Brexit, Open Banking and the FinTech Revolution
Mark Cummins (DCU Business School)
Before the UK referendum vote on the 23rd June 2016 and the subsequent uncertainty that has prevailed over Brexit, the European Union had already set in train what is to be a seismic shift in the operations of the financial services sector. Some nine months earlier, on the 8th October 2015, the European Parliament adopted a revised Payment Services Directive – commonly referred to as PSD2 – with an effective implementation date earlier this year of the 13thJanuary 2018. PSD2 will result in significant disruption to the banking industry and provide further growth opportunities for companies in the burgeoning world of Financial Technology (FinTech).
The objective of PSD2 is to provide an integrated market for payment services within the EU, which will facilitate secure and efficient electronic payments within and between member states. The disruption that PSD2 will introduce comes through the requirement for banking institutions to open up client account data – under the direction and approval of clients – to be accessed by Third Party Providers, primarily FinTech companies, which will offer clients a range of services. Account Information Services Providers will use such access to client account information to uniquely aggregate and analyse transactional data across multiple bank accounts, while Payment Initiation Service Providers will be sanctioned to initiate payments on behalf of clients. Such services will be facilitated over sophisticated application programme interfaces (APIs), the technological innovation underscoring PSD2.
While focused on payment services, PSD2 is seen as a first step in a wider move to an open banking model that will see increased competition across the spectrum of banking services, placing pressure on banking institutions to react accordingly. Significant threats and opportunities therefore exist for incumbent banks.
London is recognised as a global hub for financial services – arguably the most important centre, even over New York. Hence, the impact of Brexit on the financial services sector in the UK has been in sharp focus. Much of the discussion to date has been on the need for banking institutions to retain access to the EU market through passporting regulations and, hence, the question of where the major banking players will have their headquarters – Dublin being central to much of the speculation – and to what extent financial services activity will be moved out of London. Much less consideration has been given to the emerging area of FinTech.
Pre-Brexit, London was being touted as the major global hub for FinTech. With PSD2 to come into effect, and with the trend towards open banking, London was set to foster significant growth in FinTech companies. Brexit has significant implications for this expectation. PSD2 is a directive that applies to the full European Economic Area (EEA) and indeed to any interactions between EEA and non-EEA entities in respect of payment services. Whatever the UK opts to do around the EEA, there will be a requirement to comply with PSD2. In this regard, the UK is actually ahead of the curve as a result of its own internal open banking initiative.
However, Brexit means that the UK is likely to suffer from FinTech companies deciding not to establish in the UK and already established FinTech companies deciding to leave the UK; decisions which simply would not have been contemplated if the public vote had gone against Brexit. Furthermore, PSD2 requires that any entity involved in offering payment services must conduct a proportion of its payment activity within the country of its headquarters. Hence, a location such as Dublin may be more attractive than London on the basis of offering a strong domestic payments market, coupled with the benefits of EU passporting, from Ireland’s membership of the EU.
So at a time when banking institutions are scrambling to prepare for Brexit and to project into a post-Brexit world, the same banking institutions have to grapple with what is a rapidly changing landscape in financial services, and the prospect of heightened competition and reduced market share.
General public and political discourses are heavily focused on what will happen, post-Brexit, to the financial services sector as we know it today. What will the major banking players based in the UK decide to do? What jurisdictions will benefit the most from such decisions? What role will London play post-Brexit? Yet PSD2, and the wider move to open banking, and indeed the overarching FinTech revolution, suggests that the pertinent question should simply be: what is the future of banking? When we have a better handle on this then we can give better longer-term predictions on the implications of Brexit.
The European Commission announced on the 8th March 2018 its Action Plan on how to harness the opportunities presented by technology-enabled innovation in financial services (FinTech). The action plan sets out a series of steps to foster financial innovation, through facilitating neutral spaces for commercial industry and governmental authorities to interact; working on a comprehensive strategy on distributed ledger technology and blockchain; increasing the digitisation of information published by listed companies in Europe, towards informing investment decisions; supporting information-sharing in respect of cybersecurity; and presenting a blueprint with best practices on regulatory sandboxes, as a controlled testing ground for innovative financial service offerings.
The EU has set out its future vision for financial services as an ecosystem where incumbent banks, challenger banks, and FinTech innovators compete to the benefit of the EU banking consumer. The uncertainty of Brexit only gets all the more uncertain with this uncertain future for banking.
Mark Cummins is Professor of Finance at the Dublin City University Business School and Head of the Economics, Finance and Entrepreneurship Academic Group. He holds a PhD in Quantitative Finance. This piece also appeared as a guest blog post on Euractiv.