Welcome to the sixth installment of TechREG’s series on open banking. In this series, you’ll find everything you need to know about how banks and FinTechs share data, what are the main risks, use cases and more.
Open banking regulations refer to a legal mandate where banks need to share customers’ financial data with third-party providers (TPP). These TPPs are usually FinTech companies that are registered and authorized to access that data, as long as consumers gave their consent.
When regulators decided to enact regulations to level the playing field in the banking industry to introduce more competition, they were very careful to include only financial institutions and payment or account service providers. However, they willingly didn’t extend the right to access this data to the big internet giants.
Yet, both financial institutions and TPPs are facing a constant threat that Amazon, Meta, Google, Apple or another company will decide to offer more financial services — with or without access to consumer’s bank accounts data.
From a regulatory point of view, it is unlikely that countries like the U.K or Europe will include in the new regulations — or in the possible amendments to existing open banking regulations — provisions that will enable Big Tech to have access to this data.
However, it is also unlikely that these companies will be formally prohibited from offering certain financial services. That means that if they want to offer more services in this space, they may need to apply for banking licenses, comply with other financial regulations or partner with banks, but they could continue offering some services, as they are doing now.
The same could be applied for the U.S. and countries where open banking is market-led, without any formal regulation that mandates access to data. The limitations for Big Tech companies may come from specific FinTech or tech regulations, like in China, rather than from open banking ones.
Therefore, open banking regulation may neither help, nor hinder, Big Tech in their plans to step into the FinTech space. Most of the internet giants have either already launched digital wallets or credit services or are trying to enter the payments space.
It is well known that Meta has been trying to launch a digital currency, first with Diem and then with the stablecoin pax dollar through its Novi wallet for WhatsApp users.
Amazon provides lending services for its business partners, and both Apple and Google have their own payments systems. However, even other companies like Uber or Spotify could explore new ways to offer riders or artists some type of financial services within their apps.
Banks and TPPs have been trying to find out for years how to approach this “frenemy” relationship between themselves, deciding whether it is better to partner with each other or to develop capabilities in house, or even if acquisitions are the best route.
But, they may not have paid sufficient attention to the threat coming from Big Tech companies. This is because none of the two parties found a solution to their main problems when it comes to FinTech.
For instance, banks have struggled to benefit from innovations with legacy IT systems that complicate any major update, while FinTechs have struggled to get clients without brand recognition and reputation. However, Banks and FinTechs have found different ways to solve their differences and collaborate to fix that problem.
Big Tech firms have the reputation, the technology and the consumers’ data to decide which strategies they want to follow without any other player getting involved. Regulators could step in to pump the brakes only if they find evidence of any anti-competitive behavior, but this could take years and the result is uncertain.
Thus, this threat from Big Tech firms may encourage banks and FinTechs to strengthen their relationships, given that they have more to lose to Google and Amazon than to the new competitors in their usual turf.