By Tyler Mondres
Financial innovation is happening worldwide. Here are some of the top developments to watch.
- Regulatory sandboxes
To address the need to update outdated legacy financial rules, some regulators have established “regulatory sandboxes,” which allow firms to test innovative products, services or business models in coordination with regulators. The first sandbox was opened in the United Kingdom in May 2016. Since then, Australia, Canada, Singapore and others have followed.
Arizona is the first U.S. state to establish a sandbox. Federal efforts have been fragmented so far. While the Consumer Financial Protection Bureau launched a no-action policy in 2016, the benefits offered were limited. The CFPB is currently working to update the no-action letter and trial disclosure programs to better facilitate product testing. Coordination will be key to the design of a federal sandbox, as banks often have more than one regulator.
Global coordination has also begun with regulators forming the Global Financial Innovation Network in August 2018 to share fintech learnings and facilitate cross-border tests. The group consists of 12 regulators (including the CFPB) and has issued a consultation document. The American Bankers Association has urged the group to focus on knowledge sharing and not to build any international frameworks that could inhibit innovation.
Global investment in regtech in the first half of 2018 reached $1.4 billion, exceeding total funding raised in all of 2017. The increase was largely fueled by repercussions of GDPR and PSD2 in Europe.
Regtech promises to digitize back-office regulatory tasks, simplify regulatory reporting, and empower staff to assess risk and monitor compliance with greater confidence. It is a classic win-win for banks, regulators and customers. Banks can reduce their regulatory burden, freeing up time to better serve their customers and regulators can gain a better view into the institutions they oversee.
- Going cashless
While cash continues to play an important role in payments, new technologies and changing customer expectations are combining to accelerate a cashless trend. More than 60 percent of Americans believe they’ll see the death of cash in their lifetime. In Europe, Sweden plans to phase out cash entirely—predicting only half a percent of national transactions by value will be cash-based by 2020.
Cash use has also fallen in developing nations. In urban China, where even street vendors refuse cash, the use of mobile QR-code payments has become nearly ubiquitous.
Payments are a critical touchpoint in a banking relationship. As payments become less visible, banks need to focus on keeping customers engaged. Some banks have done this by offering personal financial management tools to offer custom financial wellness advice.
Despite fraud risks and the high volatility of cryptocurrencies, they have become popular alternative investments around the world. China, Korea, and some other nations have come down hard on this space, passing sweeping bans of initial coin offerings and cryptocurrency exchange markets alike. U.S. and European policy makers have moved cautiously, trying to bring these to tokens into the regulatory fold.
- “Big tech” enters finance
Fintech startups began as narrowly focused monoline companies. As the market has matured, they have expanded their operations to offer a broader set of financial services.
Square now offers financing to its merchant clients and consumer-facing P2P payment services via the Cash App. Square applied for an ILC banking charter in 2017. It rescinded its application but plans to reapply in the future. Most recently, Square nodded to plans to use its Cash App to offer savings products and allow customers to trade stocks.
Likewise, big tech companies are wading further into finance. Amazon already has several financial services offerings, including payments and money storage products for consumers and financing for its merchant clients. It has issued $3 billion in loans to more than 20 thousand small businesses through bank partnerships.
As these companies expand further into banking, they will run up against legal and regulatory barriers. Despite this, banks that fail to develop a digital strategy risk losing valued customer touchpoints and ultimately relationships.
Tyler Mondres is a research specialist in payments and cybersecurity at the American Bankers Association.