State of the market:
The use of technology clearly continues to be of critical interest to both established financial institutions and new ‘challenger’ entrants to the market – a trend which is only set to accelerate as we continue to see innovation in payments, identity verification and the use of blockchain, not to mention P2P platforms and the expansion of the challenger banks. As reported recently, for example, our client Atom Bank is leading the way in the equity capital raised by the four biggest UK tech banks (alongside Mozo, Tandem and Starling) which we’ve been pleased to be involved with.
Last month (March), through our US strategic alliance with Womble Carlyle, I took part in a prominent Fintech forum, organised by the George Washington University Center for Law, Economics & Finance in Washington, D.C. The forum brought together regulators, thought leaders and industry executives from all segments of the financial technology industry to discuss the ‘The Global Reach of Financial Innovation’. In leading a panel discussion on regulatory developments in ‘Fintech Abroad’, I had the opportunity to discuss the current state of affairs with a broad range of stakeholders, including senior representatives from the Office of the Comptroller of the Currency (the primary US regulator of federal savings banks and saving and loan associations), the World Bank (very active in an advisory role in the developing world) and various Fintech think tanks.
What was striking was the general consensus (including among regulators) that Fintechs are developing much quicker than the regulatory environment in which they operate. So, not only are regulators trying to catch up, they are looking to collaborate on an international basis to share experience and good practice.
It’s often reported in the UK that this jurisdiction is one of the most progressive regulatory environments as far as Fintech is concerned, with Project Innovate, the FCA’s sandbox, the Open Banking initiative (allied to developments in PSD2) and more recent developments such as the Fintech Delivery Panel launched by HM Treasury/Tech City UK (in January 2017) and the Bank of England’s new Fintech community (launched on 17 March 2017). That view was certainly borne out by a broad cross-section of forum participants, with many other jurisdictions looking to the UK to help shape their approach.
However, it’s clear that we also need to be aware of the different mandates given to regulators, as that has a direct impact on the approach Fintech businesses might expect. Going back to the UK for example, encouraging competition in the market is all part of the brief for the FCA. In contrast, the OCC in the US has had no such mandate, so is focussed squarely on avoiding risk/contagion within the financial system. Couple that in the US with a combination of state level regulation as well as federal oversight and that makes for a rather trickier playing field – as can be seen from the OCC’s current experience in trying to formulate a federal charter for Fintechs.
Fintech in developing countries:
Turning away from the perhaps more beaten track in Europe and the US, there is a lot happening in Fintech in developing markets including India, Indonesia and Mexico (to name just a few) with an explosion of Fintech activity and investment taking place in China.
Perhaps there’s also less fanfare about financial inclusion than there should be. On a cross-jurisdictional basis that was the message conveyed by many, with developing countries particularly focussed on how technology can be used to address the needs of the unbanked or underserved.
Seen as a particular growth area is the use of ‘alternative data’ (non-financial payment related information) and how that can be applied to open up access to the financial and payment ecosystem for those to whom it may have historically been closed due to a lack of formal credit history.
One only needs to think about the amount of information available from schemes such as M-Kopa in Kenya, Tanzania and Uganda (which, as of July 2016, had connected over 450,000 homes to affordable solar power in return for daily payments) and how that could be used to build up a picture of credit worthiness for those involved.
This is of course closely linked to financial independence – a key plank in the battle against poverty and inequality – topics often far from the Fintech news in Europe but which are just as valid here in their own way.
Collaboration is key:
What’s also interesting is the level of collaboration involved in the Fintech industry. Not only are regulators in regular contact with one another, there are a growing number of strategic alliances being formed between Fintechs and more traditional incumbents – a trend we expect to continue in 2017 and reflected in some of the investments being made by established players in smaller Fintech organisations.
The propensity to ‘tech’-ify all manner of concepts also continues to gather pace, with discussion now turning to the relatively nascent area of ‘SupTech’ (tech specifically designed for regulators and moving yet one step on from ‘RegTech’). Regulators are starting to look at the technology they are using and how tools can be rolled out to enhance their ability to monitor their charges more efficiently, with some forecasting an eventual move to real-time data sharing to facilitate this (Austria’s OeNB reporting initiative being cited as particularly interesting here).
Fintech, the use of ‘Big Data’ and collaboration are all combining to present a myriad of growth opportunities for financial institutions across the globe, with regulators finding it challenging to keep up with the pace of technological change.
To help bridge this gap, there will need to be an effort by the private sector to convince regulators of the reliability of the tech being used and the checks and balances involved in the creation/operation of the bespoke algorithms underpinning these platforms.
We may also see more of a ‘wait and see’ / outcome-based approach to some regulation, rather than a prescriptive one, to try to keep pace with technological advances. Either way, with many emerging and established markets looking to the UK for direction, it’s an extremely interesting time to be working in the industry.