McKinsey’s Rajgopal: Volcker Rule not doomsday for bank/fintech partnerships

By Emma Olsson | 28 October 2019

Regulatory changes in the US, including the rollback of the Volcker rule, will not be “deterministic” of banks’ propensity to partner with fintechs, according to Kausik Rajgopal, managing partner for McKinsey’s Western US region.

“I think the rule will have an impact on banks directly, and I think it could impact the potential for banks to partner with fintechs in some ways, but we don’t think that it’s a huge game-changer,” says Rajgopal.

“There may be certain areas like trading where it makes it more attractive, but by and large we think that banks think more holistically about when and whether they partner with fintechs.”

Rajgopal believes that processes of regulation or deregulation “define the environment in which banks and fintechs operate,” but that other factors – such as the need for productivity in the late economic cycle, changes in automation technology, and increased focus on customer experience – carry more weight.

“Yes, it can be less or more helpful depending on the context, but we don’t think it’s deterministic.”

Rajgopal declined to comment on how specifically he thought changes to the Volcker Rule would impact the way large banks work with fintechs.

He cites the 2019 McKinsey World Banking Annual Review, published on October 22. “[B]old, late-cycle moves” are required by 60 percent of banks who are “printing returns below the cost of equity”. The consultancy predicts that the current late economic cycle will provide fertile ground for fintech partnerships as banks place a greater emphasis on productivity.

The report contradicts similar analysis by Thomas Reuters Regulatory Intelligence which reports a 19 percent drop in financial services firms’ engagement with fintechs in the past year. The same survey also focuses on regtech, reporting that only eight percent of firms implemented a regtech solution in 2018, compared to 30 percent the previous year. These changes follow the Trump administration’s continued rollback on financial regulation that began in 2016.

Whether deregulation will spur more or less engagement with fintechs – in particular regtechs – is still to be discovered. In 2016, Reuters predicted a boom in regtech companies to help financial institutions adapt to a shifting regulatory landscape.

Alex Bores, head of commercial at Merlon Intelligence – a US regtech provider – predicts that both regulatory pressure and permissiveness of regulators to new technology will impact the market.

“Certainly when regulatory pressure increases, generally you might see more investment and more innovation in the space, and we’re perhaps not in one of those cycles,” says Bores.

“But I think if you look at the substance of the way that the regulators are engaging, it’s actually one that’s more permissive of experimentation now, even if they are not bearing down as hard on some of the original aspects.”

Bores predicts that current regulatory changes in the US will lead to greater investment in regtech and more regtech firms popping up, however he believes that there is greater advancement in the European market.

“Any time that regulatory pressure is believed to be increasing – you see more fines, you see more investigations – then obviously [regtech] rises in importance because of that, and I think there’s differences internationally in where in one of those cycles we are.”

Bores believes the advancement of artificial intelligence (AI), machine learning, and advanced technology will continue to expand the regtech market regardless of regulatory changes, though this may not translate to a larger number of regtech firms.

“They’ll certainly always be some consolidation,” he says. “But I certainly think there will be a lot of new firms that are being created and going after new problems.”

 

 

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