No Free Ride: Heightened Scrutiny on FinTechs, by Prasad Chintamaneni
Bankers may be reveling in some understandable schadenfreude at the recent travails of financial technology upstarts (FinTech).
Just as taxi drivers are decrying the regulatory free ride given to on-demand transportation operations like Uber and Lyft, bank leaders have been quick to point out the similarly unfair edge that looser rules have given to FinTechs. Recently, though, that edge has begun to dull.
Fintechs have been among the darlings of Digital Disruption 2.0. Technologies like robotic process automation and artificial intelligence are transforming global commerce. But recent developments suggest it’s not such a walk in the park for the upstarts.
TransferWise, an Estonia-developed, UK-based peer-to-peer money transfer service launched in January 2011, currently transfers more than $750 million globally each month, and it has been valued at over $1.1 billion. TransferWise has helped its users lower overseas transfer costs dramatically, but that’s not the whole story. In Jan. 2016, Transferwise’s losses had reportedly widened six-fold to £11.4 million or $16,540,830 in US dollars.
Wealthfront, the robo-advisory startup, has enjoyed phenomenal growth and once proudly showcase its assets under management. It now reveals assets under management (AUM) only in regulatory filings.
Firms that have gone public, such as Lending Club, OnDeck and Monetise, have seen huge falloffs in valuation since their IPOs. The reason: their overall promise and premium valuation did not live up to actual execution and near-term realization of revenue and profitability. And, their stock prices continue to languish. The recent crisis at Lending Club, where loans that did not meet the buyer’s criteria were doctored and sold to it anyway, has made matters worse. Ultimately, it lead to a board review and eventual ouster of the CEO.
Other developments have had an impact as well. In a move that signals growing regulatory attention to the fast-growing fintech sector, the Consumer Financial Protection Bureau fined online payment processing startup Dwolla $100,000 penalty for misrepresenting the safety of its data security practices. The Financial Crimes Enforcement Network fined Ripple Labs and its subsidiary XRP II a combined $700,000 for “willful violations” of the Bank Secrecy Act . And, one of the two shooters in the San Bernardino terrorist attack last December used a P2P loan on Prosper to buy guns and ammunition.
These incidents highlight the need for more rigorous customer due diligence as people conduct business with Procure to Pay platforms. Unfortunately in these scenarios, people stay anonymous, borrow and elude monitoring and measurement of how they use, or abuse funds.
Fintechs are indeed a disruptive force. But they’re also starting to attract regulatory scrutiny, which will impact how they operate and behave. It’s a change that banks can be forgiven for relishing.
Of course, it’s not all enmity between banks and their new competitors. My next post will discuss how the established and the upstarts are finding common ground.
Opinions expressed in this blog are of the author and may not represent Cognizant’s point of view.
Prasad Chintamaneni
Prasad Chintamaneni is President of Banking and Financial Services, leading Cognizant’s largest industry practice globally. Mr. Chintamaneni has led the global Practice…
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Originally published at digitally.cognizant.com on July 1, 2016.
