Regulate to innovate?
Bankers can seem a little bit schizophrenic when it comes to regulation – much of the time they complain about the sheer weight of the regulatory burden they face, but at other times they talk of regulation as an opportunity. It could well be that as they have finally realised regulation – and plenty of it – is inevitable, some banks have decided to make a virtue out of it.
Regulation as it applies to the payments industry was much discussed at last week’s International Payments Summit in London. Sometimes it can seem banks have lost sight of why they are being swept over by the regulatory juggernaut. Stéphane Garelli, professor at the International Institute for Management Development and at the University of Lausanne, provided some context for delegates. He spoke of a “cascade of crises”, starting with the financial crisis and leading on to economic, social and political crises. Austerity is not working because the countries that have followed that path are experiencing lower GDP and therefore higher debt. Unemployment levels among 16-24 year olds are high – 56.5% in Spain, for example.
Of course the payments industry isn’t directly associated with the ‘casino’ banking that brought the world economy to its knees and required huge bank and bondholder bailouts from taxpayers. It suffers guilt by association; risk mitigation is the name of the game and the payments industry will have to deal with the consequences, just as the citizens of Greece, Cyprus and Ireland, for example, are dealing with the consequences of the financial crisis.
Dermot Turing, partner, international financial institutions and markets group at London-based law firm Clifford Chance, noted that there are 4511 separate pieces of legislation related to the payments industry that will hit banks in some way. Moreover, the larger banks face myriad regulations covering other parts of their business as well. “The set of payments regulations are like insects compared to regulation in the securities industry such as EMIR, AIFMD and MiFID,” he said. Regulatory hot topics for the payments industry in the coming months and years will include Payment Services Directive II, Cards Regulation, the Cyber Security Directive and the Recovery and Resolution Directive.
Some of the regulation affecting the payments industry is risk related, but at the same time there is a push towards social inclusion – via financial inclusion in the form of offering basic bank accounts to everyone – that is informing the regulatory agenda.
Angus Fletcher of Deutsche Bank said while his bank was “very challenged” by the regulatory environment, it also sees opportunities in it. The challenges include the level of preparedness of some of its clients: “We have many clients we think will be ready in time for SEPA, but there are also a large number we have concerns about,” he said.
On the upside, Deutsche Bank is carving out a role for itself in SEPA: “We wanted to be among the leaders and be in the driving seat in moving the market forward and helping our clients to comply with it,” he said. The bank has identified a number of supporting services it can offer around payments following the implementation of SEPA and the Payment Services Directive in areas such as reporting and liquidity management.
These are opportunities enough for Deutsche Bank for the present, apparently. Fletcher issued a plea to regulators, saying “the regulation does not stop; there should be a period of calm so we can wait to see the consequences of current initiatives and understand them”. His comments received a round of applause from the audience.
Eileen Dignen of US-based ACH The Clearing House was upbeat about regulation. “Regulations and standards facilitate change,” she said. “Regulation should make us sit up and ask about the opportunities.” The purpose of most regulation is to increase transparency and market infrastructures should be asking how they can help improve it. “I think we should be passionate again about what we can do as market infrastructures. That includes looking at the data we have and how we can partner with third parties in non-traditional ways.”
One of the challenges with tapping the opportunities inherent in regulations is the time it can take. The consensus was that any benefits arising from SEPA will take rather longer to materialise than first thought. Aside from banks such as Deutsche, most are doing the bare minimum to be compliant; the same goes for corporates.
A reason there is reluctance to rush headlong into SEPA is growing concern that SEPA direct debits won’t work. The financial crisis has muddied the waters – protecting against counterparty credit risk is now higher on the agenda of financial regulators than it was when the financial industry was crafting SEPA. Ruth Wandhofer of Citi wondered whether direct debits could ever work given that many banks in different countries do not know each other and therefore do not trust each other. Ruth Milligan, a legal expert on payment systems at Eurocommerce (an association for retail, wholesale and international trade interests) agreed with Wandhofer. “Our business is all about risk and money. Regulators say they are changing the payments markets by harmonising it, but they never talk about money. It is all about trusting other people with your money.”
Speaking during a separate session, Javier Santamaria, chairman of the European Payments Council, reminded delegates of a key issue: “SEPA was intended for users of the payments system, not the providers.” He pointed out that the EPC had overcome “huge obstacles” in designing SEPA direct debits and that “from the start, banks have been innovative”.
A familiar cry during the Summit was “there is no plan B” when it comes to SEPA. Plan Bs are not particularly popular in other areas, just ask the UK Chancellor what he thinks of them. In the absence of a B, the next several months, as the industry heads towards full migration to SEPA, will be characterised by compromise and, who knows, maybe some innovation.