Is Open Banking forcing fintech banks to evolve again?

Fintech banks are tapping into the huge cultural shifts created by the internet and creating new desires and expectations in the financial services industry. They’re putting huge pressure on the high street retail banks and delivering results in exciting new ways.

But with the advent of Payment Services Directive 2 (PSD2) and Open Banking the fintechs need the cooperation of the traditional banks like never before, and if the high street won’t play ball, and regulation becomes too onerous, there’s no doubt that fintechs will look to other avenues to push this cultural shift to its maximum.

One fintech bank, Revolut, has already begun to evolve. Since its FCA license in 2016, it has quickly gained favour with high-profile institutional investors such DST Global, and well-regarded investment experts such as Ian Hannam. Last month, the bank launched a premium ‘metal card’ that comes with an array of extras including a 24/7 concierge service and the ability to earn cashback in a range of cryptocurrencies.

But does Revolut’s departure from the norm signal the start of a charge towards fintech-wide transformation? If the industry conditions can’t keep pace with the fintechs then the only possible answer is ‘yes’.

PSD2 came into force on 13 January 20218, kicking off a new era of Open Banking. It allows fintechs to get their hands on traditional banks’ customer data to build new targeted products and services. Or at least that’s the theory, and the intent. The practice is proving somewhat less exciting. 

Despite the giant step forward for consumers that Open Banking represents, there are still hurdles to overcome to make the whole thing really work, the biggest of these being the sneaking suspicion that retail banks are complying with the letter but not the spirit of the law. And after all, why would they want to help their competition? This is business, it’s not a game.

This corporate dragging of feet is increasingly frustrating for fintech banks. These new entrepreneurial businesses were set up to fail fast, pivot, and move quickly to find product-market fit, rather than to see out the next 200 years in comfort like many of the traditional high street banks, so it’s no big surprise that they’re getting impatient.

But this is not a millennial tantrum; they’re getting itchy feet for hard business reasons. Although around seven in 10 customers already use an app for online banking, take up of new fintech services is relatively slow and awareness is poor given their initial promise. And this extends to Open Banking too.

According to a recent YouGov poll, Open Banking is just not making much headway in terms of recognition. The survey found that only 28% of UK adults had heard of Open Banking. Perhaps most striking of all, it’s the youngest generation that is the most ill-informed, with only 14% of 18- to 24-year olds reporting they’d heard of Open Banking, compared with 39% of the 55+ age group.

One of the key reasons for the introduction of PSD2 – and Open Banking – was to increase cross border retail banking in Europe. As few as 3% of European consumers have bought banking products from another EU country, and 80% say they basically never will. And that’s not great if you want to create a cohesive pan-European financial system in the future.

Though the EU does, at times, seem surprised by this lack of affection for cross border banking by the consumer, it’s hardly a surprise when every week there’s a new cybersecurity horror story involving consumers’ personal details. So PSD2 has not, and likely won’t even in the medium term, provide a solution to our innate fear of losing all our hard-earned cash to cybercrime. 

In fact, just this week, UK-based credit-rating agency Equifax was slammed with a £500,000 fine by the Information Commissioner’s Office for failing to put in place adequate protections to avoid a huge cyber-attack in 2017 where 146 million people’s details were exposed worldwide including 15 million British Equifax customers.

It’s true that some traditional banks have rushed to embrace Open Banking.  Danish Saxo Bank, for example, did PSD2 for fun, and acted before the regulation was ever written, opening up for their APIs in September 2015. And just this month, Barclays released an update to its main app, allowing customers to view details of its competitors’ products, by way of comparison. But the suspicion remains that it will take further regulation to enforce Open Banking on to the banks.

According to EY, 94% of fintechs see Open Banking as a major area of opportunity. But if we don’t see real progress by the end of the year, it’s likely that all the main fintech banks will be evolving into something much more aggressive, and that’s a scenario that should strike fear into traditional high street banks worldwide.