The Competition & Markets Authority has introduced a package of reforms aimed at ensuring retail bank customers benefit from technological advances, while new entrants and smaller providers can compete more fairly with the high-street giants.
However, there are legitimate concerns about the impact on consumer protection and financial stability of the so-called innovation agenda in banking and payments.
Fintech providers are set to flourish under the new initiatives
Banks face increased cyber and fraud risks, as was seen with the recent spate of global cyber attacks, and it comes at a time when banks are already hamstrung by stringent anti-money laundering (AML) duties and the implementation of the bank ring-fencing requirements.
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In general terms, AML rules require payment-processors to know who is making a payment, where funds originate, and where they are going. Banks must have procedures in place to stop the proceeds of crime being channelled through them and to stop the funding of serious crime and terrorism.
Banks also face challenges with new criteria on capital and liquidity requirements and need to keep in reserve a certain level of capital in case another crisis emerges.
The Basel III capital requirements, however, can be seen as a disincentive to banks to hold deposits from major businesses. To accept deposits, banks now need to counteract this liability on their balance sheet by holding additional capital in reserves against such deposits. This has affected the way banks have structured their cash-management products and can have an impact on pricing for corporates.
Although the market is beginning to adjust, the Basel III requirements put further pressure on banks’ profitability and there are broader questions about where corporates can store money safely if regulation discourages the major institutions from holding large deposits.
It is in this context that further reforms are being delivered to support the advance of financial technology, or fintech, and open up the banking and payments market to greater levels of competition.
Reforms to EU payment services laws (PSD2) and the UK’s open banking project have the potential to revolutionise the market. It is foreseen that the reforms will help consumers access innovative new services that benefit them, from slick mobile payment options to better-targeted promotions from retailers.
However, there remain unanswered questions over customer demand for the new services the reforms are supposed to provide. There are also fears that the liberalisation of data and opening up of the market to new fintech providers will increase cyber and fraud risks as well as pose a threat to financial stability.
While the fintech providers set to flourish under the new initiatives will be subject to data security obligations, the interface between account-providers and these fintech firms will introduce new cyber risks that all firms in the supply chain will need to be wary of, as well as potential new routes for fraudsters to try to dupe firms into releasing funds or data to them.
In addition, banks, as trusted institutions, could be asked to foot the bill for losses customers experience due to fraud from the advent of new fintech services, adding a further pressure to the bottom line.
The outcomes from the PSD2 and open banking reforms will not be known until at least well into 2018, but many observers believe more thought is required on policies designed to support innovation and digitisation in the financial services market, to ensure they truly benefit customers and that new risks to consumer protection and financial stability are addressed.
As technology advances and regulators play catch-up, it is incumbent on policymakers to pause and consider whether the direction of travel in the banking and payments market is the right one.
• Tony Anderson, partner and head of financial products and payments at legal firm Pinsent Masons