By: O. Sam Ackley
In this series of two posts, I’ll address the need for a bridge between Fintech and banking, plus my ideas for what that bridge should be made of. Keep an eye out for part two next week.
Banks want to do business with financial technology firms that are creating applications that do everything from foreign exchange to offering virtual check books. Consumers and businesses appreciate the efficiency and convenience of Fintech and want to use these new apps. And yet, according to many studies and serious observers, Fintech is struggling when it comes to having access to the US banking system. What’s the problem?
No, really, what is the problem…. both parties want the same thing and yet they are struggling to “make it happen”?
Most agree that regulatory uncertainty plays a major role in holding back US Fintech growth and success. Regulatory considerations, such as the following, add complexities:
- Vendor Management
- Know Your Customer
- Bank Secrecy Act
- Anti Money Laundering
- Graham Leach Bliley
- CFPB regulations
- Truth in Lending
Even so, the regulations and the complexity are manageable. The issue is that most banks and regulators do not always understand how these regulations are properly applied to Fintech. This results in uncertainty, which is the bane of business growth.
There is a great article in American Banker that lays out the influence and control the big 5 core processors exert on the retail banking system. FIS, Fiserv, Jack Henry, and D+H control roughly 96% of the core banking software market in retail banking. Accordingly, Fintech innovation must be able to work with one or all of these systems.
Unfortunately, these systems are not “open.” They have recently introduced APIs, but if you search for US Banking system APIs you will get links to the Open Bank Project in Europe.
Accenture, Infosys, Temenos, TCS, IBM, SAP, CSC, and Oracle are all trying to enter the US Core banking market…according to American Banker.
For now, the lack of open standard banking APIs based upon a universal standard and a modern, up to date technology stack limits the pace of Fintech innovation in the US.
Fintech by its nature is technology driven.
Safeness and Soundness
The primary directive for all financial institutions in the US is safeness and soundness. This is a regulatory imperative and basic to succeeding as a bank. Ideas that, to the lay person or business person, appear to be “good business” may represent an intolerable risk to safety and soundness of the bank. This disconnect between perception and the reality of running a bank has caused many a Fintech to flounder. It doesn’t matter how innovative, brilliant, or friction-free your Fintech application may be, if it in any way poses a risk to the safety and soundness of banking in general or to a specific bank, it will be shunned.
Like safeness and soundness, reputational risks have taken on a tremendous amount of importance in recent years. While doing business with the “wrong” person or organization may not affect safety and soundness, it may bring unwanted attention or implicate the bank in wrongdoing. Reputational risks may thus expose the stockholders to loss in enterprise value, and the officers may be exposed to criminal prosecution.
Thus, we often hear the mantra of “Know Your Customer” (KYC). This simple saying is key to banks being able to avoid reputational risks, as well as fulfill their obligation to support federal law concerning homeland security and money laundering. In fact, it isn’t enough to simply know your customer in the Fintech arena. Banks must also demonstrate that they know their customer’s….customer! Not just by a name or an account number, but have proof that the customer is who they say they are. Ironically, there are some Fintech solutions (Bit Coin) that focus on anonymity.
For the banking system, Fintech represent disruptive technology on couple of levels.
Fintech represents change, and yet banks are noted for their stability which often translates to a resistance to change. Fintech can present unknowns when it comes to impacts on soundness and security of a bank. In many cases, Fintech faces challenges in demonstrating to a bank that they know their customers, not to mention their customer’s customer.
Read part two, “Building the Bridge Between Fintech and Banking.”
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