PIF Summit: Is bank de-risking increasing financial exclusion by stealth?

Smaller banks and Payments businesses are facing a fundamental threat to their operations that could have global societal and economic risks. The risk averse strategies of the big banks – de-risking from certain markets and geographies to reduce their future exposure – are creating operational, customer loyalty and revenue threats.

At the Prepaid International Forum (PIF) annual summit in London this month, a panel of industry experts – including Banking Circle’s Head of Compliance & MLRO – came together to discuss how de-risking is affecting the industry and the impact on financial inclusion. Read on for the key takeaways from the session.

The panel:

  • Mitch Trehan, Head of Compliance & MLRO, Banking Circle
  • Mark Hewlett, Director of Product & Infrastructure, GC Partners
  • Mike Southgate, Chief Operations Officer, Hamilton Court
  • Moderator: Mark Beresford, Director, Edgar, Dunn & Company

‘One-size-fits-all’ de-risking

When the big banks began significantly de-risking – spurred on by the shift in political will and pressure from regulators following the 2008 financial crisis – it was largely achieved with a “one-size-fits-all” approach, Mitch Trehan, Head of Compliance & MLRO at Banking Circle, said.

“De-risking at its heart is basically a bank having to decide whether or not to maintain an industry, a geography or business type at an objective level,” Mitch explained. “That might work at a broad-brush level for some large institutions, but the secondary and tertiary impacts of that actually are never really known by those who make the decisions.”

Mike Southgate, Chief Operations Officer at Hamilton Court, highlighted the worst case scenario for those customers who find themselves at the receiving end of being ‘de-risked’.

“With the FCA [Financial Conduct Authority] pushing for us to publish operational and security risk reports, one of the biggest operational risks that we find is having a single banking counterparty,” Mike said. “If that single bank pulls its line, your business is gone.”

Barriers to entry & fragmentation

The financial services landscape has changed since the big banks first began widespread de-risking – including the rise of FinTech. How have the changing dynamics impacted on the service available to customers?

“Regulation and the relaxed aspect of allowing e-money institutions and other payment institutions into the market has increased the players, so from that perspective, regulation has made the barriers to entry – at one point – lower,” Mitch explained.

According to Mike, many of these newer players tend to be “siloed” as they focus on one specific product – often because they struggle to find a full service banking partner – which results in more fragmentation in the market.

But this laser focus can be beneficial for customers who may struggle to access services from Tier One banks due to their ‘broad brush’ approach, according to Mitch.

“What’s happening now is you have new players coming into the market that can be specific and subjective, look at each individual firm and their risk profile, etc., and make appropriate, subjective decisions that aren’t one-size-fits-all,” Mitch said.

Mark Hewlett, Director of Product & Infrastructure at GC Partners, explained that while the barriers to entering the market remain relatively low, the barriers to actually doing business today are “crippling” for many firms.

“There is a huge burden on businesses in our space for compliance,” Mark said, adding that the cost of doing business is now “incredibly high” and firms are often competing for same costly talent in this space. As commercial organisations, banks ultimately have to make decisions based on revenues, he added.

Mitch highlighted the potential for technology to bring down the cost of doing business. “If you have a good technological payments structure that is efficient and goes as close to the central banks and clearing houses as possible, you can save costs using technology, and that can then be passed down to users.”