Innovation and regulation: an unlikely couple
Why do innovators and regulators so often sit in different camps?
The narrative that innovation in financial services must disrupt the existing systems and infrastructure is partially to blame. This can, of course, be the case for dramatic changes, such as in Sub-Saharan Africa where mobile money had to transcend the limited infrastructure to reach a vast unbanked population. But it is not the norm.
The need for innovation in the digital payments system has been heightened by the recent dramatic migration to online services, brought on by lockdowns around the world. Consumer behaviours are accelerating quickly and services must keep pace. For this to happen effectively, with customers kept at the forefront, innovators and regulators have to come together. As an industry, we need to work with the current system and boundaries in order to then expand them.
What I’m proposing is not a new approach; there are a variety of successful case studies already. But we need to be better at learning from these. Singapore’s attitude to fintech and digital payments is an example I call on regularly, and for good reason.
The Monetary Authority of Singapore (MAS) uses its position as a regulator to support change, and ensure new players and services can operate within regulatory constraints. If they can’t, it re-evaluates its framework and, where appropriate, adjusts it to safely progress innovation rather than act as a roadblock. This time last year, it issued five new digital bank licenses. Later in 2019, MAS launched Sandbox Express to help create a faster option for testing innovative financial services in the market. It’s currently reviewing its AI framework to ensure customers are judged fairly for credit risk.
PSD2 is another solid demonstration of using regulation to keep customers protected while allowing new technology to thrive. While it is a threat to existing business models, it has encouraged European banks to utilise APIs and created competition among digital financial services, while simultaneously protecting customer data.
We know this collaboration is possible. But hindsight, of course, can make these challenges seem much easier to overcome. Central banks and regulators have, in the past, been very opposed to digital currency, but it’s become one of the most hotly debated topics in financial services at the moment. A recent survey of 66 central banks by the Bank for International Settlements shows that more than are now working on central bank digital currencies.
The fallout of COVID-19 is not only reducing the use of cash but also exposing the need for more convenient digital financial services. While central banks can be slow to innovate due to their position in national and global economies, they’re no strangers to the need for a more accessible currency. Whether this is created by the banks themselves, as the European Central Bank is aiming to do, or by a consortium of different players, regulation will need to be at the heart. Luno, a PayU portfolio company and Malaysia’s first fully regulated crypto exchange, is a great example of how we can give access to financial services within the parameters of the country’s regulatory framework. blockchain is helping residents of emerging markets
In order for blockchain to begin to deliver on its revolutionary potential, regulators need to work with visionary players to investigate how it can be used effectively, safely and securely. This will have a tremendous impact on broadening access to essential financial services for billions of people, and on lowering costs for those who need it the most.
It’s also important to consider that financial services as a sector is being increasingly more crowded. Consumer internet companies, as well as startups, have taken it outside of banks’ walls and now fintech is showing even more scope to trickle into other industries. WhatsApp, for example, has been working to develop in-app payments to roll out across countries. This trend was already in play before the Covid-19 pandemic hit, but has been accelerated by the dramatic shift online across the world.
As fintech becomes a part of other business models rather than a standalone entity, regulators will need to adapt their approach to make sure payments, credit and other services are secure and the customer is protected. Regulators in Brazil and India have been grappling with this, as WhatsApp tries to establish its payments feature in both markets, but was suspended by the former’s central bank and has been in testing in the latter for over two years.
We’ve seen this before; the telecoms companies that enabled the widespread adoption of mobile money in Africa often sit outside of financial regulatory control. The industry is now moving to change this, and offer people the relevant protection and privacy. Central banks like Kenya’s have shown real collaboration of late, for example supporting M-Pesa’s waiving of fees to reduce the economic and health impact of Covid-19 on the wider population. In the Asia-Pacific region, an increasing number of digital banking licenses are being made available for telecoms operators to support innovation in a regulated way.
Regulators are recognising quite how vital their already integral role is in the progression of new and exciting technology. The trends being expedited by the pandemic are drawing attention to how they can retain their core purpose - to ensure the safety and security of the customer - while supporting positive change. To unlock the enormous opportunities emerging in the payments industry, both innovators and regulators need to work together and share a common vision: to create a world where everyone can prosper.
This article was contributed by Fady Abdel-Nour, Global Head of M&A and Investments, PayU
FCA bans ‘price walking’ for insurers from Jan 2022
Insurers will no longer be allowed to raise premiums upon annual customer renewals following a new ruling by the Financial Conduct Authority (FCA)
The new move, which comes into effect in January 2022, will directly affect people renewing their home or motor insurance because they will pay no more for their premiums than a new customer.
The FCA said the change will save loyal customers an estimated £4.2bn over a 10-year-period. However, it also admitted the move could mean cheaper deals for new customers can no longer be sustainable for insurers attempting to attract business.
Price walking practices ended
According to reports, the FCA has been working on changing the rules on ‘price walking’ as it is termed, because customers are charged more their annual premiums, even though their level of risk remains the same. The system has resulted in complaints from consumer groups that loyal customers pay more unnecessarily.
"These measures will put an end to the very high prices paid by many loyal customers. Consumers can still benefit from shopping around or negotiating with their current provider, but won't be charged more at renewal just for being an existing customer."
Victory for the customer
Consumer groups have hailed the change as a victory for customers who have ended up paying higher premiums unnecessarily, but admitted it presented huge implications for insurers in the short term.
Consumer Intelligence CEO, Ian Hughes said, “These changes represent a tsunami for both insurers and their customers, but we should be in no doubt that the fault line that sits underneath this is fair value, mentioned 153 times in the final statement. GIPP changes will feel like just a ripple for those who don’t offer fair value to customers."
He continued, “This is going to be a bumpy ride for insurance brands and consumers alike in the short term. Today, the FCA has revealed that cash and cash-equivalent incentives, other than toys and carbon off setting, cannot be used to entice new customers without being offered to renewing customers. This means the savviest consumers who shop around each year will see prices rise and discounts and offers disappear.
“However, there is an opportunity for the industry to take advantage of all this change that is coming and do something that will be good for brands, good for the industry and good for consumers."
Consumer Intelligence PR and communications manager, Catherine Carey agreed, and described the victory as “a shot in the arm for innovation.”
Carey said the move “presses a giant reset button on the relationship between price and value, it will change the relationship between brands and consumers.”
She explained, “We expect to see insurers changing their models and new firms entering the market for the first time as loss-making year one pricing phases out. If you look at these new rules, and specifically the introduction of fair value, it’s the most exciting time for the development of the general insurance market for decades.”
Hughes also warned against insurers resisting the regulatory change, “Those that don’t take advantage of the opportunity are going to find it really tough.”
He added, “The tipping point we find ourselves at today is a critical point in the journey of this industry and there is an opportunity to be positive.”