During my MoneyBox interview about Wirecard (see end of this blog), Paul asked me the question: how could this happen again? What’s next? And I said, we learn from our mistakes. Progress never stops. Wirecard won’t shut down FinTech. It will amend it.
This means this is not the end of Banking-as-a-Service (BaaS), but an amendment to it. BaaS is too important to fall apart now, when there are 1000s of companies and major innovation steps being taken to create a more interesting, competitive and different version of banking.
The issue here is obviously the statement I made over the weekend about Wirecard being a company within a company within a company. You might be a user of Curve or Anna Money. Curve and Anna Money were users of Wirecard Card Solutions (WCS). WCS is part of Wirecard AG. Which one is accountable? Which one has the money?
We can talk about safeguarding and ringfencing and such like, but that’s all baloney. The real question is how to make the system work safely and reliably.
Unfortunately for many the answer will be adding more regulation to the system, but that’s not the answer. What we actually need is more granular regulation, not more regulation per se.
More granular regulation would reflect the world of BaaS. Regulations would work at process levels rather than at entity levels, and accountability would be at the process level not at the entity level.
This means the future will see banks regulated and licensed as banks; but banks will bring in partners to work with them on payments, savings and investment process levels; and partners will work at specific areas of those process levels. Some companies may do merchant checkout online; some may provide investment and trading capabilities; others may do corporate treasury netting and pooling; and others may deliver wealth recommendations based upon real-time news feeds.
The list goes on and what that means is that you will see thousands of players in the financial technology ecosystem, but not regulated at the macro level. We need micro regulation.
If a company can grow to a value of $36 billion with just seven lines of code to perform merchant checkout within an app, Stripe, then regulations need to work at the level of merchant checkout within an app. What are the reserve, capital and governance requirements of doing merchant checkout within an app? The answer is probably nothing, but it is very different to asking: What are the reserve, capital and governance requirements of holding prepaid card balances within an app?
In fact, the real difference here is where there are balance holding and non-balance holdings. Regulations need to target areas where there are balance holdings and regulate at that micro level to ensure that if a WCS becomes insolvent, all of the other companies, areas, customers and processes that formed part of that ecosystem is not impacted.
This is where we seem to have it wrong right now. Unravelling a company within a company within a company is hard; unravelling the specific part of a process within a value chain based upon a supply chain should be far easier.
This is where the future will be guys. Micro regulation of processes at a granular level; not macro regulation of entities at a corporate level.
Unfortunately, what this means is yes, far more regulation; but far more regulation with clarity focused upon outcomes and principles. Outcomes and principles-based regulation at the micro level will be fascinating. I’m watching this space.
Meantime, when you get major market muck-ups, it’s not the markets that are wrong every time. It’s the market managers. That’s why regulators regularly get regulations wrong – Enron, Parmalat, Lehman Brothers, etc – but we learn from those mistakes and the markets move on. In other words, it’s not the markets that are wrong; it’s the market makers.