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The UK retail banking industry has, to a large degree, been shielded from the wave of digital disruption seen in other sectors in recent years, protected by stringent regulations governing the sector. Attempts by the UK regulators to level the playing field have had muted success, such as the Accounting Switching Service, while a new breed of digital challenger banks, attracted by a lower barrier of entry, are yet to show they are truly capable of usurping any of the established lenders.

This is set to change, however, with the UK's incoming Open Banking regulations.

The UK's Open Banking plans, aligned with the European Banking Authority's PSD2 directive, require retail banks to open customer data to third parties via APIs. The aim is to provide users with better services and greater choice by enabling a wider ecosystem of services based on customer information. Although there is some disagreement over the timing, UK banks will have to comply with both regulatory frameworks early next year.

The initiative has a range of potential benefits for bank customers. Essentially it will mean greater control over their data. For example, this could mean the ability to quickly and easily compare services between providers, or the creation of new services by third parties. It is an opportunity for fintech startups to provide services that were previously not possible due to the banks' monopoly over this information.

Clearly banks, for whom data customer data is an absolutely vital asset, are typically not keen to offer this information up for free. Fintech firms have complained that there is a watering-down of PSD2 plans at the behest of the incumbent lenders.

And there is good reason for this perceived opposition to new legislation.

A new report (subscription required) from TechMarketView claims that "banks face a major, indeed existential, strategic disintermediation challenge" as a result of Open Banking and PSD2. The report references research from service provider Accenture, which last year highlighted that lenders could lose up to 43 percent of card payments income due to the incoming regulations. 

This is just one of the potential difficulties faced by banks as the doors are opened to third parties.

"The digital revolution means that the historical stranglehold of the banks on financial services provision is both unnecessary and undesirable, and an 'Uber of banking' type transformation is a realistic scenario," said analyst Richard Johnson, who authored the TechMarketView report.

Not all banks will be inclined to embrace open banking, and as TechMarketView points out, UniCredit's CEO has indicated that the Italian firm will be content to provide the 'plumbing' for financial services. Yet it is unlikely that there is appetite for many other lenders to take the route of becoming a 'utility' and would prefer to provide higher value services.

However, as Johnson says, this does not necessarily mean doom and gloom for the incumbents, provided they embrace the changing status quo. And there are indications that banks are increasingly open to the possibilities of data-sharing.

According to Temenos' annual TCF report, which surveyed 235 senior banking execs, 69 percent of respondents see open banking as an opportunity rather than a threat. This is compared to 52 percent the previous year. At the same time, 38 percent are happy to support third party providers on their own banking platforms, which while still relatively low is higher than the previous year (29 percent).

According to V.S. Raj, Head of Financial Services at outsourcing firm Syntel, large banking institutions face the same challenge that telcos have been grappling with since they were forced to open up their own networks.

"The big question now is how big banks can pivot from merely being a conduit for customer data to becoming a challenger to the innovative fintech companies looking to chip away at their customer base," said Raj in an emailed statement.

Although there is scepticism from the industry – such as around security implications – it is clear that the big banks are preparing the address the changes that Open Banking and PSD2 will bring. At a recent roundtable event in London, Kevin Hanley, director of design and services at RBS said that the bank wants to position itself as "the bank of APIs".

"You see the disaggregation of banking services, the disintermediation of banking services, banking becoming more unbundled, more modular," he said.

"We are moving from an era of physical banking to a connected bank of digital services. This starts to re-frame banking and our role in it as much more of a composite where we both provide services and link to other services. So we become a platform for our customers to navigate around."

Ultimately it will be those that embrace the changes which benefit most, opening up to the ability to innovate at a greater pace. As the TechMarketView report states, "there is a bright future for those that can shift from the historic 'prison' paradigm ('people can't go anywhere else') to become more of a 'hotel' ('people choose to come here because we give a great service')."

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