The UK fintech industry is at a pivotal moment. Regulation, reputation, growth and investment are under the spotlight, and happily so.
UK fintech hits pivotal moment
These are not mutually exclusive. The powers that be need to act fast to maintain the rude health of the UK’s world-renowned financial services.
The UK government and the regulating authorities are looking into the state of affairs and what can be done not only to maintain the growth and resilience of the sector but also to grow it.
Now, there are several reasons for this crux moment, for it can be described as having reached an apex as well as having suffered, shall we say, from political and geo-economic decisions and fall-outs over the last five years or so.
It is timely that the new UK chancellor, Rachel Reeves, is actively looking at the UK payments and fintech space to assess whether the regulatory environment is still fit for purpose and whether it is performing to its best.
Because of course it is an evolving space and any fintech sector that is performing well will have given rise to a whole raft of fintech companies – start-ups, neobanks and so on.
And therefore there comes a point where these reach new levels of success and outgrow their fledgling tech beginnings, having punched above their lean, nimble weights to become heavyweights, or at least serious contenders.
The fintech scene needs to support scale-ups or they will go and grow elsewhere.
And this is wonderful to see. What’s even more wonderful is to see live in action the relationship between regulators and industry participants and the inner workings of policy being shaped.
Assessing the UK Fintech Sector
Part of the government’s approach in assessing the sector, or at least I assume it is, is to obtain feedback and evidence from the sector through the Financial Services Regulation Committee through the House of Lords.
These sessions are heard in public with transcripts published and are a fascinating insight into live policy-shaping.
They also – for anyone who finds democracy moving and uplifting or finds fintech exciting and inspiring – prove how open and progressive the dialogue is between regulator and industry, for which the UK is renowned and as a contributor is greatly missed by EU policymakers since Brexit.
But who knows, some contribution may yet be reinstated.
I digress.
Janine Hirt, CEO, Innovate Finance, called for scaling firms to receive the kind of “fantastic” support that early-stage companies receive in a sandbox environment so strong that it has been replicated by nearly 100 regulators globally.
Post-authorisation, dedicated support is needed for these scale-ups to avoid the so-called ‘valley of death’ in becoming mature and structured.
ON Authorised Push Payments
Authorised Push Payments (APP) were also to the fore.
The chair of the committee (Lord Forsyth of Drumlean) put it to the “witnesses” (Soups Ranjan, co-founder and CEO, Sardine and Simon Taylor, Head of Strategy and Content, Sardine) that some fintech firms have been criticised for failing to protect consumers, asking where fraud hits hardest in terms of cost and company type.
Ranjan explained that fintech neobanks are at a disadvantage to traditional banks on account of not having the same data.
Most neobanks are used as secondary banks and without regular salary payments, a whole world of data context is missing.
“In order to detect fraud, we need to enable information sharing across large banks as well as fintechs. Fraud detection should be thought of as a utility that helps consumers and smaller start-ups become more competitive in detecting APP scams or fraud,” Ranjan said.
Furthermore, Ranjan flagged Singapore as a model ecosystem in which banks, telcos and social media companies can share information together.
“First, before you initiate an SMS message in Singapore you have to be registered with a caller ID.
Secondly, only registered aggregators are allowed to originate SMS messages.
Thirdly, telcos have to take measures to call out scams that are being perpetrated via their networks.
Those things are still missing in the UK,” said Ranjan.
Taylor reinforced this point, acknowledging various data-sharing initiatives that are in place in the UK yet pointing out the ‘disjointedness’ of them.
Essentially, none of them are adequate for smaller fintech players as they simply don’t have access to the right data.
“A lot of what is coming out of the (fraud mitigating) online platforms is, ‘you give us your data and we’ll tell you if we think it’s a scam’, rather than ‘we will share data on a more equitable basis’. The opportunity for good co-ordination there is vast,” he explained.
The smaller fintech players, of course are also often intermediaries on the periphery, and yet, due to the broad brush strokes of the APP model, they become liable without being privy to the relevant data let alone the actual funds.
TrueLayer, for example, being one such player, also giving evidence at a different panel.
Robert Kerrigan, COO, TrueLayer, gave candid feedback on this perspective.
“TrueLayer was not in favour of the [APP] rules as they related to us specifically, because we offer a merchant bank account service where we are the receiving bank but as part of an intermediary infrastructure,” with much fewer touchpoints he describes it as “challenging to have 50% liability imposed on a payment that you have never seen initiated”.
Furthermore, Kerrigan said he felt the APP rules had been ushered in without sufficient understanding.
“If I am honest, I thought the PSR rules were rushed.
Anecdotally, we were talking to our clients as recently as August, saying, ‘Are you ready for the APP fraud rules?’ and they would say, ‘What APP fraud rules?’ So that area could be improved.
It does not serve anyone, least of all consumers, to look solely at issuing and receiving banks. The platforms on which the fraud originates are far more interesting to me.”
Said Lord V of H: “I cannot disagree with that.”
The panel conceded that GDPR is often given as the excuse not to share data.
Big Tech in UK Fintech
“We strongly think that if we were to bring the big tech companies such as Google and Meta into a data-sharing agreement, there are several things that can be done where even PII data does not need to be gathered,” said Ranjan.
He references Sardine’s anti-fraud model having been “built entirely” on the concept of data sharing.
Said Kerrigan, “70% of the fraud cases we see originates on online platforms. This responsibility should be shared with social media platforms. They have and use an extraordinary amount of data that could be put to better use to prevent this.”
On policing fraud, he continued, “I understand that fraud accounts for about 40% of all crime, but only 2% of police resources are put towards it.
It is far more connected than pitting financial services or indeed fintech as a subset of financial services against consumers and [pointing blame].”
Said Hirt, “We know that 60% of that 70% is being sourced from Meta alone. It seems wrong not to ensure we have the big techs and large US platforms at the table.”
Shachar Bialick, on the same witness panel as Hirt and Kerrigan, added, “We have sent to the police the IDs of fraudsters and rings of fraudsters who have taken hundreds of thousands of pounds over the years, and no action has been taken that we are aware of.
With KYC we have their passports, we know where they live, how much they’ve stolen, yet the police do nothing.”
The panel asked the witnesses for a Wishlist of the FCA, actively inviting suggestions, remedies.
“I suspect you are the sort of people who would have come with two or three ideas. What are they?” Lord Lilley asked.
The answers were clear. The co-ordination of FS regulators with non-FS regulators, The encouragement of data sharing between larger and smaller firms and non-financial firms, and for that data sharing to be standardised.
“Very helpful,” came the reply. According to Ranjan, UK fintechs have not adopted the data-sharing technologies “because they are not at par with what the industry is looking for”.
“Therefore, instead of the regulator playing the active technologist role, I would argue that they invite industry to come and run those data-sharing systems in partnership with the public sector, because that would be a win-win for the entire industry,” Ranjan asserted. This was policy in the making.
“You are not regulated by the financial services regulators but what you do is very affected by regulation. Has the FCA ever come to talk to you and asked for your advice and experience on how its regulation is affecting our ability to deal with APP fraud? Does it ever talk to you?” asked Lord Hill of Oareford.
No, not yet
Okay thank you.
They’ve had conversations with the regulators in the US (OCC, FDIC, etc.) but not yet in the UK.
And Taylor as head of crypto at a large bank spent a lot of time with the regulators but not in this context, not as a “small guy unregulated technology provider”.
It seemed to hit home.
There was unanimous agreement it is “ridiculous” banks should reimburse funds they have explicitly warned against transferring (card networks don’t accept such liability).
Until the finer detail is worked through- watch this space- unfortunately fraudsters will take full advantage and fake scams will likely “skyrocket”.
The post UK fintech hits pivotal moment in global development race appeared first on Payments Cards & Mobile.
