The tough regulation of banks is essential to maintain trust in the sector and is one element fintech firms could find weighs on their innovation as they get more established and are required to comply, says Chris Skinner.
I’ve been at a few conferences recently, and was amused by an audience poll at one event. The moderator first asked: “Do you believe that the regulators are in the incumbents’ pockets and protect the industry from new competition?”
You may find it gratifying that most of the audience disagreed with the statement, but I thought: 'I wonder why they are asking this?'
Obviously, it is a perception that regulations protect the industry and often perception is reality. It is certainly true that to get a banking licence involves a huge amount of regulatory oversight, compliance, rules and checks. The weight of these rules and checks has grown considerably since the financial crisis, but that is because money is a sensitive thing.
Faith in regulation
I don’t trust my bank’s brand for example, but I do trust my bank. I trust them as a value store because I know they must comply with all of this regulatory oversight. By having that licence, more importantly, I know they have signed up to the consumer regulations that protect my money if they go bankrupt. In other words, a bank is a guaranteed store of value, licensed by government and insured.
It is all of these things I trust for my store of money, not the brand. It is the reason why start-ups cannot call themselves banks, as the use of the word 'bank' in a brand name is only legal if the company has a government licence.
Yes, that creates a symbiotic relationship with the regulators, but the regulators also do recognise the banks’ misdemeanours; it is why they fine them. Does it mean they protect them from competition? Not really. But it does protect them from competition that tries to do the same as what they do, without the balances and checks. It is for this reason that Klarna, Zopa, Prosper and more are getting banking licences. It is so they can offer a value store with trust. Why else would they bother?
This is why I don’t believe that the regulators collude to protect the incumbent banks from competition. I do believe they create quite a high cost of entry into the market, however, due to their regulatory requirements. But if you’re going to be storing and managing my money, I would rather you had that onerous oversight than be unregulated without proper controls.
Fate of fintechs
There was then a second, follow-on question: “Do you believe that fintech start-ups will lose their edge as they mature and have to comply with regulations?”
The audience also disagreed with this question, and felt new companies could and would be far more agile than incumbents, primarily because they are new and using fit-for-the-internet-age technologies. But I was a bit more reticent. After all, when you look at the disruptors – Google, Amazon, Facebook, Alibaba – it is incredibly difficult to maintain your edge when you grow from a few guys in a garage to a few thousand people in a global structure.
In fact, I think there are four phases for most firms. The start-up phase is where anything is possible; the growing-up phase is where you run as fast as you can to keep up with the needs of your company’s growth (hiring, training, learning, etc); the maturing phase is where you become set in your ways and find it difficult to adapt to new needs and new competition; and the old age phase is where you try and nurture your children and grandchildren to become the new leaders.
It is amazing to see how the disruptors are in the maturing to old age phase, and I know this because you can see how difficult it is to maintain that initial joie de vivre energy. Of course you cannot keep it up, but you can find ways to sustain it by continuously bringing in new blood and new energy. This is why it is so important to find new ideas that complement your original one in the way that Facebook brought WhatsApp, Google brought Deep Mind or PayPal brought Braintree and Venmo.
So yes, I think many fintech start-ups could atrophy if they don’t keep kick-starting their energy levels. In fact, it is especially true for fintechs where, as they mature, they find they bump increasingly into regulatory requirements. In other words, the things that keep our industry safe – rules, regulations and compliance – are the very things that could cause fintechs to lose their edge.
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
