Whatever its level of burden and regardless of the unintended consequences, the waves of regulation that followed in the wake of the financial crisis are, to a large extent, the impetus behind much of today’s burgeoning financial technology sector.
Technological innovation is proceeding at a phenomenal pace in its own right.
The pairing up of cloud technology with platforms that harness the participation of consumers in crowdfunding for start-ups or traditional players such as pension funds in asset-based finance for SMEs are just two examples within a thriving gig economy that is rewriting the rule book on finance.
Payment technology, cash visibility solutions and FX trading platforms add to the mix.
Regulation – and the challenges it has brought for financial institutions and non-financial corporates alike – has created a market of large organisations hungry for ready solutions that will assist with the gargantuan task of compliance.
So it is helpful that stakeholders could turn to the ACT’s Smart Cash Management Conference 2018 to guide them through some of these developments and challenges.
Speaking in a panel discussion on the impact of regulation, Tony Craddock, director general of the Emerging Payments Association (EPA), said the impetus that regulation had given was significant.
“Without the financial crisis and the need to change the level of protection and address capital needs, I don’t think we would have opened the door to the flood of innovation that we have seen,” he said.
As fintech solutions gain ground, so the financial services industry is dividing into two camps.
On the one hand, there are those in a position to embrace fintech. On the other, there are players weighed down by legacy systems.
“There is a polarisation in the banking market between organisations that can leverage this type of technology, grow fast and innovate, and organisations that have legacy estates, which is super-difficult to change,” said Mike Walters, chief product officer at Form3, a start-up that provides payment, clearing and settlement services to financial institutions.
And while those infrastructures are famously complex to tamper with, those players are finding other ways to engage with fintech.
The market entry profile of competitive fintech businesses is already moving from consumer through small and medium-sized enterprises, and from transactions through to funding
“You clearly have this rapid explosion of capability, with solutions for corporates, for consumers, for banks and financial institutions,” Walters adds. “With all of that taking place, I think it causes organisations with legacy estates to think about partnerships and forces them to change.”
In the UK, the government is supportive of fintech, Craddock pointed out. Chancellor Philip Hammond announced a consultation on how digital payments fit into the economy in his Spring Statement, and on their potential role in a crackdown on money laundering and tax evasion.
Consumers meanwhile, while not engaged with the concept of Open Banking, continue to reveal the premium they place on customer service.
In an EPA survey of 2,000 individuals, 53% said they felt let down by current providers. Some 75%, especially younger respondents, said they would be prepared to trust newer service providers.
“Customers are changing; their expectations are changing. They will move to providers such as Starling and Metro if the current banking infrastructure and ecosystem don’t change,” Craddock said.
The number and variety of regulatory frameworks that corporates and treasurers grapple with is a complicating factor. If there is a common thread, however, it is towards competitiveness and accessibility.
“There are some pretty clear intentions now from regulators about competitiveness, openness, access and accountability,” said Walters.
Platforms need to be secure, open and accessible – a difficult feat to achieve. “We might not get all of that right all of the time, but I think regulators recognise that regulated platforms aren’t cost-effective, and that’s generating an environment for competition,” he added.
With FX platforms, payment tech providers have made some headway into the corporate sector – a viable funding source for corporate treasurers coming from the fintech sector has yet to emerge.
However, the traction already gained is evidence that the Rubicon is soon to be crossed, Walters argued. “It’s quite tempting to think about competition between banks, around actions such as moving accounts, for instance, but that is not what the fintech community is built on,” he said.
“It’s built on consumers, who are ultimately corporate customers, and the immediacy of that consumer’s choice for a given transaction.”
He added: “If you look at how this evolves over time, the easiest things to solve are simple one-off consumer transactions. The market entry profile of competitive fintech businesses is already moving from consumer through small and medium-sized enterprises, and from transactions through to funding, from short term to long term. That’s the trajectory.”
Low-cost, real-time, convenient and flexible cash management solutions from fintech providers are on the horizon, Craddock argued. And, while not widely adopted yet by corporate treasurers, the ease-of-use and economic arguments for adoption are gaining ground.
If the nature of finance is to match people who have excess cash with organisations that need it, argued Walters, then the existence of crowdsourcing, albeit on a smaller funding scale, validates the argument that fintech will continue to grow into the larger funding market.
Operators such as Funding Circle may start by making headway in the consumer space. However, their mechanics are familiar.
“They still operate on the basis of portfolios and they still operate on the basis of what you could call traditional bank-type credit scores,” said Walters. “One of the roles that traditional players play is to collect that latent demand and provide easy access to funds.
“My observation would be that technology is already in play that will do that. It doesn’t remove the need for banks to manage liquidity or to be the manufacturers of reserve cash, but the mechanism of capture is now not the exclusive preserve of banks.”
The fintech sector itself is at an interesting stage in its development. There are 950 payment institutions in the UK, 145 e-money institutions and several thousand payment service providers, Craddock pointed out.
“You end up with a multitude of models, certainly, and a whole heap of these will fail, but the ones that come through will provide a completely new environment,” he said.
This article was taken from the ACT’s Smart Cash Management Report 2018