Fintech and Neo-Luddism

Neo-Luddism is based on the concern of the technological impact on individuals, their communities, and/or the environment, Neo-Luddism stipulates the use of the precaution for all new technologies, insisting that technologies be proven safe before adoption, due to the unknown effects that new technologies might inspire. Wikipedia.

I keep hearing about how the role of compliance has never been more important, so here is my own Jeremiad.

The UK FCA reported recently that following their financial resilience survey they found that the payments and e-money sector had the lowest proportion of profitable firms. I suspect that this is because they have an ill defined business plan, a “me too” product, a regulatory licence attained by paying someone else to fill out all the documentation required and providing template policy documents. These businesses do not have enough money to pay staff more than the minimum wage who are only recruited because that is “the cost of compliance”

On the card issuing side of the payments and e-money sector, i have lost count of the number of times that i have heard the phrase “we want to be another Monzo/Revolut/Starling” and we are going to produce plastic cards, virtual cards, metal cards, wooden cards, bio-degradable cards or edible cards and have one hundred thousand customers within a year because we are aiming our product at newborn babies, people under five foot tall, the left-handed LGBT community, the socially excluded with an IQ of over 100, the financially excluded with mother issues….

One of the worst things the fintech industry has done is to convince people they can then be successful at anything, no matter how little knowledge they actually have about the matter. Too many founders are ill equipped to be CEO’s, too many Heads of [insert anything here] are guilty of title inflation, perhaps a more accurate title would be Chief Decision Officer as this is the task that they consider is their main role regardless of their abilty to understand the regulations behind the decision. The self-styled fintech companies fail to understand that their business models can become beacons for all types of financial crime, it is the criminal serpent in the garden and they are all too willing to take the apple of ignorance and naiveté because they only see compliance as the irritant of being regulated.

I will acknowledge that there are “good” individuals within the industry and their compliance and financial crime divisions, but there are too many “fine” people, and in my book if I call someone a “fine” person it means that they are barely body temperature intelligent. I also fear they may be persons of conviction… or regretfully soon will be. They get conscience and greed confused in their delusions when the role or title they hold should be more valuable and meaningful than the salary it pays.

So why do these individuals spend months perfecting a presentation to pitch the idea to potential investors and set about obtaining a regulatory licence to operate — only to fail to make a profitable business out of it? (Neo Luddites perhaps?)

Let’s take the example of the San Francisco startup “Chariot”. It was “Uber, but not for the great unwashed, with a route, and stops”. Why did no one say to them “but it’s a bus!!”?

And Smart Cards Coin, Plastc (before Curve became successful) recipients had trouble swiping the card. Moreover, the card didn’t have a chip required at most point-of-sale terminals.

For some people, they want success and recognition but are less willing to improve their product or ideas by using the latest technologies or learn from their mistakes.

In too many regulated financial institutions, the individuals lack the necessary understanding of applicable legal and regulatory requirements, which result in a failure to implement adequate systems and controls when their departments are already understaffed and the business is about as safe as a convenience store in East LA on a Saturday night (hat tip to Jonathan Littman, author ‘The Fugitive Game’ for the quote). Their financial crime monitoring system is a hindsight based, third party piece of software that comes complete with “ a set of 30 rules”, many of which are not relevant to the firm’s business.

There are excellent companies that offer transaction monitoring, ID verification, KYC and customer onboarding packages (think Sphonic, EverC, W2 and HooYu), yet many regulated financial institutions baulk at the cost involved in integrating their full services into the business. Even if they do, they fail to correctly investigate discrepancies that arise from these checks because they have no experienced professionals (and in many cases, only one person) in their fraud or money laundering departments who often work separately and do not communicate or work together.

I am amazed when i meet or hear of compliance personnel who still “google” everything when they don’t know the answer to a question asked by their managers (on the basis that being able to ‘google it’ makes them feel they have done their job successfully but a lack of recognition for their efforts make them less willing to improve their knowledge in other areas or gain other skills).

The tone at the top sets the foundation on which a financial institution operates, the board and senior management have a responsibility to demonstrate that they take their financial crime obligations seriously but many businesses i speak to, talk of smoke and mirrors when reporting to regulators and card schemes as well as an almost modern slavery and human trafficking approach to staff and salary conditions (think low salaries and high turnover of staff).

It is time for Fintech to “grow up”. You can bow your head and stay silent to make yourself feel better, you can avoid problems thinking it’s not worth the fight. You can make excuses and get used to that, but you will end up worthless and deserving to be mistrusted all the time.

The regulatory treatment of the payments and e-money sector still leaves it outside the mainstream regulations that apply to banks. It was originally conceived to bridge the large gap in capital requirements from a start-up to a fully fledged financial institution.

To be fully trusted, the role of compliance and financial crime must be given the same gravitas as the current C-suite model which is not suited to today’s financial institutions where weaknesses in governance and longstanding, significant under-investment in resourcing and relevant controls are apparent.

Fintech must optimise their anti-money laundering and transaction monitoring systems and controls, invest in experienced and qualified personnel to compliment the use of machine learning and artificial intelligence. It must include product, sales, marketing, operations, risk, data and cyber security and technology into its senior management regime.

To repeat myself… stop allowing ego driven, fast growth startup problems and GROW UP.