Threat of competition is one of the biggest challenges arising from Open Banking; however, banks should fear internet giants rather than FinTechs, according to a panel at the Global RegTech Summit 2018.
Despite PSD2 and Open Banking resulting in a number of new opportunities of the industry, the regulation poses a number of challenges to banks. The panel at the RegTech Summit which included, senior staff from AutoRek, Oliver Wyman, Apiax, FinTech Scotland and Sequant Capital, discussed the impact of PSD2 and Open Banking.
During the panel, the audience voted on the biggest challenges that banks face due to Open Banking, which is the use of open APIs to enable third party developers to build applications and services around the financial institution.
Following the vote, 34.8 per cent audience said that reputational damage exposure from TPP data misuse was the biggest issues, while 30.4 per cent of the vote went to threat of competition from FinTechs. The third biggest challenge, as voted by the audience, went to uncertainty around the definition of sensitive data.
Following the result, Erik Wilgenhof Plante, director at Sequnat Capital, stated: “I don’t really understand the threat of competition, that competition will be there whether it is open banking or not. I am from the time where the internet first came up. There was reservations about putting things on the internet as people could open up databases and steal money.
“Senior managers are not normally tech people. In FinTech, yes, but in Banks, no. They don’t understand what is happening and it becomes much easier to say no rather than stick out your neck and say lets do this. If it goes wrong, you make yourself a target by opening up your data. There will always be people trying to steal the data.”
His fellow panelist, Ralf Huber, co-founder of Apaix, agreed that the reputational damage from the misuse of TPP’s shouldn’t be a major concern arising from Open Banking. However, he suggested that banks have always done ‘a lot to safe guarding data’ and even in the ‘old world’, protecting data was a huge challenge, which many banks failed to do.
“I agree that there will be fears arising from this (open banking). However, if we are realistic and look back a couple of years, data has never really been safe. I would much prefer a regulatory framework like this, which is more transparent and open framework,” he added.
“I understand why this is a concern, but I don’t agree. I think data theft and losing data has always been a problem regardless of the technical framework of how we store and exchange data.”
Mickael Paris, marketing director at the FinTech Scotland, agreed with the audience that a major concern for bank going forward would be the competition in the market. However, he disagreed with the pressure coming from FinTechs, and pointed towards RegTech as a potential help.
“During the discussion, he said, “The threat of competition is not so much going to come from FinTechs. There will be some very good challenger banks, but I am looking more at the giants like Google, Amazon, Apple. They have the customer numbers and are winning on the experience side of things. As a result, it wouldn’t take much for them to develop the big next bank.
“If you look at what JP Morgan has done with Amazon, that’s where the threat is going to come from in terms of numbers and market share. RegTech solutions are actually addressing the challenges arising from Open Banking.”
Can RegTech solutions address the challenges arising from Open banking?
Whilst all of the panel agreed that the innovation in Regulatory technology can can help banks address the open banking challenges. Kunal Jhanji, principal at Oliver Wyman, told the audience at the summit that identity will play a big role and believes that’s where the market it moving towards. He pointed towards authentication security, liability, consent and permission, as purposing ‘a massive challenge’.
“Payments are easy, but data is pretty fungible as it can appear on the dark web and no one would know where it came from. The traceability and the security of authentication is pretty hard.”
He pointed towards the Nordics, where market identity solutions have been around for a while. As a result, the customer now interacts with multiple organisations, not just financial services. “Their lives have become much easier as a result of an identity/ authentication solution which they can interact through as an intermediary. That’s where a change is required.
“The challenge with that, from a RegTech perspective, is it requires a massive scale. The adoption of a single solution is significantly important for it be success and for multiple parties to be interested in it. Even though that’s an important aspect of the solution, it requires a market platform rather than a player-by player outreach. A utility play rather than a single play,” he added.
Wilgenhof Plante highlighted another way RegTech can ease the open banking challenge, pointing towards the onboarding of customer. He argues that from the securities side of open banking, having a RegTech solution can make it more efficient to onboard customers. He argues that even if open banking and PSD2 doesn’t give the standards itself, it can help create a dialogue.
“Banks are very hesitant in doing anything which is outside their comfort zone. That’s logical as banks have always been ‘safe things’ where people put their money. Now they have to think about putting it out there on the internet, but if you know what you are talking about and talk the same language. It makes it easier to create that dialogue. As a RegTech company, you can handle the client data, so the banks don’t have to worry about it. Onboarding has a lot of costs and RegTechs can help ease that burden.”
The proposition of FinTech and RegTech should also be viewed differently according to Huber. He told the audience it is obvious that RegTech soultions are really ‘just on the opportunity side of PSD2’. They are different from FinTech’s, which challenge the business model, as RegTech providers are B2B businesses providing services to banks.
“The challenge is that banks have to find a way to make use of use of these (RegTech) services in a more efficient way. While they have to build up an API framework for the outbound compliance aspect of PSD2, they should be able to profit on the RegTech side by having more efficient regulatory services. “
How to take advantage of PSD2 rather than fear it
The panels moderator, Gilian Boston, Head of Business Consulting at AutoRek, asked the panel for their views on the strategies which can help am organisations take advantage of PSD2, instead of fear it. Ralf Huber opened the discussion by claiming that banks are currently in a position of strength, as they have the trust, the clients, and they have being doing it for ages.
He said, “As PDS2 is an outbound API requirement, where you have to give out client data, I see a risk there. However, the advantages of having an inbound service offering, a marketplace service offering, allows the bank’s clients to profit from various elements a bank can’t cover.
“They should be coming out with a strategy to build up the marketplace, enhance its existing client services, and provide more services to clients. This is what I call a marketplace strategy, and this is what banks should be doing.”
He added that there will be a client demand, and either the bank is offering that flexibility, or they will lose clients. “Now is the time to think about the strategy and focus on which sections to accept inbound services and enhance the service offering.”
In the current market, Kunal Jhanji added that he only sees a few banks moving in that strategy direction. A number of requirements around security, among others, are currently making it hard for a bank to offer a ‘plethora of strategies or products’. Instead, Jhanji believes that a partner strategy is the best way forward as banks are increasingly open to partnering with FinTechs , especially for the SME segment.
“That is a segment where banks see a non-competitive partner strategy, where SMEs may want tax advice or accounting packages etc, which some of FinTechs are well placed to offer. We are seeing a couple of banks in the UK, who have developed these platforms to provide their SME clients a decent service through their partners, who are all predominantly FinTechs.
“Different banks are applying different strategies. The bulk of which are still in the compliance mode, but a few have started to realise the power of inbound data and analytics.”
Copyright © 2018 RegTech Analyst
Copyright © 2018 RegTech Analyst
