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I’ve just returned to New York after 6 months of living in the UK, studying at the London Business School. I felt like Emily in Paris except it was Michelle in London, and instead of marketing I spent my days immersed in the fintech ecosystem.
It was during the London Fintech Happy Hour, hosted by Michael Jenkins of the This Week in Fintech Community, that I met Andre Reina. Andre is a fintech guru and Product Lead at unicorn and London start-up darling, TrueLayer. After the cocktail intros of name, place of origin, and occupation, somehow we dove into a policy discussion about the European regulation PSD2 and the massive opportunity that open banking had brought to Europe; it was an unexpected turn of events but absolutely one that I welcomed. At the time all of this seemed like a foreign language.
On the tube that night I remember a moment of realization as someone who has lived in both NYC and London. The fintech ecosystem looked and felt really different overseas, but this was the first time I started to understand that open banking was the “why” behind the outcome.
Open banking is a growing trend of providing increased transparency and access to consumer data with the goal of improving efficiency, competition and innovation for consumers.
In two leading fintech hubs, New York City and London, open banking has spawned two completely unique ecosystems. In this piece, we’ll explore the history of regulations (or lack thereof) that shape the infrastructure of each ecosystem, take a bird's-eye look at the current state of fintech in each region, and demonstrate the usefulness of recognizing their differences.
The Story of Open Banking in the US vs. Europe
Even before we had a term for it, open banking was implemented in the US for over 20 years, ironically led by banks enabling data transparency for their customers between accounts.
To understand the history of consumer finance in the United States, I spoke to the Consumer Financial Protection Bureau (CFPB) who shared that as early as the 2000s the region was positioned to become an early fintech hub because it had some of the strongest financial institutions in the world; it was also an early adopter of the internet, and had the technical talent to catalyze its growth. The modern US fintech ecosystem that we think of today developed in the early 2010s coinciding with a broader push for fintech innovation around the world. Bentovim explained that the current state of fintech is a result of market demand and innovation moving quicker than the US government.
Even before we had a term for it, open banking was implemented in the US for over 20 years, ironically led by banks enabling data transparency for their customers between accounts.
The United States has a market-led approach to open banking. The closest thing to a regulatory framework for open banking in the country is the CFPB’s Consumer Protection Principles, a five-page document authored in 2017 made up of eight principles that loosely provide guidance to banks and fintechs. Steve Boms, President of Allon Advocacy and Executive Director of The Financial Data and Technology Association of North America, shared that “one of the reasons for the delay in the regulatory framework around American open banking is the complexity of coordinating and creating consensus amongst the 11 federal agencies that have jurisdiction over the financial market”. This problem is not encountered by other regions like the UK which only has three regulatory bodies to work with that include the FCA, OBIE, and CM9.
Unlike the US, where open banking was occurring prior to regulation, in the UK open banking started with regulation.
The 2007 Payment Services (PSD1) created the British open banking ecosystem and the 2015 Payment Services (PSD2) has shaped the open banking we see today. In the UK, the implementation of that framework is referred to as “open banking initiatives” and gives third party providers the right to access both consumer financial data and make payments on their behalf; it also requires banks to open their systems to third party providers, and has mandated that the nine largest banks in the region (referred to as the “CMA9”) build APIs for providers to access consumer data. The framework has been fairly prescriptive except for when it comes to providing technical guidance on how banks should provide that access; this has created confusion for both the fintechs and the banks.
The outcomes of Open Banking Initiatives and PSD2 have resulted in decreased cost for fintechs to access consumer data, decreased costs of consumer payments, increased industry competition and consumer choice and regional cohesiveness around payments. Most importantly, it has created a single system for both domestic and cross-border banks to transfer funds, charge an account in one country for services provided in another, work in a different country from your home country bank account, and ensure cheaper, safer, and faster cross border payments.
The modern US fintech ecosystem that we think of today developed in the early 2010s coinciding with a broader push for fintech innovation around the world. Bentovim explained that the current state of fintech is a result of market demand and innovation moving quicker than the US government.
The State of the Fintech Union in the US
The absence of mandated access to consumer data for banks has resulted in today’s reality of screen-scraping, also known as automated data gathering. Mint is one of the best known personal financial apps that uses companies like Yodlee, a third-party data aggregation service, to screen-scrape and access bank, credit card, and mortgage transactions to paint a clear picture of your financial health. Yodlee is a third party aggregator impersonating itself as the consumer to access and consolidate important transactional information to provide a comprehensive view of consumer’s financial health. This accomplishes the same results as open banking.
However, screen-scraping comes with a huge cost for fintechs as they must write unique code for each financial institution and for banks as they spend huge resources guarding fintechs from accessing consumer data. The additional cost would be forgivable if it meant a more secure outcome for the consumer but it instead promotes risky consumer behavior with important and sensitive information that give rise to privacy and security issues. Yet in some ways through direct access, the US has skipped open banking and jumped right into open finance. This is because the latter grants the ability to access other important data points like retirement and investment accounts that provide a more holistic view of consumer financial health.
In the absence of mandated access in the last few years third party aggregators have signed partnerships like the Chase and Intuit and Wells Fargo with Xero and Finicity agreements which create a direct line of access to consumer information and keep data safer. However, banks are getting smarter and instead are using Akoya, a data aggregator funded by banks and with exclusive partnerships with 12 banks and counting as a line of defense.
The Fintech Speech from the Throne
Currently in the UK you can utilize open banking in two ways: you can either access consumer financial data known as Account Information Services (AIS) or make payments on their behalf known as Payment Initiation Services (PIS). Under the current framework for fintechs you have three options: 1) Become a Third Party Provider (TPP) and take on the compliance cost of PSD2, tech costs of integrating with each bank API, customer service, and hold a professional indemnity insurance; 2) Hire a Technical Service Provider that streamlines all the tech build and provides you with a single bank API; or 3) Hire a TPP that will handle all of the backend costs and provide a single API to connect to all the banks.
PSD2 and Open Banking Initiatives manufactured huge opportunities to create value in the UK. One example of this is TrueLayer, co-founded by ex-Plaid employee Luca Martinetti, who took incredible insights from the US market and created a simple bank API that wasn’t hindered by the cost and barrier from banks but instead was shepherded in its growth.
In a short time TrueLayer has become one of the UK’s most prosperous unicorns. TPPs like Truelayer have the opportunity to provide the same level of benefit to cut costs for fintech like AWS did in the early 2000s for start-ups. Revolut, Europe’s fintech superapp is an example of highly regulated clients who have benefited from the massive cost savings and efficient infrastructure builds of TPPs. It has allowed Revolut to spend money on product innovation and global expansion instead of accessing consumer data.
PSD2 and Open Banking Initiatives manufactured huge opportunities to create value in the UK.
Comparing the US and UK fintech markets reveals the important role that market regulation plays in spurring innovation. But whether you’re on Wall Street or Canary Wharf, your potential to disrupt the financial ecosystem is only as strong as your understanding of that ecosystem. No matter how fast-paced the industry seems, history is still our teacher.
In the next article of this two-part series, we will look towards the future of regulation in the US and UK and the opportunities for innovation and investment that arise.
Link to original piece: https://www.forbes.com/sites/columbiabusinessschool/2022/02/28/fintech-across-the-pond-insight-to-disrupt-the-financial-ecosystem/?sh=10fafc549b5b