I caught up with marketing expert and BankNXT contributor Kevin Moseri this week. He’s an expert in online marketing, and reports on banking and fintech in the payments space. I asked him a few questions about government regulation, and how changes could affect the financial technology landscape, as well as the future of the financial sector in general.
[Shaun] To what extent do you think fintech is hindered by government regulation, and what’s being done to allow innovation to flourish?
[Kevin] Regulators often have good intentions, but their strict and often overstepping regulations can have unintended consequences. There’s no clarity. If you think about it, Shaun, who can or should provide financial services or products? Fintechs have very limited track records, which may (or may not) present a difficulty in identifying what their obligation is. Does this automatically mean that they represent a limited prudential and consumer risk? By the same token, does exponential growth present a risk blind spot? No.
As to what’s being done – at the moment, very little, and the little that is being done is uncoordinated, which leads to uncertainty. When it comes to regulation, more definitely needs to be done.
[Shaun] Is any one country doing more than another in terms of allowing fintech to grow?
[Kevin] Outside the US, I have to say the UK is benchmarking fintech growth. Europe should take notice. Not only is the UK attracting startups, the government is working with stakeholders to lay the foundation for a fintech regulatory framework. And I’m not being biased here! I hope other European governments are paying attention.
[Shaun] How could incumbent banks benefit from a revision of financial regulation brought on by fintech startups?
[Kevin] New and revised regulations will level the playing field. Banks are indeed at a disadvantage. The massive regulatory overhang over the banking sector inadvertently led to the emergence of online lending and alternative finance – unintended consequences. By bringing clarity to the fintech space, revised regulation would likely treat online lending platforms more like technology companies (we hope so anyway!), which should lower the cost of administering credit. This will definitely be favorable to banks.
[Shaun] Chris Skinner recently said that ‘regulations are far too often used as an excuse to not do something’. To what extent do you think complacency and apathy play a part in banks not pushing hard enough for innovation?
[Kevin] Chris is 100% right. The irony here is that it’s not really the regulation that’s preventing banks from innovating (although the lack of guidance from regulators about ‘how to implement’ doesn’t help), it’s how banks react to it. Think about the inherent fiduciary responsibilities that banks have to their shareholders. Many prefer predictable growth; fintech and innovation is just too ‘risky’. Then there are the perceived systemic difficulties, such as the interoperability between new technologies and embedded legacy architectures, coupled with regulatory compliance – it’s perception vs reality. It boils down to the fact that banks have a very low risk appetite, especially after 2008.
[Shaun] You recently wrote about banks having made ‘knee-jerk decisions‘ in adopting technology they perhaps know very little about. What did you mean when you said, ‘Their focus should be on capturing and analyzing customer transactions with the new mobile channels before pivoting towards a fully digital relationship’?
[Kevin] To remain competitive, banks need to use analytics on their customer data to improve the economics of acquisition through mobile channels. It’s crazy that a lot of the segmentation strategies used by banks today focus only on cost-to-serve or very generic needs. Analytics will help them redefine their sources of competitive advantage by thinking smart about customer needs. This will lead to focused and tailored innovation.
Something else that I wanted to point out that banks should do (and that most haven’t caught on to) is: banks need to choose asset classes and segments such as SME lending. The bottom line is, such asset classes still don’t have that much vulnerability when it comes to disintermediation.
[Shaun] There’s clearly room for collaboration, which I wrote about myself a few months ago. How do you think banks and fintech startups could benefit from working together, or do you think it’s a poor strategy?
[Kevin] Collaboration is the near-future of fintech. What I mean by that is that banks and fintech startups can build a sustainable ecosystem that’s mutually beneficial. Think about Fidor Bank in Germany. It came out with FidorOS3, which is an open API that can connect to existing core banking platforms to offer a range of modern services, including P2P lending, sending money via Twitter, and emergency 24-hour loan arrangements. Think of Seed bank in the US, launched by the BBVA execs. I think it was early last year. All startups have to do is to apply for bank membership, then they can use the bank’s API to build their own banking tools.
While large financial institutions aren’t 100% in, collaboration between startups and banks has the potential to pay off in a big way for both parties, and it is indeed a sustainable strategy.
[Shaun] When it comes to big data, it could be argued that banks have failed to mine customer information properly, and are now struggling to know what to do with it. How far do you agree that data is an important consideration in helping incumbent banks adapt to a customer-centric viewpoint?
[Kevin] It’s now become very important. It could be the difference between being a part of the digital revolution or being left behind and watching as fintechs build around the existing banking system (and not in collaboration!). In reality, banks should really have a competitive advantage. But you’re right, they’ve failed to capitalize on the fact that they hold the advantage due to scale and multi-service customer intelligence, which is really crazy because most are already providing innovative services such as mobile check imaging/deposits and text-based bank account updates. What they really need to do is quickly tap into social media streams in order to genuinely provide ‘always on’ programs that enrich each point in customers’ digital (and offline) journeys.
[Shaun] If we were to ask banks how they perceive themselves in terms of being a ‘follower’, a ‘fast follower’, or a ‘leader’ in the fintech scene, what percentages do you think we would see?
[Kevin] It’s funny you should ask that question. Banks have traditionally been slow technology adopters. They are laggards really, and here’s an example for you. The 2015/2016 FCA (Financial Conduct Authority) Business Plan shows that only 16% of UK banks had deployed cloud technologies across their business units, and almost half had technically no plans to invest in a customer-facing mobile strategy. So, to answer your question, I think banks would take the cynical route and consider themselves competitive and in a leadership position when it comes to innovation. The reality is, I consider only around 20% of banks as leaders when it comes to innovation. The remaining 80% of banks are just followers. Most banks simply love ‘bolting on’ new offerings to existing core legacy systems, which is unsustainable and non-competitive.
[Shaun] The payments sector appears to be showing the most disruption in financial technology, Kevin. Which areas do you think will demonstrate growth or innovation over the next 12 months?
[Kevin] 2014 was a fantastic year! 2015 is already shaping up to be a banner year for fintech. I think the next 12 months will see increased growth and innovation in two key areas:
- P2P lending platforms will see continued growth as innovation continues and SMEs continue to demonstrate an increased appetite for alternative finance.
- Domestic P2P & international remittances will see increased activity with an improved growth trajectory.
Shaun, don’t forget that Q1 2015 saw signs of increased M&A activity in the fintech space. I think that’s bound to increase over the next 12 months as well.
[Shaun] My thanks to Kevin for taking part in this interview. If you think you could expand on my questions (or Kevin’s answers), let me know in the comments below.