I have spent a lot of time at FinTech conferences over the last few years contemplating the impact of PayTech, RegTech, LendTech – and everything in between – on the future of the financial services industry.
While these conferences are often long on vision, they can sometimes be rather short on reality and it is usually at this point of confluence where the importance of good old regulation comes into play.
Levelling the playing field
Earlier this year, the imposition of the second Payment Services Directive (PSD2) built on the original initiative with a view to levelling the retail banking playing field in favour of consumers. Well, that’s the vision anyway.
Levelling the playing field within payments specifically comes in the form of financial institutions opening up the initiation of payments and information services to other companies to whom consumers may want to allow access to their data.
Such companies would include the likes of FinTech-focused payments companies, technology service providers and more generalist communications networks.
FinTech the facilitator
As with all things, these relationships are often based on long-standing legacy systems and it is here that the PSD2 directive is able to offer true scalability.
While traditional providers and FinTech businesses are not diametrically opposed, those younger, more agile and technologically savvy companies are increasingly able to offer better services to those previously shut out by old school systems and bureaucracy.
PSD2 was developed with the knowledge that payments are but one area of a wider ecosystem that includes other facets of international trade such as trade finance, logistics, regulatory equivalence and currency and it is here that the initiative will really
shake up the industry moving forward.
Guardians of the data
None of this would be possible, however, without access to customer data.
The introduction of the General Data Protection Regulation (GDPR) places an as yet unrivalled burden on data holders to store, transmit and utilise data in accordance with the new rules.
Transgressions of GDPR are heavily punished – up to 5% of a company’s global revenues – so a data breach is not just a reputational risk, but in many cases an existential one.
As such, the crucial dynamic within all of this is trust. Despite the global financial crisis and numerous subsequent scandals within the financial services industry, customers remain wedded to their legacy banks.
This is where the beauty of Open Banking and PSD2 comes into play. As long as new challenger banks and financial services providers are able to prove that they are trustworthy, then it will become increasingly easy for consumers to be tempted to switch sides.
The future is bright
Despite all of the considerations outlined above, ultimately the real success of PSD2 will be largely dependent on how well regulated the initiative is.
While this may sound like an interventionist politician’s dream, when a game changing regulatory development such as this is imposed it is the maintenance and growth thereof that defines its efficacy.
Rome was not built in a day and PSD2 will certainly not be an overnight success without the right investment and regulation.
PSD2 is little under eight months old and while it is still too early to label it as a success or not, it remains the most exciting regulatory change for FinTechs since their emergence some years ago.
For me, all that remains to be said at this point is watch this space.