In a climate of increasing caution around data sharing, David Gardner of law firm TLT asks how banks can reconcile new initiatives with the need to safeguard customer information.

In January 2018, the EU’s second Payment Services Directive (PSD2) came into force and the rollout of the UK’s open banking reforms began, triggering a major shake-up in the payments and retail banking industry. Commentators predict (and EU and UK regulators hope) that these initiatives will drive widespread market changes, including increased competition, innovation and greater market access, which will herald a new era of customer-focused, technology-driven banking services.

To make this vision a reality, banking customers need to share their bank account information in order to access new products and benefit from greater choice. This includes sharing personal data and other information that is highly sensitive, valuable and heretofore confidential between the customer and their bank.

A few weeks later, in March 2018, the New York Times and the Guardian first reported the full extent of data misuse by Cambridge Analytica, which involved the harvesting of profile information belonging to an estimated 87 million Facebook users. For Facebook, the fallout included US Senate hearings and a UK Commons Select Committee appearances for senior executives, not to mention a maximum fine of £500,000 ($650,000) from the UK Information Commissioner’s Office. Had the breach occurred under the General Data Protection Regulation regime that came into force in May 2018, the fine would have been significantly higher.

Doubts remain

The Cambridge Analytica scandal served as a warning to big tech companies about the financial and reputational impact of data breaches and left questions in the minds of sceptical customers about the risks of sharing data.

In this context, it may come as a surprise that respondents to TLT’s recent open banking survey identified big tech companies (such as Google, Amazon, Alibaba, Facebook and Apple) as the biggest potential threat in the developing open banking market.

However, there are good reasons to think those survey respondents may be right.

Looking at markets outside the EU, there are multiple examples of big tech and telecoms companies establishing a mass market in payments and related financial services. M-Pesa (operated by Vodafone) provides mobile payment services for about 30 million users in Kenya (population 45 million). In China, Alibaba’s Alipay service has 450 million users and Tencent’s WeChat Pay has 600 million, each offering payments and investments via their respective social media platforms.

Could this level of market penetration be replicated by big tech companies in the EU? The launch of Apple Pay, Google Pay and Samsung Pay, all of which pre-date the open banking era, indicate a willingness on the part of major players to disrupt the market.

Big tech companies have specific advantages that leave them well positioned to capitalise on the opportunities presented by open banking. Like established banks (but unlike many fintechs), they have a significant customer base and the scale and capacity to make major investments. Like fintechs (but unlike many established banks), they are designed around more agile mobile technology platforms and focus obsessively on positive user experience and frictionless transactions.

Risk profile

There are, of course, risks for big tech companies entering the financial services market in the EU, including significant governance and compliance obligations, oversight from multiple financial and data regulators and substantial fines for regulatory breaches. The traditional banking model is likely to remain too risky and too heavily regulated for big tech.

In this respect, open banking offers some interesting alternatives, which could allow big tech companies to focus on what they do best (i.e. provide good user experience and data-driven insights), without being exposed to all the regulatory requirements applicable to banks. The emerging market of open banking services has already attracted a range of fintech providers, including the first wave of providers with PSD2 registrations as ‘account information service providers’ and ‘payment initiation services providers’ (AISPs and PISPs). Big tech could also use this route to build on existing successful business models and create new ones, with a lighter regulatory burden.

If big tech providers establish successful AISPs and PISPs, the threat identified by our survey respondents would be well founded. That scenario would also present an interesting dilemma for regulators, if the more competitive market promised by open banking starts to be dominated by a small number of big tech companies.

Building understanding

At the moment, while there is clear potential for big tech to make an impact in open banking, dominance in the EU looks a long way off. Established banks have thus far proved to be relatively resilient. There is also a broad range of challengers, neo-banks, alternative payment providers (notably PayPal) and fintechs who are chasing and winning market share.

Big tech companies (and anyone else hoping to make an impact) will need to do more to build customer understanding, trust and support for open banking services. The market is still in its infancy and, from a customer’s perspective, there is not yet a ‘must have’ app that demands attention and engagement in open banking. It remains to be seen who will be the first to release such an app, but it will come as no surprise if one of the big tech companies enters the race.

David Gardner is a partner at UK law firm TLT.

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