Friend or foe? It does not matter how you view FinTechs – they are here to stay and they are helping innovate and disrupt our personal and business lives.
Once the elephant in the room, Financial Services companies can no longer ignore the double edged sword that FinTechs represent – yes they can be a competitor but they can also be a change driver for traditional Financial Services companies. Many traditional providers are looking towards FinTechs as an alternative source of innovation to their own NPD and service delivery functions. Most of the mainstream Financial Services companies have some sort of FinTech focused hub, lab, investment programme or, as we have seen more recently, mentoring programme.
FinTechs are now seen as an opportunity rather than a threat by traditional Financial Services companies. FinTechs are not shackled down by archaic legacy systems or the compliance web that most incumbents have to deal with on a daily basis. FinTechs are creative and nimble. They provide incumbents with the opportunity to build and launch disruptive technologies faster and also more cheaply. The challenge for traditional players is who to invite to their party – the invite list changes daily as some start-ups fall by the wayside and those providing a solution to different business challenges mushrooms. The solution (and the challenge!) is picking the right FinTech or FinTechs that will help deliver scalable solutions.
Regulatory winds of change
We have also seen the regulatory landscape change to become more accommodating to FinTechs as regulators move to open up the Financial Services industry and reduce any barriers to entry.
The Payments Services Directive 2 (PSD2) has become a key talking point in the European Financial Services industry. Regulation is always a talking point but what is interesting about PSD2 is that part of this regulation stipulates that Financial Services companies, i.e. the banks, must give FinTechs access to their systems in order to access / pull customer data and to initiate payments. This regulation is planned to come into effect in January 2018 and applies to all EU member states.
This is a massive win for European FinTechs and one that has left many incumbents scratching their heads and working out what this will actually mean for them in practice.
Now for the caveats. Third parties must have a licence to provide payment services and the end customer must give their explicit consent to this access.
The licence point now brings Brexit into the picture – yes, we cannot escape it! One reported impact that the UK’s vote to leave the EU could have is the end to passporting rights (allowing a European FinTech with a licence in any European country to sell its services and products into all other European countries). The end of passporting may mean that UK-based FinTechs will not be licenced in the EU and would need to secure an additional licence in each EU country (and vice versa for any European FinTech looking to sell its services in the UK). Whether this will be the case is yet to be seen.
Some darker forces may also be at play that means despite the good intentions of PSD2, FinTechs may not actually be able to play as freely at the party as the invite might have suggested. We have heard rumours of some European countries proposing new regulation which actually will make it more difficult for new businesses to start-up. This would obviously have an impact on FinTechs. It is not clear whether these are intentional developments as a means to regulate FinTechs and protect the incumbents or whether they have been created irrespective of FinTechs.
Governments and regulators from around the world appear to have adopted different approaches to regulating the FinTech industry. These approaches could be summarized under three headings:
- Active approach: Governments and regulators work closely with FinTechs and listen to their requirements and concerns when drafting any new regulation to help create a fertile playing field and to overcome any potential hurdles before they become barriers. This approach could also involve the Government and regulators helping FinTechs comply with regulations, including actively working with start-ups to help develop their offering so it is more aligned with any regulation. This approach can also encapsulate any initiatives that help country domiciled FinTechs expand internationally, e.g. through initiatives such as FinTech bridges. The UK is an example of this approach.
- Passive approach: This is more of a laissez-faire approach whereby Governments and regulators reframe from providing any supportive or restrictive regulation – essentially leaving things to take their own course and for FinTechs to make their own success. This was the German regulator’s (BaFin) original approach although its approach has moved more towards an active one as interest in FinTechs skyrockets. Singapore is also an example of this approach after its Central Bank stated it will only start to regulate FinTechs when they grow to a sufficient size to pose risks to the wider financial system.
- Restrictive approach: As the name suggests, this approach limits the progression of FinTechs through restrictive regulation. This is probably less common but the U.S. could be cited as an example. Each US state has a different regulatory body which could cause an expensive compliance headache for any FinTech looking to sell its services across the country.
Time will not only tell us if and what amendments are made to PSD2 but also in which direction the winds will blow in different countries regarding FinTech regulation – will it be a headwind or tailwind?
One thing is clear though, FinTechs will increasingly join the party. Some will reply to the industry’s formal invite, others will simply continue to gate-crash the party!