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How to flourish in an uncertain future 2017

Open banking

UK retail banks have faced headwinds since the global financial crisis. Low growth rates have prompted central banks to slash interest rates, putting pressure on banks’ margins. More stringent regulatory capital requirements, high remediation provisions, and increased ongoing compliance costs have also contributed to a tough backdrop that has caused European banks to earn returns below their cost of equity since 2008.

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During this period, UK retail banks have also been facing increased competition from innovative financial technology firms (‘FinTechs’) focusing on niches within the retail banking value chain. Such firms have been enabled by advances in technology and a favorable UK regulatory stance towards them – the same factors that are now facilitating the entry into the market of mobile-only banks looking to compete directly with the incumbents.

That’s not all. Regulation has been concurrently driving what we believe will bring about a revolution in UK retail banking – open banking. In this development, regulators are seeking to drive increased competition and innovation by opening up customer banking data to third parties. This is taking place at two levels:

  • across the EU, in the form of the revised Payment Services Directive (PSD2);
  • in the UK, with the Competition and Markets Authority(CMA) mandating the UK’s largest banks to adopt the Open Banking Standard.

Opening up bank data carries an inherent threat of commoditization for incumbent banks. This is because it potentially enables third parties to own the primary customer relationship, by allowing accounts from different providers to be accessed via a single interface that isn’t necessarily owned by an incumbent. It also potentially heightens competition by enabling more personalized comparisons between accounts held at different providers.