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Innovation with compliance is difficult

I’ve been at a few conferences this week, and was amused by an audience poll at one event. The moderator first of all asked:

Do you believe that the regulators are in the incumbent’s pockets and protect the industry from new competition?

You may find it gratifying that most of the audience disagreed with the statement, but I thought: I wonder why they are asking this?

Obviously, it is a perception that regulations protect the industry and often perception is reality. It is certainly true that to get a banking licence involves a humongous amount of regulatory oversight, compliance, rules and checks. The weight of these rules and checks has grown considerably since the financial crisis, but that is because money is a sensitive thing.

I don’t trust my bank’s brand for example, but I do trust my bank. I trust them as a value store because I know they must comply with all of this regulatory oversight. By having that licence, more importantly, I know they have signed up to the consumer regulations that protect my money if they go bankrupt. In other words, a bank is a guaranteed store of value, licensed by government and insured.  It is all of these things I trust for my store of money, not the brand. It is the reason why start-ups cannot call themselves banks, as the use of the word bank in a brand name is only legal if the company has a government licence.

Yes, that creates a symbiotic relationship with the regulators, but the regulators also do recognise the banks’ misdemeanours. That’s why they fine them. Does it mean they protect them from competition? Not really. But it does protect them from competition that tries to do the same as what they do, without the balances and checks. It is for this reason that Klarna, Zopa, Prosper and more are getting banking licences. It is so they can offer a value store with trust. Why else would they bother?

This is why I don’t believe that the regulators collude to protect the incumbent banks from competition. I do believe that they create quite a high cost of entry into the market however, due to their regulatory requirements. But hey, if you’re going to be storing and managing my money, I would rather you had that onerous oversight than just be some rogue agent like Mt.Gox, the hacked and bankrupted cryptocurrency exchange.

There was then a second follow on question:

Do you believe that FinTech start-ups will lose their edge as they mature and have to comply with regulations?

The audience also disagreed with this question, and felt that new companies could and would be far more agile than incumbents, primarily because they are new and using fit-for-the-internet-age technologies. But I was a little bit more reticent. After all, when you look at the disruptors – Google, Amazon, Facebook, Alibaba (my GAFA) – then it is incredibly difficult to maintain your edge when you grow from a few guys in a garage to a few thousand people in a global structure.

In fact, I think there are four phases for most firms. The start-up phase where anything is possible; the growing up phase, where you run as fast as you can to keep up with the needs of your company’s growth – hiring, training, learning, etc; the maturing phase, where you start to get set in your ways and find it difficult to adapt to new needs and new competition; and the old age phase, where you try and nurture your children and grandchildren to become the new leaders.

It’s amazing to see how GAFA are in the maturing to old age phase, and I know this because you can see how difficult it is to maintain that initial joie de vivre energy. Of course you cannot keep it up, but you can find ways to sustain it by bringing in new blood and new energy on a continual basis. This is why it so important to branch out and find new ideas that complement your original one in the way that Facebook brought Whatsapp or Google brought Deep Mind or PayPal brought Braintree and Venmo.

So yes, I do think that many of the FinTech start-ups will eventually start to atrophy if they don’t keep kick-starting their energy levels. In fact, it’s especially true in FinTech where, as they mature, they find they bump into the regulatory requirements more and more. In other words, the things that keep our industry safe – rules, regulations and compliance – are they very thing that could cause FinTech firms to lose their edge.

It was an interesting discussion and gave me some food for thought, as you can see. Would love to know if you have any thoughts on this.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Cedric Neve

    I have a comment being in the start-up and regulated position. In late October 2017, Digiteal got a payment institution licence from the national bank of Belgium. Digiteal is providing e-invoicing and e-payment services. We were stuck in late 2016 waiting for banks to support an open EU QR payment standard and we finally decided to get a licence to perform the payments ourselves. It was a big risk but in retrospect it was not only worth it but it also opened up a lot of doors and gave us a market in which to scale with almost no more burdens (EU market thanks to freedom to operate passporting).

    As you wrote, it is quite complicated to get the licence and those compliance rules are necessary. But if you are in this business to make things move you sometimes need to comply and change things from within the boundaries set by regulation. In the end, it’s worth it.

    I enjoy your posts. Thanks for that,
    Cedric

  • Valeria Gallo

    I think I agree overall. There is plenty regulators could to to reduce unnecessary regulatory/reporting/supervisory burdens. If they themselves innovated more substantially (e.g. machine readable regulation and handbooks), it would reduce the barriers to entries w/o reducing any of the safeguards. But in general, as you say, I don’t think regulators are in cahoots with the incumbents. In terms of start-ups I think it is a necessary part of the innovation process to separate the wheat from the chaff. If you went to play in or close enough to the financial services space but did not equip yourself with the necessary talent, expertise and resource to comply and manage your regulatory requirements, you made a significant mistake.

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