US Needs Regulatory Changes To Strengthen Fintech Prospects

October 24, 2023
Instant payment services and new open banking rules are welcome, but more is needed to improve competition and innovation, industry experts told Vixio in our "US Payments: The Next Chapter" webinar.

Instant payment services and new open banking rules are welcome, but more is needed to improve competition and innovation, industry experts told Vixio in our "US Payments: The Next Chapter" webinar

The introduction of FedNow in July, and the unveiling of open banking rules by the Consumer Financial Protection Bureau on Thursday last week (October 19), signal that the US is at a crossroads in payments. 

The FedNow service should allow faster payments to become the new normal in the US. 

However, speakers on Vixio’s webinar on Tuesday (October 17) erred on the side of caution about just how impactful the service has been so far. 

“There is certainly interest in FedNow/faster payments, but we are coming out of the pilot stage and in the early stages of the roll-out,” said Manish Nathwani, chair of the US Payments Forum.

Nathwani said that the launch has gone reasonably well. However, he did also caution that economics and fraud considerations will come into play at some point.

“There has been a lot of excitement surrounding the roll-out of FedNow,” said Brigit Caroll, policy and government relations chief for Wise in the US. 

Caroll explained that although it has only been three months and everyone is taking time to see how FedNow is coming together, what could happen is a reflection of what has happened across Europe with real-time payments — slow uptake. 

“You'll have few big players utilising the service from the get-go, and then a bit of a lag with smaller players who will take more resources to take up these types of systems.”

Fintechs want access

Caroll added that, as a payments company, Wise’s ability to take advantage of FedNow is currently limited. 

“It is only open to banks. This is a hindrance as we rely on banking partnerships to utilise the FedNow service,” she said. 

“What I would love to see is risk-based access opened up to non-bank payment companies and fintechs. This would make sure that all American businesses and consumers can benefit from FedNow.”

Fintechs ability to access payment systems has been an ongoing topic in Europe. For example, in the UK, this access is now possible.

Meanwhile, the EU is keen to catch up.

Recent proposals to revise the EU’s Payment Services Directive include plans to “further level the playing field between banks and non-banks” by allowing non-bank payment service providers access to all EU payment systems.

Additionally, the European Parliament is pushing for this to be enabled through the EU’s instant payments legislation, which is likely to pass by the end of 2023, and the European Commission has said that it will not stand in the way if this does happen. 

“I do think we need to focus on access. It won’t be turned on today but will be beneficial for consumers,” said Caroll.

According to Caroll, conversations with the regulators about opening this up are ongoing.

“Right now, the focus is really to get this out of the door and on uptake. This conversation is happening and will continue to happen going forward.”

Nathwani explained that for now with FedNow, “everyone is treading carefully”.

“The business case to just adopt at the entry level of ‘receive only’ has merits for sure, but a lot of the volume will be driven by large businesses initiating instant payments on account-based payments to augment or displace ACH,” he said. 

“Senders are also concerned about how to protect against fraud in a world of instant payments.

Nathwani explained that the question now is whether companies that formerly used the Automated Clearing House (ACH), like P2P organisations and payroll companies, can provide a value proposition to payment initiators that says it is worth going to account-based. 

“There are a lot of things to consider, and the end-game effect is that the consumer probably doesn’t care whether it is RTP, or FedNow, or debit card, they just want the payment available,” he said. “A lot of the conversations around adoption is around payment entities that are just trying to get along and create ubiquity."

Open banking standards needed to continue growth

Beyond FedNow, the US Consumer Financial Protection Bureau (CFPB) has rolled out its plans for open banking. 

Up until that, the regulation for open banking did not exist in the US. Rather, the approach has been commercial. 

Firms such as Plaid, for example, have been successful in the US while utilising open banking tools. For example, the financial services company is currently preparing to launch an initial public offering (IPO). 

“Europe took a ‘regulate first’ approach with open banking, whereas in the US, this only exists through commercial deals and private partnerships,” said Caroll. 

“I’m not sure that one is better than the other. However, this will now inform the CFPB rulemaking. They’re approaching this with businesses in mind that have already developed,” she noted. 

Andrew Gomez, director at Lipis Advisors, meanwhile said that the US should “temper expectations” when it comes to open banking. “In the US, where you have a market-led approach, it would not be prudent to expect this massive adoption where the market creates a standard in six months and a year later, everything is in place. That just isn’t feasible.”

“That may sound a bit negative, but I think that open banking is clearly here to stay and there are a lot of bilateral relationships being developed,” he added. 

Gomez suggested that there is unlikely to be mass adoption in the US without some type of regulation and standards. 

“If we look at some other markets beyond Europe, like Brazil, Thailand and India, there has been mass adoption of open banking-type principles which have led to great benefits,” he pointed out. “This knee-jerk reaction that regulation is bad is short sighted.”

Gomez argued that it would benefit everyone to have a framework in the open banking space. 

“In the same way that you have rules about what cars can drive on the road, and what speed they can go, sometimes regulation can foster innovation — so we have to get away from the immediate reaction.” 

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