eg Bank Mandiri Persero, Indonesia).

By country, incumbents in India, China, Indonesia and South Africa (eg ICICI Bank in India and Glodon Co in China) cite consumer/data protection regulation as a key challenge, while those in Brazil (eg Oi S.A) are concerned about taxation. Disclosure requirements are a challenge for incumbents in Mexico (eg Banco Del Bajio) and client funding account segregation is a hurdle for Kenyan companies (like Equity Bank).

By incumbent sector, capital requirements are a key challenge for financial sector companies like City Union Bank and Postal Savings Bank of China. Telecom (eg Safaricom) and technology companies (eg Hundsun Technology in China) cite consumer/data protection regulations as a key hurdle to their growth.

Incumbent firms' biggest regulatory hurdles

Comparing the regulatory challenges of fintechs and incumbents

On a relative basis, fintechs are more affected by consumer/data protection regulations and capital requirements than incumbents. We think this is because data holds high importance for some business models, such as credit-risk modelling for lending fintechs. Also, start-ups are generally cash-strapped, so meeting capital requirements could be more of a problem for fintechs than for incumbents. For incumbents, credit underwriting guidelines and investor disclosure requirements are more challenging than for fintechs.

Comparing regulatory hurdles for fintechs and incumbents

The regulatory hurdles faced by fintech unicorns: Consumer/data protection and deposit insurance

Fintech unicorns, defined as firms with >US$1bn valuations, typically identify different regulatory challenges relative to their less valuable peers. They are more concerned about consumer/data protection rules and deposit insurance. In contrast, for non-unicorns, capital requirements and KYC/AML regulations are more challenging.

Some non-unicorn fintechs that highlight the same regulatory hurdles as unicorns include Klar (lending, Mexico), Tunaikita (lending, Indonesia), and Kinerjapay (payments, Indonesia).

Some unicorns that are facing different challenges from their highly-valued peers include Yeahka (China, restrictions on pricing is a key challenge) and Ant Group (taxation and credit underwriting guidelines are key hurdles).

Regulatory hurdles for unicorn and non-unicorn fintechs