“As Much Opportunity as Challenge”
By Russell Bennett, Chief Technology Officer, Fraedom
Wave after wave of new regulations have reshaped the global financial services landscape since the 2008 crash. Many banks have found it difficult to adapt over the subsequent decade – and the latest round of rulings, exemplified by the Second Payment Services Directive (PSD2), are putting them under even greater pressure.
PSD2, in particular, is forcing banks to make wholesale changes to the way they operate. However, in many cases, they are simply not equipped to deliver the transformative change required.
PSD2 heralds the open banking movement, which seeks to leverage application programming interfaces (APIs), encouraging innovative new technology that taps into the wealth of data that financial institutions hold on their customers. To comply, banks need to ensure they can open up their data to third party ‘regulated providers’, normally relatively young and innovative fintech companies.
The implications of open banking are huge both for fintechs and for banks. For fintechs, it enables ready access to the largely loyal customer bases of banks as well as collaborative partnerships with highly regulated financial institutions. For banks, there is the opportunity to deliver the mobile apps that customers increasingly want to use – without having to build them in-house.
Open banking is therefore driving innovation. Fintechs can provide a layer that sits in front of bank systems and plug into open APIs. Smart traditional banks increasingly see the existence of fintechs as an opportunity to build an ecosystem of apps that help retain core banking loyalty, rather than as competitors focused on stealing customer business.
The Regional Dimension
The increasingly globalised world we live in brings with it significant regulatory challenges for traditional financial institutions. As a result, international banks are increasingly struggling to adapt to the raft of regional regulations that significantly impact their operations in specific territories – but have negligible impact on them in others.
Unravelling the different requirements of the regulatory landscape is a complex task. Our approach is often to look above the regulatory requirements of one country to understand where there is a higher level or broad-brush framework that encapsulates multiple regions.
If we are talking to a bank about compliance with a local set of requirements, we will look for the broader umbrella regulations or standards that effectively supersede them or operate at a higher level. We then find we have ticked the compliance box in terms of the requirements that a particular region has, along with multiple other territories.
Another aspect of this is to focus on the most challenging and difficult to meet levels of regulation. One example is the recently introduced General Data Protection Regulations (GDPR) in Europe, which effectively replaces the patchwork of local Data Protection laws that existed beforehand. Requirements in other regions of the world are not quite so stringent or advanced. If you can demonstrate that you can meet these stricter standards and criteria banks can be comfortable that, you can meet whichever regulations exist in other regions.
It’s a different story in Asia, where regulations can be more country specific. While regulations in Europe cover the whole region, in Asia they tend to apply to individual countries and can be so strict that, as is the case in China, restrictions discourage some bigger banks from operating there altogether.
However, it’s clear that in Asia there is a mixed bag between some markets with limited levels of regulation and others that are relatively strict. When the bar is set too high, banks will default to other areas of Asia that have a less stringent regime. But operating within the boundaries of those different countries’ regulatory frameworks is clearly still vital.
By partnering with collaborative fintech providers, banks can make the technological changes they need to comply with new regulations, whether that relates to open banking or broader regulatory risk regimes. And by adopting a flexible and best practice approach to meeting new standards and regulations, they can help ensure compliance with the latest guidelines and rulings springing up in every corner of the globe.
To position themselves strongly in the financial services landscape of the future, banks need to start seeing the ongoing wave of regulation not just as a challenge but also as an opportunity. The signs are positive. They already understand that operating within the constantly shifting sands of the regulatory compliance framework is no longer the exception but the rule, and they appreciate that by partnering with fintechs and drawing on their expertise, they will be much better placed to navigate this complex landscape.