18 July 2017
A New Revolution for Financial Services
Money makes the world go round, or so the saying goes. And money is the engine of growth, but that engine needs fuel and increasingly, that is data.
That may seem obvious in the 21st century where technology has flooded out of the workplace to touch every part of our lives.
The pace of this change has transformed our world. The way we interact is so different that if our grandparents were dropped into today’s world, they would be forgiven for thinking themselves in a science fiction story.
We communicate globally without restrictions, from wherever we choose, whenever we like. We are more flexible, even remotely, and all thanks to technology. We don't even have to go to the bank to access money or even put our hands in our pockets to pay a bill.
This pace has accelerated with the advent of smartphones, but if you think that has been revolutionary, you ain’t seen nothing, yet.
The UK is about to experience a new revolution in financial services, driven by two pieces of financial regulation that seek to open up the sector.
They are the CMA’s Open Banking Remedy and the European Payment Services Directive 2 (PSD2), which require financial services providers:
– to ease and facilitate the online sharing of customers’ transactional financial data with third parties;
– to allow third parties to initiate payments directly from an account as a bank transfer; and
– to publish product information in the public domain, including service level indicators and satisfaction surveys.
The initial goals of open banking are to make financial services companies more competitive and reduce the chance of providers charging excessive fees for low-quality services. It will allow consumers to share their transactional histories with trusted third parties without having to reveal their passwords, which has been the major obstacle to financial aggregation in the UK.
But it goes much, much further and should be seen as an absolute game changer. It will shake up the banks’ old bundled, Jack of all trades approach to service provision to one that offers core services with a choice of complementary services from third parties that can be plugged in at will by customers.
The potential is huge and will in time transform the way individuals and small businesses interact with not only banks, but providers of all financial products and services – even debt counselling or insolvency services.
New challenges, but also possibilities
On face value, this may look like a charter for new players to come and eat the banks’ lunch, but that isn’t so. Though that is perfectly possible, this development will allow existing providers to improve their own performance or even compete for new clients.
After all, this isn’t happening in isolation, but within the bigger picture that includes the implementation of other innovative technology, such as big data, artificial intelligence and cloud computing, all of which are driving change in existing corporate behaviour.
The fact that fintech companies are entering all areas of financial services and disrupting the decades old, but broken models, is not only good for consumers, but the banks and other institutions themselves. This is because fintech is not only disrupting the traditional providers, but offering them alternative platforms and processes to heal the old wounds of legacy IT.
As a result, open banking will drive open data standards, deliver higher quality data protection and improved anti-money laundering processes, which are currently a huge drain on resources.
The development of a single European payment area (SEPA) will make the often excruciating processes required to send money within Europe a thing of the past.
Though to consider data as a European project is to miss the true potential. The scope of Payments UK’s World Class Payments project should deliver a truly seamless payments experience for business and consumers, and a blueprint for a global model.
Open data – and the systems they use –will make data exchange easier and safer, boosting innovation and consequently competition that will help to stimulate growth.
It will drive the spread of financial services across emerging markets. The mobile phone has already extended banking to millions of citizens of African nations who would otherwise remain utterly financially disenfranchised. This continent will be at the epicentre of population growth over the next generation as its 1.1 billion inhabitants more than doubles to 2.4 billion by 2050 according to United Nations forecasts. That’s almost a third of the world’s population.
With more than 60% of its population under 35, consumption will be a priority and that will require a payments structure that meets the requirement of this burgeoning and increasingly sophisticated consumer group.
They already bank by phone, so adoption of new systems won’t be met with the relative resistance of some developed markets.
Of course, the ability to consume is predicated on access to education and employment, but the momentum behind global urbanisation suggests that growth will be driven off the back of this population boom.
An open and shut case
It may seem like a grand ambition for the future legacy of open data, but all this – and more – is within reach if the industry can pull the processes together.
There are those who grumble about the degree of regulatory oversight and that there are no guarantees, but that rather goes against the fact this is an opportunity for the industry to be reborn.
One thing that is certain, is that if the household names we know wish to retain a foothold in the brave new world, they must embrace change. Without it, they haven’t got a hope.