Since their emergence, FinTechs have attempted to revolutionise many areas of financial services, with retail banking amongst the most penetrated segments. Yet, incumbent banks still dominate the industry (in the UK, the five largest banks reportedly account for four fifths of the current account market). However, new EU regulation about to be implemented promises to level the playing field and increase competition amongst providers, incumbents and challengers alike. Being at the forefront of FinTech innovation (both in terms of investment and emerging solutions), the UK will be the first European country to put the concept of Open Banking into practice.
What is happening?
Open Banking is a model of finance to enable third party developers to build and augment products and services using an open API infrastructure. Indeed, the aim of the upcoming EU Payment Services Directive 2 (PSD2) is to create an environment for this concept, by mandating financial institutions to make their customers’ data accessible to licensed third parties, should their customers ask them to do so. Regulators hope, this will increase competition and foster innovation in an industry which “needs shaking up”.
As a result of the regulation, banks will, in effect, have to forego the exclusive rights to what is believed to be their most prized asset – customer data. Despite this, there remain concerns over their willingness to maintain a secure and streamlined infrastructure to facilitate the sharing of this data. In order to address this, UK authorities have taken the EU directive a step further and mandated the nine largest UK banks to adopt common API standards in order to ensure that “barriers to participation will be kept deliberately low to cultivate an engaged developer community”.
As a first step in a multi-year programme in the UK, this week will mark the roll-out of Open Banking for current accounts (both personal and small business), with the initiative to be extended to all products with payments capability (including credit cards and e-wallets) within the next two years. Starting tomorrow (January 13th), four banks (AIB, Danske Bank, Lloyds and Nationwide) will gradually open up access to their customers’ current account data, with the remaining banks (Bank of Ireland, Barclays, HSBC, RBS and Santander) to follow suit later this year.
What does this mean for banks, FinTechs and customers?
With customers virtually gaining ownership over their banking transaction data, Open Banking enables them to easily grant other financial services providers access to their information. This, in turn, will enable authorised third parties to use this data to offer more personalised financial services to the customer. Innovative products are likely to emerge, especially in the areas of account aggregation, budgeting and financial services comparison. This could lead to customers having a variety of accounts with multiple providers, with a single app seamlessly managing all of their financial accounts.
Although challengers will likely view Open Banking as their big opportunity, it does not have to be all doom and gloom for incumbents either. Large banks currently target customers with very similar offerings, resulting in very few customers switching their current account provider. However, in an Open Banking environment, those banks that are able to differentiate themselves from the crowd could gain a significant competitive advantage. By utilising customer data that becomes available from other incumbents, banks could themselves (or in partnership with FinTechs) develop innovative digital services of their own and become a one-stop-shop for their customers.
However, in order for the initiative to reach its desired effects (i.e. for the increased competition amongst providers to result in customer benefits), the education of customers will be key. Quite simply, customers in the UK are not familiar with the concept of Open Banking. More importantly, questions remain over customers’ willingness to share their banking data with third parties. FinTechs will surely be eager to highlight the benefits of the initiative; however incumbent banks will have a vital role in reassuring their customers that sharing their data with other providers is not only secure but also worthwhile. How customers respond will ultimately determine whether the UK Open Banking programme is a success or a failure.
 The deadline for these banks has been extended based on their request. Barclays, HSBC and RBS are set to launch by the end of Q1 2018, Bank of Ireland has until the end of Q2 2018 and Santander has been given a one year extension.
Keen to find out more on Open Banking or to speak to our dedicated FinTech team? Email us at FinTech@kae.com