"Delay in the introduction of innovative financial technologies makes banks weaker in the battle for a share of the financial services market"VLADIMIR VOROBEV, MANAGING PARTNER AT QUANTUM ATTORNEYS, EMPHASIZES
— How are financial services transformed under the influence of new technologies?
— Digital transformation has become a new reality for companies providing financial services as it dramatically changes the habitual principles of their operation. In particular, one can observe an increase in competition in the financial industry, entry of new players, including the entry of a significant number of financial and technological companies and so-called alternative banks.
Applications, websites and other innovative solutions upgrade the traditional financial sector, making it mobile and acting as a countermeasure against red tape and procedural delays.
New technologies also contribute to ensuring financial inclusion, which refers to the opportunity of obtaining basic financial services and making basic financial transactions: money transfers, Internet payments, deposit, credit and insurance operations, etc.
— What FinTech solutions are currently topical for the Ukrainian market?
— The most current FinTech solutions can be divided into three main categories: P2P services, B2B developments, and service technologies.
With the help of P2P technologies, users can independently make transfers, payments, micro-banking operations (for example, lend to neighbors) or micro-loan operations (borrow small amounts), insure themselves and their family members with just a few clicks in the application on their mobile device. This is also convenient for financial institutions, since it allows them to automate processes and reduce labor costs.
B2B services help to simplify transactions between corporations. For example, currency exchange platforms are created allowing enterprises to acquire each other’s currency by prior arrangement on the rate. This solution makes it possible to reduce market costs and avoid losses due to exchange rate volatility.
Service technologies are used to optimizing the work of traditional banking and financial institutions. For example, such service as online video identification, carried out with the aid of artificial intelligence, is gaining momentum. This tool guarantees a higher level of security than automated solutions that can be bypassed if one so wishes. Many banks even outsource video identification functions.
Artificial intelligence and machine learning are other examples, which have completely changed the approaches of financial corporations to risk and asset management. Large investment funds (in particular, Vanguard) develop their own bot programs for investing in a smart format. Banks use scoring tools to identify unscrupulous borrowers.
— What is the attitude of Ukrainian banks to FinTech innovations, do they agree with the need to introduce innovations in the banking market?
— The attitude of Ukrainian banks to financial innovations is gradually transforming: awareness of the need to look closely at such innovations and even integrate them is replacing incredulity and caution. The banks intend to solve the issue of competition with innovative financial technologies since many users prefer to use them instead of the traditional banking infrastructure due to the user-friendliness and optimized time expenditure. But so far, domestic banks are introducing only such services as mobile and Internet banking on a massive scale.
PrivatBank is the undisputed leader in terms of innovations in the area of FinTech solutions. It recently announced that it had integrated its LiqPay payment system into Telegram Payments. Thus, Ukrainian companies will be able to accept payments using Apple Pay and bank cards directly in the bots on Telegram. PrivatBank and Google recently introduced the capability to add bank cards to the contactless payment service Google Pay directly from Privat24.
Other Ukrainian banks, in their attempts to improve payment methods, will probably also follow the example set by PrivatBank. Delay in the introduction of innovative financial technologies makes banks weaker in the battle for a share of the financial services market, especially in P2P and B2C sectors.
— What are the legal difficulties associated with the introduction of FinTech products in the area of banking services?
— The difficulties in passing KYC (Know Your Customer) and AML (Anti Money Laundering) procedures for new customers of banks in terms of FinTech are the most formidable obstacle to the integration of FinTech innovations in the banking sector. This reduces the conversion of attracting new clients or complicates the ability to verify the legality of the funds received by the client from an external sender. It is precisely in connection with the last argument and the lack of efficient mechanisms for confirming the history of transactions and their legal basis that the banking system, as led by the National Bank of Ukraine, is not in a hurry to give the green light to transactions originating from cryptocurrency assets. Perhaps after the issuance by the Financial Action Task Force (FATF) of guideline for financial institutions in March 2019 dealing with digital and cryptocurrency assets, the situation will change for the better.
And today, the failure of banks to comply with the current KYC/AML rules may result in fines, suspension and even revocation of banking licenses. Therefore, if the banks see the insufficiently transparent nature of FinTech products, they prefer to steer clear of them, despite the possible benefits of cooperation, in order to avoid complaints from the regulator.
Other difficulties include traditional issues of mergers and acquisitions, as well as corporate aspects (in cases when banks do not develop their own innovative solutions, but acquire them elsewhere and want to retain a monopoly on them), and ownership rights to the FinTech product.
— What is the role of the legal advisor in the process of integrating financial technologies into the traditional banking and financial industries?
— The assistance of a lawyer is needed at the stage of developing innovative solutions which are based on a complex legal component. For example, traditional insurance services are a set of actions of a legal nature, and when developing a technical component it is important to consider their sequence and the interrelationship between them.
Any transactions involving the acquisition of FinTech companies by banks or the acquisition of FinTech products require the involvement of lawyers specializing in this area. In particular, lawyers should become an organic part of the bank’s team in developing the strategy and detailed plan for acquiring/purchasing FinTech companies and products in order to avoid and/or mitigate proprietary (including IP) and regulatory risks. Lawyers are also valuable for monitoring the process of a FinTech service’s entry into the market and its further operation to prevent conflicts with the regulator, competitors and consumers, or to resolve conflicts that already exist.
Since innovative technologies imply the transfer of traditional financial services to the digital plane, there are problem issues regarding intellectual property, protection of personal data, implementation of cyber security standards, successful and expeditious resolution of which also requires the involvement of qualified lawyers.