Regulating the Future
The threat of disruption by technology‐enabled start‐ups could trigger a revolution in the regulated banking market.
Small firms are building financial technology (fintech) that could either change the way that banks do business, or replace banks completely as the providers of certain financial services. No aspect of banking is more open to disruption by fintech players than the payments space.
A confluence of factors are making this possible. Firstly, banks themselves are finding their existing systems are unable to keep pace with the demands made by customers. The movement of money can appear to be real‐time, but the core records are often only updated overnight in a batch. Accounts are identified with sort codes to determine the branch customers are registered with – a legacy from the time when branches held customer records.
Now fintech firms are being given access to customer accounts, due to the second iteration of the Payment Services Directive (PSD2). This European directive is intended to help level the playing field for the payments industry across the continent. To do this it defines a payment institution for the first time and also creates a regulatory framework for two new categories of business — the payment initiation service provider (PISP) and account information service provider (AISP).
These businesses will be able to trigger payments or provide information to customers for accounts held by the banks. Getting access to the accounts will require banks to open up their application programming interfaces (APIs), which allow the flow of information and instructions between different IT platforms, by standardizing them according to technical standards set out by the European Banking Authority.
The effect could be profound. Banks and payment networks can only offer new services that fit within their technology and regulatory frameworks. These third parties can now innovate outside of these frameworks giving them the capacity to invent completely new services. PISPs can look at employing transactions which cross borders, exchange currencies or work in cryptocurrencies, for example.
Services built on the open APIs can consolidate data from multiple bank accounts and tie it together with other information in order to offer hubs of financial control – they could include investments or retailer information – the scope is massive. By opening up their platform to work with other partners, including technology firms and other banks, firms become able to better drive user experience and monetize opportunities.
Nils Gerhardt, group vice president, Mobile Security – Division Financial Institutions at G&D, says: “We are the trusted partner for many companies in various industries, from enterprises, OEMs and retailers, to MNOs, banks and transit authorities. Partnerships, M&A investments, and accepting that third parties build services based on the core banking platform, are the keys to success for a great user experience and to monetize services.”
The longer‐term effect on banking could be profound. If banks become the holders of finance but lose touch with their customers, they may simply become account utilities. The costs they incur in complying with their regulatory burden could be passed on to customers in ways that are currently subsidized by their profits from payment services.
It is likely that banks will see the risks and seek to invest heavily in their own technology architecture to improve services, rather than lose these profits.
Ultimately the threat of disruption by technology‐enabled start‐ups could trigger a revolution in the regulated banking market. Trusted partners, like G&D, can help banks orientate themselves in this new technology landscape.