[MUSIC] What are the forces that shape into regulation? And how are these forces different in emerging economies compared to developed economies? These are very important questions that shape our understanding of the direction in which the FinTech base is heading. Let's kick off by unpacking the forces which shape regulatory incentives in emerging economies. Inclusive growth, and public pressure, to develop new and efficient solutions to existing problems. The first forces is the desire for inclusive growth. Emerging economies are characterized by incomplete markets with several essential financial sources do not reach a large section of the population. As a consequence, there are many who do not have access to financial services, which limits their ability to do business or save for their retirement. For example in 2014, the share of the population without a bank account was not 6% in the USA, compared to 47% in India and 66% in Sub-Saharan Africa. Such financially conclusion can hinder economic development by limiting access to credit, savings and insurance. This is why regulators in emerging economies must ensure that growth is inclusive while also focusing on economic growth. This is where FinTech can help. FinTech has the ability to reach that part of population which has been ignored by the traditional financial system. This is possible because FinTech's solutions often require low physical infrastructure costs. For example in Kenya, we have M-PESA, a successful mobile phone based money transfer and financing service. Between 2008 and 2011, the fraction of the Kenyan population outside Nairobi who had a bank account was relatively stable. However, during the same four year period, the share of the population without a bank account who used M-PESA rose from about 21% to 75%. FinTech solutions have gained favor among policy makers because just like M-PESA, these solutions can assist in making economic development inclusive. This often puts pressure on regulators as an emerging economies to have less restrictive FinTech regulations. Regulators in developed economies on the other hand do not have to worry about inclusive growth as much. These authorities are typically more worried about the disruptive effect of FinTech. And how their regulation must be consistent with preexisting laws. These difference in priorities incentivizes developed economies to be cautious with how they choose to deal with emerging technologies. Another force that often shapes regulatory incentives in emerging economies is the pressure from the public seeking new and efficient solutions. These desires are direct consequence of inefficient traditional financial institutions rampant with corruption and the lack of competition that encourages innovation. This is to the reason why the public becomes more comfortable with idea of experimenting with any new solution that could possibly make their lives easier. This kind of public pressure can result in more lenient regulatory environment in emerging economies. Once again, this is another type of change that developed economies are unlikely to face as financial serves us provided are often satisfactory. For example, before the launch of Metro Bank in 2010, the last time of banking license had been granted in the United Kingdom was a hundred years prior to that. Competition in developed economies ensures that financial institutions are continually looking to provide innovative solutions to their customers. Regulators in developed economies under no pressure, to put FinTech Solutions under less scrutiny than traditional institutions. So shouldn't we expect FinTech regulations in emerging markets, to be very relax? Well, not quite, there are several factors that prevent regulators from giving FinTech too much leeway. First, FinTech is not well understood and the impact of giving innovators a free reign is not clear, especially in under developed markets. For example, FinTech Solutions could force firms to become more competitive, which could in turn cause firms to take on greater risks to gain an edge over other institutions. Just think of run up to the Great Depression and they ruin this competition that led to regulation cue. Or by linking the weak segments of the economy to the stronger ones and decentralizing control. Financial technology could create critical inter-dependencies in the economy. If parts of the economy become too dependent on each other, the failure of one part may inadvertently lead to cascading failures of other segments, putting the entire system at risk. This is particularly dangerous in emerging markets where a large section of the population list close to a subsistence level A second factor that prevent regulators from giving FinTech too much leeway in emerging markets, is that government in emerging markets are often particularly concerned about the levels of anonymity provided by cryptocurrencies and financial technology. These concerns stand from the fact that cryptocurrencies have previously been used to loan a money and fund terrorism. For example, North Korean hackers are set to be behind some of the attacks on South Korean crypto exchanges in 2016 and 2017. Millions of dollars worth of BitCoin and other cryptocurrencies were stolen with the goal to circumvent sanctions against the North Korean dictatorship. The risk of regulatory capture also should be considered when assessing factors that influence the quality of regulation in emerging economies. Regulatory capture is a form of government failure which occurs when a regulatory agency created to act in the public interest. Instead advances the commercial or political concerns of a special interest group that dominates the industry or sector the agencies charged with regulating. This is a reality in emerging economies for two reasons. First, has to do with the extent of collaboration that has been going on in the FinTech space. Because this is a relatively new industry, regulators often seek guidance from industry players in charting a path forward. Not because regulators are incapable of implementing effective legislation but rather because it is important to balance fostering innovation, adequately protecting the integrity of the financial system. Too much industry influence could potentially jeopardize the integrity of this process. And second, developing economies tend to have less rigid infrastructure in terms of regulatory processes along minimal accountability. Because of this, some individuals within the regulatory structures may find themselves willing to take advantage of malleable legislation, again, at the behest of influential industry players. So we have seen how regulatory considerations will differ with structural differences in the economies. Emerging and develop the economies with generally have differing regulatory priorities, that extend beyond the FinTech sector. [MUSIC]
