The UK’s Open Banking initiative was launched six months ago, along with its EU counterpart, Second Payment Services Directive (PSD2). Their introduction has seen a slow start, and while it will take a little while more, it is only a matter of time before customers discover the benefits.

The Open Banking initiative is driving the nine largest banks to offer APIs (Application Programming Interfaces) through which websites or apps can request standardised data from another system, to share data with third-party providers, as long as the customer has consented. As a result, the banking industry is facing new competition from smaller, often online-only financial services providers, who can use the data to provide better, more intuitive services to customers.

Around 80% of us still bank with one of the Big Five, but thanks to the sheer size of the UK’s biggest banks, services have remained relatively unchanged for years. Open Banking and PSD2 has now levelled the playing field and smaller disruptor banks are emerging to compete with the established players. Neobanks, such as Starling Bank or Monzo, have quickly climbed the ranks for customer satisfaction and customers are able to switch using the industry standard Current Account Switching Service (CASS).

Competition Will Drive Innovation Among Big Five

Larger, established banks are somewhat at a disadvantage, as regulatory obligations can potentially slow the pace of change. It is likely that to meet competition, the Big Five will increasingly seek innovations outside their organisation, through partnerships with start-ups or acquiring smaller firms. Unencumbered by legacy banking products, start-ups can be more nimble than their larger counterparts and so can move quickly and effectively to ‘plug into’ the ever diversifying tech giants, like Apple, Google or Amazon, and create streamlined services.

Online shopping, for example, could get a whole lot simpler. When we buy something online, we input our details, the retailer contacts an acquirer who authorises the card transaction, which is then relayed to the card providers (Visa or MasterCard) to process the transaction and take money from your account. In theory, it’s now possible for providers to authorise your payment directly, without the middleman.

This should make the process quicker and more secure, ultimately leading to lower transaction fees. The tech giants already offer a suite of their own payment solutions, whether it’s Amazon Pay or Apple Pay, and they’ve yet to capitalise on the opportunity afforded to them by Open Banking and PSD2.

Greater Financial Flexibility

If you have more than one bank account, it’s also possible that you will be able to access all of your financial information in one place, making way for apps that help with budgeting and other financial management tools. Products in this space have existed for a while, but with Open Banking and PSD2, they will become significantly simpler to set up and more secure to use.

Open Banking and PSD2 promise convenience, flexibility and efficiency – in short, better products for consumers. Fintechs are perfectly poised to deliver on this promise and upend the market.
But there are hurdles for aspiring Fintechs. Start-ups can’t request data without the consent of the individual.

At a time when data misuse and cyber breaches are hitting the headlines, many consumers may be less comfortable sharing their data. It is, therefore, predicted digital natives will lead the way with Open Banking – a generation well in tune with spotting the signs of online scams and the hallmarks of an untrustworthy company.

More Collaboration and Integration Will Support Fintech Movement

As the Fintech sector grows in Scotland, more is being done to increase integration and collaboration, thanks to organisations such as Fintech Scotland. This will only add weight to the Fintech movement and strengthen competition. Already Stephen Ingledew, CEO of Fintech Scotland, is helping start-ups link more effectively with academia and the large IT and Financial firms located throughout Scotland.

This is a national growth story for Scotland and is reminiscent of the nation’s distinguished and innovative history within Financial Services over the last 300 years. More recently, the Scottish banking market has remained fairly concentrated for a number of decades but the inevitable tides of change are on the way.

Banks and Fintechs will need to demonstrate differentiation and innovation, with offerings that help them stand out from the crowd and serve a new breed of consumer. Expect to see greater personalisation in banking as customers demand more responsive, streamlined and intuitive services. This is a market shift that banks and Fintechs simply cannot miss.