Resistance to U.K.’s open banking regs is futile
A banking revolution is underway in the United Kingdom. The new U.K. open-banking standard is intended to stimulate innovation and competition and allow consumers to authorize registered fintech companies to access their banking data.
Open banking has empowered a host of innovative fintech startups to challenge the way customers handle their money, whether via credit card products, current accounts, loans or insurance.
While some bank executives are bracing for a fight against regulatory changes that would bring these innovations to their jurisdictions, most understand that resistance to technology and disruption will be as futile in the banking sector. The best thing a banker can do today is regard the U.K. as a real-world fintech laboratory, track developments closely and seek opportunities to capitalize on change.
Timing of the revolution is far from ideal for long-established banks, which are still trying to understand that in order to survive in the medium to long term, they must embrace new technology whilst grappling with the increasing regulatory requirements which they must comply with in order to operate in today’s increasingly complex landscape.
This starts with data. Data mining helps streamline processes and cut overhead—and thus represents a huge opportunity for the operations-heavy banking business. Many banks are eyeing applications that identify suspicious transactions to help them comply with increasingly onerous fraud regulations. Artificial intelligence promises to dramatically improve the accuracy and reduce the cost of this resource-intensive activity.
But embracing such cutting-edge technology is no easy task, especially for many large banks that run on systems developed over decades. For banks to mine their data and create competitive advantages, or even just to stay current, they first must undertake the messy job of data cleanup.
In contrast, startups have the advantage of not only new technology, but also streamlined processes and fewer complex systems. Given their relatively small size and the fact that some don’t need to register as banks, they generally remain unburdened by regulatory concerns.
The U.K.’s new open-banking standards provide startups with another advantage by shifting ownership and control of data from the bank to the customer. In a world where data fuels profits, this poses a massive opportunity for fintech. It also frightens executives at established institutions, who elsewhere have fought to prevent data sharing.
Despite their threat, startups know that they need established banks for their deep knowledge of customer behavior, and experience in interacting with regulators and shareholders and making strategic decisions. For customers, established banks offer trust, pedigree and history.
One approach that’s been fruitful for established banks is running incubator programs that let startups pitch them on how to apply new technology to larger institutions. Some banks and fintechs have already established partnerships.
Bank executives need to face the fact that like many other businesses, the future for financial institutions is tech-driven. Otherwise, established banks might be the losers in this latest revolution.