What's Next?: Regulatory Influence on Transaction Technology

The complicated framework of the payments industry incorporates regulation from various government entities.  Between the OCC, FRB, FDIC, CFPB, FTC, and NCUA new regulatory guidance is always in the works and being handed down to payment technology companies.  As payment technology evolves and new innovations go to market, new regulations must be developed to hold banks and other organizations accountable for the data they are handling or transmitting.  Other times, regulatory changes come about to help protect these entities from compromising situations. In the past year alone, there have been many important regulatory developments in the financial services industry that pertain to the continuous advancements of the financial services and resources consumers and businesses are choosing to engage with.

Bank Secrecy Act/AML Guidelines for Prepaid Products in the U.S.

Because prepaid cards are so similar to a bank account in functionality, the FATF (Financial Action Task Force) issued guidance for applying anti-money laundering and know your customer requirements with the goal of better evaluating cardholders.  The recommendations from the FATF reinforce the need for financial institutions and other entities to evaluate the risks in offering prepaid card options, mobile wallet solutions, and internet-based payments.  This guidance also provides insight into the value of the proportionality principle, or the need to develop regulation that mitigates these risks without sacrificing innovation or opportunity for consumers.  These regulations were created to continue preventing the abuse of financial products, especially prepaid cards, and deterring money laundering, terrorist funding, and fraud.

Regulatory Framework for FinTechs

The regulatory landscape for the financial industry has been tough for new startups and technology companies that provide banking functionality to navigate, and even caused many to fail.  One major federal regulator, the Office of the Comptroller of the Currency (OCC) recently announced intent to start granting special national bank charters to qualified fintech companies.  With the goal of bringing these innovators more under the watch of the government, the special charters would provide a clear set of rules in place of the current “piecemeal” of regulations from different states and localities.  The OCC also plans to establish an Office of Innovation to provide the framework for fintech firms to innovate “responsibly”.

SWIFT’s Global Payments Innovation Initiative

Banks around the world joined forces with SWIFT, a global leader in secure financial messaging services, to make important changes to the way cross-border transactions happen and improve the standards by which innovation continues.  The initiative includes a new service level agreement (SLA) rulebook that encourages the right collaboration between the banks making transactions.  Starting with B2B payments, the initiative will ensure faster and more transparent transactions, fee predictability, and transfer of rich payment information.

Open API Banking Platforms

With the continued development of banking apps and alternative online payment solutions, the banks and other financial institutions have an increased need for innovation.  To accommodate this progressive movement toward new technology for consumers, banks are opening their proprietary software APIs for developers to continue building additional apps.  This API access allows startups, especially in the fintech space, to continue developing resources that could help banks innovate faster without the pressures of their difficult compliance requirements.  The Open Financial Exchange (OFX) also allows for banks to share data to the apps and aggregators that use it, whether directly or via an intermediary.