The FINTECH Book. Chishti Susanne

other industries such as music and telecommunications, which have also been completely transformed by the power of new technologies and the internet. What a traditional bank might view as a threat in the digital age, their more nimble counterparts might see as an opportunity. The result is a wave of FinTech firms that look to optimize particular segments of the financial value chain (whether that be international money transfers, loans, or payment processing) and offer their specialist services to other businesses and banks, via APIs. A company that wanted to support musicians could, for example, use one technology firm such as Kickstarter to provide loans, and another firm such as Currency Cloud to make the payment. The success of these players is in part due to their ability to focus on a very niche segment of the industry, rather than trying to compete on all levels. Banks on the other hand, have always tried to own every aspect of the financial services spectrum, yet this is where they are now struggling as alternative players offer up more sophisticated services for customers within a specific niche.

      Despite their differences, both FinTech players and banks have much to gain from working together. FinTech firms can benefit from the long history of banking operations and the foundation that banks provide. They are a vital part of the puzzle as the banks provide the financial instruments that FinTech firms package up in different ways, at the same time concentrating on one specific use case at a time. Banks can simultaneously gain value in new players – whether that means looking to partner with them or acquire their advanced technology offerings. Using API capabilities delivered in this way can help banks to expand services internationally, reduce development costs, and unlock fresh revenue without having to invest in and build new architecture.

      The growth of FinTech and push for open access to financial data has been noted industry-wide as the government continues its support of FinTech firms and the development of the UK as the world’s most exciting financial hub. It is not all that surprising that they have recently announced plans to create a consolidated, open API standard for banks. The government has committed to launch a call for evidence on how best to deliver an open standard for APIs in UK banking and to ask whether more open data in banking could benefit consumers. While the start of this process has been to discuss the product banks offer, what FinTech firms are really interested in is the next step: opening up the transactional data from within a bank. Banks, however, are still very cautious about giving outside developers access to this type of data and it will take many more discussions before such a move becomes a reality. It may not have been the strides that we had all originally hoped for when we heard about the open standard but at least it is a very good start. This is an encouraging step forward for the industry. We have already seen how nurturing the API economy can provide the industry with a large dose of innovation, and with further support it will undoubtedly continue to produce new opportunities for both banks and the up-and-coming alternative players in this industry. With the UK government putting their faith in these successful newcomers to take the industry forward into the 21st century, this further indicates that alternative players have done a successful job of proving their value to the industry – and such credibility will continue to grow.

      There is much to gain from FinTech firms and traditional banks embarking on a collaborative relationship to discover and define the future growth potential within the industry. We strongly believe in working with, rather than against, the banks and we are in no doubt that collaboration with forward-thinking technology firms will ensure that the finance industry continues to innovate.

      Global Compliance is Key

      By Jan C. Wendenburg

      Member, Executive Board, XCOMpetence AG

      We love great FinTechs, like PayPal, Apple Pay, and Stripe. We love to see them rise. We love using them. But we would all dump them within a second if they were to fail – fail to be trusted, fail to be secure, or fail to comply with local financial regulations. Compliance with legal financial regulations is not optional, but mandatory. It is mandatory for each FinTech to build a secure, trustworthy service, regardless of geography and legislation. Almost every nation has its own individual financial regulation based on its distinct culture, financial system, and historical experiences.

      If you have launched your FinTech company but disregarded compliance for your service, you may well be shut down by supervisory authorities, resulting in potential reputational damage and associated costs needed to rectify them. If you over-comply with regulations, you will not move forward fast enough and be ousted by the competition. Are there any shortcuts to compliance?

      FinTechs Must Understand Each Local Regulatory Stack!

      If you want to bypass industry incumbents, you must understand the rules of the game. While FinTechs are trying to bypass major players, they cannot begin attacking them unless they understand the regulatory landscape and quickly learn how to use regulation and legal specialties to their advantage.

      A key rule is that you should never try to bypass regulation. It’s much better to embrace it as a core function of your organization. If you take care of regulation and compliance from the start, you will be in a stronger position from the very beginning instead of having to play catch up. It’s like customer acquisition: it pays big dividends down the line. Think twice about what your organization does and how you intend to structure your compliance. Do you really see regulation and compliance as part of your organization, your life, and the DNA of your start-up? What are you doing today regarding regulatory compliance? Do you know how financial regulation works throughout the most important regions around the world?

      The United States: A Single Market with Complex, Multi-level Regulations

      Let us first take a look at financial regulation in the United States, which is highly fragmented compared to European and Asian countries, where most jurisdictions have only one bank regulator. In the US, banking is regulated at both the federal and the state level. Depending on the type of charter a banking organization has, and on its organizational structure, it may be subject to numerous federal and state banking regulations.

      This structure makes life complex for FinTechs in the United States. For example, if you want to provide investment management and advice, like Wealthfront in Palo Alto, CA, you will have to specify first which state law may apply to a particular client. Beyond that, you will not be allowed to serve international clients, unless you implement international anti-money laundering procedures and handle cross-border tax issues properly. As a result it may be easier to open international offices within other countries instead and serve local clients within the regulatory framework.

      If you want to launch something in the lending space, like Lending Club in San Francisco, CA, you will have your marketplace of lenders and investors at the bottom. On top of that, in increasing order of difficulty and market breadth, you will have US state-level legislators, then US federal regulators, NASAA, then the Securities Exchange Commission (SEC). Once you succeed here, and want to serve European lenders and investors, you will have to open European or Asian offices and must follow their local regulations.

      Europe: Still Complex but with Some Harmonized Regulations

      In 2014 Europe implemented the Single Supervisory Mechanism (SSM), which is intended to harmonize the different national financial regulations within the 27 European member states. Within each country, a National Competent Authority (NCA) supervises national banks and financial service providers. If you want to expand into other European countries, you will have to work with the local NCAs and their respective regulations, i.e. in the UK the Prudential Regulation Authority (PRA), which oversees about 1,700 banks and financial service providers, and in France the Autorité de contrôle prudentiel et de résolution (ACPR), both based on a similar regulatory and legal stack as Germany.

      Asia: Remains Very Fragmented

      Going to Asia, you may want to focus only on China and India – the rest of Asia is very fragmented and mainly focuses on what the two major Asian countries are doing. China’s financial system is highly regulated and has recently started to liberalize itself as China’s financial policy becomes more significant to its overall economic strategy. As a result, banks and financial service providers are becoming more important to China’s economy by providing increasing amounts of finance to enterprises for investment, seeking