Recent history has seen increasingly higher levels of investment being poured into the FinTech industry year-on-year. Whilst 5-10 years ago much of the literature within the FinTech space focused purely on FinTechs entering and disrupting the financial world and potentially taking away and eroding banks business, in recent years banks and FinTechs are progressively moving towards closer collaboration and partnership.
The term ‘FinTech’ has become a buzzword on a similar scale to ‘Basel IV’ or ‘blockchain’, yet remarkably there is no widely agreed definition of what FinTech actually means. The Center for Financial Professionals conducted research within the financial industry which highlighted this fact. Whilst we all know that ‘FinTech’ stands for ‘Financial technology’, perceived definitions within the industry have varied. Some define FinTech as anything using technology to disrupt the world of finance, whilst others define it as anything that invokes technology into their products used to compete or collaborate with financial institutions. With FinTech a topic invoking such a high degree of debate we undertook extensive research ahead of The Center for Financial Professionals’ upcoming FinTech Europe Summit taking place on November 14-15, London. This piece will assess three of the key areas that came out of this research as upcoming challenge areas for innovation, strategy and FinTech professionals from financial institutions; which vary from the interaction and collaboration between banks and FinTechs, the regulatory environment and upcoming PSD2 requirements & uncertainty.
During the research the most prominent area and theme that came out was around the old age competition vs collaboration debate. Many FinTechs are formed aiming to directly compete with banks, offering nimbler and more innovative services that benefit the everyday customer. They often offer low-cost solutions that consider the end user and increase useability. The recent growth of challenger banks is a good example of these new competitors and include institutions such as; Monzo Bank, Starling Bank and Atom Bank. These challenger banks provide a service that competes and challenges with traditional banking strategy and offerings, or ‘challenge’ the banking model. However, the last 2 or 3 years has seen more of a shift to FinTechs and banks collaborating. Many of the established firms have realized that FinTechs can offer faster more agile technology that can benefit them and their customers. Similarly, FinTech companies lack the experience, knowledge, capital and clout that banks do, meaning both parties see the potential opportunities and benefits from collaboration.
Many banks have started to launch innovation labs or hubs to enhance their ability to collaborate with start-ups and many are starting to see the benefits. However, ensuring that partnerships between FinTechs and banks are effective is no easy task. Startups often have to integrate with far larger organisations, not only can this be a cultural shock, but both players often have to align their expectations to the realities of their new alliance. Banks are traditionally slower, with older legacy systems and so FinTechs have to adapt to this change. Likewise FinTechs do not necessarily have the knowledge of their far larger counterparts, and so it is often a considerable investment of a banks time and resources. There are many organisational challenges that surface when banks and FinTechs collaborate with each other, unsurprising given that partnerships of any form often involve a period of integration and adjustment. However, the industry has shown that the benefits of collaboration can often far outweigh the drawbacks.
An additional area that surfaced throughout the research was on the regulatory environment surrounding FinTechs and banks and overcoming the potential challenges of regulating the FinTech industry. As FinTech companies are structured so differently to banks there is a big question over exactly how to regulate FinTech companies. FinTechs often have completely different make-ups even between themselves, so whereas regulators have the ability to tarnish a large regulatory brush over banks, for FinTechs it can be more of a challenge. The UK is arguably furthest ahead in this regard with the original design of the FCA Regulatory Sandbox where supervisors are almost assigned onto individual FinTechs who register in the Sandbox. This demonstrates almost an acceptance that the FinTech industry is a challenge to regulate in its entirety, and so a more individual approach can be more successful. However, there is no doubting that as a whole the FinTech industry has not be regulated; hence the question of how deep should FinTech companies be regulated?
The connotations of FinTechs not being regulated are widely discussed. FinTechs are not subject to such tight restrictions and regulatory guidelines as banks are, meaning from this angle FinTechs have a competitive advantage over banks who have to go through sometimes arduous processes to comply. On the other side of the coin FinTechs do not have the knowledge and experience in dealing with regulators, likewise for the regulators FinTech is somewhat of a new area for them and so they are trying to delineate how to interact with startups, something they have a limited resource pool and expertise in doing. It will be fascinating to see in the future exactly how the FinTech industry will be regulated. When you couple with this the potential impact that Brexit could have on retaining the best and most innovative talent, there is a fine balancing act between retaining this talent and ensuring FinTech companies are not put off by increasing regulation.
2018 is seen as a watershed year in terms of regulatory implementation deadlines, none more so than the upcoming PSD2 requirements, which comes into effect on January 13th 2018. The research indicated that preparing for PSD2 and navigating the uncertainty surrounding the directive is one of the key focus areas over the coming 12 months in particular. PSD2 aims to increase competition in the payments space, but the uncertainty for banks and Fintechs alike is of cause for concern. One of the most hotly debated areas is the current state of the Regulatory Technical Standards (RTS), whilst discussion between the regulators and industry bodies is on-going the RTS has not been finalised. Questions arise such as who to register with as a FinTech and how are banks going to get that list? Therefore, banks are developing projects and programmes based on assumptions at the moment rather than what will necessarily happen. This uncertainty has characterized PSD2, for example there is a lack of clear framework for what a trusted third party is, as well as questions over whether PSD2 leaves the door open to screen scrapping. Similarly, PSD2 gives a window of opportunity for third parties, including Fintechs, to access banks data on customers, in this case through APIs. This is something that has always been closed to them so from a FinTech perspective PSD2 is a way of monetizing this opportunity. However, for banks the question arises over how they comply with third party access whilst still ensuring data integrity? In its entirety PSD2 holds many challenges for banks and a collective uncertainty as the implementation deadline looms.
These are only a snapshot of some of the challenges within the FinTech industry, but there is no doubting that this is an area that will continue to grow as banks and fintechs increasingly look to collaborate. The findings of this research will be illustrated on November 14-15, 2017 at our FinTech Europe Summit, which addresses a range of challenges and topics within the industry including the interaction and partnership of banks and Fintechs, the regulatory environment, PSD2 and much more. The event boasts a range of institutions to give their insights on the collaboration between FinTechs and banks in order to advance processes, technologies and efficiency.
The agenda for the FinTech Europe Summit, 14-15 November can be viewed here, http://www.cefpro.com/fintech-europe