Big Banking Tech Rules that Solidify Trust in Transparency – AiThority

Posted: September 15, 2020 at 3:07 pm

Where is the global banking tech heading to, in 2020?

The economic misery caused by the pandemic is inviting comparisons with the Great Depression of 1929. Then, a major reason for the crash was inadequate segregation between the retail banking, insurance and investment businesses, leading to contrarian behavior and conflict of interest in financial institutions. To avoid a repeat of this incident, the United States passed a law called the Glass Steagall Act in 1933 to ring fence banking and insurance / investing to protect customers in case their banks committed financial irregularities.

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70 years after that event, the introduction of the GDPR (General Data Protection Regulation) in Europe is once again turning the spotlight on consumer rights and protection by stating that organizations may not use or share their customers data without explicit consent.

If this wasnt hard enough, the matter has been complicated by another European mandate, namely the PSD2 (Payment Services Directive 2), requiring banks to expose their APIs to level the playing field for non-banking entities wanting to enter the business. As a result, today, banks are grappling with rules demanding ring fencing, data confidentiality, API sharing and customer content rules, which frequently counter each other.

At the same time, banks are also coming to terms with a rapidly changing banking business. Increasingly, banking services are being delivered not by standalone banks, but by a gang of 4, comprising retailers, telecom companies, technology firms and the banks themselves, each bringing their unique strengths customer understanding & distribution, communications networks & data centers, technology platforms & innovation capabilities, and manufacturing & domain expertise, respectively to the engagement.

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So we have Goldman Sachs tying up with Apple to offer the Apple Card; AT&T, Verizon, Telstra etc. hosting bank infrastructure; and Ant Financial, Tencent, and others offering technology platforms supporting innovative banking models. Big technology companies like Google and Amazon are doubly invested in this space as providers of payments services and cloud infrastructure.

The biggest beneficiaries of the entry of non-banks, particularly big tech, in financial services, are the customers, who are enjoying innovative products at economical prices, and great experiences delivered 247 on the devices of their choice. There is no better example than Indias UPI payments, dominated by non-banks, such as Google, Phone Pe and PayTm, which offer unprecedented convenience to customers, without the fees, limits, and time lag associated with the bank fund transfers.

The combined reach of the gang of 4 has made banking services highly accessible even to the underbanked and unbanked. As the other players, especially big technology companies, entrench themselves in the banking business, it is inevitable that they attract the attention of regulators, sooner or later.

While it is important to regulate these entities, the authorities should approach the situation thoughtfully. For example, ring fencing, so that only banks may do banking, is not the answer. The goal should be to safeguard offerings without compromising customer interest, which today, is best served by opening up the market to new competition. Hence there is a need to expand access to good products at competitive prices, delivered as great experiences, while making sure no entity indulges in practices such as predatory lending or taking deposits without giving adequate guarantees. In fact, regulators must make it easier for all players to serve the low end of the market by adding value through scale, reach, accessibility and affordability.

It is critical for regulation not to contaminate the respective businesses of banks and big tech by equating them doing so will only bring the worst problems of banking institutions to technology companies and prevent the best technology from reaching banks. India has found a neat way around this problem by issuing specific licenses for Payments Banks and Small Finance Banks that do not put them in direct competition with incumbent institutions, yet allow them to operate in specific niches.

Under no circumstances should regulation restrict consumer choice. Todays customers are quite aware of the alternative options in the market, and their pitfalls. Therefore, it is only right to allow them to choose both product and provider. But it is equally important to protect their data and privacy by stipulating that technology companies (and others) explicitly take customers consent before using their information in any way; mandating this as part of GDPR implementation is therefore a right step.

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Finally, regulators must acknowledge that the pace of change has never been this fast, yet, it will never be this slow again. They need to keep up with the change by periodically reviewing the efficacy and coverage of existing laws. A joint review every two years by all the players concerned regulators, banks and big tech companies etc. would go far in serving not only the best interest of customers, but also of the banking industry and of the economy of nations.

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Big Banking Tech Rules that Solidify Trust in Transparency - AiThority

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