Developing regulation poses problems for smaller payments players

As the regulatory landscape continues to evolve, is innovation at risk in the fintech space?

By Lucy Frost

The economic environment has put a strain on many businesses, but for smaller market participants, some of these challenges are being compounded by what seems to be an ever-deepening regulatory landscape.

The Financial Conduct Authority (FCA) is broadly expected by market participants to expand the regulatory environment for payments firms, leading to questions over how effective such regulation is.

“For me the question is: is the current regulatory framework fit for purpose?” asks Konstantinos Adamos, senior legal counsel at Revolut. “Does it help foster innovation? Are the rules proportionate ► and agile to foster new technologies?

I’m inclined to say yes – although clearly there are pain points.

“The EU and the UK have a progressive set of rules for payments. Take open banking as an example, this is something we have had for several years in Europe, but in the US, this is only just starting.”

Other market participants pointed to the difficulties for regulators in tackling a space that is constantly changing due to the rate of innovation, such as open banking.

“Payments are subject to a variety of risks, including operational, liquidity, reputational, business and fraud,” explains Tara Rice, head of secretariat of the BIS Committee on Payments and Market Infrastructures (CPMI), which helps influence the agenda for payments policymakers around the world.

“Innovation may introduce new dimensions to these risks and new challenges in terms of detecting, managing and mitigating them. At the same time, it can offer end users more choices for making payments – and more efficiently.”

Open banking headaches

Perhaps the area of regulation posing most problems for innovation is open banking. Open banking came into the UK’s regulation through the EU’s PSD2 and was transposed into law pre-Brexit. However, this regulation is now set to be reviewed.

“The government needs to ensure open banking is set up for success,” says Luke Kosky, fintech policy lead at the Coalition for a Digital Economy (Coadec). “Right now, we are at a bit of a crossroads where the regulatory regime is going to be transitioning into a new chapter.”

Another key element of the open banking regime set to be reviewed is the competition angle. While these changes will set the market on a “long term sustainable footing”, according to Mercer, the uncertainty in the regulatory regime could be difficult for firms to manage.

The use of open banking is only going to become more important as merchants move away from card-based payments due to the high levels of fees that come with it for retailers.

Tier-based approach

Payments are regulated in a very similar way to banks, with compliance teams