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Model Risk and Model Governance in the Age of the Fintech

By Francesco Scarnera

To many, RegTech can be an odd choice of phrase – after all, technology and regulation are all too often at loggerheads. For example, we’ve all seen the regulatory landscape unfold exceptionally rapidly with the approaching dawn of driverless cars.

Francesco Scarnera

Francesco Scarnera

But the more I thought about it I realised that one area where this conflict is very clearly embodied is payments processing. In the past, payments processing was sold as a manually intensive service focusing on clear customer support. Innovation in this area generally focuses on compliance, efficiency and adding automation to relieve the labour-intensive nature of the task, rather than new products or creative elements.

Now, a philosophy of efficiency is all very well – until it can be completely automated. Processors provide an effective link between merchants and acquirers, and in many cases, this can be made frictionless with great code. It is certainly worrying a lot of people that processing is near the head of the queue for total automation.

But wait, you may be saying, isn’t there something else doing this already?

Yes, you’re right. PSD2 pre-empts the need to automate this. Among other changes, PSD2 means that merchants can act as their own payments processors without needing to use a service like Visa or PayPal.

This isn’t a technological change. It’s regulation preceding technological change. Even prior to the regulation coming into force, Facebook had been rumoured to be looking into the possibilities. It registered for a money transfer license in 2014 and very recently launched Facebook Payments, which allows consumers to send money over its messenger service.

Despite this, we have seen relatively new players emerge and navigate the regulatory hurdles of payments processing. I recently spent a very pleasant and interesting few hours with the head of innovative payments processor, Stripe. Their philosophy is extremely customer oriented – they know what the customer wants, and offer a simple, frictionless service for other financial bodies to plug into.

Now I know Stripe has been around since 2011, but to me it represents a company that really gets what next-generation service is all about. It’s about ease of interconnection, ease of use, clarity of mission – and above all, transparency. It’s focused on making life simpler, more elegant and focuses on the technology and the problem, not the industry – perhaps this is why it succeeds!

When you look into it, the intersection of regulation and technology is a two-way street, a dance between highly skilled, highly trained professionals, organisations and governments.

And when I think about it more broadly, isn’t all tech RegTech? All technology and conduct on technological platforms is governed by some form of regulation, making it one of the broadest, most interesting spheres of professional life.

Those RegTech specialists certainly have their work cut out for them!

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