There’s an old Chinese curse, “May you live in interesting times.”
2018 is shaping up to be an interesting year for the lending industry, especially when we consider the uncertainty surrounding political environments, tax reforms, and potential new regulations. At Turnkey Lender we’re a glass half full group of people. So when we balance regulatory chaos on the one hand with tremendous untapped fintech innovation on the other hand — it’s easy to be optimistic about the future of lending.
Here’s our list of the top 5 trends to watch in 2018. We’ll look at each area in isolation, but you’ll see they’re often interrelated and interdependent.
- Constantly Changing Regulations
- Regulatory Sandbox Accelerates Fintech Innovation
- Reduced Friction in the Customer Journey Differentiates Financial Brands
- Fintech Software Fuels Data-driven Decisions
- Cybersecurity Is Here to Stay
Constantly Changing Regulations
Does it feel like banking regulations are changing at a faster and faster pace? It’s not your imagination. According to a Thomson Reuters report, the number of daily compliance updates in the financial services category has increased over the past decade from 10 per day to almost 200 per day. When you layer on the new tax rules the sheer volume could drown a seasoned compliance expert.
These constant changes are one of the reasons regulatory compliance has become the fastest growing career path in the banking industry. And regtech software, which used to be a luxury, is now an operational necessity.
We found two interesting examples that demonstrate why so many lenders include a regulatory compliance director in their stable of experts. The new payday lending regulations, and the new Cyber Unit at the SEC.
The mission of the Cyber Unit is to target cyber-related securities misconduct. It sounds like their investigations would only impact the investment community, but SEC rules could apply to any lender who includes a customer rewards component in their value proposition.
The Cyber Unit put two companies out of business in December, including a foodie mobile app called Munchee. Their product design got them into hot water when they created the MUN, a digital token used to reward customers for posting restaurant reviews. The SEC Cyber Unit concluded the Munchee MUN carried enough profit potential to be considered a security token, instead of a utility token. Munchee was threatened with civil penalties and frozen assets, which they were able to avoid by returning $15 million investor funds. Their website has been pulled down, and their Twitter account has been dormant since November. So it appears the SEC review effectively put them out of business.
If a foodie mobile app can be bankrupted by an SEC regulatory action, then a complex mobile lending platform must take extra precautions. A pre-launch regulatory compliance review should be incorporated into the product launch plan, because it’s becoming more difficult to recover from a post-launch design hiccup.
The sweeping new tax reforms in the United States is another regulatory area to watch, but it may take several years to realize the full impact. It looks like the immediate benefits will go to established, profitable enterprises like big banks as their tax rate drops from 35% to 21%. That’s a whopping 14-point increase in profit.
Small to mid-size lenders should keep a close eye on how they use these found monies. Since they may invest in infrastructure improvements like enhanced cybersecurity, proprietary digital lending platforms, and proprietary blockchain technologies. These types of improvements could make them much more competitive with smaller, technology-driven lenders. And unfortunately, many financial startups won’t see any positive gain from the new tax rules for at least a few years until they’re cash flow positive.
Regulatory Sandbox Accelerates Fintech Innovation
Fintech is at the cutting edge of financial innovation for two reasons. First, it caters to consumer demand for faster, easier loan applications, instant approvals, and 24-hour online funds transfers. And second, it caters to lender demand for more efficient operational processes, and smarter credit decisions. Unfortunately, the functionality that satisfies digital savvy loan prospects and technology savvy lenders is the same functionality that makes these systems vulnerable to fraudsters and cybercriminals. And susceptible to high level scrutiny from regulatory watchdogs.
Old school regulators worked to protect consumer interests, even when it stifled innovation. Globally a new breed of regulator is emerging. One who realizes they can harm consumer interests when they slow innovation. The antiquated adversarial mindset is shifting to a more collaborative approach where regulatory bodies partner with creative thinkers. They achieve the best outcome for consumers by playing together in a regulatory sandbox.
In 2015 the first regulatory sandbox was launched in the UK. This is a safe space where innovation is supported and consumer interests are protected as part of one integrated development process. The sandbox allows new financial products to be beta tested in the marketplace with partial regulatory compliance for a limited time. This test window lets developers validate and refine their product concept without regulatory risk. It also allows the regulators to measure the impact of their guidelines in a real world environment.
Sandboxes are already being trialed in Switzerland, Singapore, Hong Kong, Thailand, Malaysia and the United Arab Emirates. Financial industry analysts believe US regulatory agencies must follow the global lead to become more competitive. American Banker recently quoted Marshall Lux, a senior fellow at Harvard’s John F. Kennedy School of Government, “…regulators should focus on the impact of compliance requirements on consumers and provide pilot programs for companies to empirically test new products without fear of enforcement.”
Influential opinions from institutions like Harvard prompted three government initiatives in 2016:
- Office of the Comptroller of the Currency (OCC) published a white paper outlining their intention to support innovation.
- Financial Services Innovation Act of 2016 was proposed to the US Congress. This bill would create the Financial Services Innovation Office (FSIO) with a stated mission to, “…foster innovation to spur greater economic growth and to bring our government into the 21st century.”
- Consumer Financial Protection Bureau (CFPB) published Project Catalyst Report: Promoting Consumer-friendly Innovation. This report highlights their desire to engage with fintech programs during early development stages in order to build consumer protections into new products prior to launch.
These initiatives were a good indication that US regulators were listening, but all three papers date back to the Obama administration. We’ll have to wait and see what actions are taken by the Trump administration to move innovation forward. A great first step would be a US regulatory sandbox for financial products and services.
Reduced Friction in the Customer Journey Differentiates Financial Brands
Millennials have replaced baby boomers as the largest consumer demographic. They’re younger with more disposable income. And they’re demanding, especially when it comes to digital delivery systems. This behavior applies to both consumers and small to mid-size businesses (SMBs). It’s great to watch Millennials pass their digital behaviors up to their parents and grandparents. Ten years ago they helped grandma set up her Facebook page. Today they’re helping her set up an e-commerce grocery delivery service, and an online banking account. Generation Z isn’t far behind. The leading edge of this emerging demographic is already graduating from college and entering the workforce. This group will be larger than Millennials, and we can only guess what technologies they’ll be demanding within the next few years. We’re betting voice-activated banking will be at the top of their list.
A recent article published in The Financial Brand reported 61% of banks listed “removing friction from the process in order to capture more Millennials” as a priority for 2018. This may be driven in part by two independent research studies that found the key to brand differentiation for financial services companies is an improved customer experience.
A Forrester brief reported that one third of banking customers say, “…all banks are basically the same.” They believe the majority of financial products and services are commodities where one brand is interchangeable with every other brand. According to a survey conducted by Microsoft Financial Services, consumers value two aspects of their banking relationship over actual services like loans and checking accounts. The first aspect is easy banking. And the second is options for how they bank. This finding seems counterintuitive until we remember consumers believe banks are offering commodity products.
One of the best ways to reduce friction and improve the customer experience is by making the loan application and monthly payments processes faster, easier and safer than ever before with online lending platforms and fintech software systems. Lending-as-a-Service (LaaS) platforms provide a fully managed, turnkey approach for small to mid-size banks with limited resources. The top platforms automate processes and improve credit decisions. They provide alternative credit scoring options, and machine learning that continuously refines the credit scoring process. And they stay current with new banking regulations. These platforms are cloud-based, so credit scoring and regulatory upgrades are automatic without additional user programming.
An omni-channel delivery system is another way to reduce friction, because every customer can choose how they want to access their accounts. One of the fastest growing trends is the mobile-only banking experience, supported by a live customer service representative when the customer has an issue to resolve.
In the next article we discuss how fintech software supports credit scoring and application approvals, and about cybersecurity challenges.