Exit-Interview with former ‘Financial Supervisory Authorities’ Executive regulating FinTech: struggles, small victories, suggestions for improvements and needs of the Ecosystem. As Banks and Insurance continue to underserve SMEs, Fintechs fail to speak with one voice – this is how we can fix it…
Stig Johannson was the ‘Head of Fintech’ and ‘Head of Fintech Innovation Center’ at the Swedish Financial Supervisory Authority. While completing a transfer to a new professional challenge, Stig decided in this exit-interview after leaving the authority to share his thoughts on struggles, small victories, suggestions for improvements and needs of the Regulatory Fintech ecosystem.
Michal Gromek: Working as ‘Head of Fintech and Financial Innovation Center’, what are your reflections on the relationship between consumers, Fintechs and the Banks in Sweden?
SJ: Studies have proven that Swedish consumers don’t like banks, but they trust them. The general observation is that despite announcements from leading banks about digitalisation, their internal structure fundamentally didn’t change within the last ten years.
Fintechs remain fragmented, failing to speak efficiently with a single voice. During the implementation of PSD2, we had Q&A sessions with the banking association regularly. I personally don’t recall any significant outreach from the Fintech community.
Missing the accumulated voice of the Fintech community
From an efficiency perspective, the regulator would like to speak to understand ‘accumulated’ voice of Fintech community and there are more than 350+ Fintech companies in Sweden. Unfortunately, the current capacities of such organisation are minimal possibly due to operational limitations.
Banks have not recognised the digital era
When it comes to the management of the banks, it seems that a significant number of them, have not yet recognised or come into terms with the digital era. It felt like they would not be able to look outside their large organisations being convinced that their historical heritage would keep them somehow preserved from the future. Similar to conferences of the representatives of travel agencies, the bankers argue that: customers desire a face-to-face interaction.
|Providing examples: Some Swedish banks force the customer to belong to or transact a particular branch office which is restricted by geography, which means that the customer has to travel across the city or to the place where the bank account has been opened to apply for a debit card or open up additional services.|
Furthermore, as there has been a significant amount of competition in the retail space, due to the market entry of both national players or often the U.K.-based, Neobanks like Revolut that seem to take the market by storm – still a significant segment of customers remain underserved from my perspective especially in the area of small and medium enterprises.
Some of the traditional financial providers still believe that loan applications for small companies have to be processed by an external committee, which sometimes takes weeks. In the retail sectors, where the lifetime value of a customer is still significantly lower than in the corporate sector, unless the Fintechs will start to grow horizontally on the value chain towards trading, funds management or mortgages and lending, the urgency for the banks to change will continue to remain low.
MG: Within the next 24 months, due to an external threat like Neobanks, expansion of providers like WeChat towards the European market or stronger participation of FAANG (Facebook, Apple, Amazon, Netflix and Google) in the financial markets, the banks will have to increase their response to the changing ecosystem. How does the Swedish perspective differ from the international landscape?
SJ: In Sweden, the idea of fairness and equality applies to everyone in the financial sector. During one of my recent trips to South East Asia, I received an insightful question – Why we as the regulator have granted the Fintech Unicorn ‘Klarna’ a banking licence, even though we already have enough banks in Sweden? The audience received my answer that Klarna has fulfilled all of the requirements and they simply had to receive a banking license as a ‘surprise’.
Sweden has all of the tools to be the global test ground for FinTech products
Of course, I am aware that many international regulators have looked up to Sweden and our regulatory framework, a situation that placed a positive pressure on my colleagues and myself at Financial Supervision, but we have to acknowledge that the amount of homework in our regulatory framework is far from being completed.
In theory, Sweden has all of the tools to be the global test ground for digital financial products! Just for clarity reasons, when I mean ‘testing’, I picture a scenario similar to ‘AB-Testing’ with different features of financial products and by no means ‘experimenting’ on our population with not ready financial products.
Sweden has a high amount of social, institutional-trust, somewhat well-functioning public system, unique access to public records displaying addresses and income from individuals. In contradiction to Singapore where, based on political will, regulatory authorities received significant funding and a mandate to encourage companies to come to launch Fintech there or in the UK, which brands itself as a Fintech destination,Swedish political leaders seem to not pay enough attention to provide tools to brand Sweden as a Fintech destination or support the growth of the ecosystem, at least when I reviewed the budget for 2019.
A good visualisation of our challenge is the fact that Swedish Financial Authorities have conducted an internal review for around a year, in which we internally analysed how to navigate in the open-water of Fintech revolution. In other countries, such investigations are being paid by government bodies enforcing digital transformation in the country – in Sweden, nobody at the government was willing to pay for such an important report and the Swedish Financial Supervisory Authorities had to pay for it from own savings.
No authority is interested in developing and preparing Sweden’s Fintech Ecosystem for the future
In a country considered as wealthy by many, there was not enough political will to sponsor a self-analysis of the future of the regulator. There is not funding also to at least, fund the outcome of such a review to be able to deliver on the promises. Due to those organisational and financial restrictions, the report which we have published at the end has so many dead-ends and shortcuts that I have been massively surprised that it has not been criticised by the media, political, business or academic sector. It’s like nobody would be interested in developing the ecosystem and preparing Swedens Fintech ecosystem for the future.
Try to manage a nationwide Fintech Innovation Center with a nearly non-existing budget
So, even the best ‘Fintech Innovation Center’, which I led and we established within the organisation last year, cannot function with a nearly non-existing budget, despite the will of the individuals working for it. Even though we have seen the expectation of different players in the national Fintech ecosystem, we couldn’t act upon them due to the lack of funding. Looking outside the financial restrictions, Fintechs’ managers forget that we as the regulator can ONLY work within the mandate provided by the legislator. A mandate to: regulate and secure the financial market, doesn’t allow for an innovative solution that would develop it.
The regulator would like to help but it has to ‘regulate’ and ‘secure’ and not ‘develop’ the ecosystem.
There is a general need to grant the mandate to ‘develop the ecosystem’ and step-up and take a little bit more of risk, to drive innovation policies to review potential products that could provide values for the underserved customer but this requires a little bit of risk, political will and a budget. Pretending that we can continue as we have done so far, is like arguing that it doesn’t make sense to develop new operating system because ‘Windows 98’ has been the best solution that has been developed so far and we don’t need any upgrades – which is quite short-sided.
MG: In case you would have all of the tools necessary as a legislator, regulator and a member of the industry having access to unlimited funding and no restrictions from ESMA (European Security Market Association), what would be your next steps on the national level?
SJ: (Smile and paused for a while). In case I would have no restrictions, I would take at least the following steps:
MG: Are FinTechs, InsurTechs and RegTech companies creating enough of a sense of urgency on the market that might motivate the traditional players to take more action to work better with each other?
SJ: Swedish Fintechs, Insurtechs and RegTechs with some exceptions tend to align at the center of small startups with up to 10 individuals with often non-sustainable business models, that rarely focus on the problems of segments which are underserved by the banks. They unfortunately often mimic services provided by the banks or insurance companies but with better user experience or customer centricity.
Banks and Insurance companies don’t communicate in which areas Fintechs, Regtechs and Insurtechs could provide solutions
On the other end, Banks and Insurance companies don’t communicate where Fintechs could provide solutions. This miscommunication in the market means that we waste our innovation potential because we are not able to channel the noise into productive innovation funnels. Swedish Fintech unicorns like Klarna, Bamborra or iZettle have grown to such an extent that they reached a level of possible of Oligopoly or Monopoly. The truth is that in case Izettle, Klarna, BankID or Swish would break down, the ‘Swedish E-commerce’ and ‘Point of Sales’ would break down nearly instantly. I don’t argue that there are signals of those companies to break down, but would like to plant a seed of thought to have a discussion what might be the steps forward in case this might happen.
It is unclear which public agency at the current stage should do such ‘thinking exercises’ on the public level. In case we won’t clear the air, at the time of a breakdown, all of us might act to be similarly surprised to ‘Highway Agencies’ that are each year surprised by snowfall in December.
MG: Sweden being part of the European Union and its financial regulatory framework, that might be defined as ‘complex’ and ‘challenging to see through the responsibilities of different agencies’ to say the least, cannot act independently from other partners. Which risks and challenges do you see u in 2019 upcoming?
SJ: To remind the readers who are residents outside of the EU, certain financial licenses for companies are being acquired in one country; they can be executed in other countries in a process called “passporting”.
This mean in practice that in case a Swedish company has obtained a Payment-Service-Provider license in Estonia, they have to ‘notify’ us in Sweden that they will do business in Sweden, but Sweden doesn’t have, to generalise, the right to supervise them and have to reach out to Estonian Financial Supervisory Authorities with questions. Such a process is easing the process of cross-border cooperation in the EU what is worth supporting, but I am afraid that, similar to the tax policies, some countries have used this also to lower the regulatory standards for some applications to both gain economic advantage in license fees and promote themselves as an innovative place.
Regulatory race to the bottom
There is a reason why plenty of gambling companies are in Malta or companies apply for a PSP license outside of Sweden. I am far away from accusing anyone but such development has already shown signs of a ‘regulatory race to the bottom’ with different regulators competing in offering the lower possible burden of regulation what might be at the opposite of what we should be doing in a highly digitalised world.
The European training system for the regulators, legislators about progress in financial systems is highly dysfunctional
Furthermore, due to restrictions of many regulators for working with external parties to see it clearly – the training system for the regulators, legislators about progress in financial systems is highly dysfunctional. I don’t desire for anyone to have to follow the development and differences between 1500+ cryptocurrencies. It would be useful to know that some national banks, like in Canada, have been working on central cryptocurrencies to understand the pros and cons, and authorities like ours are not receiving nearly any external training or in case we do – we might not have the budget to pay for it.
How should the regulator regulate a Fintech which they don’t understand
So, how can we regulate, when we don’t understand the processes? We as regulators simply have to get our hands dirty to actually learn how these Fintechs work. Instead of learning ourselves, as regulators we have been relying on publications from regulators like MAS in Singapore, BaFin in Germany, KNF in Poland which are active in a particular segment. We gave our best to listen to their angles but for those who claim that the regulators can gather the knowledge by itself – only Crowdfunding has eight different sub-segments – we have been reaching our capacities as human beings quickly despite best intentions.
MG: What is the worst possible scenario that you would hold as realistic for the next years in Sweden or Northern Europe?
SJ: As managers of our traditional Swedish financial providers, speaking about both banks and insurance companies, remain convinced about the superiority to other geographies they might fail to recognise that the threats might be possibly not coming from FAANG (Facebook, Apple, Amazon, Netflix, and Google) but providers like AliPay or WeChat.
They could apply for a banking license in a country which offers the lowest regulatory burden in Europe and passport their services. In contradiction to our fragmented Fintech ecosystem in the Nordics, they will be able to provide a complex solution to companies and individuals connecting funding with restaurant table booking, travel industry, taxes, insurance or chatting software. Such companies might alternatively buy one of the trusted existing European players and expand their service internationally. For example a national Swedish, German or Spanish regulator would have very limited powers to have an insight. The banks and insurances might be marginalised to the role of utility providers, members or political parties will act surprised, and everybody will argue that they would have taken action before in case they just ‘knew’.
For those who see this as ‘science fiction’, please look around you when you commute home today, how connected individuals are to their smartphones. Remember that millennials didn’t arrive at senior management positions. Will the current financial providers be able to offer a complex solutions to financial and insurance problems in an acceptable and reliable manner? – With the current mental restriction in place, the possibility that such a solution will originate from Sweden is way below average. What a shame for a country that launched the first ATM on the planet. At least for now.