By Andrew Mitchell, VP Development and Infrastructure Support at JCB International
The financial landscape is changing at a dizzying pace. In a sector purposefully designed around tightly-controlled checks and balances, the prominent fintech start-ups seem to be having difficulty adapting as they grow. It’s a classic scenario that many start-ups face across all sectors as they mature, but in financial services, which is one of, if not the, most heavily regulated, it goes beyond the typical company working culture and surface level PR issues that we’ve seen with the likes of Uber, as the unstoppable ‘move fast and break things’ force hits the immovable object of regulation and compliance.
The thing is that for all the shiny interfaces and hyped-up TechCrunch profile features, fintech disruptors haven’t been operating on the fringes. Far from it. These businesses have been supported from the get-go by the very heart of the financial regulatory system. The second payments services directive (PSD2) opened the banking landscape to a range of innovative providers who could challenge convention. It invited non-traditionalists to the party who blew apart staid structure in favour of transparency, speed and convenience.
The problem is that whilst entrepreneurs can play around in small teams in the FCA’s regulatory sandbox early on in the development process, the underlying regulation still needs to be accounted for as they grow. The fact is that fintech start-ups are like icebergs. What people see, the sexy interface, appears to be the whole thing, but in reality, the majority of the operation – the rails and systems underpinning the company – is hidden below the surface and is no different to any other financial organisation. For modern fintechs and providers to function well, they still need a solid grasp of finance’s founding principles, something that can take years of training and experience to acquire.
As a result, we’re starting to see some of the revolutionary fintech solutions falling foul of unforeseen problems on the regulatory side as their rapid expansion marries with the overwhelming complexity of upgrading compliance systems with a constantly shifting nexus. The recent problems that beset Revolut regarding it’s monitoring of high-risk transactions are a worthy example.
There are many reasons why such challenges might not befall the larger established institutions. With more experience of the entire ecosystem, red flags are easier to identify. Size can be a benefit as it provides the resources to invest in the technologies and specialists required to keep on top of the churning wheel of regulation. But growth of the established institutions has also been slow – glacially so in some cases. There has been no need to react with quite the same degree of immediacy as fintechs seem go from nought to 60 in the blink of eye. Finally, the simple fact is that, having been around the block themselves, the established financial brands will also have made their fair share of mistakes and learned from them.
Considering their trajectory, speedy learning is vital for fintechs that find themselves in challenging situations, many are doing just that. Bringing in industry veterans from the corporate world onto the board as non-executive directors and advisors, certainly seems to be a sensible strategy, a simple perusal of the website of most neo-banks generally shows the wealth of relevant industry experience in their boardroom composition.
What this demonstrates though, is the need for traditional and new to come together more than ever before. Much has been written about established banking brands needing the support of new, agile technologists to help bring the former into a more responsive and transparent age. Less has been said about these new entrants’ need for sage guidance and support.
Fortunately, collaboration seems to come as second nature in the fintech world. Often, many of these new companies are designed specifically as point solutions. On their own they only solve perhaps one or two consumer problems, although there are handful that are maturing towards a full-service financial solution that the traditional market might recognise, like Atom and Metro Bank.
As point solutions, these businesses are comfortable with being part of an ecosystem that can morph and realign to suit any number of highly personalised customer needs including underpinning the services of traditional operators; who in turn can bring established brand names and the trust that engenders into any relationship. That trust is built on decades, centuries even, of banking security and compliance and is critical in maintaining a relationship to consumers. Simply put, consumers are currently willing to sample fintech, but their conservatism seems to preclude wholesale market adoption.
We are beginning to see the fruits of partnership in the marketplace. Wells Fargo’s Startup Accelerator fosters solutions for enterprise customers and looks to fintech startups like Edquity, Hurdlr, Redrock Biometrics and SimSpace to help the bank explore innovations in payments, AI and cybersecurity. Fintechs are continuing to attract significant investment, $4bn in the third-quarter of 2017, according to CB Insights. The strength of their propositions is recognised.
Through fintechs, traditional providers gain access to rapid innovation, new customer solutions that are being demanded here and now by an increasingly impatient client base. Through established banks, fintechs gain access to established customer bases and deep sector understanding and expertise.
This is not an either/or race. Alone, there is a very real chance that any institution – the young and risky or the old and staid – might flounder. Together there is a real sense that they become stronger than the sum of their parts.