By Andrew Mitchell, Vice President Development and Infrastructure Support, JCB International (Europe).
America: land of hope and glory; land of the free. Except, on the latter point for fintechs, the US regulatory landscape seems anything but free. It looks to me a slow-moving behemoth where ‘harmonisation’ rarely features in regulatory lexicon.
The concoction of state and federal laws allied with the cyclical rights of objection that govern financial businesses present a strong contrast with the approach taken across Europe, especially the UK. For firms looking for a home, few places compare to London. A long history of prescient regulation—and deregulation—has fortified the City’s position as Europe’s capital of fintech.
There can be no better example of intransigence in the US payment ecosystem than the slow demise of the notoriously fraud-ridden swipe and sign. By contrast, shops in the UK may soon refuse cash in favour of secure contactless payments if they follow the trend of supermarkets piloting cashless stores. Meanwhile in Sweden, cash transactions will make up barely half a percent of the value of all payments made in the country by 2020.
The US has much to learn from its European cousins, and to some extent, whilst the eyes of US fintechs are ogling these shores, the US is making baby steps towards a great leap forward. On July 31, the Office of the Comptroller of the Currency (OCC), the national bank regulator, announced it will accept applications for special purpose national bank charters for fintech companies.
“Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale,” Joseph M. Otting, the comptroller of the currency, said at the time. The so-called Fintech Charter will pave the way for the new school to compete with the incumbents. Reading this in the UK, or across the EU, one might be wondering how on earth it took them so long.
While the US is figuring out how to compete domestically, EU and UK regulators are embracing global opportunities. In April this year, the UK’s Financial Conduct Authority announced it was considering options for a global sandbox for fintech companies. Allowing firms to test products and services in a controlled environment is supposed to reduce cost and time to market. It also helps regulators pick out appropriate consumer protection safeguards from the crowd in a very real and dynamic way.
The FCA’s proposal would foster agreements with other regulatory agencies to allow companies to conduct tests in different jurisdictions around the world at the same time and allow regulators to work together to identify and solve common cross-border problems.
While there have been whispers of similar propositions in the States, history bears scepticism. Decision making in the US can appear convoluted, where state-level dissension frequently punctures planning, a good example being Dodd-Frank legislation. Comparatively, the decision making of the EU, despite similar initial cacophonous lobbying, is seemingly a symphonic choir when it comes to post-legislative challenges.
For example, take the EU’s second Payment Services Directive (PSD2), which, among other things, forces banks to open customer transaction data to third-party companies. Considering the sensitivities about potential customer poaching, in the UK the signs are that the banks are quickly getting on with it; albeit by being lead instructively via efficient, fast-acting regulators. In fact, the UK’s history of reactive regulation has engendered a real sense here that providing competition to traditional banks will be beneficial, not only to the fintech industry, but the banking industry, and by extension, consumers.
Following the financial crisis, consumer trust and protection must be a critical priority if companies wish to avoid expensive soul-searching exercises. While the concept of open data was initially unpopular with incumbents—consumer data is, after all, a competitive asset—it is now widely accepted that fintech’s can bring value in their ability to solve very specific problems through collaboration with banks.
Financial services have been a utility-based sector with a relatively small number of players providing a largely homogeneous set of products for over a century. In the US, this remains true to a large extent, but it will be interesting to see the regulators in-action during the first wave of non-traditional FI applicants.
In a free market, more competition is healthy. Banks rarely have the dexterity or free-thinking structures to adequately solve problems that tech ingenuity can frequently fix; principles which are at the very core of the UK’s appeal and success. The UK is a great hotbed, powering contactless, mobile and other forms of digital payments, which garners attention from our strategic thinkers when planning for our future.
Developing cutting-edge payments technology to bring innovative payment solutions methods to millions with simplicity and security—is our bread and butter. Simply put, the UK provides us with an environment in which we can learn like no other.
The elephant in the room is, of course, the UK’s decision to leave the European Union, Brexit. Politics aside, given the adaptability, agility, and ingrained ability to move with the times—we remain optimistic that the UK’s pioneering spirit will remain embedded irrespective of the nuances of any final deal between UK and the EU.
To bolster that theory, Britain’s fintech industry so far shrugged off the Brexit vote, attracting more than double the amount of venture capital investment last year than in 2016. So much so, the UK overtook China in second place worldwide, behind the US, which attracted $7bn of VC money into its fintech sector. Given the size and scale of the US economy—the world’s largest consumer market—it’s quite staggering that the UK is steaming ahead. But it does.
Stateside, let’s hope the observance of thoughtful regulation, such as PSD2, will indirectly sow the seeds of innovation. Until America gets to grips with how to harness fintech quickly and efficiently it will continue to do a disservice to its millions of consumers.