Our Partner and Managing Director John Sills explores whether the new kids on the banking block are playing by the rules
This article originally appeared in the April issue of FS Focus, ICAEW’s financial services magazine which is available to read here.
In all the excitement and intrigue of disruptive innovation – with onlookers watching the new kids take down the old incumbents – many people turn a blind eye to the fact that the start-ups often do it by bending the rules. Fintech unicorn Revolut has lately endured criticism of its ‘single-shaming’ Valentine’s adverts that also contained fabricated statistics, and a damning Wired report about its workplace culture.
However, most worrying is the probe it is facing from the Financial Conduct Authority over claims that an anti money laundering system Revolut used was switched off for three months last year. When it comes to innovation, a similar pattern emerges across companies and industries as the old world gradually gets used to the new way of doing things, and the start-ups take advantage of being able to get away with more.
First, a new technology emerges that early adopters find ways to use without commercialising it or making it legal. When some take off, the incumbents first dismiss them and then try to stop them with protests or appeals to the regulators. However, realising that customers’ expectations have now shifted, the incumbents are forced to catch up – and find ways to make money from it, while the start-ups accept a slap on the wrist and promise not to do it again, having gained customers and credibility in the process.
This pattern can be seen repeated throughout history. Take the 15th century invention of the printing press. It heralded the mass distribution of books, including William Tyndale’s English translation of the New Testament in 1526, which earned him the slightly harsher punishment of being executed rather than fined.
The most recent example is the change in music and film distribution. People have always shared music illegally. Recording mix tapes and burning tracks on CDs wasn’t really allowed, but it never caused a huge problem to the incumbents. But when higher internet speeds arrived, coupled with greater personal data storage capabilities, the likes of Napster changed all this.
Suddenly music and film could be shared, quickly downloaded and stored in volume, creating panic for CD retailers and a legal nightmare for those charged with trying to uphold existing copyright laws
While the existing organisations tried to work out how to save their businesses, Netflix and Spotify worked out how to do this in a way that was legal and profitable, capitalising on those forerunners who were happy to break the rules. In doing so, they set a new customer expectation for what good looked like.
But just as those companies become incumbents, so the process starts again. How do Netflix and Spotify stop people from sharing log-in details and passwords? How does Sky Sports stop people from finding streaming services to watch football matches for free? And for the regulators, how will they deal with the increasingly cloudy rules around privacy? While big companies try to stick to the existing rules, the challenger companies can push the boundaries and create a new product or experience that raises customer expectations.
Whereas the impact of this rule stretching is felt more by the companies than the customer in most industries, the stakes are far higher for all involved in financial services. It’s people’s real money at risk, in a heavily regulated, complex industry. And that means it’s far more difficult, but also far more important, for the rule-makers to find the balance between championing innovation and protecting those involved.
So to create a level playing field – and a safe environment for customers – regulators and incumbents need to stay abreast of the trends most likely to affect the industry and customers; the technologies most likely to create new opportunities; and the companies starting to challenge the way things are done.