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New banking industry regulations spur competition and innovation

Blog: Capgemini CTO Blog

Following the sub-prime crisis, banks faced stringent regulations and heightened scrutiny. In parallel, emerging FinTech players were facing high barriers to entering the banking industry. Increased regulations meant little time for incumbents to consider innovation because resources were earmarked for regulation compliance, while agile newcomers were building a reputation on creativity and customer experience.

Today, as the industry increasingly embraces all things digital, more and more traditional firms and new players realize the business value of working together strategically to collaborate, share best practices, and innovate.

Traditionally, the banking industry was highly concentrated. In fact, in some countries, market share was distributed among two to four players. Within this concentrated scenario, however, customers faced issues around quality, variety, and accessibility because of the relatively low priority placed on innovation and customer experience.

With an eye on opening markets, increasing choices for the customer, and beefing up industry competition, regulators around the world pressured traditional banks to think and work differently.

Regulatory mandates forced banks to open their closed systems to new players to increase competition and instill innovation through openness, which created opportunities to build and distribute innovative products while offering customers transparency and security.

The EU’s Revised Payment Services Directive (PSD2) requires banks to give Account Information Service Providers (AISPs) access to bank account information and to allow Payment Initiation Service Providers (PISPs) to initiate payment transactions. By enabling customers, consumers, and businesses alike to use third-party providers to manage their finances, PSD2 removes the monopoly banks once held over their customers’ account information. Moreover, by providing third-party providers with access to consumer banking data, a host of new financial products and services can now be built on top of existing bank infrastructures, giving customers greater convenience and control of their payment options through a single service.[1]

Australian regulators are following suit, and last year announced an overhaul of the country’s financial system and a comprehensive package of reforms to strengthen accountability and competition – including the use of application programming interfaces (APIs) to facilitate the sharing of customer and small business data.[2]

Removal or relaxation of entry barriers has spurred the growth of new players by fostering a safe environment to innovate and gain ground in the banking value chain. A variety of innovation labs, FinTech sandboxes, and new FinTech platforms have been springing up, globally.

In Singapore, the Monetary Authority of Singapore (MAS) built a FinTech Innovation Lab in 2016, and relaxed some regulatory requirements to give FinTechs the flexibility to innovate in a responsible environment.[3] Likewise, a regulatory framework for FinTechs in Japan was set up to support progress and development in this sector.[4]

In Australia, regulators are relaxing the ownership cap, removing restrictions on the use of the word bank, and introducing an enhanced regulatory sandbox.[5] And, in South Korea, the Financial Services Commission (FSC) opened a FinTech Open Platform to encourage startups throughout the country.[6]

Regulation Fosters Banking Industry Innovation

Regulation Fosters Banking Industry Innovation

Source: Capgemini Financial Services Analysis, 2017

With increasing competition and decreasing margins, banks have prioritized process digitization and are outsourcing larger pieces of the value chain in their middle- and back offices to improve cost/revenue ratios.

Banks are investing in innovation and vying to collaborate or partner with the hottest new players to develop innovative products and services, improve upon digital offerings, and extend their reach into untapped markets.

Not surprisingly, traditional banks also are acquiring, or investing in, FinTech firms and digital-only challenger banks. This new environment offers a win-win situation through which new players learn to thrive in the banking value chain by becoming platforms and marketplaces as incumbents diversify their product portfolios.

The big winners? Customers, who gain a wider variety of offerings while being assured of data privacy and security thanks to regulatory mandates.

Indeed, banking regulations triggered an industry sea of change to promote stiffer competition and a shorter innovation cycle. However, for the full potential of this disruption to be realized, incumbents and new players must continue to push their internal and external boundaries and explore new opportunities to better understand and fulfill clients’ needs and expectations.

Find out more in Top-10 Trends in Commercial Banking 2018, a report from Capgemini Financial Services or connect with me here.

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[1] Capgemini, “Top 10 Trends in Payments 2018,” December 2017, https://www.capgemini.com/wp-content/uploads/2017/12/payments-trends_2018.pdf

[2] ComputerWeekly.com, “The dawn of open banking in Australia,” Andrew Brydon, April 23, 2018, https://www.computerweekly.com/news/252439063/The-dawn-of-open-banking-in-Australia

[3] Ripple, “How Regulators Can Help Drive Innovation,” Ryan Zagone, July 27, 2016, https://ripple.com/insights/regulators-can-help-drive-innovation

[4] Mazars Financial Services Blog, “FinTech in Japan: a regulatory framework on the move to support a strong development,” June 5, 2017, http://financialservices.mazars.com/fintech-japan-regulatory-framework-move-support-strong-development

[5] OpenGov Asia, “Australian government announces several measures for promoting FinTech innovation and growth,” PRIYANKAR BHUNIA, October 27, 2017, http://www.opengovasia.com/articles/7586-australian-government-announces-several-measures-for-promoting-fintech-innovation-and-growth

[6] Crowd Fund Insider, “Korea Financial Services Commission Launches Fintech Open Platform,” JD Alois, August 30, 2016, https://www.crowdfundinsider.com/2016/08/89655-korea-financial-services-commission-launches-fintech-open-platform

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