Financial services are changing beyond all recognition. In 2015, we predict that technology and innovation will be driven forward, with a view to generating important revenue streams and cutting risks for established and emerging businesses.
FinTech offers the real chance to drive efficiencies and improvements in the way commercial activity is carried out and deliver benefits to the retail customer base. Technology can help the market open up; it is quite democratic: it helps new players and pushes established businesses to shape up or risk losing ground. This competition should be welcomed.
In the UK, the financial services regulators have a clear mandate to make sure the sector is fair and effective. By launching initiatives such as the Innovation Hub, which intends to offer a more user friendly experience for innovator businesses, the Financial Conduct Authority (FCA) makes it clear that the regulatory framework wants to accommodate innovation as it can be in the best interests of consumers.
Before using technology, firms need to get to the heart of what their clients want and need. Faster, more convenient ways to pay and deposit? Lower costs? One-stop access? Better biometric security features? Control over their data? Image banking? Passive portfolios? Currency management? Access to pools of alternative assets?
So how can regulation help?
Innovation in MiFID II
As many enhancements to the present regime covering investment business and trading are built into the MiFID II package of legislation, innovation and technology will have to play a role in any firm's strategy and approach to change management. It is essential that legislators and regulators do not cut off routes to innovation in the run up to MiFID II implementation in January 2017.
If firms get on board early, they can influence the way forward and develop ground-breaking tools in such fields as conflict management, data collection and reporting, product development, client communications, and 'automated' trading (e.g. high frequency and algorithmic trading). Innovation needs to be driven and managed along the value chain and its true value needs to be seen in its overall context.
Firms must be creative and use technology innovatively to develop and offer not only the investment or product customers need today but also the ones they might need down the line. Firms will need to plug into mobile carriers and wearable devices as well as the wider cloud and 'internet of things' to help source relevant data to inform the products developed and advice offered to customers. We anticipate firms will make more of the opportunity FinTech presents to utilise the customer data that MiFID II allows or requires firms to collect and report. Such a move could have an important role in cutting mis-selling risk, for example, while protecting and enhancing revenue.
Firms need to give a seat on their MiFID II steering committee to their Chief Innovation Officer (even if that means appointing one first), who should be encouraged to put infrastructure and policies in place for pursuit of an innovation strategy that materially impacts earnings and operations – while placing consumer protection at the heart of decision making. Firms should plan for the Chief Innovation Officer to have a key role in the firm's product governance structure in the post MiFID II world.
Payment services developments
The payments industry is still set to grow exponentially and dramatically. The US-led Millenial Disruption Index released in early 2014, (representative of consumers born 1981-2000) shows that retail consumers are increasingly crying out for change and, for the most part, they want that to come from outside the traditional banking industry.
Nearly three quarters of respondents "would rather go to the dentist than listen to what banks are saying", whereas around 70% want the way we access our money and the way we pay for things to be totally different in five years' time. Despite this, merchants of all sizes still need to be incentivised to invest in and accept new payment methods and related technology.
We consider that EU legislation such as the recast Payment Services Directive (known as PSD2), which is expected to be adopted at European levels during 2015, is uniquely placed to create a single market standard across the EU and enhance trust and accessibility, while embracing technological originality. A significant objective behind this proposed new version of the legislation is the need to ensure markets are open to the benefits of innovative ideas in the payments industry – while at the same time closing down risks that can follow.
For example, PSD2 offers the chance for third party payment providers to use logins from consenting consumers to provide financial snapshots and facilitate payments to merchants using frameworks such as Faster Payments. PSD2 will also enhance how smaller merchants can embrace mobile point of sale (mPOS) technology to speed up transactions and reduce costs. The PSD2 proposals also clear the way for greater take up of digital, electronic or mobile wallets – both from a consumer and a business perspective. All players should be aiming for a frictionless payment experience.
Added to this, in the UK, the Payment Systems Regulator will take up its powers as an economic regulator in April 2015. Its remit is currently relatively narrow (e.g. LINK, CHAPS, Bacs, Faster Payments, Mastercard and Visa) but its influence on the online and mobile payments space is undeniable. The PSR has the real ability to impact planning and strategic decisions in this sector. As the online payments market continues to go from strength to strength, we can expect to see the UK's Treasury designate an increasing number of e-payment and m-payment structures as subject to this form of economic regulation, helping ensure the market remains open yet safe. Added to this, following comments linked to the Brisbane G20 meeting, it's clear that the UK's model is likely to form a significant element of the international blueprint.
In Germany, the regulator currently takes the approach that 'virtual currencies' are, for some purposes, within their supervisory scope. This appears to be in contrast to the UK position, where there have been active calls for information about whether virtual currencies should be regulated. As the timing to implement PSD2 is too tight to address regulations on virtual currencies, a regulatory framework for virtual currencies in the EU can only be expected at a later point in time.
So far, a regulatory vacuum has allowed the world of virtual currencies to emerge rapidly and, perhaps even chaotically, with high profile collapses and unbalanced coverage of their probity damaging sentiment and take up. In our view, the current vacuum is harmful to the ability of virtual currency derived benefits to go mainstream.
Firms should also look at how digital currency can work for them in a wider sense. Can the technology behind virtual currencies be taken into areas like international currency exchange markets or even stock or derivatives trading? We expect to see more partnerships between mainstream, established firms and purveyors of disruptive technology. Whilst the first movers are often well known, it could be that last mover advantage will be strong in this field as it takes time for regulatory frameworks to mature.
The world is going digital: we already store many of our documents in the cloud and access money through our phones. We use these technologies readily enough in our everyday life. What consumers and businesses want is for transactions to be cost efficient, easy, accessible and secure and this is what legislators should be looking to provide. We hope the regulators will keep an eye on ensuring that opening up the market doesn't lead to fragmentation, confusion, fewer benefits of scale and reduced cost efficiencies.