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Risk for multi-tenant platforms and regulatory focus on vulnerability

More risk for multi- tenant platforms and a regulatory focus on vulnerability

2022 will mark a regulatory turning-point for banks and FinTechs. Reversing the trend of seamlessly smooth finance, some products – such as Buy Now Pay Later – may be mandated to add a lot more friction.

While others, such as those who encourage mortgage prisoners, may be outlawed altogether. Another fascinating development could the tax-incentivized rise of FinTech innovation that is likely to arise, according to the Kalifa Review. Overall, the banks who surge ahead will be those who embrace compliance at every stage of the journey, not just the review phase. And those who rocket forwards are likely to be those who swim with, not against, the new regulatory current.

Trend 1:

More friction for Buy Now Pay Later

Buy Now Pay Later (BNPL) falls between the cracks of UK regulation. Regulatory bandwidths include things like charging interest, arranging credit for at least twelve months, exceeding £50 in value, and continuing for more than 12 repayments. To date, BNPL has managed to dodge these qualifiers and continue unregulated... but that could all be about to change as the FCA, the UK regulator, is very much focused on financial difficulty.

One of the most interesting things that’s being debated today is creating more friction in the BNPL journeys. For some time now, concerns have been raised from Citizens Advice and debt support charities around how effortless it is for younger people to fall into deferred payment schemes. It’s just too easy to apply for payment instalments for a piece of clothing and then forget all about it.

Pressure is mounting for these firms to slow down the process and give buyers more of an opportunity to say no. So, in a bizarre flip of events, this is one area of embedded finance that is likely to become less convenient in 2022.

Trend 2:

FCA focus on vulnerable consumers

The humanitarian theme is likely to spread to other areas of finance too. Over the past years, the lockdowns and dwindling employment levels have highlighted stark differences in wealth and living conditions in the UK, with many vulnerable people finding themselves destitute. According to FCA figures, around 24 million Brits fall into the “financially vulnerable” category – a shockingly high proportion. So, now more than ever, customers need support from banks. Now, the regulators are on the case.

In addition to BNPL, the FCA is also turning its attention to other forms of debt. There’s word of a consultation next year, which is likely to emphasize and reinforce fair treatment for customers, and add in some new requirements.

One particular group likely to receive a special focus from the FCA over 2022 and beyond is known as the “mortgage prisoners”. This is often somebody who has a negative equity or an interest-only mortgage. How the FCA plan to add in extra protection to help these homeowners is not yet clear. But for banks offering these mortgages, there will almost certainly be a shake-up in the coming years. Rather than putting out fires, banks may be required to pre-empt them – something banks have never been particularly good at.

The only way to meaningfully do this will be with technology. With a digital core banking engine connected to the relevant third parties, they’ve got that much-needed one customer picture. They can see all the risk elements for that customer, including the onboarding, risk profile, credit scoring, and their actual behaviour. With this information, banks can intervene to offer more suitable products, while staying on the right side of the regulator. It hardly seems real, but worldwide a jaw-dropping 68% of adults are excluded from credit because they don’t have the right history. Unlocking this by using relevant and accessible data could change the world for the better.

Trend 3:

The Kalifa Review makes its mark while open finance moves down under

When it comes to open finance over the next years, the UK may move to a model that is more like Australia. This means doing away with siloed financial product data and instead looking at the customer holistically. It’s a truly customer-centric approach. This new outlook comes off the back of the highly-acclaimed and HM Treasury-commissioned Kalifa Review – a key document for banks and FinTechs alike.

The 108-page report sets out a five-point plan for an upcoming “technological revolution”. Its aim? To help the UK “retain its position as a global leader in financial services”. Steps include a policy and regulation overhaul - as well as a drive for more skills, investment, international collaboration, and national connectivity. This review will change the landscape of banking and FinTech drastically over 2022 and beyond.

So, what kinds of things could we be looking forward to? Well, one important outcome is likely to be a refreshingly smoother path for financial innovation. If you’re a new start-up, it’s virtually impossible to navigate the rule book, unless you have some kind of specialist helping you. The Kalifa Review aims to change that – especially as it recommends dishing out tax credit for technology research and innovation.

Trend 4:

Overly ambitious tenants could pose risks for unprepared Banking-as-a-Service providers

Embedded finance has exploded onto the online shopping scene at breakneck speeds. But let’s hope it’s not happening at break-bank speeds. Incumbents offering up their license need to be wary of tenants without rigorous compliance standards. Not all tenants are created with equal risk appetites, and this could be an issue for banks over 2022 and beyond. As banks embrace more multi-tenant platforms, these varying risk appetites could prove to be problematic.

To manage this risk, the best banks and FinTechs will be the ones who embed compliance (as well as finance) into their culture. They need to be engaged at the earliest opportunity throughout the product design and marketing, a practice known as “swim chairing”.

Banks who fail to incorporate compliance from day one won’t keep up with the speed of the market over 2022 and beyond.

Solution: Genuine collaboration is essential to get ahead

All roads point to partnership. Not in the flimsy “can I borrow your license?” sense of the word. But a true and real partnership, where banks learn from tenants... And more importantly, tenants learn from banks. It’s only by sharing the fullest expertise that banks and tenants will be able to create products that truly meet customer needs.

At its heart, this involves banks and tenants sitting down together and listening to each other, every step of the way. And the data they discuss – not to mention the projects they implement - will come from technology. Finding the right core banking partner will be crucial for firms looking to get ahead in 2022 and beyond.