Bad cop regulation will be the death of many a fintech firm

Nick Day

The days of sweet talking are over.

After the “good cop” approach from policymakers and regulatory bodies, fintech businesses are increasingly moving into the spotlight of official supervision – with tough talking “bad cop” regulators on the rise.

Last weekend, the FCA was reported to be readying a crackdown on peer-to-peer lending, while the European Banking Authority (EBA) is starting to rethink its entire approach to fintech.

With the attention of regulators shifting, the main challenge for fintechs is becoming more than apparent: they have to excel in offering a customer-centric product, while satisfying regulatory bodies which are seemingly intent on tightening the regulatory corset.

For many years, the prevailing view was that the financial sector was ripe for technological disruption – come what may – and the lion’s share of a fintech’s efforts should concentrate on the tech side of a product.

Gains were made, and many improvements delivered for businesses and consumers. However, the technology arms race approach only gets a fintech business so far – a competitor can catch up with you by adopting similar technology, which today can take just weeks.

To develop a robust, profitable business that is compliant with ever-increasing regulatory demands, you need to have significant financial and regulatory expertise.

The money transfer market is a great example of this. We are currently seeing a wave of new entrants that are all trying to get a piece of the pie and convince consumers that they have somehow “disrupted” the market. But think about the complexities that an international operation like money transfer brings with it, starting (but not ending) with endless particularities and complex regulatory regimes around the world. In this year and next, companies need to embrace a raft of complex new EU regulations, most of which hide behind cryptic names and acronyms such as PSD2, GDPR, the Fourth Money Laundering Directive, and the Second Wire Transfer Directive.

Don’t get me wrong. The interest in the sector is great for competition and the current drive for technological innovation is offering consumers more choice and convenience than ever before. However, success can only be achieved if you also invest in financial expertise within your team, leveraging the experience of people who are familiar with particular markets and models. So, the value of a fintech business is to a large extent derived from a clever hiring strategy and targeted partnerships that help underpin the “fin”. A strong understanding of how and why financial regulations have developed over time, and where they are headed, is requisite.

The “fin” expertise is also important when it comes to other parts of the operation – not only for the back office – but often for the channel strategy itself.

In fact, you won’t find many fintechs today that don’t somehow collaborate with established providers and rely on a good relationship with the financial sector. An example is start-up shooting star Monzo Bank, which leverages MasterCard’s massive, established payment infrastructure. For the money transfer market, the exploding number of people with access to bank accounts across the world means that you need classic partnership agreements with local banks if you want to be able to instantly pay money into these accounts. In these cases, the question of whether you can now put emojis into your transfer description line is the least of your customers’ concerns.

The current bubble of new tech entrants in the money transfer market can’t be sustainable. It is a highly-fragmented market, with high customer acquisition costs, and will need to keep consolidating. Sooner or later these new companies will have to sink or swim. One thing is clear: it is the companies that make use of “tech” as an enabler of “fin” who will make the cut.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles