The Future of FinTech Is Changing with the UK’s Open Banking

Open banking empowers fintech startups and innovation

 Future of FinTech
 

Naomi Bowman

LONDON — A banking revolution is underway in the United Kingdom—one that could change the way banks do business with consumer and commercial customers all over the world. 

The revolution began in January 2018, sparked by new UK open-banking standards intended to stimulate innovation and competition. Under open banking, consumers can authorize registered fintech companies to access their banking data, in real time, including transactions and balances. Open banking “is set to unleash significant innovation across UK financial services,” said Glenn Manoff, senior vice president at research firm Trustpilot, which predicts that open banking will deliver a £1 billion annual boost to the UK economy. Yet Manoff stressed that trust is paramount: Fintech must “[demonstrate] that consumers can trust them with their banking data” or the revolution will fade. 

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. One open app, for example, aggregates customers’ financial relationships, offering to find better deals on each of their current accounts and credit cards. Another provides detailed digital receipts for customers, along with loyalty rewards.

Embracing the future of fintech

Some bank executives are bracing for a fight against regulatory changes that would bring these innovations to their jurisdictions. It’s not difficult to imagine a banking lobbyist’s pitch against open banking filled with dire warnings of data breaches and the specter of untested, upstart technologists serving as the custodians of sensitive assets and information.

But smart executives understand that resistance to technology and disruption will be as futile in the banking sector as it was in the music or publishing industries or any number of other businesses where agile startups and consumer preferences have upended longstanding business models. 

Indeed, the best thing a banker can do today is regard the UK as a real-world fintech laboratory, track developments closely and seek opportunities to capitalize on change. 

 Graphic illustrating the future of banking

Pairing UK open banking with fintech creates a stark reality for legacy banks

The timing of this revolution is far from ideal for long-established banks, whose chief executive officers are still coming to grips with a stark reality: Unless they embrace new technology, they may face extinction. 

As in other sectors, it starts with data. Data mining is quickly becoming an operational imperative for banks. It 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 (AI) 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. Many large banks run on systems developed over decades, stitched together through acquisitions. It is typically a struggle to get these legacy systems to speak with one another, and data is rarely stored in modern formats. 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. 

Fintech disruptors are coming, and open banking is paving the way

Open banking has empowered a host of innovative fintech startups to challenge the way customers handle their money.

In contrast, startups have the advantage of not only new technology, but also streamlined processes and fewer complex systems. They code using the latest software languages, which are developed to be secure and work on the web and on mobile devices. In designing for customers, they take inspiration from the intuitive, user-friendly interfaces built by companies like Facebook and Amazon. 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 UK’s new open-banking standards provide startups with another advantage by shifting ownership and control of data from the bank to the customer. Banks can no longer block consumers from sharing their data with registered third-party fintech institutions. Underpinning open banking is a system that lets customers grant (or withdraw) access to their data at any time, safely and without having to share usernames and passwords. 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. 

The fintech movement also benefits from an outsider’s fresh perspective and a healthy dose of enthusiasm for disruption. The movement is coordinated by Open Banking Implementation Entity (OBIE), a body established by the UK’s Competition and Markets Authority. OBIE calls open banking “the future of money” and boasts, “Get ready for a world of apps and websites, where you can choose new financial products and services from providers regulated by the Financial Conduct Authority (FCA) and European equivalents.” Proponents say open banking will provide customers with more choices, better prices and better products across the banking spectrum. “[It] is forcing the banks to think about how they develop new products and how they fundamentally work in a much more innovative, fast-moving and iterative way,” said Matty Cusden-Ross, CEO of Flux, a receipts, rewards and loyalty app. “We're going to see a lot more change, a lot faster.”

How the future of fintech and banking can leave both victorious

The good news for established banks is that, despite the threat, challenger banks actually need them. Large financial institutions have far more experience and know-how. They have deep knowledge of customer behavior, and have more experienced leadership teams who are used to interacting with regulators and shareholders and making strategic decisions. For customers, established banks offer trust, pedigree and history. Fintech may appeal to millennials who want to operate their banks via smartphone apps, yet it’s unlikely that baby boomers and Gen Xers will switch en masse from Citibank to Monzo—a fintech startup that has attracted more than 500,000 customers since launching in 2015.

  Not your traditional British banker:   The UK’s open-banking standards have empowered numerous startups that hope to change the face of banking. Flux offers a digital receipt and loyalty program.

Not your traditional British banker:
The UK’s open-banking standards have empowered numerous startups that hope to change the face of banking. Flux offers a digital receipt and loyalty program.

The startups recognize their established competitors’ power. In my experience, employees who perform an innovation role at established UK banks receive as many as 50 to 100 solicitations a week from fintech companies eager to offer services or forge partnerships. Fintech entrepreneurs and technologists tend to have fantastic ideas, but they don’t necessarily have the financial services network necessary turn them into viable businesses, nor do they have experience implementing ideas at scale. Often, they need help marketing to established banks and understanding how large organizations operate. 

Nurturing the future of the fintech industry inside legacy banks

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. Rather than treating startups with an us-versus-them mentality, both sides benefit from collaborating and sharing expertise. Some banks and fintechs have already established partnerships. Bud, a UK bank information aggregator, is building apps on behalf of HSBC. Likewise, Santander has launched a joint venture with mobile payments firm Monitise to invest in, build and scale fintech businesses. 

Finally, bank executives need to face the fact that like many other businesses, the future for financial institutions is tech-driven. They need to forge innovation, which means updating their data and systems, thinking like tech companies and even hiring key tech professionals from companies like Google and Facebook. 

Otherwise, established banks might be the losers in this latest revolution.


Naomi Bowman is a managing director for Berkeley Research Group in London. She has advised global banks on some of the most prominent regulatory changes, integrations and insolvencies.

ThinkSet