Will the new Consumer Duty regulations upset the fintech applecart?
The new Consumer Duty rules could become a big opportunity for financial startups, writes QED’s Yusuf Ozdalga.
The Consumer Duty (aka “The Duty”) is a new and far-reaching framework that has been proposed by the Financial Conduct Authority (“FCA”) and is due to come into effect in July 2023.
The Duty sets the standard of care firms should give to customers in retail financial markets, and thus will impact fintechs and legacy financial institutions alike.
Not surprisingly, a lot has been written about The Duty, and the risks it poses for regulated firms in the UK. However, if fintechs act carefully, they can turn this change into a big opportunity.
The path to doing so lays in having the right intention, the right implementation, all underpinned by the right information. We also refer to this as the “3-i” framework. Let’s look at each one in turn.
The right intention is the starting point for how any regulated firm approaches its customers and its value proposition.
While many companies pay lip service to putting the customer first, the Duty will now shine a light on actual outcomes and results. Hence, we would expect that there will be a separation between the firms that really deliver superior customer value and those that just say the right things but fail to make that promise a reality.
In theory, this is an area where innovative fintechs should have a strong edge.
The starting point for many an entrepreneur is to make the world better for their customers, and fintechs tend to be maniacal about measuring their Net Promoter Scores.
Of course, a high NPS score is no guarantee that the Duty is being delivered, but it is certainly a step in the right direction.
Hence, our advice to fintechs and any other regulated firm in the context of having the right intention is simple. Make sure you put good customer outcomes in the centre of your vision, mission and culture, and make sure that whatever you say goes beyond just words and translates into actions.
This brings us to the second “i", implementation, which has particular relevance in three of the four outcome areas the FCA has highlighted, which are governance, price and value, and consumer support.
The right implementation is all about being on top of the details.
For example, a bank may have the right intention for its customers.
But if somebody calls their helpline to transfer money into their checking account to avoid going into overdraft, but ends up having to wait on hold for one hour, gives up, and the account goes into overdraft and incurs a fee as a result, this is an example of implementation gone wrong. Specifically in the area of consumer support.
Our advice to fintechs in the context of implementation is therefore to have a culture that not only has the right intention but also the right level of empowerment at all levels of the organisation.
It is crucial that all employees, whether they be a customer service rep, or a mid-level manager, are empowered to take the necessary actions and implement the changes needed to deliver good customer outcomes.
For example, a call centre service representative may notice that the Loan to Value of the mortgage the customer holds has gone down, which qualifies them for a better rate – in which case they should immediately be empowered to switch the customer to that more advantageous rate.
Better yet, these types of changes should be implemented automatically.
In order to implement these types of changes, the organization also needs to have access to the right kind of data, which brings us to the third and final “i", information.
Any company that is to be successful in the twenty-first century needs to have access to, and be able to digest and act on information at a grand scale.
Needless to say, fintechs should have a big advantage in this arena.
The right information at the right time should underpin all that a dynamic firm does and should in particular support the fourth outcome area which is consumer understanding.
By constantly tracking the right information the firm would be able to understand how exactly the intention of good consumer outcomes is being implemented and turned into products and services.
Hence our advice in this arena should not come as a surprise. Build an organisation that has the capability to consume information and act on it with the right intention.
Implied in this statement is that the company has recruited and incentivised individuals with the right set of skills.
In other words, people that are capable of mining the data, analysing it to turn it into information and insights and turning those insights into products and services via an empowered set of employees that can act swiftly.
Today’s fintechs have all the right ingredients to turn the new Consumer Duty framework into a big opportunity, and the key to doing so lies in being able to leverage their core strengths around being intentional, nimble, and data-driven.