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The future for financial institutions

An overview of the legal issues facing banks

18 July 2019

Fintech companies, using cutting edge technology, are disrupting traditional banking and finance and competing for their business. Their aim is to be better, faster and cheaper. Financial institutions will either need to compete or collaborate with these challengers. Here Clifford Chance experts look at the legal issues banks face as they move towards generating revenue from their own technology.

Fintech firms are growing fast. The Economist magazine estimates that Silicon Valley firms alone, attracted US$12 billion in investment in 2014. They are particularly active in payments, foreign exchange, peer-to-peer lending, data, investment services, wealth management and infrastructure. While regulation makes it difficult for non banks to provide account and deposit-taking services, recent regulatory activity is aimed at breaking down these barriers and leveling the playing field for new entrants.

Peter Chapman, a senior associate in financial regulation at Clifford Chance says: “Consumers want a range of financial services providers and they want the market to be competitive on price and service. They also want accessibility, not just in terms of the amount of services available, but also in how they receive those services, which they increasingly want to be doing through digital devices.”

He adds, “The risk for financial institutions is that they become simply a utility; an expensive set of pipes and plumbing. To compete, financial institutions need to remain relevant to consumers and continue to provide a range of services.” 

Financial institutions have sources of capital, established brands, loyal customers, access to behavioural data and relationships with regulators, but they are disadvantaged by the burdens of legacy IT systems, investor and commercial constraints, a lack of familiarity with IP and tech as a revenue source, and overly complex governance structures.

The rating agency Moody’s said, as part of its predictions for the banking system in 2016, that: “The more nimble and technologically advanced players will continue to gain market share,” highlighting just how critical innovation will be. As regulators encourage fintech innovation, financial institutions find themselves under attack on several fronts.

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