2018 is only a few days old but already the UK’s financial services industry is getting to grips with not one, but two major changes in the regulatory landscape.
The headline grabber – which came into force on January 3 – is MiFID II, a European Union directive aimed at offering greater protection to investors. Less heralded but more relevant to the debt market, is the arrival in the UK of Open Banking.
Conceived by the Competition and Markets Authority (CMA) is intended to level the banking industry playing field by making it easier for entrepreneurial challengers to compete with major banks.
To achieve this, the CMA decreed that the giants of the industry – nine banks and one building society in the first instance – should be required to share data with smaller rivals. So from January 13 2018, the big banks will be required to share current account information with licensed financial services companies, including challenger banks and fintech firms operating in areas such as payments.
And in theory at least, the sharing of information should be a relatively seamless process, with information being exchanged across secure APIs – software applications that allow one system to talk to another.
You can see Open Banking as part of a much bigger story. The last few years has seen not only the arrival of alternative finance platforms in the shape of crowdfunding and market lending, but also an opening up of the banking market to challengers. Some of these – for example Tesco Bank – offer a wide range of banking services, other focus on very specific markets, such as lending to small businesses. In addition, payments companies serving both consumers and businesses have gained traction in the money transfer market.
But incumbent banks have one big advantage over the challengers. The road to Open Banking began when a CMA review of the industry (in 2014) revealed that 85% of business accounts and 77% of current accounts were managed by the ‘big four’. Those numbers have probably fallen a little since then, but the underlying truth is that major institutions manage the accounts of the vast majority of business and retail customers. Consequently, they hold a lot of data that has not been available to rivals.
A New Landscape
Until now. Under the new rules that data must be shared with licensed rivals, if authorised by the customer.
There are many ways which this information might be used. At its simplest, a challenger bank might use the current account information – revealing a huge amount about the financial affairs of the customer – to create a bespoke, or at least a highly competitive loan deal. Meanwhile, there wouldn’t be so much form filling for the customer as relevant data can simply be moved across.
Equally there could be an ongoing flow of information, allowing, say, payments firms to transfer money from one bank account to another. Meanwhile, accountancy software firms are excited by the prospect of linking their services to bank account activity.
A Partnership Model
But beyond all that, the secure APIs that underpin Open Banking will open the door to partnerships between different service providers, sharing the same pool of authorised data.
All this is likely to have an impact on one of the fastest growing areas of the fintech industry – namely market lending. In the longer term, access to bank information, may well enable platforms to offer tailored deals or enable them to partner with banks.
None of this will happen overnight. Current account data is the first step in the Open Banking information and more information will fall under the remit of the regulations in 2019. Meanwhile, smaller providers – be they banks or fintech companies – will have to apply for and win licences before they can take advantage of the new open environment.
And it may not be an entirely smooth road. Already four banks have been given extra time to prepare for the change and the new system may take time to bed in.
But innovation on the part of alternative finance providers should follow. The alternative finance marketplace will continue to evolve. If all goes according to plan, the result will be not only a wider range of options for borrowers but less bureaucracy and paperwork There may even be partnerships between alternative finance providers, banks and other fintech companies – all using the same APIs.
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