Banks have long had an advantage when it comes to customer data.
From checking accounts to credit cards, established lenders have access to vast amounts of information that financial technology (fintech) competitors could only dream of.
In Europe, all that could be about to change.
This Saturday, banks operating in the European Union will be forced to open their customer data to third-party companies, that is to say when customers give their consent.
EU lawmakers hope the introduction of the revised Payment Services Directive (PSD2) will give non-bank businesses the opportunity to compete with banks in the payments industry and provide consumers with more choice in financial products and services .
The UK Competition and Markets Authority (CMA) has developed similar plans to allow customers to share their data with other banks and third parties. With the customer’s consent, UK banks will be required to give authorized third-party businesses access to current account data.
These regulations are part of a conceptual transition known as “open banking”. In an open banking framework, supporters say, non-bank companies – from companies as large as Amazon and IBM to start-ups – would be able to create new financial products using data from banks.
What does this mean for the banks?
Banks will need to create application programming interfaces (APIs) – sets of codes that give third parties secure access to their master data.
These APIs serve as channels for developers to access data and build their own products and services around it. Such information could serve as a tool to understand things like customer spending habits or credit history, and could lead to the creation of new services.
“In an open banking world, the customer can choose a supplier in each part of the value chain. And every bank must participate in the value chain as an employee’s right to be there, ”Anne Boden, co-founder and managing director of UK-only mobile-only bank Starling, told CNBC in an interview earlier this year. .
Anne Boden, CEO of Starling Bank
Boden added: “You can’t just assume you’re going to have the end-to-end value chain. Barclays, HSBC and RBS, right now, own everything in that value chain – the app, the back-end. , they sell other products. In a world where everyone earns their entitlement, you could have the app from HSBC and the back end from Barclays. “
Some European lenders are giving early signals of what a post-PSD2 world will look like.
Spain’s BBVA, Danish bank Saxo, Nordic lender Nordea and Irish bank Ulster have already published open developer portals ahead of EU legislation.
HSBC has also taken early steps to comply with the new rules. In October, the bank launched a beta version of an app that allows customers to see all of their bank accounts, including those of competitors, on one screen.
This development – known as “account aggregation” – should be a key part of open banking, encouraging collaboration rather than competition.
Iain McDougall, UK National Director at Stripe.
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“I am cautiously encouraged by some of the progress that we are starting to see around the adoption (of) open banking style principles by emerging and existing financial institutions in general – banks or otherwise,” said Iain McDougall, UK director of the fintech company Stripe. CNBC.
McDougall said commentators announcing the end of banking are misguided. “We certainly don’t see it that way,” he said.
What does this mean for tech companies?
Dozens of fintech companies across Europe are expected to benefit from the updated EU directive, as bank data will enable them to create new products.
Several smaller lenders set up to compete with larger institutions hope to profit from the move towards a more open data infrastructure. UK companies Starling and Monzo, for example, want to make banking a ‘marketplace’, connecting consumers to a number of products and services, including those from other vendors, within their apps.
“Where we’re going longer term is in market banking, where we’re trying to make Monzo a control center, a dashboard, a marketplace,” Tom Blomfield, co. -founder and general manager of Monzo.
Tom Blomfield | Monzo
“So we do the day-to-day money management, but say for example you want a mortgage, it’s not something we would provide,” he said, “so actually , we will offer mortgages from other banks on our platform. “
Another fintech company, MarketInvoice, has completely changed its business model from a digital invoice service to a lender based on EU regulations. Its CEO and co-founder, Anil Stocker, said that PSD2 would allow him to access small business data and use technological advancements such as artificial intelligence to improve credit scores.
“I think banks are starting to realize that this world that they’ve kept around customer data for so long is now starting to open up,” Stocker said in an interview at the time.
Some believe tech giants like Facebook, Amazon and IBM might be poised to disrupt the banking industry, especially once lenders are forced to open their data vaults to tech companies.
Antony Jenkins, who served as CEO of Barclays from 2012 to 2015, said he’s not sure which tech giant or small fintech company is most likely to benefit the most from an open bank.
“I think it’s very unpredictable,” Jenkins said. “What is certain is that there will be disruption.”
Antony Jenkins, founder of 10x Future Technologies and former CEO of Barclays.
Chris Ratcliffe | Bloomberg | Getty Images
Jenkins, who is now the founder and CEO of fintech startup 10x Future Technologies, said data addicts would be the biggest beneficiaries.
“All financial services products are just data. Companies that master data management very well are therefore at an advantage in this space. I would also say that once you step into an open banking world, when you don’t have to be a bank and you can run a big balance sheet and have all the regulation that goes with it, that’s a game-changer. “
He added, “This disruption could be from a FinTech company, it could be from a technology company with very good customer relationships and a very good understanding of how to manage data.”
Some fear that banks are slow to respond and others are reluctant to comply.
“Implementing open banking and making it happen doesn’t happen overnight. It’s a tough journey for everyone,” said Boden of Starling.
Indeed, the transition to PSD2 was not without friction.
In May, several fintech companies and lobbyists decided to push back against plans by the European Banking Authority to relax its open banking rules by banning a technique known as “screen scraping,” which essentially involves copying data from the bank. ‘one interface to another.
And in October, European authorities raided the offices of banking groups in several EU countries for allegedly trying to prevent fintech companies from gaining access to customer account data.
“In the UK, France and other markets, we’ve seen the big banks sue start-ups like ours, trying to block them by all means,” Daniel Kjellen, founder and director, told CNBC. general of the fintech start-up Tink.
“I think PSD2 is not a driving force in this area; the consumer need is the driving force. Rather the lack of regulation has been a hindrance.”
The continent’s lenders pride themselves on their good client relationships which differentiates them from emerging challengers.
Raman Bhatia, European digital manager at HSBC, told CNBC in an interview earlier this year that the bank has benefited from its story and customers trust the lender.
He said HSBC was prepared for the regulatory change in 2018 and did not fear an “existential threat” from fintech competitors.
“It’s very clear to us at HSBC that we have to open up our architecture one way or another,” said Bhatia. “Open banking regulation in the UK and wider PSD2 in Europe acts as a forcing mechanism and catalyst to allow us to explore our transaction data with third parties that we are in the middle of. We’re making sure the program architecture is ready when banking regulations come into effect next year. “
But following Bhatia’s comments, it was revealed that HSBC, along with a number of other UK banks including Barclays, RBS and Santander, would miss the deadline for adopting the CMA’s open banking rules. . They each obtained an additional delay by the regulator.
A spokesperson for HSBC UK said the financial giant “is committed to providing open banking services, which is a real opportunity to expand the range of financial services available to consumers. The UK is the first market in the world to implement these significant IT and infrastructure changes. , and with other banks, we are working closely with regulators to complete the testing necessary for a smooth and secure open banking implementation next year. “
Monzo’s Blomfield said it was still unpredictable what exactly PSD2 would look like. Regarding compiling all of a client’s bank accounts into one app, Blomfield said he and the Monzo co-founders are considering integrating the feature, but they will take a wait-and-see approach.
“I think this is a huge opportunity and one that we are really reluctant to miss,” he said. “We just don’t know how PSD2 is going to roll out in January. Is it going to be smooth or bumpy? We don’t quite know yet. So I think we’ll play it by ear.”
Correction: This article has been modified to reflect the exact effective date of PSD2, January 13th.