27 Jun 2018

Who is going to win in the post-open banking world?

Kevin Chong

Investec Emerging Companies

Hungry challenger banks, fintech start-ups, big tech giants and the trusted, but unloved, big banks are all lining up for a slice of the pie

The Money 2020 juggernaut came by Amsterdam earlier this month (4-6 June). 5,000 delegates, nine stages, more than 400 speakers.

 

Interestingly, out of nearly 300 talks, just 12 were dedicated to blockchain and crypto-currencies (and only one covered ICOs). 

 

The dominant theme at Money 2020 this year was open banking. The introduction earlier this
year of the EU’s Payment Services Directive (PSD2) and the UK’s Open Banking Standard is a life-changing development for European retail banking. Banks are now required – with customer consent - to share customer data with third parties who will now be able to initiate payments from a customer’s bank account. 

 

This disruptive regulatory development coincides with European banks finally emerging from the defensive bunkers they retreated into following the great financial crisis of 2007-2008 (HSBC’s announcement last week that it will be investing $15bn on growth and technology joins a procession of similar announcements by the big banks). 

 

The big question is who will emerge as the winner in the post-open banking world. Will it be the hungry challenger banks and fintech start-ups? Will it be big tech with their giant platforms? Or will it be the trusted but unloved big banks? 

Money 2020 Europe

Big tech have the platforms and user momentum. China showed what big tech can achieve. China’s largest e-commerce platform (Alibaba) also runs China’s and the world’s largest money market fund (Yu’e Bao). Payments in China is dominated by Alipay and WeChat. A similar trend is emerging in India and south-east Asia. However, the EU (and US) banking markets will be tougher for big tech. Balance sheet and operational regulations are much more stringent. 

 

The challenger banks and fintechs have massive advantages. They have data capture and centralisation (the lifeblood of AI) baked into their tech architecture from the moment a customer signs up. Their product development cycles are 5-10x faster than big banks. Their many fans include politicians and regulators (the UK’s FCA leads the world with its sandbox regime). And, now, they have open banking.

 

Let’s not forget the big banks. Yes, they are held back by complicated product and geography mixes. Yes, their tech stacks are prehistoric – not fit for a mobile first world; plenty of customer data yet all silo’d and unusable.  However, this is a market where incumbency, trust and inertia are powerful advantages.

 

For big banks, open banking is as much an opportunity as it is a threat.

In the UK, the average lifetime of a current account is 17 years. And, now, big banks too have open banking. It is as much an opportunity as it is a threat. By working with fintech startup Bud to roll out open banking plaftform Artha, HSBC showed big banks don’t have to be resigned to a future of being just a database for others to tap into.   

 

Steve Wozniak, in his packed out prime time appearance on the first afternoon of Money 2020, provided a most useful reminder: the product must be good and it must be simple. Apple II provided all of Apple’s profits for its first 10 years, so he knows.

 

Open banking has made European retail banking a very interesting space. The next few years will see plenty of investment and plenty of consolidation. Recognising this generational opportunity, VCs are scouring the UK/EU market to find startups who have built product to take advantage of this opportunity – the product must be good and it must be simple.

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Kevin Chong

Emerging companies

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