The future of fintech: opening access and open banking

James Tall weighs in on the key themes from the AltFi London Summit 2018.

How has the burgeoning fintech sector expanded access to financial services? This was one of the hot topics at this year’s AltFi London Summit, with panellists discussing asset classes, the unbanked and different geographies. Looking to the future, how will the open banking movement further fuel fintech’s increasing role? 

Fintech is a catchy new name for a sector that in fact boasts a substantial history of providing a route to finance. Technology was the driving force behind all major developments to financial services throughout the last century, from credit cards to ATMs to internet banking. It continues to be so.

As fintech leaders and decision makers gathered in London for the recent AltFi Summit, one thread of discussion was how 21st century fintech – P2P/marketplace lending, robo-advisors, equity crowdfunding platforms et al – has further opened up access to financial services.

Is it really all about democratisation and the fight for underserved customers? Or is it more about serving current customers in a more effective way? This was a prominent theme throughout the day, and the subject of a lively panel discussion featuring some of the sector's top thinkers.

Driving returns

On the investor side, fintech is certainly increasing access to better returns for the masses.

Speaking at the event, RateSetter’s Rhydian Lewis stated that P2P lending is helping yield-hungry retail investors to make their money work harder. “People tend to focus on the borrower side as underserved, but on the lending side it’s underestimated how difficult it is for normal people to access returns,” he said.

Lewis believes that P2P lending is bringing a new higher-yield asset class into play for those who would usually go through an asset manager or brokerage. The platforms have helped to create a multiplicity of access points, with individual access possibly the most fundamental creation of the fintech revolution.

Didier Baclin of Zopa agreed, pointing out that, more than 10 years after his company introduced the concept, P2P lending is still radical in the way it provides access to both borrowers and lenders: “We’re providing great value and better customer service. We see people who have used different platforms but are attracted back by Zopa’s record.”

A path to new asset classes

Fintech has also provided the key for previously locked asset classes.

One area in which this is particularly true is property finance, traditionally the domain of institutional players. It was a closed shop available only through equity in a development company or through real estate investment trusts (REITs), not direct investments from individuals.

The proliferation of property platforms in the market have now applied the principles of crowdfunding to property investment, bridging and development loans, and mortgages – to the benefit of both borrower and investor.

These sites are proving especially popular with millennials, who have had their well-publicised struggles with property. According to a recent survey by UOWN, more than half (54 per cent) of those who invest in property crowdfunding are aged 18-30. Hold the avocados! This is in stark contrast to the demographics of other asset classes and demonstrates the accessibility that fintech can offer.

LendInvest Capital’s Rod Lockhart agrees that fintech is adding great value by accelerating exposure to real estate. Speaking at the AltFi Summit, he said: “We’ve revolutionised an asset class, opening it up to a broader base of investors. It’s inefficient for banks to provide property development loans, so we’ve stepped in to offer loans for property developers and have used technology to improve the broker and borrower journey.”

James Codling, who co-founded equity investment platform VentureFounders, talked about fintech providing a ‘smoother’ customer journey.

He believes that scale-up equity is a badly underserved area, characterised by fragmented angel investor networks that are spread too thin. Despite a plethora of government initiatives trying to remedy this, Codling thinks that fintech is now best placed to provide the solution.

“We’re professional and we’ve brought structure to it. We provide a venture capital fund on a platform that you can access with £1,000, rather than £250,000 through a straight venture capital fund,” he said.

Searching for optimum prime

It’s clear that fintech has provided a much-needed shot in the arm for investors, but one accusation levelled at the sector is that it’s only helping prime borrowers, whilst those classed as sub-prime remain isolated.

According to Lewis, this is a common misconception. “At Ratesetter, we’ve opened a targeted portfolio of prime and sub-prime. We provide a balanced portfolio of loans for our investors, and so long as the risk of different markets is priced appropriately, then it’s fine. We respect all borrowers,” he said.

Baclin added that Zopa traditionally focuses on prime, low-risk borrowers – but this is changing as its business model evolves: “As we launch credit cards, we’re opening up to sub-prime borrowers. We’ll lend a smaller amount and then assess how the borrower manages the credit. Then we can offer them a wider range of products. One step at a time to ensure affordability.”

Of course, Zopa must secure a full banking licence to go down this route. Chief executive officer Jaidev Janardana has previously stated that a banking license allows Zopa to build a fairer bank, which for him centres on an alignment between the incentives of the bank and the customer. Zopa’s development highlights how fintech is prompting a shift from banks to banking.

One note of caution, echoed by a number of the speakers, is that fintechs can’t be seen as an easy place for banks to dump risk. As they become larger and more competitive, it's imperative to help consumers move away from bank-first thinking and not be seen as the provider of last resort.

It’s perhaps a fair assertion to say that the platforms have had to be careful regarding borrowers to this point, while building the necessary scale and consumer trust. But now that they are more mature, they are in a much stronger position to help the underserved. As Lewis suggested, “technology is changing the economics of distribution.”

And this is surely the aim of the government and regulators as they seek to encourage more start-ups to take on the big high-street lenders through open banking.

Creating a level playing field

Open banking kicked off in the UK in January 2018. It mandates the major banks to share their data with third party financial service provides in a move that is heralding an age of enhanced transparency and competition.

These landmark reforms follow an in-depth 2016 investigation by the Competition and Markets Authority (CMA) into retail banking. The much-publicised resulting report found that barriers to entry for smaller and newer entrants made the banking landscape much less competitive. An overhaul was desperately needed.

The report laid the foundations for open banking, which requires the incumbents to share customer information, provided they have permission, with fintech challengers, amongst others.

The ultimate aim is to leverage open API technology to improve the range and quality of products and services on offer. One intended consequence is that there will be bespoke solutions tailored to customers based on their past financial behaviour – accessibility that suits their situation.

Fintech created the door that open banking has entered through. Baclin believes that open banking can now help the sector in terms of affordability, shining a light on borrower circumstances so that the platforms can make an informed suggestion about what the right product is for them. “As customers give us their bank details, we can make smarter recommendations,” he said.

This goes wider than the UK. The open banking movement is possible through the EU’s Second Payments Directive (PSD2). This new, or rather updated, regulation will ensure that the European market is transparent, competitive, and – importantly – secure. PSD2 enables bank customers across Europe (both business and consumer) to safely use third parties to manage their finances and improve their experience.

Panellists noted that fintech was less developed in smaller markets, such as Ireland and Denmark, due to underdeveloped financial infrastructure. By enabling third parties to layer new financial services on top of banks’ existing data and infrastructure, PSD2 opens up more opportunities for fintechs across Europe. It increases the reach.

Further afield, there is a government review into open banking underway in Australia (as well as a fresh new fintech agreement with the UK). Meanwhile, the Monetary Authority of Singapore (MAS) is busy encouraging financial institutions to adopt APIs to further drive innovation, customer protection and transparency. The Hong Kong Monetary Authority (HKMA) also recently launched an industry consultation for an open API framework.

The open banking movement is fast becoming a global phenomenon.

An era of collaborative innovation between banks and fintechs

There is no question that open banking and PSD2 will massively strengthen fintech. The new environment created by this regulation allows fintechs to play a larger role in the future of the financial services industry. Importantly, it allows them to provide previously underserved consumers access to an enhanced suite of financial products.

The banks, in turn, will need to rethink their relationships with fintechs in order to stay relevant to their customers. To date, ‘collaboration’ has been characterised by the acquisition of promising fintech firms or partnerships, which enable a bank to offer a white label product developed by the fintech.

Moving forward, there will need to be true collaboration.

Customer-focused collaboration which draws on the strengths of bank and fintech to provide people with better products and solutions – and better access. Expect new friendships to form. And quickly.

All main-stage sessions from the Summit may be viewed here.