Apps at the gate
Tech start-ups promise to transform finance, if regulators will let them
Aug 3rd 2013 |From the print edition
TWO millennia after the Temple was cleansed of money-changers, the Archbishop of Canterbury, Justin Welby, plans to open his churches to moneylenders. This is no capitulation in the struggle between God and Mammon. It is an effort to “compete out of existence” payday lenders that offer expensive loans by supporting not-for-profit credit unions.
The archbishop is right that more competition is needed, but old-fashioned credit unions are unlikely to be able to beat the slick systems and snappy service of online providers, like Wonga. A more effective way of pushing down rates would be lighter regulation to allow more lenders to flourish.
Digital communications have given birth to a new generation of finance companies (see article). Money-transfer agents such as Xoom have drastically cut the time and costs for migrant workers to send money home. Peer-to-peer lenders are matching savers and borrowers, slashing fees and delivering a better deal to both. New foreign-exchange firms are giving travellers access to the prices quoted on wholesale currency markets. Card companies such as Square and iZettle let anyone from yoga teachers to plumbers accept payments by credit card. Firms such as M-Pesa have given millions of people in developing countries access to mobile money.
Heavy regulation of financial companies means many firms stick to small niches to skirt the boundaries of banking regulations. Peer-to-peer lenders do not offer savers the security of deposit insurance or the convenience of guaranteed instant access to their cash. This limits their appeal. Other firms that take deposits such as Holvi, a Finnish start-up that offers group accounts, are not allowed to lend. Those that do lend, such as Wonga, cannot take deposits.
Creating a financial-tech company is arduous. Whereas it takes less than a day to register a company in Britain, it takes months or years and can cost millions to get authorised as a bank. The number of new banks started over the past decade can almost be counted on one hand. Even those that have started, such as Metro Bank or Aldermore, are penalised by regulation: rules on capital favour large and complex firms. In America the Dodd-Frank Act is an imposing barrier to all but the biggest firms. And regulation is closing in on some existing firms. M-Pesa has struggled to grow much beyond Kenya, partly because authorities stand in its way. The market for remittances has been a hothouse for start-ups in Britain, partly because it was lightly regulated. Yet almost half the country’s money-transfer firms may be shut as banks close their accounts to comply with money-laundering rules.
Banks need to be more heavily regulated than other firms because of their central role in the economy. However, governments could regulate more smartly, raising capital requirements for big and systemically important banks while easing the burden on smaller ones. Regulators should be even more relaxed about many of the new entrants to the market, most of which simply provide quicker and simpler ways of shifting money around. Most of these start-ups avoid the alchemy of banking—the transformation of short-term deposits into long-term loans—so pose little systemic risk.
The idea of lighter-touch regulation will seem to many an anathema after the financial crisis. It would certainly lead to more failures by small banks and start-ups. This would also impose some costs on society and deposit-guarantee schemes. Yet these costs would be outweighed by the enormous benefits to consumers and businesses of a far more competitive financial system.