The worldwide payments industry has enjoyed accelerating growth for several years on the back of the rise in online transactions among both businesses and individuals. But, how can payments companies take advantage of new growth opportunities whilst dealing with ever-growing complexities in regulation? The landscape has shifted and this requires a major rethink in the relationship between regulation and innovation.
The pandemic accelerated the digitalisation of payments and there is widespread industry optimism that the trend will continue or accelerate further over the next few years. This progress doesn’t seem to have been undermined by the growing volume and weight of regulation. Yet, given the chance, any player in the financial services industry will bend your ear mercilessly about the cost of regulation and how it hampers growth and innovation.
Is regulation overload stifling innovation?
Aside from the cost of regulation, the volume and complexity of constantly evolving rules is also seen as a barrier to growth and innovation. A survey commissioned by OneSpan, a leading US cybersecurity firm, found that among 100+ bankers across the world product innovation and digital transformation were among the four areas of business that they considered being most hindered by regulation. It is notable that 78% of respondents stated that compliance requirements created roadblocks in at least one of the four areas.
But what sort of innovation is being affected? In their publicly-funded paper, The Impact of Regulation on Innovation, published in September 2020, Philippe Aghion (Collège de France, LSE), Antonin Bergeaud (Banque de France), and John van Reenen (MIT, LSE) distinguished between two types, incremental and radical.
They looked only at France and its industry in general, not just financial services. Nonetheless, their findings ring true for the finance industry also, especially given the heavy hand of notoriously restrictive French labour legislation.
Innovation that ‘swings for the fence’ is largely unaffected
What the three academics discovered was that, while regulation posed a significant hindrance to incremental innovation, it had negligible effect on innovation that ‘swings for the fence’. It may even encourage such a radical response.
That’s positive for the independent payments industry, where innovation can be of the sort that threatens disruption for incumbents such as the bankers whose fears are evident in the OneSpan survey.
Surely, that can’t mean regulation can help a company to “move fast and break things”? It could be argued that Facebook, for which Mark Zuckerberg coined that internal motto, became a social media giant partly because its activities are not regulated (although the USA’s Federal Trade Commission is in the process of building an anti-trust case).
A matter of trust – the importance of regulation
On the contrary, unregulated Facebook actually proves the crucial importance of regulation to the payments industry. As with most financial services, international payments groups can only prosper when their services are trusted by their users.
Those customers place their money in the care of organisations they do not know. They do so with complete faith because they realise that, if something goes wrong, they have full recourse under the law.
Largely, it’s regulation that creates that trust and faith. That’s partly a factor in why giants such as Facebook, Twitter and Google are losing the trust of some users. Rules also help to create a level playing field, which gives payments industry newcomers and boutiques a fair shot at challenging the banking giants and other incumbents who dominate.
Shadow of a doubt
Despite these compelling – and, frankly, pretty obvious – advantages to being regulated, there remains a hardcore of apprehensive doubters. VIXIO’s 2022 Payments Compliance Outlook, a survey of 100+ of the world’s leading legal, compliance, and regulatory executives at payments organisations, found that stricter regulation continues to be seen as a challenge to growth.
It’s hard to dismiss those concerns when, in the UK alone, VIXIO also recorded well over 250 regulatory events of all types, as you can see below.
It seems, therefore, that the unprecedented blizzard of new rules that has marked the first two decades of this millennium risks blinding the management at payments groups to the opportunities created for innovation.
Assessing growth opportunities
BNPL (buy now, pay later) services are a pertinent example of growth opportunities in the sector. VIXIO’s survey identified this regulatory grey area as highly placed in the new product wish lists of payments executives.
For industry newcomers especially, the lack of BNPL regulation in many jurisdictions makes the opportunity particularly attractive. They reason it gives them the freedom to establish the service without interference. Once established, they think it will be hard for regulators to act freely because of the risk of detriment to existing users.
Meanwhile, the more established players realise the advantage of regulation and are actively calling for it. They understand well that the current lack of clarity, combined with negative publicity around some business practices, could put the entire business at a disadvantage.
By championing regulation, those providers can engage pre-emptively with regulators. They can help frame the rules and, in all likelihood, give themselves an edge over the outlaw disrupters.
How compliance teams can create the environment for innovation to prosper
Which, then, is it better to be? A prescient planner, knowing where the regulatory road is leading, your bag packed, and already in possession of the map? Or a presumptuous opportunist, no bag and no map, assuming you will manage – somehow – when the rule-makers catch up with you?
Having a bag packed means that a compliance function is in place, with the appropriate resources. It should be fully integrated with the business development process. That ensures innovations – indeed, all market and product plans – are appropriately shaped to meet regulatory requirements, with the appropriate licences already applied for, if not actually acquired.
Meanwhile, VIXIO has the map. Our Horizon Scanning tool tracks developments in payments regulations across hundreds of jurisdictions around the world. It’s not just an ex-post record of new rules. Much more importantly, it’s a planning resource, providing an ex-ante picture of regulatory plans and intentions.
And VIXIO has recently gone further with our Global Regulatory Impact Index, which combines a monthly overview of the regulatory landscape with a deep-dive analysis of the most pressing issues. This new development will allow clients to proactively assess the impact of new regulation and identify key regulatory trends before your competition.
Innovation is no accident
The American inventor, Thomas Edison (1847-1931), famously said that “genius is one percent inspiration and 99 percent perspiration.” The same is true of innovation. In the world of international payments, it is foolhardy to ‘wing it until you win it. Sweating through plans and preparations is essential if even a visionary genius is to succeed.
VIXIO provides the tools to enable that success. They ensure that regulation will, at least, not hinder your incremental innovation, while actively assisting your more radical or disruptive ambitions to meet their targets. This involves finding the opportunities that allow payments companies to meet their ambitious growth targets whilst playing by the ever-changing rules. Regulation and innovation are entering a new dynamic and VIXIO is helping this relationship to blossom. So we can conclude that regulation doesn’t have to stifle innovation, but can help build the trust that is needed to thrive in the long term.
Get started by downloading our free 2022 Innovator’s Resource Kit. It will give you a first-hand insight into where payments leaders are finding specific innovation opportunities to gain a competitive advantage.