Joel Gladwin is Head of Policy at the Coalition for a Digital Economy (Coadec).
Our fintech sector is a great British success story. Investment into UK fintech companies is at record highs, accounting for over a third of all investment into the sector in Europe. Last year, London had more people working in fintech and a greater number of venture capital investment deals than any other city in the world.
Companies like Monzo, Starling, Revolut and TransferWise are all less than 10 years old but they have matured into global brands in their own right. They have also grown into formidable rivals for customers and their cash, putting pressure on the rest of the financial services sector to step outside its comfort zone, innovate rapidly and embrace a fail-fast, customer-centric culture.
Our historic strength in financial services, combined with forward-thinking regulators in the Financial Conduct Authority (FCA) and pro-competition policy in the form of open banking, have all contributed to establishing London as the fintech capital of the world.
But that is enough backslapping for now.
Not only are our international rivals catching up when it comes to the volume of fintech deals, they are also drawing up plans to open up more financial – as well as non-financial – data for their fintechs to access and innovate. These plans go well beyond the limited scope of our own open banking regime. The key to defending our fintech crown will be building on this momentum.
Thankfully, the Government is already starting to think seriously about what comes next, with the Treasury and the FCA embarking upon a number of reviews this year including on payments regulations, open finance and the broader UK fintech sector.
Moving beyond open banking to open finance is the next logical step for our fintech sector’s growth and development. It will open up the savings, credit, mortgages and pensions sectors for innovation – and, ultimately, bring consumers more choice, convenience, and ease when it comes to managing their finances.
In its latest Digital Finance Strategy the EU has committed to establishing an open finance framework by 2024. As someone who was involved in the lobbying battles of getting PSD2 over the line – the EU regulation that made open banking possible – I know full well that this is an extremely ambitious target by European standards.
After all, the bureaucratic wranglings of Brussels led PSD2 to be an extremely lengthy project. It spanned five years (2013 to 2018), one directive, eight guidelines, six technical standards and seven opinions. And it has still not been delivered in parts of Europe to this very day. The UK’s approach towards a functional open finance ecosystem can now be quicker, leaner and more agile.
By returning to our principles based approach to regulation, rather than overly prescriptive technical standards, and enabling the market of AP specialists to get on and build the connections for open finance from below, new research by The Coalition for a Digital Economy (Coadec) suggests that it would be possible to unlock the benefits of open in two years.
This isn’t a novel idea either. It has been the approach taken by the Australian Government which has introduced arguably the most expansive open data regulatory initiative in the world.
The Australian Consumer Data Right (CDR) will give consumers the right to access not only their financial data but also utility and telecom data by 2021, even though they started on their journey two years later than us. A market-led, principles-based regulatory framework will allow the UK to deliver open finance much quicker than our near neighbours.
The Chancellor has also made it clear that he will “review our regulatory framework on financial services” and that “not being inside the EU more generally gives us a chance to do things differently.” One area that desperately needs the Treasury’s attention is the innovation-killing, anti-competitive, EU regulation that forces customers to re-authenticate third party access with their bank every 90 days – known as Secure Customer Authentication (SCA).
Imagine having to send your accountant, bookkeeper or financial adviser a new letter of authority every 90 days just so they can continue to work on your behalf. The chances of forgetting to do so would be high – potentially missing filing deadlines, payroll or important insights on your financial health. But this is precisely the situation that customers of accountancy software and financial adviser platforms face.
As a result, fintechs are forced to endure customer attrition rates between 13 per cent and 65 per cent according to industry data, rates which are not viable for any business at either end of the spectrum. This is made even worse by this process being managed by the very same banks for which open banking measures were introduced to provide competition. There is little incentive for them to get this right.
These barriers have thwarted open banking’s potential to add $1.4 billion to the UK’s GDP on an annual basis, according to analysis from the Centre for Economics & Business Research. It is vital that we address them.
The UK’s regulatory influence on the global stage will endure. Informal channels, networks and knowledge communities have always played a critical role in shaping the content and application of policy frameworks, especially in areas where technological progress necessitates new approaches such as fintech. By moving quickly to embrace an open finance environment, and correcting the deficiencies within existing European regulation, the UK can continue to lead on fintech.