Jens Bader is the chief commercial officer of Secure Trading. In this article, he discusses why FinTech firms are right to make demands from the banking industry.
UK FinTech firms are currently in talks with the Bank of England to secure access to settlement accounts, with a decision likely to be made by the end of the year.
Rights of use are currently only on offer to big banks, with FinTech firms having to pay them for second-hand access, and it’s easy to see why they are demanding change.
In order to continue providing their services to customers, FinTech firms are wholly reliant on their rivals and, if that wasn’t enough, have to give them money for the privilege.
Think of it as owning an independent burger van and having to pay McDonalds 20p for every customer served, by virtue of also selling burgers.
Why are we in this situation?
It all dates back to 1997 and the origins of electric money.
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E-money has been a slow but remarkable revolution in the payments industry, the secret catalyst behind innovation and an array of services and businesses including Paypal and Transferwise.
Today, there are many automated API driven services, made available through direct interaction and delivered without banks and traditional financial organisations – all powered by e-money.
For businesses and consumers alike, these services have had a profound impact on usability and customer experience, for instance not having to log into online banking in order to make a payment or using a third party mobile banking app that offers a wider variety of functionality and better usability compared to your bank’s offering.
Both, the European E-money Directive and PSD(2) follow a mutual objective to build a regulatory foundation and set of rules for technology to be transformed into new and innovative financial services and models.
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The ‘bone of contention’
What started with prepaid-issuing has long progressed into other, alternative B2C and B2B financial services such as online money remittance, P2P transfers, online bill payments or digital currencies.
However, whilst the regulation on these kinds of e-money institutions is quite tight, the commercial opportunities are increasingly limited by not having access to core-banking services – or due to the reliance on conflicting entities to get such access granted.
This is the FinTech industry’s main bone of contention during the BoE discussions, with Richard Wagner, head of the Emerging Payments Association, arguing that FinTech organisations already have the ability and experience required to be granted access to settlement accounts:
“We are not FinTech cowboys, this is for firms which are regulated but do not necessarily have the banking licence [including] payment institutions such as Paypal, e-money issuers like us, who have over the past 10, 15, 20 years been running a regulated entity and we believe are competent enough to run it directly.”
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What we witness here is the challenging of legacy business models and establishments.
Legacy-thinking in any industry is one of the main reasons that innovation is hampered.
Extending rights to open Bank of England bank accounts and liberating e-money issuers from the clutches of banks would be a big win for these organisations individually, enabling them and their business models to be more successful.
It would also give much more transparency and points of control back to the regulator if e-money issuers were to become further integrated. A win/win scenario, except for the big banks of course, which continue to be squeezed by the online payments industry – and rightly so.
Should ongoing discussions reach a positive outcome, UK FinTech firms would also further strengthen their leading role in financial services innovation and possibly establish a role model for other European countries to follow suit.
It’s hard to argue with Wagner’s point of view about the maturity of UK FinTech.
It has become abundantly clear that the financial services industry needs to open further still, despite having made great strides already.
We’re looking at an API-driven era ahead, with APIs helping to build more integrated and seamless systems, create better customer experience and de-couple financial services from traditional banks.
It’s time that the industry as a whole reflected this fact, updating outdated rules such as this and maybe in the future even granting third membership status extended to card schemes as well.