Fintech needs a voice to counter aggressive lobbying from banks
Forbes published a story this week which asked the question whether banks were friend or foe of fintech? This article was one of the first that shone a light into how some large banks were working hard behind the scenes to push for greater regulation of fintech.
Banks in Europe are increasingly splitting into two groups, those that are embracing the opportunity to facilitate great financial products by partnering with fintech, and those that believe fintech is an existential threat. The great news is that this isn’t universal, there are plenty of forward-looking banks that are embracing the opportunity, including banks like Starling, Crédit Mutuel Arkéa and LHV that work with Railsbank, to generate net new revenues by monetising as infrastructure for fintech. Unfortunately, this isn’t universal and many are taking an alternative approach to fintech — working hard to restrict the ability of fintech to compete.
Here’s the context. I recently presented to a group of central banks, finance ministries and other financial authorities from around the world at The Organisation for Economic Co-operation and Development’s (OECD) Financial Round Table on Open Banking.
The purpose of the Round Table was to take lessons from markets like the UK, where fintech and Open Banking is a little more established than most, and translate lessons learned into policy guidance for regulators globally.
However, as the only technology company in a room of delegates from over 25 countries, including heads of policy of some of the largest banks in the world and several bank associations, it was shocking to see how aggressively some banks are lobbying against fintech behind closed doors.
Fintech startups need to find a voice and find one quickly, or the implications will be far-reaching.
Fundamentally, the ground hard won for competition and consumers in Europe won’t be replicated elsewhere and indeed, may well be rolled back.
The Empire Strikes Back
Since the financial crisis, European regulators have overseen an explosion of e-money license holders, with more than 140 in the UK alone. This license allows its holders to do almost everything a bank does, except charge and pay interest, and create money. It even permits settling domestic payments directly at the Bank of England, like Transferwise began doing in April.
Quite simply, without e-money licenses, we may not have companies like Monzo, Revolut and N26.
The e-money license, along with open banking under PSD2, has lowered the barriers to entry for new financial services products. Previously, a banking license was the only option and required a two-year application process and many millions of investment — which is well out of the reach of most venture-funded startups. Today, it’s possible to launch a financial product in less than 100 days with less than 1% of that.
Lowering barriers to entry has undoubtedly been great for competition and great for consumers, but the financial crisis was years ago and banks are starting to realise it’s their time to fight back. We may not see it every day, but behind closed doors at places like the OECD, where startups aren’t usually invited, banks are working hard to redirect policy and this will have an impact on fintech startups sooner or later. It’s just a question of time.
This is how the banks articulate their argument.
The tone of the debate was set by the first speaker, the Head of Open Banking from one of the ten largest banks in the world, that started “We are in favour of competition, but….” This line was followed by all the banking associations and other banks, including one that runs one of the largest fintech-focused corporate venture funds in Europe. Their arguments were centred around two main areas:
1. Unfair competition:
a. PSD2 compels banks to share data with technology companies, but technology companies are not compelled to reciprocate;
b. technology companies were better positioned to use that data in a way that banks are not;
c. banks were not being compensated for making their data available to third parties;
d. banks felt that technology companies could leverage network effects in a way that resulted in an unfair advantage;
e. one bank was adamant that technology companies could cross-subsidise financial products unfairly, this wasn’t particularly clear to me as most banks also depend on cross-subsidisation, so I won’t elaborate;
f. regulators often are reluctant to permit banks to use cloud hosting/services.
a. a large number of new fintech competitors, combined with real-time payment systems, makes maturity transformation more difficult for banks and may necessitate more capital or result in less lending for the real economy;
b. the internet is generally a risky place, it was harder to open a bank branch than it was to open a website if you wanted to launder money and the internet has a history of illegal activity (Silk Road etc)
c. banks were trustworthy entities — customers may not be able to assess the difference;
d. technology companies generally were less able to compensate customers following data breaches.
Analysing, or refuting each of these points is another post for another time, but the overarching point here is that most are poor arguments, despite the vigour with which they were delivered. The fact remains that, with sufficient effort, a bank is able to do everything a technology company can do, but the opposite is not true — technology companies cannot offer financial products, at least without the appropriate license.
Furthermore, in the vast majority of cases, whether a financial service is provided by a bank or a fintech startup, there is a bank that is driving the payment and holding the money. So, what we’re really talking about is increased competition and margin compression as banks move from manufacturing the financial product and owning the customer interface, to providing the underlying financial infrastructure for third party’s product.
I feel the arguments about data portability are red herrings. Banks will only hold customer data for as long as they continue to sell products that customers want and, in the end, I can’t think of a fintech startup in Europe that has grown to become a unicorn using any of the capabilities made available under PSD2, despite screen scraping being available to technology companies since 1999.
Some banks believe that now is the time to push back against new entrants before larger technology companies with well-resourced policy functions join the conversation. The strategy of these banks is to use misinformation, selective truths, exaggerations and fear to drive regulatory change and reduce competition by new entrants. At the heart of it is a fear by some banks that fintech startups are just a sideshow, and the real threat is going to come from Google, Apple, Facebook, or Amazon.
We participate in places like the OECD because we are passionate about being a voice for our customers and for future generations of fintech startups. We believe that making it easier for fintech startups to operate will result in better and fairer financial products for people and businesses.
What next? Hope and a positive surprise
The good news is that, with some notable exceptions, the representatives of most countries at the OECD were polite and diplomatic. However, they were fully aware that banks were talking their own book. Also, these views are clearly not held by all banks. Railsbank works with banks around the world that believe that when they work with fintech startups, both can benefit.
The real issue is that fintech, as a sector, does not have a structured voice on this stage, to counterbalance that of the banks. By the time something makes a directive or regulation, it is too late and so startups need to get involved at this stage to help shape the direction. Railsbank will continue to push for regulation that results in better outcomes for consumers, the real economy and for entrepreneurs trying to bring better financial products into the world.