Innovate Finance

The finance technology revolution is here to stay

As the Payment Services Directive makes life easier for challenger banks and payment providers using fintech systems, the big banks need to step up their game

The digital revolution has finally hit financial services. The UK financial technology (fintech) industry is worth around £20bn a year – and the sector is booming.

Startups are beginning to challenge the UK’s large, establish banking institutions and regulations are helping to break down the barriers to entry in the market.

At a recent roundtable, some of the finalists in the Digital Leaders 100 Awards (DL100) Fintech Innovation category discussed the challenges and opportunities that lay ahead in the industry. 

Peer-to-peer platforms, mobile payment systems and data and analytics products are changing the way consumers do banking.

Tom Beevers, CEO at StockViews – a company that connects fund managers looking for good investment ideas with a network of independent equity analysts – said fintech companies can have a “huge impact on the end savings for the customers”.

“There’s a lot that fintech can do – not all of it is necessarily this huge thing that’s going to revolutionise the entire financial sector, but each one of them working in turn on a particular workflow or element of that financial service that makes a difference,” he said.

“It’s about bringing down the cost of financial services generally, which has been far too high for far too long. It’ll take time for that cost to come down, but it’s one of the major impacts fintech companies can have.”

He added that people’s expectations – which have generally been quite low in financial services – are growing and “archaic practices” will soon be unacceptable.

Big banks playing catch-up

Stuart Hall is the digital practice lead at digital consulting firm iBe TSE, an organisation that tries to bridge the gap between traditionalist banks and fintechs and helps its clients find a fintech company to help them solve a particular problem. He said that the boom in the fintech industry means the larger banks have no choice but to re-invent themselves, which helps customers.

He said fintech startups are challenging the bigger, incumbent banks to the point where they “are starting to have to reinvent themselves and really push innovation”.

“The banks have, to a certain extent, rested on their laurels – but now have to be brave and take decisions they probably wouldn’t have taken 10-15 years ago. So the customer is really going to benefit all-round from having a better banking proposition,” Hall said.

A report from US banking group Citigroup, published in March 2016, found more than a third of jobs at European banks will disappear over the next decade. Citigroup said this will be as a direct result of the growing fintech industry. 

Virginie Raux, head of conduct and culture at Lloyds Banking Group – the only representative from the large banks – said large institutions are realising that they do need to do things differently. At Lloyds, she said, the bank has invested £1bn on its transformation programme and “realise that we need to move fast".

“Especially if you combine the effect of digitalisation – plus the interest rates that aren’t really doing much at the moment, banks know they need to do something,” she said.

Regulation: Barrier or blessing?

One of the main barriers for fintech companies has been strict regulation. Companies need to go through a long vetting process by the Financial Conduct Authority (FCA) to get a banking licence.

As of April 2016, 86 companies are awaiting a decision on whether they will be authorised to operate peer-to-peer lending platform, with a further eight approved so far this year. 

One of the companies currently awaiting approval is mobile banking app Mondo. Mondo aims to become a new type of bank, at the moment through a current account delivered through an iPhone or Android app, paired with a prepaid debit card.

But co-founder and CEO Tom Blomfield’s ambition is to become “the app for all the money”. He wants to use application programming interfaces (APIs) to connect savings, borrowings, loyalty schemes and “all the things you wish your bank did for you” in one place, he said. 

Blomfield said that, although having some level of regulation to entry “feels burdensome”, it was “absolutely right”.

“You’re not dealing with people’s songs, or their cat photos. You’re dealing with their life savings and you could ruin people’s lives here, so having a level of oversight and regulation is absolutely appropriate,” he said, adding that the FCA is “the most progressive regulator in the world”.

PSD2 could improve innovation

The revised Payment Services Directive (PSD2) will accelerate payment innovation. For instance, PSD2 extends the regulations to include third parties or payment initiation service providers.

It also means that banks of credit institutions will have to allow licensed third-party payment services providers with access to customers’ account information, if the customer has given explicit consent.

Ross Tapin, CEO of Swave – a company that aims to help people save – said that, although there are still some legal issues around PSD2 to be answered, it will make it easier for third parties to use the data to provide value for the customer. 

“It could be a real massive think for the UK in breaking down those barriers to entry and allowing companies to come up with ideas, using any bank’s data to work with – and, in essence, use any bank’s customers to work with,” he said.

Swave has partnered with Lloyds, which means it has been able to use data to understand people’s saving habits and how they can nudge people in different directions. The company has produced an initial application which nudges people in a “quick and easy way to transfer money” into a savings account, pension or similar.

“When you’re doing a gym work-out, you have an individually tailored session. You should be having an individually tailored savings scheme too,” Tapin said.

Era of service integration ahead

Norval Scott is communications manager at DueDil, a data intelligence company that helps people find information on private companies, often used for lead generation. He agreed that the UK has progressive regulators: In fact, he says, the openness of data and the support of the government and regulators was part of the reason why the company’s American owners founded DueDil in the UK.

He said that the regulations are helping remove some of the big obstacles for fintech companies – but that innovation shouldn’t just be about creating something that’s easier and cheaper, but something that’s better.

“Creating better transparency for businesses across the world, and increasing the ability of companies to sell to each other better, would mean you could theoretically use your competitors to create something much bigger and much better than breaking down the costs,” he said. 

Tom Blomfield added that, in the last 10-15 years, single-purpose providers have been nibbling at the outside of the sector – but the next generation “is taking the very middle”.

He envisions taking a current account and “opening it right up using APIs and PSD2 to put back together a loosely coupled set of disaggregated financial services”, where a person could use different providers for different services.

“Instead of having to maintain 10 different accounts, you have a single unified space, linked through APIs, to recreate banking at a lower cost. I think when that happens, the big banks would be in extraordinarily big trouble – and PSD2 will only accelerate that,” Blomfield said.

Voting for the DL100 Awards has now closed. The winners of the DL100 Fintech Innovation category will be announced at the DL100 Awards on 15 June 2016.

Computer Weekly is a media partner for the Digital Leaders Awards.

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