The world is watching
The financial services industry in Europe is at a crossroad. Regulators have decided to open the floodgates to competition by introducing the concept of open banking. Although Europe is progressive when it comes to regulations, implementation can be complex. Now the world is watching to see how new regulations affect the financial industry in Europe.
Financial services have never been as exciting as they are today. Open banking regulations have the potential to change the financial services industry as we know it. But implementation relies on collaboration, and around the world, governments and large corporations are waiting to see how it unfolds in Europe before enforcing any radical changes to their own financial markets.
Legislation has been introduced across the EU with the aim to create an environment that fosters innovation and competition within the market. A few technology companies have driven innovation forward, and proved the end user value exists – a stark contrast to the non-competitive market that existed historically.
Following the Data Sharing and Open Data for Banks report in the UK, alongside the EU’s work to update the payment service directive (PSD), the conditions were perfect to see a pseudo-alliance between the UK and the EU form around open banking. The EU’s PSD2 and the UK’s Open Banking Legislation were both enforced in early 2018. This means that banks and other financial institutions haven’t had a lot of time to prepare themselves. In addition, some countries are in a state of limbo as they have not communicated to the EU how they will govern PSD2, despite the fact that it has already been enforced. At the same time, the EU does not specify a uniform standard, which means they risk not complying with PSD2’s 'Regulatory Technological Standards' (RTS) when it is enforced in September 2019.
It’s clear that Europe is progressive when it comes to regulations. But how does it look in the rest of the world?
China leads fintech
In China, we see just what fintech can mean for the economy. Tech giants, Tencent and Alibaba, have shown the world how two mobile apps, WeChat Pay and Alipay, can completely transform consumer finance. Ant Financial, one of Alibaba’s subsidiaries, currently stands as the highest valued fintech in history at US$150 billion. China’s fintech market is the largest in the world and services are not limited to just payments – it has also helped transform traditional markets such as wealth management, credit and lending.
The Chinese government refrained from getting involved until China’s banks recognised that the tech giants were becoming competition due to their dominance in payments and wealth management services. To protect the sovereignty of the banks in China, the government transitioned to a more proactive regulatory approach. In particular, to limit - or at least control - the size and scope of some fintechs. Since then, the banks, tech giants, and the Chinese government are working closely together.
Making America wait again
Although China’s fintech market is dominated by a handful of contenders, the competitive environment in the US has allowed it to be a leading example when it comes to consumer innovation. Tech giants like Apple, Amazon, Facebook and Google are challenging the consumer payments market with their apps. These tech giants are looking to form partnerships with other fintechs, such as Paypal and Transferwise, and created a group called Financial Innovation Now (FIN) to pressure regulators into enforcing new standards similar to the ones put in place in Europe.
Although the Consumer Financial Protection Bureau (CFPB) and the National Automated Clearing House Association (NACHA) introduced API standards for a US open banking environment, until recently there was no intent to make any of the proposed guidelines mandatory. This meant banks could continue to be the gatekeepers of their customers’ data with no obligation to share it. Banks have no interest in losing control over the data, which is why many are launching their own banking platforms – inviting fintech entrepreneurs to develop new services with APIs that the banks control.
This could change due to a report published by the US Treasury Department stating that American innovation of financial markets is a cornerstone of a healthy U.S. economy. Creating a regulatory environment that supports responsible innovation will be crucial for economic growth and success, particularly in the financial sector. The report makes several recommendations, following the UK’s Open Banking legislation example and a means to foster a more competitive banking environment. But this will be a daunting task. While it looks straightforward in Europe, the US suffers from a fragmented regulator landscape. The country has eight federal regulatory agencies with jurisdiction over financial data access, plus state authorities that would need to approve open banking. Most regulators will likely want to see how it plays out on the other side of the Atlantic before making any changes themselves.
It’s up to us in Europe
Europe is helping to shape the future of what banking will look like from a regulatory perspective, which could indeed promise greater innovation and competition. Within all the speculation, one thing is clear: open banking is not something any bank or financial institution can do alone. The success of open banking will require the ecosystem to work together to introduce new business models and leverage fintech innovations. Legislation can open the doors to change, but technological innovation will need to be the driving force, and deliver on the promise of bringing end user value.
Other international developments
Around the world, there has been a confluence of initiatives that have been inspired by the actions taken by the UK and EU.
Canada has recently indicated that it has plans to review the benefits of an open banking regime. The government is eager to give consumers the ability to share their financial data with third parties but has its reservations when it comes to security and privacy.
Mexico has laid the foundation for its forthcoming open banking standard (OBS), which will mandate that banks establish open APIs to make the market more competitive. The OBS is expected to be enforced by March 2019.
Although being in an early stage of open banking, Brazil’s central government has confirmed it is looking to have the relevant legislative reforms approved by the end of 2019.
Inspired by PSD2, the Japanese government issued an amendment to the country’s Banking Act, requiring banks to open up APIs for electronic payment service providers (EPSPs) by 2020. So far, only 12 banks have.
India is one of the more progressive countries when it comes to open banking. The umbrella organisation for all retail payments systems was already live with 21 banks in 2016. This, combined with policies to reduce the usage of cash, promote digital identity, and increase mobile innovation, has created a landscape where many new players are expected to emerge.
Australia is expected to enforce open banking as early as July 2019. The government commissioned a study to review the initiative, and is now consulting for a final decision and implementation.
New Zealand’s open banking pilot was launched to develop and test two payment APIs similar to the ones in the UK: account information and payment initiation. It is unclear when the New Zealand government will enforce new regulations, but it will likely follow Australia’s example.