For years, London has been the fintech capital of the world. Is that likely to change now that Britain is gearing up to leave the EU before April 2019?
While U.S. regulators have struggled to create a regulatory framework that supports innovation in banking, the U.K. and fellow European Union nations have charged full steam ahead toward open banking.
A critical mass of digital platform opportunities could create a new center of gravity for startups and alter the flow of fintech talent and funds.
The centerpiece of this effort is the EU’s Revised Payments Services Directive (PSD2). Aimed at creating a more integrated European payments market, the directive requires that all banks operating in EU member states provide access to customer account information,
transaction information and payment initiation to third parties via application programming interfaces (APIs).
Notably, APIs aren’t mentioned at all in the original payment services directive, which was issued just six months after the launch of the iPhone. This "v2" update reflects the fact that APIs have become key to creating a market in our digital era where
consumers can choose from a wide range of providers while, at the same time, counting on a consistent level of security and speed.
Ironically, Brexit may speed up rather than slow down progress toward this goal.
That’s because the prospect of the U.K. exiting the single market is raising doubts about London’s continued reign as the leading city for fintech talent and investment. With the balance of power between cities now in question, fintech talent and funding
are up for grabs and banks must reassess their strategy for responding to PSD2.
In the end, there are two approaches to PSD2 that individual banks can take. One option is doing the minimum to meet mandates while sticking to "business as usual." In other words: Treat APIs as a tax rather than an asset, and maintain, as required, APIs
that do what the law requires and nothing more.
The challenge with this strategy is that once the locks around a bank’s ‘crown jewels’ have been cut, the risk of disintermediation is a one-way street. An ever-longer queue of third parties will tap them as ‘dumb pipes’ as quickly as they can come up with
use cases and value propositions for their own customers.
Consider how today’s API masters are becoming household names — entire industries are now described as getting ‘Amazoned’ or ‘Uberised.’
The alternative is getting ‘in it to win it’ using APIs as drivers of growth. That means becoming master aggregators in their own right. It may mean adding value-added functionality to the APIs for which the bank can charge a fee. It may also mean, in order
to maintain a direct connection with customers, becoming a payment initiator and a data broker to retailers and other potential disruptors for whom the bank becomes a route to market rather than a target.
It’s a major departure from how banks have operated in the past, but if the impact of APIs on other industries is any guide, it’s also their inevitable future. Consider how today’s API masters are becoming household names — entire industries are now described
as getting ‘Amazoned’ or ‘Uberised’. And the game is not just for digital natives anymore either. Visa, for example, now offers ‘the power of the Visa Network, delivered as an API.’ Telcos are even getting in on it, increasingly using APIs to make the transition
from ‘pipe to platform’ and develop new services (including, in some cases, financial services).
For the banks that succeed at beating disruptors to the punch by building a digital platform and becoming their own data aggregators, the grand prize is becoming a digital platform business with an ecosystem of fintech companies and other digital innovators
that complement and enrich — rather than cannibalise — the bank’s existing customer relationships.
Throwing Brexit into the mix raises the stakes by dangling a tantalising prospect in front of policy makers. What if more banks in their jurisdiction — whether in London, Frankfurt, Dublin or elsewhere — complete their digital platform journeys first? A
critical mass of digital platform opportunities could create a new center of gravity for startups and alter the flow of fintech talent and funds.
U.K. policymakers have made it crystal clear that they see themselves as the ones leading the way on open APIs in banking. They realise it is an opportunity to stimulate innovation and gain competitive advantage.
Creating conditions for more open innovation faster is a competitive lever that U.K. policymakers can pull to defend the fintech jewel in London’s crown.
To that end, the U.K.’s own open banking policies are broader in scope than those of the European Commission, encompassing loan accounts not included in PSD2. Moreover, the U.K.’s Competition and Markets Authority was already advocating for a faster implementation
of open banking well prior to the Brexit vote.
Given that Britain may leave the EU in fewer than three years, there is a wide aperture for fear, uncertainty and doubt to be sown about the future of fintech in London. But creating conditions for more open innovation faster is a competitive lever that
U.K. policymakers can pull to defend the fintech jewel in London’s crown.
The question then becomes: Will their counterparts in Edinburgh, Berlin, Frankfurt, Dublin or Paris stand idly by?
With the U.K. as a member of the single market, PSD2’s embrace of open APIs as engines of innovation promises to lift all boats — in time. However, with the prospect of the U.K. leaving, the race is on to grow the ecosystem value creation opportunity — bank
by bank — into an industry cluster that a critical mass of fintechs can’t refuse.
I suspect Brexit has piqued the interest of many cities in becoming the global hub for digital financial services platforms.
I think it’s a safe bet that none aspire to be the world capital of ‘dumb pipes’.