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Pinsent Masons blazes a trail as finance goes digital

Financial services are currently undergoing a digital transformation, with Pinsent Masons at the forefront of navigating the challenges and opportunities for businesses in the sector.

The digital economy is booming and changing the game for the financial services sector. Madeleine Barratt from Pinsent Masons says that to keep up with the innovation in the market, customers’ appetite for online banking services, and new rules from the regulators, financial services are stepping up their digital makeover like never before.

“There’s no question that AI is the hottest tech trend – it could boost the financial services industry like never before. AI tools could help with lending decisions, risk forecasts, scam prevention or customer support, for example.”

AI is still seen as risky, however. There are issues with its outputs – it can “hallucinate”, giving false returns, it can also produce biased results. There are also concerns around confidentiality, privacy and intellectual property infringement. 

“Dealing with AI risk is key to unlocking its full potential in the financial services space. With AI’s rapid pace, we anticipate swift solutions to these challenges and for the use cases of AI in the sector to grow.” Barratt commented.

While AI is advancing at a breakneck speed, open finance tools have been more of a slow burn. But now, there are more signs of open finance products and services popping up, which makes sense when consumers are looking for a clearer view of their money situation in the face of rising interest rates and the cost of living crisis.

Banks and financial service companies are increasingly adopting these kinds of technologies and applications devised by fintech suppliers to stay relevant. 

As the complexity of a bank’s ecosystem grows, the risks associated with using third-party technologies are relevant. In particular, operational resilience – the ability to withstand disruption, is a key regulatory priority.

“Operational resilience is obviously a key concern, just as it has been for decades, but as Fintechs become key to the provision of critical customer-facing services, operational resilience is coming into sharper focus” she explains.

Cyber risk is also a big issue. The more interfaces a financial institution has with technology providers, the more cyber risk it takes on. One answer to this is to ensure that all third-party suppliers conform to standardised security policies and industry frameworks such as ISO 27001 or the NIST Cybersecurity Framework.

“The key message here for Fintech companies looking to sell services to the financial services sector is that they need to be really diligent in ensuring that their systems are cyber resilient.

If your security practices are weak or have vulnerabilities, you put your institutional clients and their customers at risk, and you won’t get hired,” Barratt points out. 

Generally, relationships between Fintechs and large financial institutions are growing, but still challenging. 

Fintech companies are fast-moving whereas the procurement processes of traditional financial institutions can be slower and more risk-adverse. 
This is understandable given the regulatory oversight to which they are subject, but it does cause challenges.

“One issue that we are seeing today is that there are any number of interesting applications being produced by Fintech companies. 

“Business leads see this whizzy technology and they want to move fast to integrate it into their systems, but their procurement processes might struggle to move at the same pace,” she comments.

Another problem is that when a financial institution onboards a new supplier and makes that supplier part of its ecosystem, it wants that supplier to be financially stable. “This need for demonstrable, long-term financial stability is a challenge to for a new Fintech start-up, and so some compromise is required,” Barratt says.

In her experience, financial institutions are getting better at streamlining their Fintech procurement processes. 

“The deals that we were seeing even three years ago were very slow in coming to fruition. Today, there are clear signs that things are moving more rapidly. Competition in the market to provide customers with leading-edge services is intense. However, there is still room for improvement,” she comments. 

As a law firm, Barratt points out that Pinsent Masons is well placed to help institutions and Fintechs negotiate and work through the various issues and risk areas. “The financial services sector is highly regulated and there is a lot of regulation coming through in the financial technology space, so there is lots for lawyers to do. The legislative approach in the UK is also starting to diverge from the European approach, which creates further complexity.”   

Many UK and Scottish Fintechs are very keen to expand internationally. For example, in the context of AI, the EU has taken a “top-down” approach through the EU AI Act. The UK, by contrast, is taking more of a principles-based approach, describing this as more business-friendly.

“Since many Fintechs want to sell their products and services outside the UK, it may not be that helpful for the UK to go its own way on this. UK businesses who are selling into the EU will inevitably have to move to the highest common denominator to do that.” 

Barratt says that the space has its challenges and complications, but also huge possibilities for Scotland’s over 220 fintech firms. “Scotland is a big player in financial services and a hotspot for Fintech as well. Fintechs that are based in Scotland can seize the chances in this space like never before” she remarks. 

Source: The Herald

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