Adam Prince, Vice President Product Management, Compliance & Brexit, Sage
In September this year, the European Union’s second Payment Services Directive (PSD2) went live. As far as end-user businesses are concerned, the goal of PSD2 is to drive down the costs of managing bank accounts and payments and enable teams to get on with value-add activities.
As the directive opens up banking to greater data sharing, automation and secure interaction, the aim is to move finance into the age of ‘invisible admin’, taking away repetitive, non-valuable tasks so that SMEs can focus on driving the success of their business.
In other words, the point of PSD2 is to make finance work for business, rather than the other way around. With that in mind, how will the regulation change working practices – and what do SMEs need to do to ensure they reap the benefits?
How can PSD2 help SMEs?
Under the new rules, systems will be developed that help SMEs to get a much clearer view of where their money is moving. Cashflow is widely regarded as the biggest cause of insolvency among SMEs in the UK – the FSB recently noted that ’80-90% of failures in the sector are due to poor cash flow.’
As a result, it’s essential that they can track where their money is going and ensure that outstanding invoices are followed up. At present, tracking payment and banking details is a hefty administrative task, which means that it either drains valuable resources out of the business, or worse, ends up being left undone.
To address that issue, PSD2 mandates banks to provide APIs (application programme interfaces – essentially sets of interfaces that make it easier for one system to interact with another) to make deeper, automated integration possible. When SMEs’ IT systems can track payments on their own, providing reports on demand to keep the finance team informed, staff can get on with pushing the business forwards rather than chasing up payments.
The UK’s Open Banking framework, which runs in parallel to the PSD2 regulation, also mandates that the nine largest banks must provide a single standard of APIs, so that if a company can interface with one institution, it can interface with them all.
SWIFT, the global banking standards body, also announced in September 2019 its intention to mandate that all banks implement common standards under ISO20022. This unified approach will reduce the number of technical and economic barriers stopping businesses from operating in the way that works best for them – whether they want to work with a challenger or a high street brand.
Security is a priority
This API-driven approach to banking will make life much easier for businesses, but it does come with its risks. Financial data sharing must be done securely or it could cost companies a lot more than admin time. To ensure the required level of security, PSD2 includes a set of Secure Customer Authentication (SCA) rules to ensure that users can be authenticated and that APIs can be accessed securely via common standards. Essentially, this means that SMEs will need to use two-factor authentication to access their data.
The UK’s Financial Conduct Authority (FCA) has announced an 18-month migration period or ‘soft landing’ for this part of the regulation to ensure banks and payment service providers have the time they need to comply. So long as there’s a clear plan in place to achieve compliance, no fines will be levied if the APIs and SCA are not yet in place.
Interestingly, that need for security in digital banking across the globe can be seen in the difference between the way that the EU and Australia have approached their regulations. PSD2 is based on the premise that payments must be regulated to provide APIs – in other words, that banks need more supervision to ensure quality service. By contrast, Australian regulators are working on the premise that financial data is personal data, and customers should be able to access it free of charge – so banks must provide open APIs to make that access possible.
Both approaches end up at the same point from different ends of the scale. In both cases, the customer is at the heart of the regulatory change. As a result, SMEs stand to benefit hugely from increased control over their data and more connected, flexible services – but they must have the right tools in place to access those services.
Banking without cloud is no longer an option
If businesses are to get the most out of the new PSD2 regime, there is a clear need for cloud-based software to ensure they can access all the integrations available. If they don’t have the ability to import financial data, they’ll completely miss the benefits. The alternative is to carry on doing everything manually, spending time doing reconciliation by hand, always working on cash flow data that is out of date, missing customers who fail to pay you and making avoidable manual errors.
Businesses that work with an experienced financial software provider also stand to benefit from assistance as the industry goes through the final roll-out of PSD2. Most large banks are ready for API integration and secure customer authentication from the September launch date, but some banks are a bit behind the curve, which may cause some businesses functional problems in the short term. It’s essential to work with a partner that can continue to make access to essential financial data available despite these growing pains.
PSD2 was developed for the benefit of businesses and individuals across Europe. We live in an era of unprecedented information exchange, and regulations like PSD2 point the way to a more connected, user-friendly, flexible and intelligent way of working. Compliance with PSD2 will ultimately bring a host of benefits so long as the correct security measures are put in place – far from a burden, this is the start of a brave new world.
Now is the time for SMEs to move to a cloud-based financial platform – and unlock the full value of open banking.
‘MOVE FAST BUT DON’T BREAK THINGS’ – WHY FINTECHS WILL COME TO LOVE REGULATION
Alex Johnson, Director of Portfolio Marketing, FICO
The guiding ethos of fintech is move fast and break things. It’s the fundamental advantage that disruptors have over the incumbents they’re disrupting — the ability to move quickly and make mistakes, learn from them and deliver innovative services to customers. Generally, this ethos is presented as a virtue. Banking is ‘broken’ so any investments in improving it are both notable and noble – even if there are bumps along the way.
Conversely, anything that stands in the way of this ‘march of progress’ is generally cast as a villain.
The most prominent villain for fintech companies is regulation. From their perspective, it’s a competitive moat, based on rules written for a different century, that protects banks’ ability to make money without needing to innovate and offer more or improved services to their customers.
So, it’s easy to see why a fintech company — believing fully in the virtue of its mission and faced with a litany of illogical and intractable regulations — might just say ‘we’re doing it anyway.’ That’s what Robinhood co-founder Baiju Bhatt reportedly did when his company tried to roll out a checking and savings product that it claimed was insured without confirming that with regulators first.
The problem is that while we may mythologise the ‘move fast and break things’ ethos in the abstract, consumers don’t love it when their stuff breaks in the real world.
And when fintechs and challenger banks aren’t constrained by regulation (as they mostly are in the U.S and Europe) the harm caused by this ‘move fast and break things’ approach can be much more severe than a service outage or a false claim of deposit insurance.
Stories from overseas
In China, online P2P lending exploded in popularity, with the number of P2P lenders growing from 50 in 2011 to 3,500 in 2015. Then the whole industry imploded when it was revealed that 40% of P2P lending platforms were Ponzi schemes.
In India, online lending companies raised a record $909 million in venture capital last year (the third-biggest market behind the U.S. and China). And those lenders are now using personal data from borrowers’ mobile phones to make lending decisions – which although illegal, is reportedly ignored by Indian regulators.
In the Philippines (another emerging market where venture capital dollars for online lending are pouring in), the National Privacy Commission is investigating hundreds of complaints from consumers about lending apps leveraging their personal data to shame them into making their payments.
A prediction for the decade to come
In the 2020s, I believe fintech companies will come to love – or at least quietly appreciate – regulation for two primary reasons:
Fintechs and challenger banks understand that brand recognition and affinity is key to their long-term success. Building their brands will be a challenge. A recent survey of 2,000 Brits found 40% don’t trust challenger banks at all and 67% said they are more likely to do business with banks that have branches on the high street. As Zach Bruhnke, co-founder and CEO of U.S. challenger bank HMBradley recently said, ‘We’re going to have to grow by word-of-mouth and doing the right things for our customers.’
Fintechs and challenger banks focused on the long-term task of building brand affinity and trust will, over the next decade, come to despise bad actors that skirt the rules and dress up get-rich-quick schemes in the same language they use to describe their own firms. Regulations that constrain and/or shut down these bad actors will be increasingly appreciated by legitimate market participants.
In the 2010s, we saw the beginning of a trend that will strengthen in the 2020s — regulations designed to foster competition between incumbents and new market entrants. To date, such regulatory action has run the gamut, from vague (innovation sandboxes and special-use charters) to hyper-specific (U.S. regulators’ cautiously approving the use of alternative data, or the Bank of England considering giving non-banks access to its 500-billion-pound balance sheet). Perhaps, most promising, has been the work done by the Competition and Markets Authority (CMA), which has been proactively driving the adoption of rules and standards around Open Banking for past couple of years. O
ver the next decade, through careful management of public perception and increased investment in lobbying, fintechs and challenger banks will further reshape the regulatory environment from a competitive moat to a more level playing field.
Reaching fintech maturity
’As a licensed broker-dealer, we’re highly regulated and take clear communication very seriously. We plan to work closely with regulators as we prepare to launch our cash management program’.
This was the statement issued by the chastened co-founders of Robinhood shortly after they backed away from their plan to launch a checking and savings product without government insurance. And here’s the crazy part — that’s exactly what happened! Less than a year later the company announced a new deposit product, this time insured by the Federal Deposit Insurance Corporation (FDIC).
As fintech companies mature in the 2020s and the focus of their strategic objectives shifts from growth to profitability, regulation will play a vital role in transforming the ethos of those companies into something a bit more sustainable. Call it ‘Move fast, but don’t break things’.
HOW TO MERGE YOUR FINANCES AS A COUPLE?
By Nelisiwe Ndlovu, Certified Financial Planner at Alexander Forbes
There is never a good time to discuss finances with your partner, married or unmarried, and one key issue that needs to be discussed is whether you should merge your finances.
Joining all your money matters can seem overwhelming at first, so you don’t have to combine every bank account and credit card from the get-go.
Start by having an honest discussion with regards to your individual money management and financial commitments before deciding to merge or co-manage your household finances while deciding if you want to fully merge all your finances. Detail all individual income, expenses, and all your financial commitments. The best way to achieve this would be to first take your individual budgets and combine them. This will tell you what you can and cannot afford as a couple. If one partner does not usually budget, this is a chance to start doing so as this will ensure that your household finances are under control.
Before you think about merging your finances, be open and honest about:
- How much you earn – what is the income that you will bring home? What is the frequency of your income? Are you permanently employed or a contractor?
- What are your current individual expenses and financial commitments? List your assets and your current debt.
- Your individual financial goals and money management techniques – don’t worry if you might have not figured this out at the time of merging your finances – the important thing to do is to be open and honest so that you both build a stronger money foundation
- Disclose your financial obligations, this becomes very tricky if left until too late and may cause unnecessary tension in the relationship
- What are your goals as a couple – what is the purpose for merging your finances?
Married couples can formally or informally merge their finances as detailed above where household expenses are split between the couple (the split could be 50/50 or any fair split agreed upon by the couple, which could be based percentage-wise depending on one’s income). Some couples tackle finances by adopting the ‘pick a bill’ approach, where one couple pays the water and electricity while the other covers the food.
Being married does not mean necessarily that you need to have one joint account. You may also just want to open one joint account where you each deposit money to pay just your monthly household expenses.
The top five things to remember when merging finances as a couple:
- Have the ability to manage your own finances before expecting another person to merge their finances with you.
- Be mindful of your potential spouse/life partner’s money management behaviour and skills so that there are certain things you can address together before considering merging your finances
- Always keep an open line of communication – honesty is the best policy
- Set a money limit which you can each spend without having to consult each other
- Don’t forget to change your wills and beneficiaries on pension or provident funds as required.
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