The cost of compliance

Hello and welcome back, readers, to the third issue of the Future of Money!

A big thanks to everyone who’s been in touch already about the future of payments — I’m looking forward to some really interesting conversations on the topic. And thanks to everyone for suggestions on places to try in east London!

One area of discussion which keeps coming up is the shape of Central Bank Digital Currencies (CBDCs). When I started at the Financial Times, if you searched for that, you’d find a picture of a money flower from the Bank for International Settlements.

But today, discussions about the space are rooted in genuine examples such as China’s e-yuan; in Australia last week, a senator introduced a bill which would impose disclosure requirements on banks which might offer that CBDC in the country.

The exact nature in which CBDCs will be rolled out globally remains unclear — national governments have different motivations and limitations. Grappling with these challenges will be key, however.

As before, you can contact Imani and me at futureofmoney@ft.com. Happy reading!

The latest news

• Joshua Franklin in New York reported on JPMorgan’s grand plan to kill credit cards with its “pay-by-bank” product — and how that strategy split the bank. As competition in the payment sector heats up, a growing number of businesses are likely to face these kind of choices.

• Adrienne Klasa and I reported on the news that Jupiter Asset Management is in talks to sell its stake in UK digital bank Starling at a price which could imply a drop of up to 40 per cent in its valuation since April — although new buyers could come in at a higher price.

• Imani reported on Citigroup’s plans to shutter its UK retail bank to focus on its wealthiest customers — the opposite move to JPMorgan and Goldman Sachs which have built out their digital banking offerings in the UK market in recent years.

Fintechs and the complexities of compliance

For most fintech consumers, fincrime is probably not front of mind. Talk of money laundering regulation officers (MLROs) or AML rarely makes its way to advertising pitches alongside easy and rapid onboarding.

But those working in fincrime warn that the complexities of implementation pose a stumbling block to the smooth running of fintechs.

“It’s where every firm trips up,” said Jessica Hodson, co-founder of financial crime career consultancy FincSelect. “A lot of fintechs are now hiring from big banks and have to pay banking salaries.”

In part, the pain stems from a tension within fintechs, said Richard Wegrzyn, a partner at regulatory consultancy Avyse Partners, as they seek to differentiate themselves from traditional lenders (with large and established compliance teams).

“Some fintechs do have really interesting real-time monitoring capabilities, and should have good quality data.” he said. “[But] in the past few years, you’ve seen a battle between fincrime and UX teams pushing for account opening in minutes and [consumers expecting] everything to be quick and easy.”

“Getting basic things right is still hard,” he added. “In the past, it was apparent that regulators were letting challengers and fintechs grow. We’ve seen a pivot from that stance in the two or three years.”

On the other hand, Taavi Tamkivi, founder and chief executive of Estonian regtech company Salv, said that more innovative approaches to compliance were sometimes stymied by legacy systems.

“Even if the in-house technology is good, it can be hard to get banks to adopt,” he said. “You have some companies using products and technologies from years ago.”

Regardless, as Hodson explained, the growing demand for competent MLROs among fintechs to ensure that they do not fall foul of potential investigations has created a buyers’ market.

“The average MLRO salary in payments used to be £85,000 to £120,000,” she said. “Now it’s about £120,000 to £160,000 — that’s a change of only a year or two.”

“There’s definitely a bit of vanity hiring — they’ll hire a well known MLRO so that the regulator goes ‘I know that big hitter’,” she continued, adding that in some cases these individuals will leave after licensing.

Tamkivi sounded a more positive note on the direction of travel. She highlighted that the formation of communities for data sharing about fincrime includes both traditional players and fintechs.

“We’re seeing new networks emerging, with local ecosystems [across Europe],” he said. “We’re seeing people talking to other fincrime fighters, and sharing more high quality information.”

Quotable

It’s about focusing on something unique, rather than something that’s there to just grow, and add to a broader landscape — Nalin Patel, Europe, Middle East and Africa lead analyst for private capital at data provider PitchBook

I spoke to Patel for a report on why start-ups need to look beyond scale. While his point wasn’t sector specific, it’s worth considering its aptness for sectors such as buy now, pay later.

While the sector has grown tremendously in the pandemic, players don’t just face competition from a plethora of similar fintechs — banks and Big Tech players like Apple are piling on the pressure too.

As economic conditions turn, those players who are likely to survive in BNPL, and across fintech, will have to find new ways to monetise and new products that are not readily replicable by traditional companies too.

Recommended reading

What the mini-Budget means for UK fintech Amelia Isaacs in Altfi asks what the mini-Budget from UK chancellor Kwasi Kwarteng — with a stated aim of making the country more competitive — could mean for fintechs.

SME fintech lender Allica reaches profitability Chief executive Richard Davies, formerly of Revolut, TSB and HSBC, said that the bank Allica has been profitable on a monthly basis since June 2022. The bank has lent £1bn to midsized SMEs since March 2020, targeting an underserved market segment.

HSBC invests in Monese British fintech Monese, which offers easy to open account as an alternative to traditional banks, has secured $35mn from HSBC Ventures as part of a strategic partnership, bringing the total it has raised to $208mn.