Fintech Startups and Incumbent Players Series: The Fourth OBLB Annual Conference Report *
Eftim Ancev, Carlo Brunold, Param Pandya, Georgios Pantelias, are Associate Editors of the Oxford Business Law Blog. This Report was first published on the Oxford Business Law Blog.
Conference Overview - Session 1: Interaction of banks and fintechs - Session 2: Competition & fintech - Session 3: Technological aspects of fintech regulation - Session 4: Regulating financial innovation - Practitionersípanel: a roundtable discussion - NOTE
The potential of financial technology for innovation and growth is well-established by now. Yet startups often face many regulatory challenges in the early years, obstructing market access. Technology firms and incumbent financial institutions are experimenting with new solutions to this problem, often establishing co-operative linkages between them. At the same time, governments and regulators have introduced special frameworks that may facilitate the newcomers’market entry. Among these are regulatory ‘sandboxes’, which provide for a safe experimentation space allowing new market participants to test their services in the real market with a reduced regulatory burden, but under close scrutiny of the supervisor. Governments are continuing to experiment with other formats to help new market entrants with the regulatory complexity, including through incubators and mentorship programmes. The 4th Annual Oxford Business Law Blog Conference, co-organized by the University of Oxford, the University of Hamburg and the European Banking Institute, put together high-level academics, regulators and practitioners involved with these issues, with the objective of evaluating these different initiatives. The conference, generously sponsored by Intesa Sanpaolo, was held online on Friday 27 March 2020. A brief summary of all sessions and the practitioners’panel discussion is provided below. Please note that the views expressed by paper presenters, discussants and practitioners are personal and do not represent the views of any organisation.
Session 1: Interaction of banks and fintechs
How successfully do banks interact with fintechs? Lars Hornuf (University of Bremen) presented an empirical study that examines how banks interact with fintech firms – how prevalent are alliances between banks and fintechs, and what form do they take? What are the motivations for these alliances, and what is their impact on bank value? The study examines these questions by collecting and analysing data from the hundred largest banks in each of Canada, France, Germany and the UK in the ten years between 2007 and 2017, and through an event study of changes in listed bank value in response to alliance announcements. His key findings are that: banks are more likely to ally with fintechs if banks have a digitalization strategy or a Chief Digital Officer; the most likely alliances take the form of minority stake investments by large listed banks in small fintechs; surprisingly, an announcement of an alliance has a slightly negative effect on bank value in the short term, except where the bank is a digital bank, where there is slightly positive effect. The discussant, Kristin van Zwieten (University of Oxford),brought attention to whether there is any causal relationship between banks’digitalisation strategy or appointment of a Chief Digital Officer and their entry into fintech alliances – is it possible that alliances pursued through an informal commercial strategy prompt banks to adopt a more formal and publicised strategy? She also noted the paper’s conclusion as to the typical form of alliances appears to be driven primarily by larger fintechs, and if this variable is controlled for, then the typical form of alliance is less clear. She suggested that there may perhaps be other factors impacting more on fintechs’(rather than banks’) choices, that could be explored in subsequent (perhaps more qualitative) research. The counterintuitive result regarding bank value seems to point toward some other factor explaining negative market reactions. The case for a fintech mentorship regime Georg Ringe (University of Hamburg) presented a paper co-authored with Luca Enriques (University of Oxford) that makes the case for a ‘mentorship regime’ as a regulatory framework to address issues of regulatory responsibility, supervision, and enforcement that arise from increasingly closer collaboration between banks and fintechs in the provision of banking services. While there are numerous advantages (especially to [continua ..]
Session 2: Competition & fintech
Data, innovation and competition in finance: the case of the access to account Rule Oscar Borgogno (University of Turin), who presented a paper co-authored with Giuseppe Colangelo (University of Basilicata) started out with an analysis of consumer inertia in financial market. He briefly discussed the research by the UK Competition Markets Authority (CMA) on how consumers do not switch bank accounts and how big banks have exercised market power by increasing the bank charges, in the highly concentrated UK retail banking market. He underscored the importance of consumer data as fintech firms are increasingly providing data-enabled services, particularly in the payment service industry. Banks who largely control customer data did not have enough incentives to provide access to the data to fintech firms thereby leading to the ‘data bottleneck problem’. To mitigate the ‘data bottleneck problem’, the EU Revised Payment Directive (PSD2) granted access to consumer data on real-time basis to fintechs (subject to consumer consent). This is also known as the ‘access to account rule’. His paper noted that the technical specifications such as standardised Application Programming Interfaces (APIs) are crucial for smooth functioning otherwise the PSD2 would remain a dead letter. The CMA had issued a Market Order requiring nine large banks to develop a common set of APIs to access the consumer data also known as the Open Banking initiative. By such demand side regulatory intervention, fintech has served as a new frontier of antitrust enforcement. Australia, Singapore, Canada, Japan and other EU member states have also embraced this approach. However, these interventions may have unintended consequences if bigtech firms, who have huge resources, could use the consumer data to gain unfair advantage in the retail banking market. Additionally, the paper proposed that banks would have to carry out a regulatory role for their own services to mitigate the unintended consequences of the access to account rule. The discussant, Katja Langenbucher (Goethe University Frankfurt), raised concerns regarding how banks and bigtech could misuse data. She highlighted the lack of regulatory capacity to monitor concerns that stem from the access to account rule. Further, she noted that whether this rule would benefit consumers and/ or change their behaviour remains an open question. ‘Platformification’ of banking: strategy and [continua ..]
Session 3: Technological aspects of fintech regulation
5. Technology v technocracy: fintech as a regulatory challenge In the third session of the conference, insight was offered into the regulatory opportunities and challenges presented by the emergence of fintech start-ups in the financial system. In her conference contribution, Saule Omarova (Cornell Law School) claimed that the emergence of fintech disrupts the underlying ‘technocratic paradigm’ of financial regulation. Using the USA as a case study, her paper analysed the key fintech-driven changes to the financial system as well as the corresponding challenges presented to regulators. Omarova identified as the ‘core of the fintech problem’ that technocratically-minded financial regulation still acts primarily at the ‘micro-level’; this means that it operates mainly along ‘product/entity’ lines and targets isolated transactional phenomena, which encourages bureaucratic specialisation and deep but narrow technological expertise. ‘Regulatory sandboxes’, special fintech charters, and ‘regtech’ exemplify these tendencies. Omarova argued that the fast growth of the financial system in size and complexity, driven by fintech, cannot be handled by this traditional way of regulation, shifting the control over technology to private actors and leaving financial regulators in a ‘catching-up role’. She suggested alternative forms of regulation that target the ‘macro-structural’aspects of the financial system. This approach is based on three main pillars: a proactive rather than a reactive role of regulators, a focus on structural rather than transactional regulation, and the incorporation of direct public participation in financial markets. Examples for this could be the licensing of new financial products or the issuance of a digital currency by central banks. The discussant, Luca Enriques (University of Oxford), qualified Omarova’s suggested approach to fintech (and financial regulation more generally) as a ‘testing and tracing’ model and noticed how in fact elements of this approach may already be present in the current financial regulation framework. An example of that is regulators’pro-active stance vis-à-vis Facebook’s Libra project. Technologising the bank charter David Zaring (Wharton Business School) investigated into the merits of the US Office of the Comptroller of the Currency’s (OCC) special purpose (federal) [continua ..]
Session 4: Regulating financial innovation
How to best regulate financial innovation? Dirk Zetzsche, Roberta Consiglio and Robin Veidt (University of Luxembourg) offered a quantitative approach to assess the impact of regulation on financial innovation and answer questions on the fintech-specific tools and resources employed by regulators. Their database stems from the preliminary results of their survey of Financial Supervisory Authorities (FSA) across the globe and public disclosures made by these FSAs. The data and the questions posed in the survey focus primarily on the cooperation of general supervisory approaches as well as the cooperation between banks and fintechs. Acknowledging the importance of regulatory sandboxes, the authors shed light on the relation between the various regulatory tools and their impact on financial innovation. Beyond the use of different regulatory tools, the survey aims to fill a gap in the existing literature by identifying country-specific challenges and features of the financial ecosystem that might influence the choice or the success of one regulatory approach over another. The research questions also revolve around the fintech ecosystem in general, with emphasis on the fintech-regulator communication and the cooperation between the regulated entities and fintech enterprises. Some of the preliminary results of this survey, such as the lack of clarity characterising the entry and reporting requirements applicable to fintechs, were further analysed. The survey results also brought useful conclusions on the importance of a clear national fintech strategy or the relationship between the number of employees in fintech departments and regulators’commitment to promote fintech. On the bank-fintech cooperation level the survey seems to suggest that more needs to be done (even if regulators already recognise its value for all stakeholders). A core takeaway is the lack of clarity with regards to regulatory and licensing requirements, this being a considerable impediment and potentially an entry barrier for innovative fintechs. The discussant, Hilary Allen (American University Washington College of Law), acknowledged the importance of the survey in light of the lack of empirical data in this area and its timeliness given regulators’eagerness to revise their initial approach to fintech regulation. She highlighted that the survey questions seem to revolve around the issue of how regulators can further financial innovation in the private sector, [continua ..]
Practitionersípanel: a roundtable discussion
The final round table was chaired by Thomas Hellmann (Said Business School) and included practitioners working with or at fintech firms. The panel offered insights into the various themes covered throughout the day. Huy Nguyen Triêu (The Disruptive Group) presented an operating model for the collaboration between new entrants and banks. He emphasised that large and small organisations differ not only in the profiles, mindsets and objectives of the people working within them but also in technology and processes. To underline the importance of people, processes and technology, he presented three case studies of successful collaborations between incumbents and fintechs where challenges in relation to were dealt with successfully. According to Jeff Lynn (Seedrs) there are fintechs that build technology meant to work with incumbents and these that act as disruptors and may not so easily fit with large organisations. Describing his own experience, Jeff Lynn focused on this second category and explained the hurdles his company faced in the collaboration with incumbents. The problems were mainly attributed to the different risk aptitude and risk profiles: fintechs would like to collaborate with incumbents on activities that would usually create more risk for the incumbent than value. Incumbents’business on the other hand is based on the integrity of their regulatory licence and the risk to jeopardising their existing structure and integrity by incorporating a new fintech model would rarely make sense. Silvio Fraternali (Banca 5, Intesa Sanpaolo Group) offered his view on the collaboration between new entrants and banks from the side of the incumbent. Drawing on his insight into the industrial collaboration between his bank and a fintech, a partnership based on commercial synergies which resulted in the combination of two business models instead of a mere investment in the fintech, he noted that this process required the transformation of the group’s proposition in a way that would allow growth and benefit for both sides and described the tedious process and the challenges they faced to achieve this. In addition to the explanations and clearance requested by the regulator, substantial work was required by the group’s own business units and control functions. In general, the preparation needed for such collaboration to work was a rather lengthy process, even if each single step examined in isolation may ex-post seem reasonable and [continua ..]