Headlines around regulatory breaches and fines have been infrequent over the last couple of years. This is partly because regulators are starting to feel more comfortable with capitalised banks. The rise of the Regtech ecosystem has also helped as some regulators have started to actively engage with innovation that helps regulatory compliance.
There has been a rise of the Regtech community over the past couple of years. 2017 and 2018 were, in my opinion, going to be the Regtech years, until Cryptos partly (or largely) took the limelight.
While innovation within Regtech has been important, the reaction (or the lack of it in some cases) from some regulators has been quite interesting. Inconsistent approaches to regulating fintech across the globe, seriously hampers chances of a consistent approach to a stress scenario in future.
Post the recession in 2008, the West got quite active in imposing regulations and fining banks for various breaches. As the UK, EU and the US led the regulatory agenda, the Asian financial hubs followed them. However, with the industry settling down, regulators (especially in Asia) have started to take the liberty to customize policy making to their local needs.
With Open Banking for example, there have been different approaches across different fintech hubs. EU has its PSD2, which requires banks to share customer data to third parties if the customer wants to. Banks view this as prescriptive as they are forced into a new operating model for consumer finance.
However in Singapore (MAS) have taken a collaborative approach through the sandbox capability they offer. They have encouraged banks to open their infrastructure so they can integrate with fintechs. Thanks to the approach, Singapore’s DBS now has the world’s largest banking API developer platform.
As a policy-maker, our view on APIs is that ‘open banking’ doesn’t mean open mandate, but rather open collaboration
Sopnendu Mohanty, MAS Chief Fintech officer
China and the US unsurprisingly have taken two extremely different approaches. China on the one hand have allowed for their tech giants to access into lenders’ customers data, there by paving the way for ecosystems such as Ant Financial and Tencent. These firms are now replicating their consumer finance model across Asia to provide ecosystem based consumer finance experience.
The US regulators have been largely indifferent to data sharing. and have let the banks make data privacy decisions. The US has an unsupportive regulatory regime when it comes to innovation as Fintechs must be regulated in every state they operate in. Over and above that, the US banks have typically opened up their APIs to fintechs only because there is a commercial upside to them.
This means that firms like Amazon who have rich behavioural data about consumers, will take longer to replicate the models of Tencent and Ant in China.
But more importantly and worryingly, the divergent approaches the regulators across the world have taken to consumer banking, have already forced financial services firms and fintechs to adopt different operating models.
This has two challenges. One, when Consumer Fintech firms want to expand across different regulatory regimes, they may have to redo their operating model. For example, Tencent and Ant Financials will struggle in EU due to the data privacy policies.
Two, when the next recession hits us, the response to that may not be consistent from the regulators. In a borderless financial services ecosystem, working with inconsistent and conflicting regulatory regimes would slow down the global response to a stress scenario. While regional customization is essential, there needs to be an underlying consistency in the way consumer finance models are developed, managed and regulated across the world.
Arunkumar Krishnakumar is a Fintech thought leader and an investor.
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