I was in conversation with a banker the other day and we got around to regulations and regulators, as many conversations with banks tend to do. There were some interesting reflections in that dialogue, however. I guess it falls into three categories: the way regulations used to be; the way they are; the way they should be.
Regulations used to be all about stability and resilience, compliance and audit. For most banks, regulations are a huge overhead of work. That work is done to keep the licence to trade. Like a licence to kill, the banking licence is the key to operations. On the one hand, it is a huge overhead; on the other hand, it acts as a huge protection. The banking licence is hard to get, difficult to keep and death if lost. It is the key. It acts as the biggest barrier to new competition, because hardly anyone can get a banking licence that easily. As a start-up, it used to be that you would need a minimum $30 million just to get a licence, let alone start operations. Typically, you’d need $100 million to launch a bank, and that would just cover the first year. The regulatory structure is a massive barrier to entry and that’s why banks exist in their own world, with little new competition and stable operations measured by market share. Who needs to innovate? Nothing changes.
The way regulations are now is different. Today’s regulations are designed to stimulate innovation and new competition. This is why fintech startups are doing well, because the regulators have changed. The regulators are offering fast-track licences to market based upon light regulation for lighter products. Rather than launching a full banking service with a full banking licence, you can launch a prepaid card, a prepaid wallet or a payments service with just an emoney licence. Then, as traction grows, brand gains recognition, customers join and trust increases, you then apply for the full bank licence. By that time, you have the $30 million in capital needed and the vision to succeed. You have success and some customers. You can grow and offer richer services and more capabilities. This is why Monzo, Revolut and Zopa have moved from narrow offers towards more full banking. New competition has arrived, and banks need to wake up to this, albeit slowly. Because banks are still protected by regulations with their full banking licences and, by the time these new guys widen their products and services to recognise full-service banking, banks have adapted to survive.
The way regulation will be needs to change again however, according to the bankers. Regulators regulate what they can see. They often regulate based upon past performance, past experiences, past activities and past events. They cannot regulate for what they cannot see which are future performance, future experiences, future activities and future events. Hence, they often get it wrong. In particular what they are getting wrong today is regulating by state, by country and by region. The world has moved from a physical structure with localised activity to a globalised structure with networked activity, and the Big Tech giants are exploiting this. The global internet giants act globally and have no global regulations. This means they get away with a lot more than banks do, who grew up locally with local regulations. What is needed today is global financial markets regulations set by the G20 or similar, and managed on a global basis. A standard across all markets like Basel IV but widened into all aspects of bank and financial activity.
I agreed with the first two points, but the last is too difficult. A global regulator? A global standard across all financial markets? I doubt that would happen. However, on the converse, a global standard across all internet giants to adhere to? That makes more sense. The internet giants are currently very lightly regulated compared to banks. They deal with far less regulatory overhead than almost every other industry in fact. The move towards regulating the internet giants is starting, bearing in mind that many of these giants are less than a quarter century old. Give it another quarter century and a global internet regulatory structure may be something the G20 and their brethren could implement. It will be interesting to watch.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.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...