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The changing landscape of payment regulation

This article was written by Faisal Khan, Banking and Payments Consultant at Faisal Khan & Company on 3 October, 2016.


How do you see payment regulation changing in the next few years and what consequences do you believe the landscape will face?

At the start of the new millenia, payments and banking have had a transformative decade. Mobile usage, value-exchange using the internet, sporadic growth of payment networks, and large amounts of venture capital money driving the industry has led to a plethora of payment players.

Around 2010, another historic event was witnessed, the birth of Bitcoin and its operating stack, i.e. the Blockchain. Today, regulators are trying to keep pace with the fintech industry that is literally disrupting the banking and payments space.

Regulations are inevitable. However, two camps have sprung up. Those who want less regulation and those who want more regulation.

It is fair to say, we are moving towards an unknown where, presumably, banking would be decentralized, as would be payments settlement and clearing. Companies, new and old, are either trying to stitch the disparate payment networks or trying to disrupt. In some cases, there is the perfect marriage of physical money with digital money, in other cases, the two are divorced.

More companies (startups and incumbents) are coming up with innovative solutions for the movement of digital value (i.e. money) and this is precisely what is challenging the established norms and guidelines that regulators have painstakingly authored.

Regulators will have to address questions like the following sooner than later: Distributed banking, savings, storage of wealth is not a pipe dream but a reality today. That financial services can now be offered by anyone with an internet connection. The difference between domestic and international payments is thin (if not disappearing all together). Non-fiat money (or wealth) will somehow have to be legalized.

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The barrier to entry for becoming licensed has to be lowered substantially. Entities outside their jurisdictions can now easily sign-up customers, so how can they be effectively regulated? The banking system has to adopt an open-standards / open-API policy. Many of the initiatives would have to be led by the regulator and you cannot expect the market to decide for themselves (Faster Payments is an example or Open-APIs).  Consolidation within the banking & payment laws is necessary. Where to start from? And perhaps the most important question is, when not to regulate in the spirit of continual evolution (case in point the Bitcoin or Blockchain), etc. How to mitigate systemic risk of defaults without overly mitigating growth of the fintech industry. Amend or author new laws and regulations for consumer protection.  Deal with litigation that comes from opposing camps.

However, the biggest challenges that regulators will face, will come from within: old school versus the Millennial; conservative versus the liberal. Technologies like the Blockchain and Distributed Ledgers represent a fracture in traditional thinking. You would need continual education and awareness just to be able to grasp the concepts which the newer generation so easily understands. Some disruptions literally break into a thousand pieces like banking norms and practices that have not been disrupted for hundreds of years.

As we gravitate to this digital value-exchange age, regulators represent not only a clear and present danger, but also an opportunity. Some will be able to play catch, unfortunately, many will not. Resistance to established norms and indecisiveness will be the most challenging aspects of regulatory hurdles.

With a decentralized financial space, how does one tackle licensing, human ATMs, peer-to-peer transfers via marketplaces, information intermediaries that facilitate financial transactions, netting off, peer lending, distributed insurance, privacy, identity, compliance, etc.

These are the questions that both the regulators and the industry (old and new) would have to face and answer collectively. We are in a transitionary phase of a banking era that has stretched back to the Venetian Bankers.

The walk over will not be an easy ride.


Faisal Khan is Banking and Payments Consultant at Faisal Khan & Company. He will be presenting on the topic “Cross Border Payments: Slow, Inefficient & Costly For Banks & Business: What’s The Solution?” at Payments International event held at Hilton London Tower Bridge, London on 15-18 November 2016.  For more information on Faisal, the event, and how to register, click here 

 

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