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Where will Open Banking take us? OPINION
Francesco Simoneschi, CEO and co-founder of leading financial API provider TrueLayer, discusses how Open Banking and PSD2 will change the financial industry
CEO and Co-founder, TrueLayer Francesco Simoneschi
C
ast your mind back to 1983. Microsoft Word launched, Michael Jackson was dominating the charts, Return of the Jedi had introduced us to Ewoks, and in London, Margaret Thatcher’s
government settled an anti-trust case with the London Stock Exchange. If you’re a student of history, or a fairly seasoned City operator, you will recall that this case led directly to the 1986 ‘Big Bang’: a wide-ranging deregulation of the City of London to open it up to competition.
Ultimately, over the course of a decade, it made London the financial capital of the world. Fast forward to 2018 and we have Open Banking and PSD2. Now, you may be scoffing at the suggestion that these two events are in any way similar in their scope and ramifications. I would agree with you – Open Banking is going to be much more important.
The Big Bang was designed to break open the old boy network that had stifled competition and innovation in investment banking. Open Banking has broadly the same goal. However, in this case the ‘old boy network’ is the big four banks and the new regulations impact the entire financial sector.
It’s not hard to see why, as in the 1980s, radical change is needed. Save for sporadic innovations like ATMs, chip and PIN and online banking, the fundamentals of banking remain reasonably unchanged by new technology. Other industries have gone through staggering transitions – retail, hospitality, marketing, logistics and travel are almost unrecognisable from little over a decade ago.
Of course, some people would be quick to point out that below the surface, data science, customer service and marketing automation, and digital transformation projects are radically altering the fabric of many financial institutions. However, for the man and woman on the street, the way banking seems to work has remained largely constant. The Great Recession also showed us the great danger inherent in allowing the financial sector to become a closed shop dominated by a few.
So how is Open Banking and PSD2 going to spur innovation and competition?
First, we need to look at why startups have not yet disrupted the financial sector to the same extent as other industries. Many fintech companies follow a familiar trajectory, they identify an issue or pain- point, develop great technology to overcome it, grow quickly but soon hit a wall, many are bought by financial institutions, but in general, their promise often remains unfulfilled.
The reason they hit this ‘wall’ is a lot to do with their ability to integrate into different banking systems and gain access to financial data. It is incredibly difficult to develop technology that seeks to improve your banking experience if the banks are unwilling to play ball. In many cases why would they? There is little incentive to freely help a company that may soon damage your market position. Similarly, if you identify a great piece of technology, would it not be easier to buy it than leave it for your competitors?
This is of course a simplified overview of the fintech industry; there are issues related to the complexity and lack of homogeny in financial regulations across markets and the level of funding required to scale that are also impediments. However, at its core, the power traditional financial institutions have over start-ups is stifling innovation. You only have to look at companies such as Stripe and TransferWise to see what is possible in other areas of the financial sector.
To level this playing field, Open Banking is designed to enable consumers to share their personal financial data, currently held by banks, with approved and regulated third parties. It essentially removes the data monopoly.
Businesses and consumers will gain access to products that will make their life a lot easier. Consumers and businesses will finally have the freedom to immediately and accurately compare the rates of current and business accounts and mortgages. This will lead to services that vastly increase access to financial products – going far beyond what is currently available today. More complex finance management tools will also be built. People will soon have all of their financial information collated onto easy-to-manage dashboards – including utility bills,
www.ibsintelligence.com | © IBS Intelligence 2018
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