As Brexit negotiations being to heat up, the issue of regulation continues to raise its thorny head. The Chancellor, Rishi Sunak, has already said that the government will “review our regulatory framework on financial services” and that “not being inside the EU more generally gives us a chance to do things differently”. Fintech Plaid is just one of a number of companies who tend to agree. Dan Morgan, European Policy Lead at Plaid explains more.
Gallons of ink have been spilled on what Brexit will mean for UK financial services. How will regulations change? Will they maintain access to European markets? Now that Brexit is here it is time to shift to the key long-term question of how the UK could build on its embrace of open digital financial services to thrive outside of the EU financial framework, diverge smartly from EU rules and move more quickly than other markets.
As an inward investor from the US, Plaid came to the UK in 2019 and has thrived in the UK’s open banking ecosystem. It made sense for Plaid to establish itself in the UK. The approach taken by the FCA and other regulatory agencies has helped create a vibrant and growing market where fintech firms can grow and thrive, resulting in the most mature market both in terms of open banking and fintech and financial services as a whole. According to the Open Banking Implementation Entity, there are now an estimated 2 million active monthly users with numbers continuing to grow. COVID-19 restrictions have also further accelerated the use of online and mobile money management in the UK, with 54% of consumers now using them regularly, according to a survey from UK innovation foundation Nesta.
The key is building on that momentum. Thankfully, the UK is already starting to think seriously about what comes next, with the Government and regulators embarking upon a number of reviews in 2020 including on payments regulations, open finance and the broader UK fintech sector. Among other fintech providers, Plaid is a member of the regulatory steering group working on the strategic review and we have some strong ideas on what this change could look like.
Use independence to diverge smartly
Although open banking has been successful, it is not perfect. Rectifying mistakes such as ineffective and anti-competitive security measures will be key to future success.
Strong Customer Authentication is the European mandated standard to authenticate TPPs, like Plaid, in the open banking ecosystem. Currently, rules mean that every 90-days open banking connections are broken resulting in customer attrition rates between 13% and 65% according to industry data, rates which are not economically sustainable at either end of the spectrum. Firms lose customers who fail to reauthenticate for a variety of mostly technical and behavioural reasons.
This is made even worse by this process being managed by the very same banks for which open banking measures were introduced to provide competition. There is little incentive for banks to get this right.
If the government wants open banking and open finance to succeed something must change.
Move quickly based on principles
Regulation in the UK tends to be based on principles, rather than prescription; the country’s common-law system builds on over time. European regulation, by contrast, is more codified, which leads to a lot of prescriptive detail.
This approach should again be embraced as we move towards open finance, an evolution in open banking which gives consumers the power over all their financial data. In its latest Digital Finance Strategy the EU has committed to having an open finance framework in place by 2024. This is far too long and ignores the fundamental shifts in digital finance that are happening today. The UK should use a principles-based approach to implement a Consumer Data Right (CDR), a guaranteed right for consumers and businesses to access and share all of their personal and financial data directly or through a third party. In 2017 the Australian Government announced the introduction of such a Consumer Data Right (CDR) giving consumers greater access to and control over their data.
The Chancellor, Rishi Sunak, has called for the UK to align its regulations with financial centres in New York, Tokyo and Hong Kong rather than the EU – another option might be Australia.
Once a CDR is established from above, let’s enable the market to build open finance from below.
PSD2 took many years to be implemented and it is still not fully delivered in parts of Europe. API specialists like Plaid can play a role in delivering open finance – they can promote competition while developing APIs that deliver the customers’ needs and wants. Open finance could potentially encompass disparate and diverse sectors which would be very difficult to coalesce around a particular technology and governance standard like in open banking. A market-led, principles-based regulatory framework will allow the UK to deliver open finance much quicker outside of the EU.
Continued influence and leadership
UK regulatory influence must not and will not end with Brexit. Informal channels, networks and knowledge communities have always played a critical role in shaping the content and application of policy frameworks, especially in areas where technological progress necessitates new approaches such as fintech. The UK must leverage those networks and lessons learned to think about how we can set an example, move quickly and embrace an open finance environment. Fintech is one of those industries that we can genuinely call a global community, the UK can still lead, if it wants to.