The convergence of regulation and technology is inevitable. When trust models are translated into software then compliance will become affordable to fintech startups. It is what will drive the next massive boom in the sector and allow them to truly compete with the armies of lawyers and compliance resources at the disposal of the incumbents.
Australian regtech has government backing
In Australia, the subject of regtech is high on the agenda of local regulators and politicians. Last Friday federal Treasurer Scott Morrison, in a speech to around 200 members of Sydney’s fintech community, indicated “regtech” will drive efficiencies in the Australian financial sector by creating “a regulatory system which is technologically advanced”.
So there is appetite for innovation all the way to the top. But this positivity is often tempered by the regulatory hangover post 2008, and the sharp uptick in compliance activity across the world. For those new to the sector it is an overwhelming burden and a barrier to entry. Warm words about regtech can feel for many fintechs, small businesses themselves who sit at the on-boarding coalface, more like a pipe dream than a reality.
Small fintechs caught in regulatory ‘No Man’s’ land
Small business owners running remittance services and bitcoin operators know this only too well, progressively being ‘de-banked’ by major Australian financial institutions who increasingly refuse to provide bank accounts to the sector. Banks cite the high cost of conducting due diligence on these customers as the factor behind account closures, some pulling out of the remittance sector altogether. Scrutinising these accounts in order to comply with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) is simply not profitable they say.
Ironically, many remittance and bitcoin operators who toe the line with the regulator, by listing themselves on AUSTRAC’s Remittance Sector Register argue this is being used as a ‘red flag’ list by banks, in order to facilitate closures under the guise of AML. The regulator has indicated it does not support the wholesale closure of accounts, however given AUSTRAC cannot force banks to reopen accounts, it is little relief to those who have already been affected. Small business owner Ram Karuppiah is one Darwin based money transfer agent claiming to be a victim of such ‘debanking’ practices.
Regtech and data inextricably linked for challenger banks
While regulation is forcing some emerging business types out of business altogether, challenger banks and financial institutions who have been granted licences are not without their own problems.
Incumbent banks own a vast amount of data on their customers, while challenger banks on the other hand own next to nothing, forced to start from scratch in a world where centralised data repositories are few and far between and KYC checks are more onerous than ever. And while banks themselves face massive data cleansing issues, this sort of housekeeping task doesn’t halt revenue flows. Not being able to on board in a challenger bank does. The word bank is a generous one, and covers a multitude of product lines, which not all challenger banks may operate within. But regulation for the most part fails to capture this nuance.
Sharing the KYC burden for small business
Partnerships is a recurring theme in small business banking and fintech. The complexity of the space and the traditionally high on boarding costs are what have kept banks from overly investing in the sector to date. These problems don’t go away for challenger banks. But what challenger banks can do is share the burden of data collection and verification through mutually beneficial partnerships.
A natural fit could be a large telco partnering direct with a challenger bank. We are already seeing telcos diversify into non traditional areas as they seek new revenue streams amidst an increasingly digital landscape. Australia’s largest telco, Telstra, has already pumped over $100 million into the sector, acquiring health technology assets across Australia and Asia. The company isn’t holding back on fintech either, investing in Singaporean voice tech startup enepath.
Regtech can be approached in a top down manner, by pushing regulatory bodies to be more agile and flexible – here we see the often lauded sandbox approach wheeled out.
But government led changes take time, and time is money. Fintech startups often don’t have much of either. Which means working smarter not harder is often the way, finding regtech solutions within existing frameworks. Halving the burden of data collection could mean halving the cost of compliance, and telcos and challenger banks leveraging each others strengths could lead to huge wins for small business owners in the cross fertilisation of banking and technology.
What is clear is that some of the early wins in fintech have already been found. The real nut to crack now is making fintech and regtech work harmoniously together. The problem is large, and often overwhelming, so a simultaneous top down, bottom up approach is needed to effect change. The good thing is, people are listening and the subject is on the agenda. And this is the first hurdle overcome to effecting change.