The U.K. is known as a banking and fintech leader in Europe. It’s also slated to leave the European Union, a move referred to as Brexit. So, where does all this leave open banking? Below, we’ll discuss Brexit’s effect on open banking, particularly taking into account the upcoming second Payment Services Directive (PSD2), which goes into effect January 13, and the U.K.’s own Open Banking Regulation. However, before we get into these two issues, we’ll give a general overview of how Brexit is affecting the banking landscape.
Brexit and banking
The date for Brexit is March 29, 2019 and thus far there is a lack of clarity in EU-level negotiations over the ultimate terms of the exit, as no agreements have been made. This has caused banks and financial services entities to take contingency measures so their transitions go smoothly and they still have access to the single EU market. Chief amongst these measures is preparing to set up offices in other places in the EU for use post-Brexit. Top destinations include Frankfurt, Dublin, Paris, and Amsterdam.
Relocation is seen as a measure to avoiding the effects caused by losing passporting rights, an issues which remains undecided in negotiations. These rights allow U.K. banks and financial services, as a part of the EU, to carry out business across borders anywhere in the EU, and have brought in more than GBP 9 billion in revenue per year. Michel Barnier, the EU’s chief Brexit negotiator says that “[t]he legal consequences of Brexit is that the UK financial service providers lose their EU passport. This passport allows them to offer their services to a market of 500 million consumers and 22 million business.” Also since 2016 when the vote to leave the EU was made, European banks have been significantly reducing their exposure in the U.K..
In the U.K, and in particular London, one of the governing Brexit fears is that the country become locked out of a trade deal, which would result in the loss of thousands of London jobs in financial services. Job losses due to Brexit were predicted to be high, with Bloomberg reporting last fall that London alone could see 10,000 banking jobs fly out of the door and twice as many positions in the financial services sector. However, recently, the City of London’s EU envoy Jeremy Browne remarked that “It may end up for quite a lot of them [U.K-based firms] being a bit less dramatic than it might appear.”
Transition talks and ironing out trading terms have been deadlocked, but new talks over these issues are beginning at present.
PSD2 and Brexit
PSD2 requires European banks to open access to customer data to third party providers, with customer consent, though the use of application programming interfaces (APIs), forming one of the significant developments affecting open banking. With this regulation, for example, an online shopper using an app would be able to see their bank balance in app while shopping, or a retailer could access customer information in order to offer them on-the-spot loans to assist buying their goods or services. As Brexit decidedly places the U.K. out of the EU in 2019, the question remains if the directive will still apply to the country post exit and if so in what form.
At present, as PSD2 goes into effect January 13, the regulations in the directive will apply to banks in the U.K.. In preparation for the regulation, banks have spent more than GBP 750 million, notes Accenture’s head of U.K. banking, David Parker. Yet, as the Verbond van Credit Management Bedrijven writes, “once the UK has officially left the EU it will be left up to Parliament to decide whether or not to implement it into British law”, leaving the future of the directive in the country unclear.
To add to the complexity of the situation, after Brexit, since many banks in the U.K. still operate in the EU, the country’s access to the European Economic Area (EEA) may be predicated upon its adherence to European-wide regulations standards. Thus, the UK will most likely still need to adhere to the regulation if it wishes to both operate in the EEA and remain competitive. However, for the meantime, how PSD2 will evolve in the country remains uncertain.
Competition and Markets Authority (CMA) and Open Banking
Although what is going to happen in the U.K. with PSD2 after Brexit in terms of open banking remains to be seen, the country has its own open banking requirements: Open Banking. This was set up through the Competition Markets Authority (CMA) last year, and the organisation hopes it will both drive down costs and encourage account switching. The Financial Times writes that it is “its [the U.K’s] own version” of PSD2, indicating it was created in order to “provide extra safeguards for the transference of customer data”. Open Banking applies to the nine largest account providers in the U.K. and initially will only apply to currently-held accounts, although U.K. chancellor Philip Hammond revealed this week that it will also apply to all variations of payment accounts, such as e-wallets and credit cards. Open Banking coincides with PSD2, going into effect January 13, and also has to be implemented so it is compliant with the directive.
Major differences between PSD2 and Open Banking are that the latter doesn’t require customers to hand over their log-in details, where PSD2 will most likely allow screen scraping, where customers give log-in data to third party services who can in turn log in and access their financial data.
The effect Open Banking will have on banks is, though, similar to the effects of PSD2 in that open APIs will be used to transmit data to third party providers and there will be increased customer service offerings and competition, particularly form fintechs. Imran Gulamhuseinwala, trustee of the Open Banking Implementation Entity, states that:
These enhancements [a better environment for new services brought on by Open Banking] should give greater confidence to the fintech community to seize the opportunity to participate fully in the financial services ecosystem. They will create standards for future dated, recurring and international payments as well as all the payment and product types covered by PSD2.
This increased competition has banks nervous that customers will trade in their bank apps and services for solutions from competitors. Jayne-Anne Gadhia, Virgin Money chief executive, says, “I think it’s really interesting that when I talk to CEOs of major banks they feel defensive about Open Banking. This is an opportunity for competitors to attack their customer base.”
In terms of preparation, five banks, including HSBC and Barclays, will miss the January 13 adoption deadline, but have been given extensions. Reasons for delays include, for example, Barclays, which remains busy testing its APIs to ensure customer data security.
By Elliot Lyons, Research Analyst at Holland FinTech