Last week I attended Karen Webster’s Project Innovation 2016 conference held at Harvard University. It was first time visiting the campus and I must say I was impressed with the history the campus preserves so beautifully.
The theme of the conference was Payments on the Edge and there was much discussion among attendees about financial inclusion; the delivery of financial services at affordable costs to disadvantaged and low-income segments of society. The attendees heard again how difficult it is for traditional banks to serve these segments profitably due to the low dollar amount of the accounts (whether deposit or loan accounts). They claim that compliance costs are a large part of the cost structure that makes these accounts unprofitable and unattractive for bank and customers alike.
There is a way to address regulatory concerns and increase financial inclusion, but it will take a collaborative, systemic approach to innovation and regulation. When it comes to financial inclusion, existing regulation can hinder access to financial services. Existing KYC requirements drive current account opening procedures at financial institutions that could be considered overzealous for a given situation. How much verification is really required to obtain a $300 loan?
Further, existing regulations can hinder the emergence of alternative financial institutions more suited to the needs of lower-income consumers. From 1990 to 2008, over 2,000 new banks were formed, however from 2009 to 2013 only 7 new banks were formed, according to a 2014 Federal reserve Board study. In addition, high minimum capital requirements, limited funding structures, and heavy supervision further suppresses new entrants..
Fintech companies and financial institutions that partner to solve a particular problem need to prototype an end-to-end solution that addresses the risk presented to the financial system. They also need to include regulators early in the process to educate them on the solution. Regulators need to shift from regulating the individuals to regulating the systemic solution so the compliance burden is born only once in the system by the appropriate party.