It's not hyperbole to say that 2018 is set to be one of the most interesting and potentially transformative years for the banking industry since 2008, as open banking regulations come into force across the UK and Europe.
The introduction of open banking, and the second Payment Services Directive (PSD2) across Europe, in January will open the floodgates to competition, as third parties can start to get their hands on customer's transactional banking data to offer comparison services and new applications to let people manage and move their money online.
Whether you consider this an opportunity or a threat, there are real problems on the horizon too. There is uncertainty in the sector surrounding Brexit, the impending GDPR deadline and the ever-present danger of cyber attacks to contend with.
Aside from politics and regulation, there are some technological trends to watch out for in the banking sector in 2018 too, as banks continue to face competition from more nimble fintech startups and digital-native challenger banks.
Here are some of the biggest technology trends we expect to see in UK banking in 2018.
All UK banks will be forced to open up their data via a set of open APIs at the start of 2018. This will allow whitelisted third parties to access transaction-level data from customers once permission has been granted, and could cause a seismic shift in the industry.
The data being opened up will allow developers to securely view things like transaction history when applying for a mortgage, or to alert users that they are at risk of becoming overdrawn, for example. Really we won't know what innovative companies, or the banks themselves, will do with the possibilities of open banking until later in 2018.
As Anita Kimber, director of channel development and innovation at Nationwide said: "This greater control for customers over their data will perhaps be the most important change within financial services next year.
"However, we expect the impact of open banking to evolve steadily from January over the next 12 to 18 months, and beyond, as more members start to use the broad range of services which this will enable."
HSBC UK proved itself to be an early mover when it comes to open banking by announcing a new Beta app in September. This will allow customers to see all of their accounts on one screen, even if they are with a rival bank. The bank will do this through a new test and learn mobile banking platform ahead of introducing a new app for customers in early 2018. It will be interesting to see if other big banks follow suit.
Then there are startups like small business lender Iwoca, which is preparing for open banking so that it can start to offer lines of credit without forcing customers to manually submit bank statements. Reducing these sort of friction points will be a huge benefit to many fintech startups.
As Caroline Plumb, founder of fintech startup Fluidly said: “In the short-term you’ll see more frictionless financial experiences and faster, better access to financial services. In the medium and long-term it has the potential to be transformative and deliver new business models, new categories of business - true innovation.
"But this potential can only be reached if the ongoing implementation, regulatory framework, funding models and willpower continues to develop and that will not be easy.”
However, Nick Caley, head of financial services and regulatory at identity and access management specialists ForgeRock, believes the incumbent banks stand to benefit the most from open banking.
“While a lot of the discussion around PSD2 has been focused on how banks will be under pressure from tech-savvy fintechs competing for customers, it is often overlooked that retail banks do have considerable advantages over new players entering the market," he said. "The big banks have built up trust with consumers over decades, and they also have a huge amount of insight and customer data that they can use to inform their strategies and decision-making."
The European Central Bank has said that UK banks will have to build up operations in across Europe post-Brexit. This will help the banks hedge their bets as a final trade agreement still appears to be a far-off possibility.
Peter Roe from TechMarketView sees this as having a knock-on affect on banks' IT budgets. "Consequently, bank CFOs will be prioritising the needs of the European offices and downgrading investment in London. The ability to spend on IT will be further constrained by the rapid rise in salaries for people with experience in European operations and regulation," he wrote.
Furthermore, "London’s leading position in the burgeoning fintech scene will also be seriously challenged if the mobility of specialist labour or EU-wide regulatory passporting is constrained," Roe added.
GDPR and RegTech
The general data protection regulation (GDPR) can no longer be ignored by banks, which hold some of the most sensitive data on the planet, with the May 2018 deadline looming. Banks should already have their processes around the handling and managing of customer data in-line with the new regulations, but that is not a simple proposition.
As Roe puts it: "The lack of discipline over data management and the consequent proliferation and poor management of databases have left many organisations with polluted data lakes, severe duplication issues and insufficient signposting of where data is held. This requires substantial investment in data discovery, data base renewal and various work-arounds."
This could see a rise in adoption of so-called RegTech, tools developed specifically to help overcome regulatory challenges.
Sophie Guibaud, VP of European expansion at German online lender Fidor Bank, believes that “2018 is the year when RegTech really takes off, thanks to two key pieces of European-wide legislation coming into force: MiFID II and GDPR.”
“Due to the need to be fully compliant with these new rules, financial organisations will be looking at immediate options to help them decrease their regulatory risk and costs, while also improving the customer experience next year," she added.
"The new regulations will, in future, have a huge effect as financial organisations’ relationships with regulators will rely upon real time data to be shared to improve and speed up risk management and market stability, all through the power of APIs.”
Rise of the robo-advisors
Once the realm of startups like Nutmeg and Wealthsimple, established banks are starting to enter the robo-advice market.
Robo-advice is a slightly misleading term but generally it is the practice of using software and algorithms to replicate the work investment managers would traditionally perform, namely investing money in a portfolio with varying risk levels and then giving users mobile access to information about their investments.
Robo-advice tends to invest in relatively safe exchange traded funds (ETFs), which are bundled according to risk appetite and generally determined by a survey.
Asset management giant UBS launched its SmartWealth service in the summer, and retail bank Natwest launched a robo-advice service of its own in November, offering automated investments starting at just £500. We expect to see more established banks enter this market to democratise investing for their customers.
Asset management firm BlackRock’s Investor Pulse survey found that four in 10 millennials with savings or investments are aware of robo-advisers, which is the highest level of awareness among all age groups surveyed.
Commenting on the survey findings, Nick Hutton, head of the BlackRock UK retail sales team said: “For a generation that has often lacked financial confidence and has been hamstrung by immediate financial priorities, technology is empowering millennials to start thinking about their long-term financial futures by giving them access and information at their fingertips."
From 2018 UK banks will have to publish data on how many complaints and security breaches they have encountered for the first time, thanks to new rules introduced by the Financial Conduct Authority.
The previous year was rough for large businesses from Uber to Equifax reporting record-breaking customer data breaches, and banks will have to work harder than ever to avoid having their names added to this list.
The use of biometric information to verify banking customer's credentials is also due to continue in 2018. Barclays has long been keen on voice verification and rolled out biometric readers for corporate banking clients in 2017.
John Devlin, a principal analyst at P.A.ID Strategies said: "Any customer will prefer taking a selfie and snapping a photo of an ID credential using their mobile over a manual process that means taking documentation to a branch. The banks who are succeeding are offering identity capture and biometrics that allow customers to verify their identity remotely.
"Banks that don’t adapt now risk new customers abandoning the application process altogether in favour of a challenger bank using this technology. Furthermore, manual onboarding is costly, inefficient and prone to errors, increasing the scope for fraud."
Banks will need to be aware of the risks of biometric security though, as shown by the BBC's successful attempt to trick HSBC's voice security in 2017.
Blockchain use cases
Despite having a pretty progressive regulator in the form of the Financial Conduct Authority (FCA), the UK still lacks a regulatory framework for blockchain - the distributed ledger technology which facilitates crypto-currencies like Bitcoin. Some progress on this front would be welcome in 2018 if we are to see in-production uses of the technology.
The Bank of England itself is interested in the technology to transform its clearing processes - which underpin the major UK payments systems like CHAPS, Bacs, Faster Payments and Visa.
Guibaud from Fidor Bank believes that a shift away from dependency on cash will see a rise in blockchain adoption in the banking sector. “Despite the UK introducing new one pound coins and ten pound notes this year, we’ll see a further acceleration to a cashless society, not only in Britain but globally in 2018," she said.
"This profound shift in how people pay for goods and services will also have an effect on the rise in blockchain adoption. As all money can more easily be traced to its rightful owner and beyond government’s control, Bitcoin will continue to rise in popularity and also valuation.”
The rise of voice assistants
Banks are also experimenting with voice interfaces such as Amazon's Alexa skills, so expect to see some of these come online in 2018. In the US, Capital One has developed an Alexa skill which will tell you your balance and how much you spent the night previously, for example.