Public Policy Drivers of Fintech

Abstract: Fintech startups utilize technology to deliver improved financial services to users. Innovative business models created by them are increasingly important, because innovations have potential to reinvent the financial industry, but they also might bring additional risks. Around the world, agencies face the challenge of regulating these new entities, addressing potential risks without stifling innovation. In this paper, two empirical models are developed to examine the drivers of the fintech market in different countries from a public policy perspective. There is robust evidence of regulatory arbitrage as an important driver. The introduction of regulatory sandbox is found to be successful in promoting fintech funding, but only in pioneer countries in this approach and jurisdictions that adopt Common Law. Monetary policy has less robust direct association with fintech funding. However, exchange rate volatility and very high gross capital flows decrease fintech market attractiveness. Macroeconomic policies that reduce these sources of financial instability and promote financial market development have the most impact in the fintech markets. There is also evidence that less competitive financial sectors attract more fintech funding and that banking concentration is unrelated to competitiveness.