The UK retail banking industry has, to a large degree, been shielded from the wave of digital disruption seen in other sectors in recent years, protected by stringent regulations governing the sector. Attempts by the UK regulators to level the playing field have had muted success, such as the Accounting Switching Service, while a new breed of digital challenger banks, attracted by a lower barrier of entry, are yet to show they are truly capable of usurping any of the established lenders.
This is set to change, however, with the UK's incoming Open Banking regulations.
The UK's Open Banking plans, aligned with the European Banking Authority's PSD2 directive, require retail banks to open customer data to third parties via APIs. The aim is to provide users with better services and greater choice by enabling a wider ecosystem of services based on customer information. Although there is some disagreement over the timing, UK banks will have to comply with both regulatory frameworks early next year.
The initiative has a range of potential benefits for bank customers. Essentially it will mean greater control over their data. For example, this could mean the ability to quickly and easily compare services between providers, or the creation of new services by third parties. It is an opportunity for fintech startups to provide services that were previously not possible due to the banks' monopoly over this information.
Clearly banks, for whom data customer data is an absolutely vital asset, are typically not keen to offer this information up for free. Fintech firms have complained that there is a watering-down of PSD2 plans at the behest of the incumbent lenders.
And there is good reason for this perceived opposition to new legislation.
A new report (subscription required) from TechMarketView claims that "banks face a major, indeed existential, strategic disintermediation challenge" as a result of Open Banking and PSD2. The report references research from service provider Accenture, which last year highlighted that lenders could lose up to 43 percent of card payments income due to the incoming regulations.
This is just one of the potential difficulties faced by banks as the doors are opened to third parties.
"The digital revolution means that the historical stranglehold of the banks on financial services provision is both unnecessary and undesirable, and an 'Uber of banking' type transformation is a realistic scenario," said analyst Richard Johnson, who authored the TechMarketView report.
Not all banks will be inclined to embrace open banking, and as TechMarketView points out, UniCredit's CEO has indicated that the Italian firm will be content to provide the 'plumbing' for financial services. Yet it is unlikely that there is appetite for many other lenders to take the route of becoming a 'utility' and would prefer to provide higher value services.
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