Open Banking has got off to a good start, but it’s time for it to capitalise on the full benefits it can give consumers and the market, according to Justin Fitzpatrick, CEO at DueDil.
The final deadline for the revised Payment Services Directive (PSD2) is September 14 2019. When this lands, financial institutions must ensure their APIs and their systems are opened to third-party providers. Among the requirements is the sharing of customer data with third parties, enabling services such as bank account aggregation or improved personal finance management for consumers. Baring down on the shoulders of PSD2 is the hope it will foster both collaboration in the market as well as improve competition, all the while it guarantees consumers’ data is protected from malicious players. Quite the tall order.
While the regulation is not in full swing yet and it has not necessarily met expectations, there have already been major improvements to the market, with a range of new types of services entering the financial ecosystem. The regulator has played a crucial part in this, taking on a very different role than it has in the past. Typically, regulators focus on compliance and supervision; however, across the EU, with the UK’s FCA a key example, they have taken a driving seat and actively fostered innovation.
As with most things in life, opinions are split, and some are questioning whether they should be pushing the innovation agenda or remain in their usual supervisory position. Fitzpatrick believes it is entirely necessary and justifiable, as its helping meet requirements around competition and consumer protection. And, putting it simply, if regulators were not doing this, there is little chance the industry would do it themselves.
Despite these positive strides, Fitzpatrick believes the market and consumers have not begun to witness the full benefits of PSD2 and Open Banking, with much more potential on the horizon.
Fitzpatrick said, “I think it would be fair to say that these things have been a good start but they failed as of yet to catalyse the kind of change in the market that I think people have hoped for. You can see evidence for this by looking at the way SME’s continue to behave and unfortunately, they haven’t really changed their behaviour that much. More than half of SME’s are still likely to go to their business current account holder for their financing needs and if they’re unsuccessful in getting the full amount, only about one in ten will seek financing from someone else. I think it’s really imperative that as we think about what’s possible with Open Banking, we look at it as an opportunity to address some of the structural challenges that still exist within the market.”
One of the challenges is the way SMEs perceive the application process for financial services. Currently, if they want multiple quotes they will have to go through long and laborious application processes for each lender, all asking for the same information but in different ways. He added, “if we don’t use the potential of things like PSD2 and Open Banking to solve some of these underlying issues and get to the root of the problem, we’re going to continue to miss realising the full potential of these initiatives.”
PSD2 failing to have the earth-shaking impact that it really should, could be down to the fact most consumers are not even aware of what it is and why they should even care. A recent study from Mastercard which explored the adoption of digital banking in Europe, getting 11,000 responses from 11 markets, found 85 per cent of respondents had no clue or rather little knowledge, of PSD2. This just highlights the need for market education. This does not deny interest in such services. Of respondents, only 13 per cent said they used an app to track multiple bank accounts, but 43 per cent would like to use this type of solution. Further to that, 22 per cent would love a personal finance solution which helps them manage their money and forecast spending patterns based on previous spending records.
Potential benefits of PSD2 are in an abundance and it will just take time and education for it to reach its full potential. The legacy technology stacks financial institutions have do serve as a big challenge for companies and it is why it’s imperative a financial institution finds the right company to help them open their systems, he said. The regulation is not only requiring a technical change, but also a change in culture and how things operate. But if they can find the right partner, the positives are paramount.
“One of the areas where we’ve had a lot of success is working with Santander’s corporate and commercial bank, helping them to digitalise their customer onboarding journeys for the corporate and commercial banking customers. The result of integrating our API and bringing our insights on companies into that process for the benefit of the customer, meant they were able to up the speed of onboarding by three-times and increase the speed of credit underwriting by five-times.”
DueDil, recently named ‘RegTech Vendor of the Year’ for 2019 at the British Banking Awards, is a data and insight platform helping companies identify opportunities and better evaluate risks. Its machine learning technology connects billions of company data points from authoritative sources to offer companies detailed insights and business information graphs. A client can leverage DueDil to improve their KYC and AML checks for the onboarding proves, comparing a range of record types, validating information and cross-checking with PEPs and sanction lists. Earlier in the year, the RegTech start-up received a £3.5m loan from Shawbrook Bank to support its growth and scale up its presence in the sector.
The future of FinTech/RegTech
Easing the access of data and the improved collaboration between third parties and banks could be the next step in the unbundling phase for financial services, Fitzpatrick said. This regulation is helping bring about new solutions from both FinTechs and incumbents, which are revolutionary, and this is down to them taking advantage of technology and data to offer the best services.
“This kind of ‘best in class’ for different financial solutions will become the norm rather than a big monolith where you only have one relationship and that one relationship caters for all of your financial needs. What this points to is a financial services sector that looks much more like an ecosystem where different parties are providing services which are best in class and there’s a combination of competition and cooperation depending on where you sit in that ecosystem. One of the real potentials of data and technology is it can kind of create a seamless exchange within this ecosystem.”
Those embracing change and technology are going to be the success stories. Regulators are becoming more stringent, largely due to the financial crisis a decade ago, but customer expectations are evolving, constantly. For example, this means a financial services player has to make sure they have a robust system for onboarding processes, while also ensuring low customer experience frictions. This is a tough thing to achieve, especially when it is not the business focus, and just one of the many initiatives or developments in the works.
He said, “Whether it takes ten, fifteen, or twenty years, our hope is that FinTech ceases to be a term because the market will have just fully embraced financial technology in a way that FinTech is just finance. If I look of five years down the line, my hopes are for these initiatives is that the market will fully embrace the potential of PSD2 and Open Banking and we won’t kind of feel the need to talk about it as a separate thing anymore because it’s baked into the way that financial services is delivered and we experience financial services every day.”
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