“Fintech”: in search of a legal definition

by Carlos Goettenauer (PhD Candidate at University of Brasília)

During the last decade, the term “fintech” gained popularity and became a topic of discussion among market agents and financial regulators all around the world. The term’s origin, however, can be traced to the early 1990s, when Citigroup established the “Financial Services Technology Consortium”[1]. As with any other nascent buzzword, its meaning remains a subject of debate and controversy among many social actors. Market agents tend to associate the term “fintech” with innovations on financial systems and on so-called “market disruptions”, linking it to other common Silicon Valley tropes, such as “disintermediation” and “consumer-empowerment”. On the other hand, financial industry incumbents, and even its regulators, may wish to broaden the meaning of the term “fintech”, in order to fit all sorts of technological innovation under its umbrella. Considering its many possible meanings, it is time we ask whether there is space for a legal definition of “fintech”.

The law often plays a major role in reducing polysemy in contested expressions. Legal predictability and normative stability require terms to be precisely defined and agreed upon. This way, a legal definition (or even a statutory definition) of “fintech” would aid authorities in grounding their regulatory efforts, thus producing a more stable and predictable legal environment for both entrants and incumbents.

Having said that, proposing a definition for “fintech” raises two major questions.

First, we must ask ourselves whether adopting a legal definition for “fintechs” would be beneficial in the first place. In an ever-changing market, establishing a rigid legal framework to define “fintech” could be an exercise in futility, as that definition could rapidly become obsolete. On the other hand, the regulatory landscape itself has changed significantly in response to the introduction of new technologies in financial systems, particularly in the last decade. Around the globe, open banking regulatory initiatives were implemented by authorities who sought to increase market efficiency and competition. However volatile this scenario may be, a legal definition would bring stability and contribute to the creation of a predictable legal regulation — one that would be able to deal with up-and-coming business models.

Even if we agree on the benefits of a legal definition of “fintech”, one major question remains: is such definition even possible? From the very beginning, fintechs were considered the driver of innovation in financial markets. It is hard to imagine a legal framing for these initiatives in advance, predicting future business models and the impact of technology on banking activities. Maybe the whole idea contained in the fintech revolution really is beyond the reach of legal definitions.

In spite of the difficulties involved, there has been at least one serious attempt to reach a definition of “fintech”. While it is unlikely that a jurisdiction or authority ever claimed to have a statutory definition of “fintech”, the European Parliament did try to achieve a delineation that deserves some attention. In a 2017 motion for a European Parliament Resolution, the Committee on Economic and Monetary Affairs presented the report “Fintech: the influence of technology on the future of the financial sector”. In this document, the Committee established that “FinTech should be understood as finance enabled by or provided via new technologies, affecting the whole financial sector in all its components, from banking to insurance, pension funds, investment advice, payment services and market infrastructures”[2]. Furthermore, it also proposes that “any actor can be a FinTech, regardless of the kind of legal entity it is; whereas the value chain in financial services increasingly includes alternative actors such as start-ups or tech giants; whereas this term therefore includes a broad range of companies and services which differ widely from one another, pose different challenges and the regulatory treatment of which has to differ”.

Although not a legally binding document, the Committee’s report on financial technology is illuminating. It sheds light on the interpretation of the concept of “fintech” and on the likely construction of future provisions by European authorities.

First, the report indicates that “fintech” is not restricted to a narrow concept of financial activities. It is true that technology has impacted many core financial activities, and in such cases the term “fintech” can be confidently applied. But it also reached fields that are only marginally related to the financial sector. According to the Committee of the European Parliament, the concept of fintech ought to include even these borderline cases.

The report also does not exclude incumbents from the fintech definition. Traditional financial institutions may be considered fintechs when they implement new technologies to the financial system. Also, tech giants can be considered relevant players in the market, as they provide infrastructure for the value chain in the financial sector.

This definition goes against the idea that fintechs are startups companies with disruptive business models, generally associated with the Silicon Valley culture. The document offers a comprehensive concept of “fintech”, one which includes many different players. But there’s a risk in adopting an overinclusive definition. If every legal entity related to the financial sector is considered a fintech, what does this definition achieve?

All over the world, financial regulators are facing challenges presented by new technologies. Adopting a definition to the term “fintech” may be an option to calibrate the reach of any proposed regulation. However, no authority was able to come up with a sufficiently stable legal definition. This indicates that, although the term itself is not new, we are still far from reaching a consensus on what fintechs really are.

[1] Langley, P., & Leyshon, A. (2020). The Platform Political Economy of FinTech: Reintermediation, Consolidation and Capitalisation. New Political Economy

[2] Comissão Europeia. (2017). Fintech: A more Competititve and Innovative European Financial Sector. Consultation Document, Directorate General Financial Stability, Financial Services and Capital Markets Union, Brussels. Available: https://www.europarl.europa.eu/doceo/document/A-8-2017-0176_EN.html

Pictures credits: nattanan23.

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