By David Gardner, partner at law firm TLT
18 months on from the introduction of PSD2 and Open Banking in the UK, we can begin to assess how large tech firms have responded to these developments at the crossroads of banking and technology. By increasing competition, innovation and market access, Open Banking is already driving significant market change by giving consumers control over their financial data, and the power to share that data with third-party providers offering innovative customer services. With digitisation of banking services now well underway, it is not surprising to see that large tech firms are also making inroads into financial services.
With their substantial resources and unrivalled expertise in Big Data, Google, Amazon, Facebook and Apple (GAFA) and China’s Baidu, Alibaba and Tencent (BAT) have an established track record of disrupting various industries worldwide. For several years their entry into financial services has loomed large on the horizon. In the past few months, that horizon has moved closer: in May, Chinese firms Tencent, Alibaba and Xiaomi were granted virtual (online-only) banking licences by the Hong Kong Monetary Authority to launch digital banks, and are expected to launch their services in late 2019/early 2020. Once launched, they will operate as new challenger banks, competing with established global banks such as HSBC and Standard Chartered in one of the world’s leading financial centres. It would be surprising if this development was limited to Hong Kong.
Although we are yet to see such radical developments closer to home, in many respects the UK has taken the lead in the digitisation of financial services, driven by the Open Banking Implementation Entity production and promotion of world-leading, PSD2-compliant Open Banking standards. From a product perspective, the UK has a mature credit and debit card market and has started to embrace the digital wallet, with ‘Apple Pay’ and ‘Google Pay’ becoming established methods of payment alongside PayPal. More recently, Apple has teamed up with Goldman Sachs and MasterCard to launch the “Apple Card” – a credit card, complete with repayment options and cashback facilities on various Apple-related purchase, built into and managed by the Apple Wallet mobile app.
Apple’s entry into the world of financial services through Apple Pay and Apple Card is a logical step when viewing Apple as a tech and lifestyle brand, with a range of integrated services orbiting around the use of core Apple products, like the iPhone and the iPad. Other large tech firms may also recognise the benefits of building Open Banking channels into their existing business models. For Google or Amazon, adding customer financial information to their existing customer data sets will enable them to offer more tailored, competitive services to users. PSD2 compels EU banks and payment service providers to make account information available and allows customers to give consent for use by third parties they trust. Furthermore, by registering as Account Information Service Providers (AISPs) or Payment Initiation Service Providers (PISPs) under PSD2, large tech firms can access this information in the EU without the requirement to obtain a full banking licence. Banking regulation has historically been a major barrier to entry for non-bank service providers, so the existence of these alternative routes is likely to be attractive to large tech firms who do not wish to establish and operate banking subsidiaries.
All this sets the stage for a near-future where users of personal digital assistants and smart speakers may be able to ask “OK Google, which is the best current account deal for me?” and, if they like the answer, “Alexa, switch me!” If that future state becomes reality, this presents a considerable challenge to more traditional, established banks and financial services institutions.
As with other would-be providers of Open Banking services, large tech firms have their own challenges when it comes to engaging with the public and earning their trust: in the wake of the Facebook/Cambridge Analytica scandal and other high-profile data breaches, consumers are more alive than ever to the risks of sharing data and consequently are more sceptical about the practices of large tech firms; whether consumers will choose to share financial data with them (or anyone else) is by no means a forgone conclusion.
Whilst GAFA and BAT executives ponder these issues, banks and fintechs are already responding to the risk of Big Tech’s entry into digital banking. TLT’s Opportunity Knocks report found that large tech firms were perceived as the biggest competitive threat in the Open Banking market – something that was agreed by senior decision-makers from banks and non-banks alike. Given the relatively low level of activity by large tech firms in financial services when our survey was conducted, it is interesting to note how seriously banks and fintechs have been monitoring this potential threat.
Banks are now allocating significant resources to stay ahead of the curve with their digital offerings. As well as developing their own digital service offerings in-house, the pressure to innovate and keep competitors at bay has resulted in a flurry of bank-fintech partnerships, joint ventures and acquisitions. Through strategic partnerships, banks are able to benefit from specialist tech expertise and tap into disruptive culture necessary to deliver innovative client services.
The dynamics of challenger banks working to take market share, established banks adapting to maintain their pre-eminence, and fintechs collaborating and competing with them all, means that the financial services sector will continue to experience disruption. The entry of large tech firms into the market, via Open Banking or by taking the bigger step of establishing new banks, will introduce a significant, further disruptive element.
The market itself is developing rapidly and customer engagement is increasing as more Open Banking products and services become available. Additional security requirements relating to Strong Customer Authentication for transactions under PSD2 will come into force in September this year, facilitating the provision of more new Open Banking services, particularly for providers offering payment initiation services. More broadly, regulators such as the FCA are already looking beyond the confines of Open Banking to “Open Finance”, which will encompass all elements of customers’ financial lives.
For all participants, the race is on to find the killer product or the perfect partnership to win market share and establish a leading position in this exciting and unpredictable market.
