The Chief Executive of the Financial Conduct Authority (FCA), Nikhil Rathi, weighed up the pros and cons of ‘full fat’ and ‘semi-skimmed’ approaches to fintech advancement in a speech this week.
Such an approach would ultimately benefit consumers, such as the hypothetical ‘Mo’ and ‘Sally’ used as examples by Rathi. The bigger picture however could be detrimental for the wider finance and tech sectors.
Starting with the consumers, in his speech to students at the Imperial College London Business School, Rathi noted that ‘Mo’ would benefit from the use of Open Finance, Open Data and AI to combat fraud and detect financial crime. Meanwhile, ‘Sally’ could benefit from fintech startups opening up banking and financial services.
From the outset, it appears that in the FCA Chief Executive’s view, the benefits of a ‘full-fat’ approach to fintech seem to so far outweigh the positives. The picture changes when looking at the wider industry, and in particular the regulatory attitudes to it.
“The boundaries between gaming, gambling, entertainment, trading and investing become so blurred as to endanger people’s long-term financial wellbeing,” he said. “We may have to brace ourselves for the Techlash.”
This blurring of boundaries is something that has concerned regulators and gambling law reform advocates for some time. For example, the blurring of gaming, gambling and entertainment have been cited by people concerned about loot boxes in video games.
Additionally, some MPs and other reform advocates have called for the UK government to classify cryptocurrency as a form of gambling and although this was rejected by the Treasury last summer, the view is still held by many.
On top of this, the UK Gambling Commission (UKGC) has repeatedly stated that it will continue to monitor emerging technologies and ‘novel products’ which could bear a resemblance to gambling, including crypto and other blockchain-based assets.
“Any of the Big Techs has the financial firepower to buy up all the UK’s major listed banks and financial services firms”
Nikhil Rathi
This is not the only area that was of concern to the FCA, however. Rathi highlighted that the largest firms, notably including but not limited to the Big Tech giants, could lose connection with some segments of the general consumer population.
“Hyper-personalisation could mean more groups become ‘too hard to bother with’ for firms, entrenching, rather than reducing, financial exclusion. Not least as huge gaps remain in financial literacy.
“The tech and banking giants gobble up the competition. Indeed, any of the Big Techs has the financial firepower to buy up all the UK’s major listed banks and financial services firms.”
On this latter point, the financial power Big Tech firms have is something the FCA has been examining of late. Late last year, the regulator initiated a consultation, asking participants to submit evidence and viewpoints about whether a ‘data disparity’ has benefited Big Tech firms.
Some in the financial and banking sectors have been more welcoming of these large entities, however. For example, NatWest shared its views with Payment Expert last month about the ways in which tech giants can drive financial services forward.
Regardless, regulators such as the FCA are clearly concerned about the impact a proliferation of power Big Tech firms could have on the financial markets.
“Potential jobs, investment, and growth could be imperilled, our ambition thwarted”
Nikhil Rathi
Whilst noting that competition and financial regulators ‘would have something to say’ about such a development, Rhati reflected that ultimately the immediate consumer impact would be that ‘Mo and Sally may be left with less, not more choice’.
In contrast to the ‘full fat’ approach, there is the ‘tech lite’ approach – also coming with its own pros and cons. First and foremost, Rathi observed that this would reduce the risk of widespread tech failures.
More limited use of AI could have two effects, frustrating some who prefer the time-saving this tech provides but pleasing others who value human contact and the ability to carefully discuss matters with an in-person advisor.
However, progress made on personalisation would falter and Big Tech would ‘avoid the regulatory sphere’, Rathi believes, meaning ’ data held by these giants would not be shared with smaller fintech firms.
“With little appetite for innovation, only tech giants seriously invest at scale, distorting competition further,” he continued.
“The cost base of traditional firms becomes bloated, impacting the long-term return on capital and their attractiveness to investors. We miss out on productivity gains.
“We also miss out on the benefits of innovation, arresting the recent success of the UK as a fintech hub. Potential jobs, investment, and growth could be imperilled, our ambition thwarted.”
Regardless of whether the FCA endorses the ‘full fat’ or ‘semi-skimmed’ approach to tech innovation in finance, the regulator’s Chief Executive noted that “our appetite as a society for consumer technology and innovation in financial services is growing fast”.
The FCA, and other fintech stakeholders, have a difficult job ahead in ensuring that a balance is struck between technological innovation with the consumer, at least in theory, front-and-centre, and ensuring that Big Tech does not disrupt and dominate competition and the market as a whole.
