During the last decade, financial technology has improved dramatically, moving from mainframe trading computers and COBOL to mobile banking and blockchains. Never before have we been at such a critical inflection point as money, contracts, and regulations are combined into almost infinitely scalable code. Remote operations and contactless procedures are becoming the new normal, those financial services providers who previously resisted digitization now find themselves in a race for survival.
As with any “gold rush”, this frenzy brings new opportunities for exploitation, fraud, theft, etc. One only has to review the Wild West scenarios that played out in the cryptocurrency sector to recognize the potential for fintech to be used to either create or extract value. While some made fortunes in the early crypto days, others lost a lot. Hotter than the cryptocurrency and ICO wave of 2015-2017, fintech platforms are growing faster than ever before.
Within the realm of fintech exist neo-banks, challenger banks, incumbents, and disruptors, each with unique threats, opportunities, and unit economics. From a technology perspective, fintech today has the capacity to perform nearly all core operations – yet, few financial services providers have been able to fully digitalize the front office experience, much less mid and back office operations. For example, most institutions cannot open a new bank account for a new SPV of an existing client.
While incumbents, tech giants, and startups race towards 100% digital delivery of nearly all financial products and services. New technologies, such as blockchain powered digital assets, have received constant media coverage but still only account for less than 1% of the addressable market. Registered financial services providers need clear regulatory guidance in order to take advantage of the benefits of blockchain technology.
Beyond blockchain technology, we are at the forefront of major shifts in regulation on virtual assets, data governance, privacy, custody, exchange, payments, KYC, and AML. The “new normal” has captured the attention of regulators, law societies, and governments globally. Digital delivery is contactless delivery.
As new technology such as e-signatures, blockchain, artificial intelligence, and cloud computing are only now being accepted by regulators, law societies, and governments we are going to revolutionize what is possible for digital finance. On a global scale, regulations change constantly – however, these five trends are likely to have the biggest impact.
Trend №1. Virtual Assets Service Providers Join the FATF
Last year, the FATF published new guidance that included definitions of both virtual assets and virtual asset service providers (VASPs). Around the world, financial intelligence units (FIUs) – such as FinCEN in the USA – have local
updates of their interpretation of the FATF definitions with most coming into effect as of June 2020.
Combined with the “Travel Rule”, as well updates to payments and custodial regulations, VASPs that implement compliance by design into their platforms stand to earn billions. A recent analysis of Facebook’s Whatsapp payment service in Brazil estimated first year revenues of $8.7B, and $17B by year two.
No doubt, VASP regulation is a tool that Facebook will leverage to bring Libra to market. Currently operational VASPs, such as Binance now earn billions per quarter. With virtual asset regulation now in effect, more traditional financial service providers will be able to explore the use of virtual assets in their businesses.
Trend №2. Digital Reporting
Many new fintechs underestimate the cost of the regulatory burden in their business model. Whether it is filing securities registration or exemption forms, documenting and reporting suspicious activities, managing know your customer, or maintaining cybersecurity compliance – regulatory reporting has traditionally been an onerous and manual process.
Many regulators, such as FinTRAC in Canada, have recently rolled out enhanced digital reporting systems that support REST APIs and batch reporting. Government agencies and law societies are recognizing that physical documents and face to face meetings now present health risks, liability, and business continuity threats.
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Digital reporting systems not only make it easier for financial services providers to fulfill their obligations, they also provide regulators with better tools for audit, supervision, and investigation.
Trend №3. Increasing Pressure on Compliance in Communications
As regulators themselves upgrade their toolkits they are also better able to supervise their markets digitally. Regulators such as MAS in Singapore or BCSC in British Columbia are actively targeting businesses that offer their services digitally, without maintaining local licensing or reporting requirements.
As more regulators enhance their capabilities beyond digital reporting, they are becoming more efficient and better able to focus their efforts. This not only reduces regulatory burden for financial services providers, it makes life a whole lot easier for their clients.
Technologies such as natural language processing, big data, machine learning, etc are able to go well beyond analyzing inbound data feeds and with greater digital adoption can monitor the market at scale. While it is still early for the “Suptech” sector, regulators are starting to be equipped with the tools that enable them to separate signals from the noise.
Trend №4. Liquidity in Private Capital Markets
As technology continues to inspire digital transformation throughout financial markets, few sectors have more room for improvement than the private capital market. Previous to now there were many restrictions on using core business tools such as e-signature, video conference meetings, digital onboarding, digital identities and digital notaries.
Private market leaders such as Nasdaq and Carta are shifting their offerings from software tools to providing platforms and marketplaces that also enable discovery and exchange. While this has been attempted by many with little success, such as Marco Polo or Open Finance Network, the digitization of reporting systems for payments, securities, know your customer, and anti-money laundering has unlocked the possibility for transactions that take weeks or months to close today to be processed almost instantaneously.
Trend №5. Identity and Access Management Meets KYC and AML
It’s not like the financial industry didn’t have enough regulatory acronyms, compliance teams now have to learn a few more: GDPR, SCA, IAM, and more. Globally, new regulations for strong client authentication and transaction monitoring require financial services providers to manage a web of complex tools.
Many early stage fintechs enter the market unaware that digital onboarding is not KYC, leaving them to fail compliance reviews, lose banking relationships, and have to shop for jurisdictions with lower standards and smaller markets. By combining or integrating biometric authentication, push notification, and privacy centric single sign ons together with anti-fraud, KYC, and AML tools – financial services providers can maintain KYC compliance for the entire life cycle.
As these regulatory trends continue to evolve and unlock new digital capabilities, financial services providers are able to improve the effectiveness of their compliance operations while drastically reducing cost. In order to maintain KYC for corporate accounts – traditional firms in the USA can spend as much as $30,000 USD per client account per year. In contrast, fintechs and major technology platforms such as Salesforce, Bloomberg LEI, and Apple’s App Store use digital KYC services to perform the same business functions for less than 5% of the cost per client, per year.
While each of these trends has the potential to have a major impact on how we use or provide financial services, it is the combination of these trends that is brewing a perfect storm for a rapid digital transformation throughout the world’s oldest and most conservative institutions.
Matthew Unger CEO iComply Investor Services Inc