Chiu, I; (2016) Fintech and Disruptive Business Models in Financial Products, Intermediation and Markets — Policy Implications for Financial Regulators. Journal of Technology Law and Policy , 21 (1) pp. 55-112.

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Abstract

A recent Financial Times survey indicates that the financial services sector (in mainstream terms) is concerned about the disruptive potential of several digital-based technologies as applied to financial services, such as blockchain, big data and robo-advisers. Not to mention that we have already of late witnessed the emergence of high frequency algorithmic trading, novel consumer payment devices, online crowdfunding and peer-to-peer lending. Financial technology seems to be ushering in an order for upheaval, and is defined by Price Waterhouse Coopers as a dynamic segment at the intersection of the financial services and technology sectors where technology-focused start-ups and new market entrants innovate the products and services currently provided by the traditional financial services industry’. Nevertheless, financial technology is not a new concept and should be understood in broader terms. From the development of stock exchanges to facilitate corporate fund-raising to the development of wholesale money markets where short-term financial institution borrowing is backed by collateral (rehypothecation or repo markets, regarded as a type of shadow banking), financial technology is financial innovation intertwined with legal technology to change the way finance is conducted, oftentimes as a form of disruptive innovation. "Disruptive innovation" in Bower and Christensen's framework, refers to the creation of new markets and value networks that eventually disrupt existing markets and value networks, displacing established market leaders and alliances. Financial technology is a history of many culminating moments of disruption, while the current wave of 'fintech' specifically focuses on the embedment of digital technology into financial technology, different aspects of which have, to larger or smaller extents, also required innovation in legal technology. By contextualising 'fintech' against the broader historical backdrop in financial technology generally, this article intends to offer high-level perspectives in order to frame the understanding of the disruptive potential of fintech, and the implications for financial regulation. Using the framework of disruptive innovation in a widely understood sense, the article focuses on potential revolutions of products, intermediaries or markets and the regulatory implications of such. The article will not examine in detail particular areas of fintech, but will draw from a range of examples and their key features. The disruptive potential of fintech will be discussed to highlight market themes, changes in legal technology and regulatory implications, in respect of (a) financial product development, (b) financial intermediation interfaces and/or (c) financial markets and value networks. In this way, we can critically appreciate to what extent and in what respects fintech is disruptive, and whether its disruption is relevant to financial regulatory objectives. This overview article, which provides a framework for analysing the disruptive potential of fintech and regulatory implications, is envisaged to be an anchor for more specific pieces that examine particular areas of fintech in detail. The purpose of this article is not to delve into excessive detail regarding each area of fintech highlighted. We believe that such a high level perspective is necessary so as to introduce a more coherent blueprint for regulatory thinking and design, avoiding silo-based and narrowly reactive approaches to increasingly complex financial innovation that weaves in both digital and legal innovations.

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