Regulation in Banking and Payment Industry – Thematic Research

Financial services providers carry a heavy compliance burden. It is not unusual for 50% of all spend by incumbent banks to be regulatory-driven. The pandemic has increased that cost further, as banks must now report on a wider range of metrics, while taking on entirely new tasks, such as disbursing government loans. Fair treatment has come into particular focus, with CEOs brought in front of US Senate hearings on a regular basis.

This follows at least a five-year period in which the impact of open banking, General Data Protection Regulation (GDPR), anti-money laundering (AML), Know Your Customer (KYC), and now environmental, social, and governance (ESG) principles have begun to force real business model change by making reactive compliance (i.e., doing the bare minimum) increasingly unsustainable. Leading providers are building new business models premised on data security, privacy, and portability. Those dragging their heels have been confronted by emboldened regulators, as evidenced by punitive fees for data breaches and other forms of non-compliance. AML, KYC, and fines for global retail banks have topped $36bn since the credit crisis, for example.

The next regulatory challenge is the blurring of industry lines. As non-banks diversify into banking and banks diversify out, there is no single regulatory body to regulate across all sectors. This creates regulatory loopholes and arbitrage opportunities across sectors while exacerbating those that already exist (such as differing regulations for niche fintech’s versus incumbents).

What are the key trends in banking and payment industry?

The main trends shaping the regulation theme over the next 12 to 24 months are shown below. We classify these trends into three categories: technology trends, macroeconomic trends, and regulatory trends.

Technology trends: In 10 years, fintech has arguably done more for consumer protection than over 100 years of consumer protection regulation. In the aftermath of the credit crisis, Dodd-Frank and the Consumer Financial Protection Bureau (CFPB) represented an unprecedented effort by regulators in the US to limit abuse of market powers by incumbent banks. But this pales in comparison to what tech achieved across the same time horizon, able to deliver better, faster, cheaper (and often, more ethical) across the value chain, creating margin pressure for incumbents and driving better outcomes for customers.

Banking ranks first among industries in the annual cost of cyberattacks at more than $18.3m per company per year. The increased attack surface area that the shift to digital banking created mid-pandemic put many banks on the back foot in terms of countering cyber threats. Danske Bank reported that it struggled to achieve just a 40% fraud detection rate and had around 1,200 false positive alerts a day, diverting finite resources from customer-benefiting tasks. Danske Bank chose to employ Teradata’s AI product to use innovative analytics to secure its systems. The company also integrated deep learning software with GPU appliances. Santander has employed ThetaRay’s AI-based big data analytics platform to detect AML incidents in correspondent banking transactions

Macroeconomic trends: The pandemic has also changed what matters to customers. The experience of dual health and economic crises – in which the fate of individuals was so dependent on other individuals – created a heightened sense of togetherness. In particular, the size of the economic disruption reminded retail banks that they were “in this together” with their customers. Resorting to fees or penalties would have pushed even more customers into the red and devastated loan loss provisions further. Enlightened self-interest – buttressed by government regulation – saw banks really focus, perhaps for the first time, on helping their customers improve financial resilience. Unlike during the global financial crisis, this time banks were not seen as the cause, but had an opportunity to help limit contagion and protect customers from the worst economic dislocations. Forward-looking institutions used COVID as a unique opportunity to forge ESG credentials, making short-term decisions to support customers in key moments of truth that will reap benefits long after the crisis dies down.

In the past few years, BNPL has gained popularity as an alternative credit option. In 2020, growth in the value of BNPL transactions almost quadrupled in the UK alone, driven in part by COVID-related lockdowns. On a global level, Worldpay projects that the BNPL market will reach $166bn by 2023. Yet this increasingly important segment of the payments space is currently unregulated, and rules are urgently needed to protect consumers from overburdening themselves with BNPL debt. There’s clear evidence BNPL can increase spending to the benefit of merchants. For example, lifestyle brand BlackCool reported a 600% increase in sales after making BNPL payments available to its customers. Additionally, by passing the credit risk on to BNPL providers, the merchant guarantees they receive payment for their goods or services (less the BNPL provider’s fee).

Regulatory trends: Given the cost and time taken to obtain regulatory approvals, some banks are making a conscious decision to focus on offering their own approvals “as a service” – in effect, to monetize those otherwise fixed costs and insert a commercial opportunity within the encroach of non-traditional providers. Cross Riverbank works with many large fintech firms such as Affirm, Coinbase, GreenSky, Rocket Loans, Stripe, TransferWise, and Upstart. Synchrony Financial issues an astonishing 115 branded cards, partnering with Amazon Prime, Chevron, Texaco, and, most recently, PayPal’s Venmo (as PayPal seeks to monetize the popular peer-to-peer payment platform). From a fintech perspective, partnering with smaller banks is a quicker route to market.

Social media companies have come under fire for stifling competition and face an unprecedented level of scrutiny on both sides of the Atlantic. Due to their network effects, large social media companies could easily become monopolies. In 2021 Facebook has around 2.9 billion monthly users, accounting for 61% of the global online population, while YouTube has more than 2 billion monthly users. The UK’s Competition and Markets Authority’s 2020 report on online platforms and digital advertising concluded that the competitive threat to Facebook is limited by network effects and economies of scale inhibiting entry and expansion of other platforms.

Which are the companies mentioned in the report?

Amazon, Facebook, Apple, Alphabet, AIB, Capital One, WeBank, MYbank, Monzo, NatWest, RBS, Danske Bank, DBS, TSB, BBVA, Citibank, mBank, Revolut, Credit Agricole, Barclays, CreditLadder, NovaCredit, Experian, Equifax, and TransUnion are some of the companies mentioned in the report.

Regulation in banking, by players

To know more about key players, download a free report sample

Market report scope:

 Scope:

• The scale and pace of technology change, and the diversity of sources from which it can now emanate, make fintech partnerships more important than ever to ensure external innovation can be delivered to existing customers through the structures and processes of the bank, which presents heightened data privacy risks.
• Compliance challenges often center on data management. The challenges here bring banks back to longstanding big data issues around handling the requisite volume, velocity, variety, and veracity of data coming into the enterprise.

Reasons to Buy

The report will enable you to:

• Identify key regulatory focus areas in banking.
• Understand key gridlines of change in regulation from a technology, market, and consumer angle.
• Understand investment flows and M&A activity for regtech.
• Understand which individual firms are best placed to win and lose amid regulatory change.