Welcome to the Frictionless Finance Report, our monthly look at everything new in the world of Open Banking, FinTech, and consumer experience. If you’d like to receive this in your inbox, fill in the form at the bottom of the page. This week we cover the introduction of PSD2, disruption in the banking sector and Open Banking news from Canada and Australia.
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No question on the top story to feature as the headline for this week’s installment – PSD2 has arrived.
It will surely go unnoticed by all interested observers that it has not been a smooth journey, and much work still requires to be done. Although the legislation was made live on Saturday 14th September, it is unlikely that bank consumers will notice a big difference – particularly with the delay to Strong Customer Authentication (SCA).
That said, the impact that PSD2 will have on European markets in time is still calculated to be enormous. Banks and FinTech’s alike have invested a huge amount of time and resource to ensuring that APIs are fit for purpose, and as such, new customer propositions will soon be making their way to market.
There has, quite rightly been several paragraphs devoted to the implementation of PSD2 from a range of publications. Some have focused on consumer offerings, while others have devoted time to exploring the issue still being remedied on API quality.
As a starting point on our PSD2 journey, we recommend articles in EU-startups.com and Finextra as good explainer pieces. The Finextra piece has several useful quotes from Dr Ruth Wandhöfer, honorary professor at the London Institute of Banking & Finance and board member at LSEG, and Nilixa Devlukia, head of regulatory at the Open Banking Implementation Entity. One from Nilixa Devlukia particularly stands out:
“Open banking is the cornerstone of moving forward on this customer journey, choice is not just for the financially wealthy and literate. Open finance will provide bespoke services for areas such as mortgages, investment and lending and put financial services in the palm of your hand. The only barrier to this will be the connectivity of your mobile service provider.”
Several of the articles that we cover carry concerns about the lack of readiness from the banks, with API quality a particular concern.
Computer Weekly, Fintech Times and Bobsguide all carry forward this concern.
Bobsguide have focused on the delays to SCA and the “fragmented” approach to API development. This lack of coordination has given rise to individual APIs being developed, which need to be integrated one-by-one. This, they argue, will have a knock-on effect for third-party providers (FinTech’s) who will struggle to integrate with such a plethora of competing and overlapping APIs.
This theme has been followed up on in the Fintech Times who have outlined the different interpretations to the Regulatory Technical Standards (RTS), thus leaving APIs that are not compatible for third-party providers.
In Computer Weekly, potential vulnerabilities in the APIs themselves are exposed, in an interview with James Maude of Netacea. He writes:
“The problem for banks is that, even if they take every precaution to make sure that the API is secure, there are ways to attack it that are out of their control. A hacker with access to a TPP’s system could use it to scrape personal details, but it doesn’t have to be quite so direct. An improperly secured and poorly designed third-party app configured to share the bank’s data is a direct link to an API that can be exploited in a “supply chain” attack—in which instance, automated attacks that test credentials and card details and commit fraud become possible.”
Open Banking Reports
There has been a spate of new research published over the last month to coincide with the launch of PSD2. Prominent amongst these, is the “State of Open Banking Report” from Cloud Elements, “A whole new world: How technology is driving the evolution of intelligent banking in Europe” from Temenos, and an interesting poll conducted at University of Edinburgh Business School.
Cloud Element’s report finds that a significant majority of respondents are not yet ready for the introduction of PSD2, with only 24% banks stating that they were ready. Perhaps more surprisingly, only 29% FinTech’s stated that they were prepared. The main benefits brought about through Open banking were thought to be increased innovation (46%), and improved compliance (44%).
As Open Banking expands into Open Data in years to come, the impact of the Silicon valley tech firms are likely to make their presence known. This was the main theme from the Temenos report, which highlights that a quarter of banking execs believe that they will be their biggest challengers within as short a timescale as the next twelve months.
Meanwhile at the Credit Scoring and Credit Control XVI Conference at University of Edinburgh Business School, a poll of 100 credit experts found that 77% believe that Open Banking will make the consumer credit market more competitive, with just 6% disagreeing.
“Open Banking, while still in its infancy, is allowing banks and companies offering credit to gain a greater financial understanding of existing and potential customers, and consumers to have greater autonomy and comparability when choosing financial products.”
Said Professor Jonathan Crook, deputy dean and director of the Credit Research Centre at the University of Edinburgh Business School.
Open Banking Abroad
It isn’t the first, and most certainly won’t be the last time that the two big countries outside the UK and Europe dominate this section of our rundown. Once again, Canada and Australia, arguably the two countries furthest along on the Open Banking journey have succeeded in generating all the headlines.
With Open Banking now live in Australia, ANZ Bank has jumped on the opportunity. Hosting an innovation day, the bank formed 21 apps that take advantage of Open Banking.
Switching products, one of the prime focuses for Open Banking in the UK, has been touted as a key opportunity for Australian consumers. Marie Mortimer, writing in savings.com.au, notes that now that consumers have better access and knowledge of their own financial data they can use that to make savings by switching products, particularly in savings and mortgages.
For the same reason, Australians are now better placed to make savings in their utility bills. It has been reported that 30% do not switch their utility provider due to the effort involved.
As with consumers in UK and Europe, Australian consumers must be confident and comfortable that their data will be stored and managed appropriately. That point is brought home by an article in Computer World. They conclude:
“To allay concerns and help ensure the security of consumer data, there must be continued collaboration between banks and their fintech partners, as well as regulators and government agencies. All stakeholders must be united in prioritising security throughout the implementation process and up until the wider February 2020 rollout.”
In Open Banking Expo magazine, Toronto Finance International - the convener of government and the financial sector around issues that impact the growth and competitiveness of the industry – highlight the fact that while there is broad recognition of the virtues of Open Banking from industry and government in Canada, the continue to watch how it plays out in other jurisdictions, in order to ensure that strict data standards are met and customer data is kept secure.
That, however, is not good enough for Soheil Karkhanechi, who writes an op-ed in the Globe & Mail. He argues that the government's response to the rise of Open Banking in other countries has been “less than robust” and “ambivalent”, which has been further hindered by the banks who are deliberately slowing the process. He points out that:
“In the face of overwhelming evidence of the benefits and inevitability of open banking, the banks have adopted the tactic of calling for an “industry-led approach.” In Ottawa-speak, this is the equivalent of “let us do what we want” or “trust us, we got this.” In Canada’s notoriously concentrated banking market, the call for an “industry-led approach” is particularly alarming.”
Finally, one area that the Canadians may decide to focus on before the implementation of Open Banking is on public service announcements, informing the public of what is to come. A poll of Canadians has found that the term “Open Banking” was met with blank stares from respondents, while many did not respond positively to the term itself. Other monikers such as “data right” or “Financial data right” performed more positively.
“Disruption” has become almost a commonplace word in the banking sector. Whether it be digital payments, the rise of FinTech, Bitcoin or the demise of cash, we are consistently being told how the finance sector is changing beyond recognition.
In this week’s Frictionless Finance, we can add some validity to these claims with a number of use-cases and examples that show how the finance industry is, indeed changing before our eyes.
Example 1: Millennials. Is there anything millennials won’t disrupt? CB Insights have the lowdown on how millennials banking habits are affecting the industry. As a group, their spending power grows year-on-year, and their prevalence for all things digital are clear to see from this new report. They have a clear tendency to prefer the use of digital apps over in-store, and a whopping 73% say they would be excited about a bank offering from the big tech firms. It's important to put context behind this story, as CB Insights do, noting their high levels of student debt, difficult getting on the housing market, and being impacted by the 2008 great recession.
Example 2: Digital currencies. Like it or not, digital currencies such as Bitcoin and Etherum are here and are unlikely to go away anytime soon, regardless of their massive swings against fiat currencies. But as we know, the tech companies have seen this success, and are keen on a piece of the action. Facebook only launched Project Libra in the Spring, but already some national regulators have begun to hit back. This week, the Guardian reports that France’s regulator is planning on blocking Libra in France. Bruno le Maire said:
“The monetary sovereignty of countries is at stake from a possible privatisation of money … by a sole actor with more than 2 billion users on the planet.”
However, this news comes within days of rumours coming out of China were published in Forbes. The rumours are that China's Central bank, the People’s bank of China (PBC) is planning to launch its own digital currency. China has banned initial coin offerings (ICOs), and so has caught many commentators short with this potential news.
Example 3: Chinese technology firms. Payment in China are made completely digitally, with virtually no cash changing hands. The two firms that dominate the payments industry are Alibaba and Tencent, and in this blog from Brian Wong, Alibaba’s first American employee, he outlines some of the thinking that separates the two companies from Silicon Valley firms. He outlines how Alibaba focuses on growing markets, rather than hoarding them, and focusing their resources on underdeveloped markets overlooked by US tech firms. Pertinently for those of us in the west, he writes:
“Digital platforms can be used for changing mindsets, behaviors, and entire economies in positive, constructive ways. There are risks in this new and uncharted digital world. But Alibaba has demonstrated that there are greater benefits that come with the inclusive development of this world than those risks which we fear. The biggest risk is missing the opportunity altogether.”
Example 4: Digital payments. A new report from Accenture and reported in FS Tech, illustrates how banks are set to be disrupted by digital payments to the tune of £8 billion – comprising almost 20% of all revenue.
The report states that for banks do compete in this growing market, they must offer payment solutions that are invisible, seamless and free of charge.
Sulabh Agarwal, Accenture UK’s payments lead, said:
“In order to avoid being pushed aside, banks need to both continue to develop scale - becoming big, efficient machines - at the same time as differentiating themselves in the minds of their customers. Currently, rather than being at the forefront of the wave of the new-payments market, banks are feeling the heat from the competition – we’re inevitably facing a world of instant, invisible and free payments, which presents both a challenge and opportunity for banks.”
Best of the rest in finance:
- Are banks using mobile contracts and social media accounts to assess loan applicants? The WSJ [paywall] suggests they are.
- Mastercard is to begin offering retailers a small cash payment for giving cash back to customers. The company states this is to make access to cash easier at a time that it is becoming harder to gain access to it.
Despite tensions in the global economy and the fear of an economic slowdown, investment into FinTech companies continues to grow at an astounding rate. We’re pleased to bring you articles from Forbes, Daily Business Group and Fintech Alliance that all highlight the growth in the sector – not least in the UK.
John Glen, economic secretary to the Treasury highlighted the booming FinTech sector during a speech to mark the UK-China FinTech bridge which has been in place for three years. He noted:
“The UK will remain the leading global financial and FinTech sector. Together the UK and China can continue to grow from strength to strength.”
Daily Business Group have illustrated how more money has poured into UK FinTech firms in the first seven months of this year, than through the entirety of last year. A new report from Tech Nation and the UK’s Digital Economy Council show that the UK now has higher investment than the United States per capita.
Eileen Burbidge, chairman of Tech Nation, said:
“Investment in the UK tech sector has been steadily rising for years and as these latest figures demonstrate, the momentum is increasing. It is incredibly gratifying to see that in addition to domestic and European investors, British tech innovators are also attracting US and Asian investor attention and allocation.”
And from a US perspective, FinTech continues to grow also. An article examining FinTech trends for 2019 states:
“Venture-capital-backed companies in fintech raised nearly $40 billion in 2018. That’s an increase of 120%, just since 2017. This investment has enabled companies to expand into new areas. For example, Wealthfront now offers savings accounts, loans and real estate advice, while Robinhood is applying for a bank charter to offer deposits and secured credit cards.”
Closer to home, we’re delighted to bring you news that FinTech Scotland have created a new consumer panel to help develop a more inclusive FinTech ecosystem. The panel will act as a voice for consumers and citizens, bringing further inclusion and ensuring that new products brought to market are fit for purpose.
Stephen Ingledew, CEO of FinTech Scotland
Separately, but closely linked, we have had a formal announcement on the creation of a Global Centre of Excellence for the FinTech sector is to be created by FDATA, FinTech Scotland and other industry bodies and will run out of Edinburgh University. The press release states:
“The centre would create a data research facility which would give a detailed snapshot of anonymised consumer spending to the fintech industry for debt researchers and future sociologists wanting to understand how people live today – as well as companies wanting to tap in to consumer function.”
News via the Scotsman.
Best of the rest in FinTech:
- Big Issue traders will shortly be able to utilise contactless payments, provided by iZettle.
- While profits continue to be elusive, Challenger bank’s rise in customer numbers is extremely impressive.
The ID Co. News
We've had another extremely busy month at The ID Co., where we have been focusing on welcoming in PSD2.
At our Edinburgh offices on Friday 13th September, we welcomed the Capital’s banking executives for an evening of talks, networking, whisky tasting, gin tasting and food.
Straight from the success of our welcoming party, we host a further drinks reception on the evening of Monday September 23rd in London. We’ll be at the rooftop terrace of the stunning Good Hotel – only a minute's walk from the Sibos conference. Tickets are extremely limited – but there are a handful remaining. You can find all you need to know at this link.
If you’d like to know about the events that The ID Co. Will be attending and speaking at over the course of the next month, you can find out more in this summary.
Also happening this month:
- Our CEO, James Varga, was interviewed for the Futurist podcast by Andrew Grill. You can listen to the excellent conversation, here.
- James was also quoted in this Times article looking at the progress made in Open Banking in the UK.
- Between speaking engagements, James also took the time to pen a new article for our blog – this month making the strong point that now that Open Banking and PSD2 are here, we are all responsible for making best use of the data.
- DirectID Connect is here! Learn more about it in this new blog from our Marketing team.
- There's been a lot of speculation that big tech is coming to eat the bank’s lunch. Is it true? We examine the evidence.
Anything we missed? What was your top stories over the last month? All feedback is warmly received: firstname.lastname@example.org