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Banking to become open and a utility says FinTech chief

Fintech
Oliver Burston | Getty Images

"Banking is the last vertically integrated sector left, but it is the next utility to face change," said Michael Laven, CEO of the financial technology (FinTech) firm Currency Cloud.

"Every other utility has been privatized and commoditized. (Telecom operator) BT might provide the rails but every other phone company can use their infrastructure in the U.K.," said Laven, head of the foreign exchange (FX) online payment specialist, during a panel discussion at the 2017 SWIFT Business Forum that was focused on the transformation of banking by technology.

"If you press the plus sign on your phone you can call anywhere in the world instantly, at a price that is falling," said Laven. "That is the direction of travel for banking. Frictionless, fast payments are becoming a reality."

Fellow panelist Richard Martin, global head of product management at Barclays, agreed. He added that in this environment, "excellence and service will be the future differentiators" and candidly admitted that some market share in the cross-border FX payments had been lost due to newcomers such as Currency Cloud.

The consumer end of the market in particular is vulnerable due to the lower prices that technology-enabled firms can often offer due to their lower operating costs and lack of legacy IT, which is expensive to maintain and inflexible. Banks tend to offer more competitive corporate pricing in order to keep their high volume and value business with large multinational companies that transact millions of payments annually.

According to Mark Buitenhek, global head of transaction services at Dutch bank ING, technology; increased customer service expectations; and regulation are the key interconnected forces driving the present transformation of banking.

In the U.K., for instance, the Competition and Markets Authority (CMA) Open Banking initiative mandates that banks must make standardized product and reference data available to authorized third parties in order to increase competition and service. With customer consent, U.K. banks will also have to provide secure access to specific current accounts by 2018, enabling others to read the transaction data and initiate payments.

The information will be shared through an open Application Programming Interface (API) framework, which the U.K. regulator says will prioritize customer protection. An Open Banking Implementation Entity will develop API standards to allow two different pieces of software from different financial institutions (FIs) to interact and exchange data.

Open Banking

No bank will own the customer or their data in the future, enabling new FinTech-enabled competitors to enter the marketplace, drive down price and offer new services. The coming world of 'open banking' and standardized APIs, mandated by the CMA and others, could transform the banking landscape.

The industry trend towards openness is also inherent in the European Union's (EU) Payment Services Directive (PSD) 2 regulation. This is seeking to open up the marketplace continent-wide and encourage more alternative payment service providers (PSPs). Other such initiatives are evident around the world, driven on by the increasing power and interconnectivity of technology, big data, cloud computing services, and so on.

"Whether it is open APIs, the blockchain or whatever technology catalyst – the direction of travel is clear," said Currency Cloud's Laven. "And yes, it will need appropriate regulation, cyber-security and consumer protections and so on, but the future of the industry is clear."

New communities, operators and services may emerge from an increasingly open and commoditized banking world.

"We recognize that we haven't got all the brains in the world, but also see the trend as an opportunity to use others' innovation," said Damian Richardson, head of innovation and strategic initiatives at RBS, alluding to the desire to collaborate with more nimble start-up technology firms in order to harness their zeal and ideas.

After all, many FinTechs simply want to sell their idea to a bank and many participate in bank-sponsored incubator or accelerator scheme such as Barclays Rise program. ING, RBS and most other banks have their equivalents.

Only a minority of FinTechs possess the scale, customer base and financial expertise needed to compete directly with banks.

As ING's Buitenhek said during the panel debate, "probably only one of two of the smaller FinTechs will survive and avoid being bought out by an incumbent".

"The true winners (of the technology revolution)] could be the technology giants such as Google, Facebook, AliPay or WeChat," added Buitenhek. The latter already has its spin-off online WeBank offering to its social media community, illustrating the potential threat from technology-enabled newcomers to the established banking industry.