The Unintended Consequences of Overregulated Banking

Fintech firms have disrupted several subsectors of the financial industry.

Years ago, foreign workers resided temporarily in one country, while their families remained in another country within what today is the European Union – these individuals utilized creative ways to get the money earned back home in the form of remittances.

Common channels for these type of transfers include sending traveler’s checks and incurring wire transfer fees or Western Union equivalents. However, with the proliferation of ATM banking, withdrawing money from a local ATM has become a far more tangible option.

In years past however, transfer fees and money exchange commissions became a matter of concern to individuals sending money across European borders. Now, within the EU, border openings and laws allow workers from one country to reside and work in another, and tourists to travel with one currency throughout several countries. The sending of funds across borders has become an incredible business development opportunity in its own right, leading to an uptick in providers on the continent.

Then and Now

During the early days of the eurozone, the flow of money between European countries became one of the most relevant and tangible means of cooperation between countries on the continent. Workers would go into a bank and easily transfer funds to their families abroad (still within EU borders) without losing a cent in foreign exchange.

Since then, fintech firms have disrupted several subsectors of the financial industry, with services such as mobile payments and online payments, prompting regulators across many jurisdictions to incorporate resolutions that help protect consumers, while embracing the advances that these technological innovations are able to provide.

One such resolution is the PSD, or Payment Services Directive. When originally established in 2007, PSD intended to create rules to simplify payment processing across the EU and create a single market for payments within the Union. With the growth of technology solutions, a revision to PSD was proposed – PSD2. The idea behind the revision is to provide a level playing field for new companies looking to get involved in the payment processing arena, improve customer security and harmonize pricing.

This all sounds wonderful, doesn’t it? Well, levelling the playing field to benefit consumers is certainly of utmost importance, but doing so comes at the high expense of banking and financial institutions, which are required to heavily invest in technology that supports the directive, while seeing new competitors enter the market. These two scenarios end up in a dangerous reduction of profit for some well-established names in European banking.

If we look at the increasing number of regulations in other financial verticals, such as forex, we can say undoubtedly that the EU is unlikely to cease its regulatory momentum with regard to payment processing, and that a PSD3 has real potential. As a result, we may begin to see more consolidation and more innovative companies occupying a piece of the pie. So, what have been the unforeseen challenges for both established institutions and newcomers? Ensuring that they can provide the highest levels of security set forth by regulators, while at the same time meet rising consumer expectations.

Creating better APIs, better user experiences and richer choices will become a must for banks and other fintech challengers. With advances taking strides as they are, who knows, one day we may find ourselves banking via Facebook.

This article was written by Adinah Brown of Leverate.

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