Regulation needs to match the pace of fintech innovation

UK consumers are relying on digital solutions more than ever before. The Covid-19 pandemic has only accelerated that process. Regulators now need to keep pace, and balance the needs of consumers with the risks posed, writes Emmet McEvoy at Origin Digital.

Let’s look at the stats. In 2019, 73% of people in the UK accessed their bank account digitally according to Statista. That’s a 33% increase in the past five years. It’s estimated that 35 million people in the UK will have a digital-only bank account by mid-2020.

We recently undertook a social listening research project and discovered that mentions of online banking or digital banking across publicly accessible platforms (i.e. those without a login or paywall) rose by 55% between 2015 and 2019.

In addition, a recent study by Brandwatch shows that UK consumers are more open to the prospect of a cashless society than the likes of those in the USA, Australia, Spain or France. UK consumers were found to be the second most likely to describe the idea as ‘very appealing’, behind Singapore.

All of the above make the UK a ripe market for fintechs and challenger banks who want to expand their operations. Despite the threat posed by Brexit, a record £39.5bn was invested in the UK’s fintech industry in 2019, driven by the takeover of Worldpay. That represented a 91% increase year on year. The momentum is there.

Modern-day millennials have disrupted traditional models in favour of digital solutions and 70% of 18 to 44-year-olds use mobile banking at least once per week, according to the Brandwatch survey. They now make up the largest generational workforce in the UK and will be a significant driver of the economy as it recovers from its Covid-19 downturn. They expect digital services to expand as technology advances.

In the financial sector, regulations potentially stand in the way of that technological advancement.

Major changes to regulations are usually instigated by a crisis. They expanded considerably after the financial crisis of 2008 and the continued crisis caused by Covid-19 and its’ fallout is showing signs of accelerating this evolution.

But will that be enough?

The main focus of fintechs and challenger banks right now is growth. That growth is driven by new technology and a great customer experience, with data-driven decisions. For example, Monzo and Starling threw their weight behind technology to produce slick, modern apps. Revolut made international payments easy.

Traditional banks have realised they need to adapt or risk getting left behind. Some have modernised their digital products which others have embraced fintechs. Danske Bank, for example, in conjunction with Catalyst Inc (innovation centre), opened a dedicated fintech hub in Belfast in 2018 to help start-up fintech companies grow and expand.

Consumers have more choice than ever as a result, though that comes with increased risk. A KPMG report highlights that the initial regulatory response to the emergence of fintechs was supportive. But regulators now need to balance the needs of consumers with the risks posed, including cybercrime, money laundering, credit provision and data protection.

The concern is that regulations are hampering the growth of fintechs. They impose a burden on companies, with costs and restrictions often passed on to customers.

If updates to regulations don’t match the pace at which people are relying on digital solutions, innovation will be restricted and the full benefits of fintechs are unlikely to be realised.

Pressure is growing for regulations to be recalibrated. This is likely to involve a mix of creating new regulations and adapting the existing ones and needs to be implemented quickly.

Failure to do so poses a huge threat to the UK’s status as a world-leading fintech hub at a time when the industry is booming.

Emmet McEvoy is Search and Content Executive at Origin Digital.