Following on from the FIMA conference in London a couple of weeks ago, we have been thinking a lot about how changes to regulation are set to impact financial institutions and banks particularly.
There are 2 main regulations which are causing a stir:
As part of its Market Investigation into competition in the UK’s retail banking sector, the Competition and Markets Authority (CMA) is requiring the nine largest current account providers in the UK to implement Open Banking. Developing the Open Application Programming Interface (API) standard will enable customers to consent to allowing third parties safe and secure access to their current accounts; to either gather transaction data or initiate payments on the customer’s behalf – also known as Open Banking.
This will give customers more control over their data and will support an emerging market of new, exciting third-party products and services, such as tailored price comparison websites.
The above Open Banking requirement coincides with the EU legislation – the revised Payment Services Directive (PSD2) – which requires all payment account providers across the EU to provide third party access. While this does not require an open standard, PSD2 does provide the legal framework within which the CMA requirements will have to operate, and the CMA mandate will need to be delivered in a way that is PSD2-compliant.
It will keep customers safe and secure, enhancing the opportunities for enhancing customer propositions.
PSD2, through both intermediating and dis-intermediating the bank, provides a legislative mandate for more open data and an increased open data interchange between financial services organisations. By January 2018, European banks must provide access to customer information (e.g. account balances and details) to Account Information Service Providers (AISPs), introducing another entity to the customer relationship.
In addition, banks must expose customer information and payments services to Payment Service Providers (PSPs), dis-intermediating the traditional payments model. Most importantly, banks and financial services institutions may also take on the role of AISPs and PSPs themselves. This will all be enabled through the effective use of APIs; setting the scene for the API economy to play a disruptive role in the future of financial services.
The need to drive a more open set of business practices will in turn accelerate the adoption of Open Banking. How organisations respond to this change will shape their future.
Approaches to new regulations
We are seeing a few common approaches to meeting the new requirements:
Challengers – These are new entrants the market who do not have an existing technology estate to tie them to a particular solution. Typically, they are selecting fit-for-purpose platforms to quickly build capability and products. They’re embracing and defining the opportunity for change and transformation, centred on providing a better customer experience in banking. Their biggest challenge is in scaling their innovation, but if they can overcome this, they look to be very successful.
Transformers – These are the banks which have been around for a while, who have the scale, but are trying to grasp the innovation that Open Banking presents, as well as reeling from the new competition posed by the Challengers. They may decide to embrace existing technology investments and selectively transform these to compete effectively. The biggest challenge for Transformers might be to overcome their own siloes. This approach may be costly as well as risky, but may well leverage the reach and scale they already have.
Modernisers – Companies which have started embarking on a modernisation project before the new regulations came into play, may find themselves having to reconsider their plans. This may count in their favour, as they have already committed to updating or replacing some of their legacy systems. Their challenge might be to continue their plans and investments as well as changing to meet new requirements at the same time.
Revivers – This is a hybrid approach, where some of the most established banks find that their legacy systems are not going to meet the new requirements, and they decide to create a challenger bank outside the walls of the current institution. They develop their new operations and brands in parallel, which means they could potentially shift everything across in future.
The winners in this game will be those who offer their services to be consumed by external third parties, while being creative about how to use third-party services for their own offerings. They will open their own systems for others to consume and innovate and enrich their services by using other organisation’s APIs.
Clearly there is a lot of work to do, but also many opportunities to be had. We are keen to help banks in any of these scenarios. Please contact us for a free consultation and impartial advice.