Fintech will do to the banks what Amazon did to the book stores

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Borders Insurgent service providers are using new technology to disrupt traditional banks. Booksellers like Borders were crushed by new ways of selling books. The bank’s days are numbered. Or is it that simple?

Startup service providers are disrupting traditional retail banking bread and butter business by offering person-to-person (P2P) payments at a fraction of the cost. Consumer lending platform Zopa, for example, takes deposits from customers and then provides loans to those who want to borrow. It charges a fee for this service that is a fraction of the cut that traditional banks typically make. The internet has a long history of successful dis-intermediation and the legacy banks hardly have covered themselves in glory with all the mis-selling scandals and general apathy to their retail customers lately.

Challenger banks, when they accept deposits, are subject to the same banking licencing regulations and regulatory oversight as the legacy banks. Regulatory enforcement action against banks for anti-money laundering policy breaches have grabbed headlines in recent years with eye-popping fines. The UK division of South Africa’s Standard Bank was fined $12.6 million for breaches of AML (Anti-Money Laundering) and KYC (Know Your Customer) regulations. The UK regulator noted that they had no evidence that Standard Bank had ever actually handled the proceeds of crime, yet the fine handed down was still huge.  It cited an example, a customer account was flagged as “medium risk”, yet the company was in the mining industry and therefore, by policy, automatically “high risk”.  The failure here was of incorrect reference data.  More specifically, a failure to apply a business rule that derives a reference flag consistently and accurately.  I wonder how some firms would feel if a regulator turned up and asked to go through every field of all their reference data and check it for consistency and provenance?

The challenger banks and P2P payment services need to heed this warning. Many financial services firms are deep into this kind of regulatory risk because their client/counterparty data is in a mess. Having the right licences issued and appropriate policies in place is not enough. If the data isn’t right, the processes are suspect and if the processes are suspect, even if no dirty money has been handled or other laws broken, whopping fines can be issued. So, before steaming quite so fast into crushing the legacy banks the same as Amazon did to Borders, we urge a pause for thought. Selling books isn’t as highly regulated as selling banking services. First, get the data right.

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