The things that keep our industry safe – rules, regulations and compliance – are the very things that could cause fintech firms to lose their edge. Story by Chris Skinner.

I’ve been at a few conferences this week, and was amused by an audience poll at one event. The moderator first of all asked:

Do you believe that the regulators are in the incumbents’ pockets and protect the industry from new competition?

You may find it gratifying that most of the audience disagreed with the statement, but I thought, I wonder why they’re asking this?

Obviously, it’s a perception that regulations protect the industry, and often perception is reality. It’s certainly true that to get a banking licence involves a humongous amount of regulatory oversight, compliance, rules and checks. The weight of these rules and checks has grown considerably since the financial crisis, but that’s because money is a sensitive thing.

I don’t trust my bank’s brand for example, but I do trust my bank. I trust them as a value store because I know they must comply with all of this regulatory oversight. By having that licence, more importantly, I know they have signed up to the consumer regulations that protect my money if they go bankrupt. In other words, a bank is a guaranteed store of value, licensed by government and insured. It’s all of these things I trust for my store of money, not the brand. It’s the reason why startups cannot call themselves banks, as the use of the word bank in a brand name is only legal if the company has a government licence.

Yes, that creates a symbiotic relationship with the regulators, but the regulators also do recognise the banks’ misdemeanours. That’s why they fine them. Does it mean they protect them from competition? Not really. But it does protect them from competition that tries to do the same as what they do, without the balances and checks. It is for this reason that Klarna, Zopa, Prosper and more are getting banking licences. It’s so they can offer a value store with trust. Why else would they bother?

This is why I don’t believe that the regulators collude to protect the incumbent banks from competition. I do believe they create quite a high cost of entry into the market, however, due to their regulatory requirements. But hey, if you’re going to be storing and managing my money, I would rather you had that onerous oversight than just be some rogue agent like Mt.Gox, the hacked and bankrupted cryptocurrency exchange.

There was then a second follow-on question:

Do you believe that fintech startups will lose their edge as they mature and have to comply with regulations?

The audience also disagreed with this question, and felt that new companies could and would be far more agile than incumbents, primarily because they are new and using fit-for-the-internet-age technologies. But I was a little bit more reticent. After all, when you look at the disrupters – Google, Amazon, Facebook, Alibaba (my GAFA) – then it’s incredibly difficult to maintain your edge when you grow from a few guys in a garage to a few thousand people in a global structure. In fact, I think there are four phases for most firms:

  1. The startup phase, where anything is possible.
  2. The growing up phase, where you run as fast as you can to keep up with the needs of your company’s growth – hiring, training, learning, etc.
  3. The maturing phase, where you start to get set in your ways and find it difficult to adapt to new needs and new competition.
  4. The old-age phase, where you try to nurture your children and grandchildren to become the new leaders.

It’s amazing to see how GAFA are in the maturing-to-old-age phase, and I know this because you can see how difficult it is to maintain that initial joie de vivre energy. Of course you cannot keep it up, but you can find ways to sustain it by bringing in new blood and new energy on a continual basis. This is why it’s so important to branch out and find new ideas that complement your original one in the way that Facebook brought WhatsApp, or Google bought Deep Mind, or PayPal bought Braintree and Venmo.

So yes, I do think that many of the fintech startups will eventually start to atrophy if they don’t keep kick-starting their energy levels. In fact, it’s especially true in fintech where, as they mature, they find they bump into the regulatory requirements more and more. In other words, the things that keep our industry safe – rules, regulations and compliance – are the very things that could cause fintech firms to lose their edge.

It was an interesting discussion and gave me some food for thought, as you can see. Would love to know if you have any thoughts on this.

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– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image by Tashatuvango,

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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