RegTech is becoming a buzz word in the financial services world. Due to significant investments in developing financial solutions, some commentators claim that regulators are always one step behind innovation. What is your opinion?
We have one of the most progressive regulatory bodies in the FCA – and the focus on RegTech is testament to that. The reality is that regulation reacts to the threats (as well as opportunities) of the moment. Invariably, where you find a high level of innovation and customer uptake, you will find regulation following closely behind. This is not a new concept. The first car was introduced in 1893, but early regulations on speed limits did not come into play until 1901. The difference today is that technology develops at such a tremendous pace that it is even harder for regulators to keep up and establish what is right for both the customer and the industry.
The MiFID framework underwent a number of regulatory changes in the first half of 2016. How have these amendments affected fintech-related companies and the ecosystem in general?
The most important MIFID concept for our business is the requirement for full pre and post trade transparency around pricing. Currencycloud is fully committed to full pricing transparency on FX and payment pricing to our customers. We believe that this should be the norm across our industry and welcome the MIFID changes.
Turning our attention to PSD2, do you think that the new players in the financial services industry have, somehow, altered the traditional ‘compliance’ culture previously dictated by banks?
Banks have typically viewed compliance as a ‘tick-box’ exercise. A burden to overcome. This is understandable to an extent – their regulatory expectations have become broader and more complex over time. PSD2 does start to turn this concept on its head. Complying with this regulation does not just mean sorting through documents for a seal of approval. PSD2 requires a fundamental attitude shift for banks, which encourages collaboration and forces innovation.
This attitude to compliance should not just be limited to PSD2, or to traditional banks. Too often I hear emerging fintech startup CEOs say “we have this great business model, if only we didn’t have this whole regulatory regime to get through we’d be off and running”. Compliance is not an add-on, it should be a fundamental part of the company and for that reason, it needs to be built into every stage of the business – extending beyond the compliance team to the wider company. If compliance is not built into the DNA of the company, you have a problem.
What are the main differences between the US versus Europe in understanding the international business compliance aspect?
In our business, payments, and this may differ in other segments such as crowd-funding, lending, and banking, our European-wide regulation is through a single regulator, the UK FCA. Being regulated by the FCA means we can provide services to customers in a market as large or larger than the US. The US is a much more complex regulatory environment. Basic compliance rules are set at a national level starting with the Bank Secrecy Act, Dodd-Frank and other legislation, but a State issued license is required for providing services in each State. Additionally State reporting and monitoring requirements vary--so rather than a single regulatory authority, in the US there are 50.
How may a company find themselves on the wrong side of regulatory standards and what is the potential impact in their customers?
Compliance is not optional. The regulator and our banking partners do thorough and frequent audits of our process. All staff, not just those who deal directly with customers and the flow of funds, are required to take compliance and regulatory training and refresher courses. The key point is to have a robust compliance regime, update the process frequently as rules and the market change, keep investing in regulatory technology as it keeps upgrading, and keep all staff trained and up to date. If you do all of this, you will keep on the right side of regulation and provide continual service to your customers.
What is the direct impact of the PSD2 initiative on the money transfer business outside of the EU?
Many people are rightly fixated on the stipulations around banks opening up their data to third party service providers. This introduces a whole new world of potential business models into the sector and is a very welcome change. But a lesser known part of the legislation is that PSD2 will further enforce transparency around payment costs. The current legislation only covers payments that start and end in Europe, but the new legislation will cover any payment that either originates or ends here, regardless of currency. Payment providers will have to be clear about all costs in a transaction, which puts pressure on correspondent bank fees around the world. We fully welcome this shift towards greater transparency.
Thinking forward, what is the next big step in RegTech?
RegTech was born from the challenge that comes with monitoring risk in a data-driven world. This is crucial in financial services – businesses in this space are guarding people’s money, and identity. Innovation comes when there are inefficiencies in the current system, and the rise of RegTech tools is no exception. KYC (Know Your Customer) for example, is a critical responsibility, but how can it possibly make sense for customers to still have to scan a utility bill as part of the identification process?
We are going to see more and more companies across various verticals outsourcing some of the more manual elements of compliance, making the whole process more streamlined and automated. The key thing these enterprises will need to keep in mind, is that while you can outsource the data and the manual compliance checks, you can’t outsource the attitude. The fundamental understanding of the responsibility to protect customers, needs to come from within.
About Michael Laven
Behind Mike’s friendly exterior lies one of the sharpest minds in the financial technology industry. Over the last 20 years, Mike has held leadership roles at a number of a FinTech companies. He joined Currencycloud in 2011, growing the company to the point where it has now processed over USD 20bn of international payments and more than 2m transactions since 2012.
You may be surprised to learn that Mike once spent six years working for the United Nations. In his spare time, Mike plays classical and jazz piano – a topic on which he can bore even the most ardent music aficionado rigid.
Currencycloud’s Payment Engine is the power inside countless businesses, driving the transformation of the global payments landscape. The company is re-imagining the way money flows through the global digital economy, allowing firms to remove the friction and inefficiencies of traditional cross-border payments using its flexible APIs. Launched in 2012, Currencycloud is based in London and regulated in Europe, the US and Canada.
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