Five months on from the initial roll out of Open Banking in January, what impact has it had on the financial services market, and what are the next steps?
The goal of Open Banking is, ultimately, to improve choice for consumers, and to streamline the process of consumers being able to take advantage of that choice. As with any regulatory intervention, this creates challenges for businesses: both incumbents, who have to bring their current systems and products up to date, and new entrants, who have to overcome barriers to market entry. Start-ups also have to find a gap in their market, to enable them to display a sustainable business model which will be attractive for investors – not an easy feat in an increasingly crowded market.
However, there is a clear sense from all corners of the industry that Open Banking is much more about opportunity than challenge. With the rapid growth of the FinTech industry in recent years, along with changes to the way consumers access and manage their finances, traditional banks are being pushed into the 21st century. An important driver to this is the emergence of challenger banks which are new to the market and therefore do not have legacy payment systems which need to be updated. When a challenger bank enters the market, it does so with technology and current regulations at the forefront of its offering, allowing those banks to hit the ground running.
But Open Banking is not necessarily seen as a nuisance for the more established banks, with many seeing the opportunities for developing and enhancing their products and services. While a number of banks and financial institutions now have in-house software development capabilities, some are looking to outsource to FinTech developers for answers to their customers' demands. This fosters innovation and competition in the market, both among banks and with FinTech firms.
Furthermore, it's predicted that Open Banking will not see a mass exodus of customers from the' big banks'. If consumers can get a better deal for a particular product elsewhere then they might move to another provider for that product, while keeping, for example, their current account where it is. A current trend in the FinTech area is for apps which aggregate customers' finances into one place, to enable them to have an overview of their services across all providers. Data analysis in these apps will eventually lead to consumers being able to see where they can get a better deal based on their spending/saving habits. In turn, apps will enable consumers to change providers 'centrally' without having to go through lengthy processes with their present and new providers. This will represent an important step change in how financial products are sold, priced and developed, leading to incumbents and new entrants having to constantly innovate and develop their digital offering in order to remain competitive.
While it remains to be seen exactly what will develop out of Open Banking, this is obviously fertile ground for enthusiastic and inventive FinTech firms. It's clear that Stephen Ingledew, the newly appointed CEO of Fintech Scotland, has a vision for the progression and support of the further development of the Fintech industry in Scotland, with the aim of making us a key player in this vital area. Brodies can offer the full range of legal services required to get a new tech company off the ground, or support businesses as they look to expand or diversify their products and services – that includes our teams offering services from corporate structuring to intellectual property capabilities and employment support.
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