Thursday

17th Jan 2019

Opinion

Progressive regulation needed now for 21st century finance

  • The open banking environment PSD2 requires payment service providers (PSPs) to give third-party providers (TPPs) access to their customers' accounts. (Photo: Fotolia)

Looking at Europe's payments sector, a rapidly evolving blend of FinTechs and established players, is not quite A Tale of Two Cities but more "a tale of two views on regulation".

The cynical view says that small firms can't spare the time for regulation because they are too busy moving fast and breaking things, whilst big firms love regulation because it helps them maintain the status quo.

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The progressive view says that regulation can be the bridge between these two worlds, a basis for mutually beneficial collaboration that enables new services, products and solutions that otherwise would be impossible.

Which view should prevail is a key question for Europe's businesses and regulators.

With new players entering the European payments market on a seemingly quarterly basis, there is growing political and regulatory focus on innovation at all levels of the payments value chain.

The revised Payment Services Directive (PSD2) is a good example of what this regulatory focus means in practice, for good and for ill.

The open banking environment PSD2 requires payment service providers (PSPs) to give third-party providers (TPPs) access to their customers' accounts.

Businesses must work together. The upside is that sharing data (for specific purposes among regulated parties) is now seen not only as acceptable but beneficial.

In its attempt to make the sector more open and competitive, however, has the directive gone too far? Do the PSPs get any return on the data they are required to handover? Have the established businesses suddenly found themselves on an uneven playing field?

Certainly, there are a number of voices, raised in private with the commission, arguing that instead of fostering collaboration with mutually beneficial incentives, the directive's rigidity is setting parts of the payments sector against each other.

The role of regulation in fostering not just innovation but genuine collaboration is fundamental but striking the right balance between these objectives takes time and experimentation.

Regulatory sandboxes

In countries such as the UK, the Netherlands, Singapore and Australia, among others, platforms known as regulatory sandboxes have been established that allow companies to experiment with new business models and regulators to get a closer look at these emerging players.

The objective is to better calibrate future legislative frameworks leveraging the agility and flexibility of start-ups while allowing incumbents to focus on what they know best: building trust with customers, managing risk and providing scalability.

Traditionally, the financial sector has been told to be cautious whilst entrepreneurs have been lauded for taking risks.

How can regulations be balanced if the businesses involved are so very different from one another, at opposite ends of the spectra of focus and scale, flexibility and inertia?

Businesses of any scale are always going to be keen to keep control of their competitive edge as well as their products and data.

One side cannot feel the other is stealing a march on them or holding them back for purely selfish reasons. Dialogue, a balanced set of technologically neutral compromises from all parties, and the art of the possible is what policy-makers and regulators are uniquely able to deliver.

Done correctly such an approach will not only enable collaboration but also help consolidate mutual trust, by clarifying and aligning the rules of the game, by shedding light on licensing schemes for emerging players and by creating incentives for different players to work together rather than making its requirements too prescriptive.

Payments regulation has the potential to make or break the FinTech revolution, which will have meaningful consequences for the whole financial services sector and society more broadly.

There is no real upside for any of us, least of all for consumers, if the revolution fails; certainly, too much has changed in terms of customer expectation for the 'ancien regime' to return.

On the other hand, should the payments industry, policy-makers and regulators find a way to build the right dialogue and regulatory framework it would be an outstanding achievement. The moment to make this effort is at hand, and it is incumbent on all of us to play our part.

Elie Beyrouthy is vice president for European government affairs at American Express

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