The future’s bright…the future’s ‘fintech’. This phrase is radically changing the way we do business in the 21st century. The traditional model of going to a bank for financial services is being replaced by a new breed of third party financial service providers that aim to disrupt the status quo and radically change the way we pay for goods and services.
Fintech (also known as Financial Technology) is usually applied to the technology start-up scene that is disrupting financial services such as mobile payment, money transfers, loans, fundraising and asset management. These services are currently monopolised and controlled by the banks, as well as access to customer data for such services. However, days of the banks’ monopoly in financial services may soon be over. There is a desire for greater innovation and competition in banking. In the UK, the Competition and Markets Authority (CMA), the regulator that promotes fair competition for the benefit of consumers have demanded that UK banks accelerate technological change and move towards open banking.
Open banking is the idea that UK banks will have to shift from being the sole provider of financial services and provide open platforms to third party financial service providers. This would give customers direct access to personalised financial services which are tailored to meet their individual circumstances. The introduction of the revised Payment Services Directive (PSD2) which must be implemented by 13 January 2018 is set to aid this change. PSD2 will break down the bank’s monopoly on their customers’ data. It will require banks to open account data with third parties, including retailers and financial technology groups who can then make payment without redirecting their customers to another service like PayPal or Visa.
For customers with more than one bank account, PSD2 would allow third parties, known in the Directive as Account Information Service Providers (AISPs) to display all their account information through an Application Programme Interface (API). It will enable bank customers, for example, to click on an app that will direct them to the bank account which offers them the best deal. An example of this is the financial service offered by Mint in the USA (see https://www.mint.com/).
The rise of fintech has resulted in incumbent banks working with technology start-ups to reduce costs. This has generated additional work for law firms, particularly with regards to regulation. Take for example Blockchain technology that forms the basis for cryptocurrencies such as Bitcoin. Bitcoin is now being applied to a wide range of activities across the financial services sector such as clearing and settlements, trade finance, asset ledgers and personal identity verification. Lawyers will be asked to advise on how this new technology fits in within the existing legal and regulatory framework and if any changes need to be made. Such regulatory and legal clarity would enhance the creditability of Blockchain technology.
Fintech is not just a US or European phenomena; the Chinese are also in the game and are becoming strong leaders in fintech. Chinese banking has been growing at an exponential rate, helped by the widespread use of the smartphone, 700 million internet users and tech giants such as Alibaba and Tencent which have incorporated payment systems into their online platforms. The world’s second-largest economy is showing that it can compete with the United States and Europe in fintech. China topped the global rankings in the world’s leading fintech innovators for 2016. Chinese fintech companies featured in four of the top five and eight of the top 50 companies. The UK has a lot of work to do if it wants to compete with the likes of China. Atom Bank was the only UK fintech company to feature in the top 10. As China continues to open itself to the world, UK corporate and commercial law firms stand to benefit from the advice Chinese fintech companies will need on financing, intellectual property matters, technology issues, and regulation. Therefore, law firms will play a key part in driving fintech business plans and innovation.
Although fintech is playing a larger role in financial services, let us not write off the banks just yet. Banks will continue to play a leading role in financial services for some time to come. But there is no doubt, fintech is an upcoming revolution that will radically change the way we think about money. Watch this space!