Banks, FinTech And Regulators: Friends Or Foes? by Monica Eaton-Cardone
The financial crisis of 2007–2009 had ramifications that have lingered to this day and fundamentally changed the way financial service firms do business. To strengthen consumer protections in the wake of the economic collapse, the government introduced a series of new regulations that have had a profound impact on the nation’s financial institutions.
Mandates established by the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, Dodd-Frank Act and Regulation E, among others, have greatly benefited consumers—but they have also created significant costs for the banking industry. As of late 2013, the six largest U.S. banks alone were estimated to have spent $70.2 billion due to new regulations.(1)
So perhaps it should come as no surprise that 86% of financial services CEOs are concerned that “overregulation” will hinder their growth prospects, making it the largest threat to growth they currently face.(2) And with the recent emergence of financial technology, or FinTech, on the banking scene, many believe further regulations are yet to come.
FinTech Advances Spark Regulators’ Scrutiny
[drizzle]Among the recent FinTech innovations expected to prompt new regulations are self-service investment portals and so-called “robo-advisors,” which create investment portfolios based on answers customers provide in response to a series of questions. These robo-advisors currently manage an estimated $53 billion in assets, and are projected to collect nearly $285 billion by next year.(3)
Some regulators have questioned whether robo-advisors have a sufficiently complete view of investors’ financial standing given that there is no human assessing and responding to customers’ input. In fact, the Massachusetts Securities Division has stated that an algorithm alone is incapable of serving as a fiduciary, and the U.S. Securities and Exchange Commission has openly warned investors to be aware of the risks and limitations of automated investment services.(3)
Of course, robo-advisors are just one of the many FinTech advances that have blurred the lines between finance and technology. Mobile wallets and money-transfer apps have revolutionized payments and fund transfers. Online platforms allow individuals and businesses to lend and borrow among one another, bypassing banks. The insurance industry now faces competition from web-based upstarts. And you can be assured that regulators are keeping a very close eye on all of these developments.
Regulatory Uncertainty Concerns Banks and FinTech Firms Alike
Though many traditional financial services firms are wary of FinTech—64% of bankers regard it as a threat(4)—others are leveraging it for their benefit: 32% are engaging in joint partnerships with FinTech companies, 22% buy and sell services to them, and 15% are establishing programs to incubate FinTech companies.(2)
However, both sides see regulatory uncertainty as one of their top three challenges in collaborating with one another. Nearly 50% of traditional financial services firms and over 40% of FinTech companies cited regulatory uncertainty as a major challenge.(2) Their concern has less to do with specific regulations than with the ambiguity and confusion they can create.
Regulations—and what some perceive as “overregulation”—will remain an inevitable reality of the post-economic-crisis financial industry. While many banks continue to lament regulatory changes and FinTech disruption, I believe it’s far more productive to focus on the benefits of regulation and new technology.
Regulatory Compliance as a Competitive Advantage
Consumers have reaped many benefits from recent regulations, which protect them from abusive financial services practices, reduce the amount of fees and interest they have to pay, and require banks to focus on customers’ welfare rather than solely on their own profitability. Regulatory compliance has also created greater transparency and simplicity in financial transactions, empowering consumers with a clearer understanding of financial products and enabling them to make better-informed decisions.
Most financial services providers recognize that complying with regulations is essential to protect their firms against the legal consequences of non-compliance and subsequent negative publicity. However, some astute firms have realized that regulatory compliance can actually provide them with a competitive advantage and help them achieve long-term gains.
Wells Fargo and ACI Worldwide believe that treating compliance as a differentiator gives them an edge over the competition in terms of overall efficiencies and time to market with new products.(5) PwC counsels financial services firms to leverage risk, regulatory and compliance data for business purposes, asserting that it can help them reduce costs, increase revenue and improve operational efficiencies by eliminating duplicated efforts and using the data to better target marketing campaigns, identify new customer segments and develop new products.(1)
Transforming Threats Into Opportunities
Change is inevitable; the financial industry can either fight it or embrace it. Will new regulations hamper or promote growth? Will FinTech be the downfall of traditional banks, or can both thrive if they learn from one another? It’s all in how you look at it, and how that outlook shapes your strategies and decisions moving forward.
In the end, those who are able to transform threats into opportunities will be the most likely to prevail. Firms that embrace regulatory compliance as a tool to support growth, banks that integrate technology into their product and service offerings, and FinTech companies that deliver personal service and human support will all be well positioned for future success. Such approaches will contribute to a stronger financial system overall—and that’s a win for banks, FinTech and consumers alike.
About Monica Eaton-Cardone:
Monica Eaton-Cardone is an entrepreneur and business leader with expertise in technology, e-commerce, risk relativity and payment-processing solutions. She has co-founded a number of successful companies, which globally comprise 350-plus employees. With the advent of “friendly fraud” expanding from the US to other countries, Eaton-Cardone recognized the necessity to protect the global economy from illicit chargeback threats, hence Global Risk Technologies (GRT) was established. She currently serves as the CIO of GRT, as well as its US subsidiaries, Chargebacks911 and eConsumerServices. She also serves as the COO of Chargebacks911. Eaton-Cardone has earned a reputation for creative business solutions, helping merchants and banks to achieve sustainable payment-processing practices and supporting consumers in resolving transaction issues. She is a champion of women in IT, and hopes to contribute to an expanded presence of females in technical professions and leadership roles.
- PwC Financial Services Institute. The Extra Mile: Risk, Regulatory, and Compliance Data Drive Business Value; April 2015; pages 2 & 4. pwc.com/us/en/financial-services/publications/viewpoints/assets/pwc-business-value-risk-management.pdf
- Global FinTech Report; March 2016; pages 25-28. pwc.com/gx/en/advisory-services/FinTech/PwC%20FinTech%20Global%20Report.pdf
- Bernard, Tara Siegel. “The Pros and Cons of Using a Robot as an Investment Advisor”; The New York Times; April 29, 2016. nytimes.com/2016/04/30/your-money/the-pros-and-cons-of-using-a-robot-as-an-investment-adviser.html
- NTT Data. “The FinTech Threat Is Real: 28 Million Households Are Ready to Move to a More Innovative Bank”; press release issued August 23, 2016. americas.nttdata.com/news/news/press%20releases/press-releases/2016-press-releases/the-fin-tech-threat-is-real-28-million-households-are-ready-to-move-to-a-more-innovative-bank
- Theisen, Keith and Jonathan Eber. “Transforming Compliance Into a Competitive Advantage”; InformationWeek; June 17, 2013. banktech.com/compliance/transforming-compliance-into-a-competitive-advantage/a/d-id/1296419