Tue, 26/11/2019 - 17:01
Fintech has unleashed a golden age of innovation in consumer financial services. Highly specialised, free from legacy, and often able to bypass bank regulation, new entrants have gone after every piece of the banking value chain, reducing friction and addressing unmet needs, according to a new report GlobalData, a leading data and analytics company.
The company’s latest report, ‘Fintech – Thematic Research’, reveals that fintechs have proven to be more beneficial to customers than over a century of consumer protection regulation. Regulators worldwide are enabling fintechs through various supply and demand-side initiatives.
Listed below are the key regulatory trends enabling fintech, as identified by GlobalData.
GlobalData expects the most disruptive and fastest-growing fintechs to emanate from open banking. Typically enabled by application programming interfaces (APIs), open banking makes direct-to-consumer fintech business models more viable.
The service can combine elements of fintech, property tech and health tech in ways that could render entire processes, products and provider types irrelevant.
Fintechs have also lobbied effectively for risk-based regulation. In response, the Office of the Comptroller of the Currency (OCC) in the US has proposed a special-purpose national bank charter that would allow fintechs to operate nationally without having to meet stricter regulatory and capital requirements dictated by a full charter.
Hong Kong has introduced a series of new virtual banking licenses, with Singapore and Taiwan to follow suit. Similar efforts in Australia have seen three new banks (Volt, 86 400 and Judo) get full licenses, along with a restricted license for Xinja.
Authorities are clarifying sandbox environments for partnerships. The Financial Conduct Authority (FCA) and Monetary Authority of Singapore (MAS) have done this in complex and esoteric areas such as automated advice for mortgages.
Regulators have clamped down on punitive overdraft charges, interchange fees, mis-selling of payment protection insurance and hidden fees in commissions. In exposing the true cost of financial services, regulators are making the cost differential between incumbent services and fintechs more apparent.
The Basel III regulatory framework raises the cost of business for incumbents. In the US, the Consumer Financial Protection Bureau (CFPB) increases the cost of business with guidance on loan qualification and capital requirements, as well as rising the frequency of reporting.
However, firms such as Prosper and LendingClub are funding in a way that requires less capital to be held on their own balance sheets. Non-bank fintechs earn more from interchange fees than incumbent banks.
Bank regulation is a massive commercial opportunity for fintechs. Most recently, Danske set aside USD8 billion to cover likely fines for a USD235 billion money laundering scandal. Firms such as Money Catcha and RegTek.Solutions use machine learning, artificial intelligence (AI), and APIs to help big incumbent banks limit potential reputational and pecuniary damage from anti-money laundering and Know Your Vendor (KYV) violations.
General Data Protection Regulation (GDPR) prepares banks for the growing importance of digital, data-driven business models. Fines of up to EUFR20 million, or 4 per cent of global turnover, can be inflicted on organisations failing to obtain permission to process data. Since GDPR was passed, other countries such as Argentina, Australia, and Brazil have begun implementing similar rules.
The US is likely to adopt a federal law on data protection very soon. The state of California enacted the Consumer Privacy Act, which is due to come into force in 2020.
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