Analysis: ‘Missed opportunity’ reforms should be embraced as happy medium by fintechs and banks.
On the 9th of August the Competition and Markets Authority released the final report in its investigation into retail banks.
Among the highlights was the call for banks to create open APIs, develop phone-based apps, and generally use technology to a much greater extent than they currently are.
In the immediate aftermath there was plenty of questioning over what this actually means for incumbent banks and for the challengers in the fintech space.
Some voices called it a missed opportunity, stating that it didn’t go far enough, while others focused on the benefits for customers.
What should be remembered is that the CMA is focused on what is best for the customers and it clearly holds a belief that more competition in the space will help to create better services, more openness, and generally a healthier banking industry that will insure that the damage done by the 2007 banking crisis is not repeated.
The push for increased technology use by banks is an understandable one as a growing number of people use mobile phones, applications, and other digital technologies in everyday life.
John Rakowski, director of technology strategy, AppDynamics, said: “It’s now clear that consumer attitudes towards their finances have changed in line with the pace of tech innovation. Customers are becoming increasingly comfortable with using their smartphone as the primary channel to manage their finances, which calls into the question the relevance of traditional bank branches.”
Banks such as Atom and Mondo, which focus on mobile app technologies to deliver banking services, have led the charge but banks like Barclays have also been trying to innovate with things like payment bracelets, which it launched in partnership with Topshop earlier this year.
Typically the feedback that I get from fintech companies is that regulators, such as the CMA, are doing a good job. Certainly when compared to markets in the U.S, and Europe, the UK’s regulators are considered to be far more willing to engage with fintechs and enable them to grow.
However, whatever is done will always be met with some dissenting voices. Craig Donaldson, CEO, Metro Bank said: “It is disappointing that they decided not to get at the root of the problem, but rather they missed the point and tinkered around the edges.”
While the banking lobby group, the BBA, said that more work needs to be done to create a level playing field that supports new banks.
Change comes gradually, and attempted to force change on a banking system that has operated pretty much in the same way for decades, will take time.
The CMA report recognises this with the suggestion of introducing account number portability. This would allow customers to take their account number with them when they switch banks, but the cost of this would vary between £2bn and £10bn, so it was decided that the Open Banking programme should be explored first but that (ANP) should be considered in the future.
One of the big developments will be the requirement for banks to create open APIs in order for data to be shared between themselves.
This would make it easier for customers to compare account offers through an app, but the issue of security needs to be raised.
Jes Breslaw, director of strategy at Delphix, said: “The applications that will leverage these API’s will require rigorous development and testing using real customer data from competing banks. How this will be done has yet to be seen.
“After all – if consumers are going to use an app to see which bank is cheapest, given their particular pattern of behaviour, this needs to be accurate or organisations risk facing the wrath of the regulators and customers alike.
In order to make sure that the data in the app is as secure as it can possible be, and to ensure that the data is of a high quality it will be necessary for banks to employ data virtualisation.
So far all of this seems perfectly possible, a challenge but one that current technologies should be able to deal with as long as effective strategies are put in place.
The reason none of this has been before, or why so little of it has been done, is because open data sharing isn’t good for the incumbents unless they are offering the best deals across the board, and because they are burdened with legacy.
It isn’t necessarily that legacy, or simply old, systems are bad – they have been doing a good job for decades for specific things. The problem is that legacy systems weren’t designed for an omnichannel, big data, cloud, IoT, and mobile world.
It is estimated that around 70% of the world’s commercial transactions run on a legacy mainframe program which means that they simply haven’t been able to benefit from the technology changes that have happened.
Mark Cresswell, CEO of LzLabs said: “The CMA directive will shine a light on how legacy technologies act as a boat anchor when trying to remain competitive. Traditional banks will need to accelerate their transition off legacy mainframe systems, before the agility of the Fintech companies becomes an existential threat.”
Banks until now haven’t really had the incentive to rapidly shift away from legacy systems but perhaps the CMA is finally forcing their hand by introducing real competition into the market.
The problem is that moves away from legacy aren’t typically easy or cheap.
In essence, banks have to pay to develop better mobile applications, pay to create open APIs, pay to help the competitors get a clearer shot at them, pay to move away from legacy, and potentially pay to create ANP.
The question should be asked whether or not banks are being asked to do too much for the sake of competition?
The lingering distrust of banks following the financial crisis continues to ring in the ears of those that were hurt by it, but a banking system that is as fragmented as an ice cream menu may not be any better.
The “too big to fail” theory asserts that certain corporations are so large and interconnected that their failure would be disastrous to the greater economic system. But with their size does come a form of trust that your money is safe.
Ongoing regulatory changes are significantly shrinking the size of banks’ market share so that instead of a big five, there could effectively be a medium 20, or small 50. In that scenario it is less an issue of “too big to fail” and more of a “too many to care.”
This is of course playing Devil’s advocate, the idea of smaller banks, greater openness and competition seems sound, but the possibility that having multiple small banks rather than five big ones is a bad thing, should be considered.