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What are the Barriers to FinTech Investment?

Is 2017 truly a year of investment for fintech innovation as has been suggested? A report at the end of last year by law firm, Mayer Brown, suggested that financial services firms are keen to make an investment, yet they remain cautious due to the complications presented by strict and changing industry regulation.


The report highlights the eagerness amongst financial services firms to invest in fintech and outlines main challenges posed before them. Surveying 70 financial services companies in the UK, the resulting paper demonstrated increased collaboration between ‘traditional’ financial services – established firms – and fintech firms, who tend to fall into the category of smaller, ‘disruptor’ businesses. In fact, every respondent said they expect to purchase a product or commission work from a fintech company in the next three years. This, they suggested, would present them with three key benefits: improvements in customer service, increased cost savings and the delivery of new products and services.


One of the biggest concerns for firms interested in investment, and ultimately what will hold them back, is regulation complexity. Across the market there is clearly a desire to see a change in the way that regulation is applied to business. Some would even argue that the eruption of fintech and banktech applications calls into question whether regulation, in its current format, is still relevant for financial services. Undoubtedly, some of the regulations in place are not relevant to all the new technologies hitting the market.


So, there is an agreement that change is needed. What that change is however, is disputed.


According to Mayer Brown, 60% of fintech companies would want greater self-regulation and limited regulatory oversight while 76% of financial services firms would prefer clear regulatory oversight with some self-regulation. This is an interesting conundrum which suggests that, should change be made, one side of the market will feel hard done-by.


The Financial Conduct Authority is listening. It’s been outspoken in its encouragement of innovation within the market and its support of new approaches. In 2014 it established Project Innovate to identify opportunities for innovation in UK financial services. Coming out of this have been an Innovation Hub, set up to support new ideas, and a Regulatory Sandbox, where new products and solutions can be trialled in a controlled environment.


But is regulation really such an obstacle? Peter Dickinson, the co-head of Mayer Brown’s Global Business & Technology Sourcing group, declared that when looking to make acquisition “large financial services firms are understandably risk adverse and will want to carry out detailed due diligence”. In part, this is because of regulatory compliance concerns, as well as financial and cultural issues required for due diligence.


Brexit, as you might expect, is considered as another obstacle to market development. This should come as no great surprise given that the shadow of Brexit is seemingly having an impact across all markets and industries. Nonetheless, respondents in the report claimed that there is still scope for increasingly integrated partnerships between traditional financial services companies and young fintech companies.


If this is true, perhaps it’s time that firms open their arms to embrace technology on a wider scale. At the moment, even in terms of financial promotions, regulated firms’ use of digital marketing, such as social media, has lagged some way behind other industries.


In my opinion, there’s no reason why regulated firms shouldn’t embrace digital technologies – certainly in terms of marketing. But regulation does need to catch up. It’s been struggling to keep pace with new channels up till now - the FCA’s social media guidelines were last updated in 2015, and before that had remained unchanged since 2008. The rate of technological evolution is only going to increase in coming months and years. Therefore, adaptation needs to happen fast.


I firmly believe that with clear guidelines in place, the desire for new solutions, delivery mechanisms, and customer communications channels within the financial services sector will grow. It is this desire, that is essential for the progress of the market. The success of UK fintech development lies with the ease in which companies can embrace their potential, and a lot of that depends on the regulators.



Comments: (3)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 15 March, 2017, 18:13Be the first to give this comment the thumbs up 0 likes

Neobanks, Roboadvisors and a few other category of fintechs depend on access to customer information from traditional banks / brokerages / stock exchanges and the ability to execute functionality on behalf of customers on these incumbent entities. If an incumbent cuts off this access, such fintechs would die instantly. To me that's one of the biggest barriers to fintech investments.

It could be argued that regulation will disallow incumbents from cutting off access to fintechs. But, in the event of a dispute, incumbents can easily muddy the waters by pointing out the numerous instances when LinkedIn, Twitter and other pure-play Internet companies have (a) totally cut off access to third party services or (b) tweaked their APIs in such a way that many third party services shut down by themselves because they don't have the resources to modify their applications to conform to the new API specs.

A Finextra member
A Finextra member 17 March, 2017, 11:20Be the first to give this comment the thumbs up 0 likes

Good point @Ketharaman Swaminathan. However, new API specs are something you cannot run from today. That's why you need the support of the regulators and the clear guidelines to follow. It's not always about the resources, it's about how good you are at using your potential and being able to keep up with the speed of digital innovation. A lot of t this depends on the regulator as I have already mentioned.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 17 March, 2017, 11:341 like 1 like


And, as I've pointed out in my latest blog post Innovative Fintechs Don’t Need No PSD2 Regulation, it's a bad idea for fintechs to depend on regulators.

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