How open banking and robo advice are changing our relationship with money
As transformative technology reaches beyond the accumulation of wealth into the wider ‘wealthtech’ arena, 2019 is set to be one of the most dynamic in the banking industry since 2008, as open banking regulations come into force across the UK and Europe and banks integrate robo advice with their range of existing services.
The introduction of open banking, will lead to much greater competition, as third parties will be able to access a customer’s transactional banking data in order to offer comparison services and it is predicted that there will be a whole raft of new applications to let people manage and move their money online.
Whilst regulation will allow the development of such services, it is the powerful financial technology, ‘fintech’, movement that will drive changes in the banking sector as competition increases from more nimble start-ups and digital-native challenger banks.
However exciting the prospect, the backdrop is of uncertainly of what the economic and political landscape will look like post-Brexit, and the thorny issue of data security in the face of the ever-present danger of cyber attacks.
So what can we expect from the as the banking industry’s metamorphosis?
In a major shift, subject to receiving a customer’s approval, all UK banks will have to open up their transaction-level data, via a set of open Application Programming Interfaces (APIs); this will allow authorised third parties to see information such as transaction history with a view to offering competitive services or alternatives.
Whilst it is not yet known precisely how this data will be used and what new products and services will follow, the switch to open banking is seen as the most significant shift in the banking industry to date
HSBC was quick off the mark when it announced a new app late last year that allows customers to see all of their accounts on one screen, even if they are with a rival bank; other banks will surely follow.
Small business lender Iwoca is a start-up founded on open banking; it offers lines of credit without customers having to manually submit bank statements and the process of starting many fintech businesses should benefit from the removal of such pinch points in their processes.
Caroline Plumb, founder of fintech startup Fluidly told Banking Technology: ‘In the short-term you’ll see more frictionless financial experiences and faster, better access to financial services. In the medium and long-term it has the potential to be transformative and deliver new business models, new categories of business – true innovation.
‘But this potential can only be reached if the ongoing implementation, regulatory framework, funding models and willpower continues to develop and that will not be easy.’
Much has been made of the threat that existing retail banks and institutions face from fintech start-ups and robo advisors, but many believe that the incumbents will be best placed to benefit from open banking because they have built up trust with consumers over decades, and they also have a huge amount of insight and customer data that they can use to inform their strategies and decision-making.
With the precise nature of any trade agreement still unknown, and a seemingly ever-extending transition period pushing uncertainly well into the next decade, the European Central Bank has said that UK banks will have to build up operations across Europe.
Whilst this may allow the banks to hedge themselves against any eventuality it could have the knock on effect of reducing investment in London as banks prioritise spending on European offices; there could also be pressure brought to bear on salaries by demands from those with experience in European operations and regulation.
Any attempt to reduce the mobility of specialist labour, or to constrain EU-wide regulatory passporting is being seen as a potential threat to London’s pre-eminence in Europe’s burgeoning fintech scene.
Data protection and ‘RegTech’
In May 2018 general data protection regulation (GDPR) came into being, forcing banks to adopt processes around the handling and managing of hugely sensitive customer data in-line with new regulations; it is not a simple proposition and required significant and ongoing investment.
‘RegTech’ includes a range of tools developed specifically to help overcome regulatory challenges posed by initiatives such as GDPR and MiFID II, and will become increasingly prevalent as 2019 progresses as banks seek to decrease their regulatory risk and costs, while also improving the customer experience.
It is now almost seven years since fintech trailblazer Nutmeg launched in the UK, and there has been a steady flow of start-ups of varying shapes and sizes in the interim; now established banks are entering the robo advice market.
Retail bank Natwest launched a robo-advice service in November 2017 targeting 5m clients with automated investments starting at just £500.
Inevitably more established banks will enter this market to democratise investing for their customers, and a number have participated in the FCA’s regulatory sandbox, established to encourage the digital investment management sector.
Asset management firm BlackRock’s Investor Pulse survey found that four in 10 millennials with savings or investments are aware of robo-advisers, the highest level of awareness among all age groups surveyed.
Announcing the survey’s findings, Nick Hutton, head of the BlackRock UK retail sales team said: ‘For a generation that has often lacked financial confidence and has been hamstrung by immediate financial priorities, technology is empowering millennials to start thinking about their long-term financial futures by giving them access and information at their fingertips.’
From 2018, new rules introduced by the Financial Conduct Authority required UK banks to publish data on how many complaints and security breaches they have encountered for the first time.
The use of biometric information to verify banking customer’s credentials will continue to develop; Barclays is developing voice verification and has offered biometric readers for corporate banking clients since 2017.
The banks who are succeeding are offering identity capture and biometrics that allow customers to verify their identity remotely by taking a ‘selfie’ or a snap of some other form of ID.
The challenger banks have almost entirely abandoned the application process altogether using technology to reduce onboarding costs, improve efficiency and reduce errors; banks that don’t adapt risk alienating new customers.
Banks are also experimenting with voice interfaces such as Amazon’s Alexa skill; in the US, Capital One has developed an Alexa skill which will tell you your balance and how much you spent the night previously, for example.
In the UK insurers like Aviva and challenger banks like Monzo have been the first to market with Alexa skills and a number of banks are believed to be working on similar products.
Blockchain, the distributed ledger technology that facilitates cryptocurrencies such as Bitcoin, is likely to continue to increase its influence in the banking world, although the UK still lacks a regulatory framework.
The Bank of England itself is interested in using blockchain technology to transform its clearing processes, which could accelerate the shift towards a cashless society; the shift in how people pay for goods and services will fuel the rise in blockchain adoption, as all money can more easily be traced to its rightful owner, beyond government’s control which could see the value of, for example Bitcoin, continue to rise.
Those that may have considered banking as more than a little fusty would scarcely recognise the transformation that is taking place, but it is not a revolution founded on regulation or technology alone; rather these are the key facilitators that will allow the banking world of the future to more accurately represent and support the changing ways in which we now live our lives, and the changing relationship we have with money.
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