US Treasury FinTech Report: A major shake-up or Open Banking FOMO?
by Martin McCann, CEO of Trade Ledger™
The United States is the global leader in financial services and innovation, and the Administration’s policies are designed to maintain and enhance America’s competitive edge and open business environment.
This was the opening line from the US Treasury as part of a new report on proposed changes to the US banking & financial services industry. Whilst many may agree that the US does indeed have a booming financial services sector at present, the reality is that many other countries around the world are now making a significant transformational push towards a more progressive and competitive financial services industry – one that could be the catalyst for not just leapfrogging the US but also creating and nurturing home-grown companies that compete with some of the world’s largest technology players.
Some of the most notable programmes are in Europe with the Payment Services Directive (PSD2), in the UK with Open Banking and in Australia with their more ambitious version of open banking due for delivery in July 2019. We’ve also written previously about a number of other countries that are now starting to scope similar programmes including Mexico, Japan, India, Canada, Singapore, the list goes on!
These local regulatory mandates aimed at promoting competition and better consumer outcomes are now causing a stir on a global level and prompting countries that may never have dreamt of getting these regulations through into law, to think twice about how much of a competitive advantage this could provide when you’re looking to boost domestic productivity and output alongside driving new growth through exports on the global markets.
Since the financial crisis, “a proliferation of technological capabilities and processes” seen predominantly in the fintech sector has developed “increasing levels of cost effectiveness and speed” by digitising historically manual processes.
The Treasury’s recommendations in this report aim to “Embrace the efficient and responsible use of consumer financial data and competitive technologies” – i.e. Open Banking.
There are two primary reasons I suspect, which have prompted this reaction, the first of which relates to a number of very high-profile incidents relating to data security involving some large US based companies and a large swath of the US population. Whether it’s a large data breach, misuse of data by social networks or indeed the sale of data on the black market, the treasury is now realising the need for companies to be more responsible with consumer data which has resulted in a recommendation to “set a national data security and breach notification standard, to permit consumers to withdraw prior data authorisations, and develop more secure data sharing methods”. We can draw significant parallels between this recommendation and the General Data Protection Regulations (GDPR) in Europe and the Consumer Data Right (CDR) in Australia where consumers are being given increasingly more control over their data. Crazy when you think that many American businesses will laugh at you when you suggest that in Europe, control over data is now classed as a human right.
The second, can be traced directly to the increasing need for the US economy to become more efficient and productive across the board. The US is still experiencing very low unemployment rates and high consumer confidence resulting in sustained growth but with increasing trade disputes overseas and increasing inflation, the focus may soon turn to productivity.
Source: Tradingeconomics.com | US Bureau of Labor statsitics
In the financial services market this means creating significant efficiencies in the form of “better enabling digital communications, data sharing, and the use of cloud computing and machine learning”.
Again, we can draw major parallels with other global territories that are more proactively exploring new enabling technologies that may create domestic efficiencies such as Application Programming Interfaces (APIs), Robotic Process Automation (RPA), Artificial Intelligence (AI) and Distributed Ledger Technology (DLT) none more so perhaps than in Asia.
The US has always performed well on the global stage with financial services exports however it doesn’t come anywhere close to the UK. In fact, the UK is the world’s leading net exporter of financial services, with a trade surplus of $77bn (£57bn) in 2016 nearly twice that of the next leading country, the US, at $41bn (£31bn) and more than both the US and Switzerland (3rd on the list) combined.
The UK financial services sector is a clear front runner in terms of exports but with Brexit creating significant inertia for many UK based FS providers, the government and treasury have not been keen to rest on any laurels and, stemmed by support from the competition regulators; a booming fintech sector; and a wave consumer lobbying groups, are now again leading the world in their progressive approach to regulation such as that of the CMA’s Open Banking programme and the FCA’s regulatory sandbox which now has plans to expand this on a global scale.
Hot on the heels of the UK are the Chinese who have had state ownership as the driving force behind their financial services sector and a distinct lack of competition has meant this dominance has been prolific in standardising financial services across nearly their entire population of 1bn+ people. Chinese giants like Alibaba are now casting their eye overseas and looking to turn their world class domestic financial technology sector into one of their largest exports.
This is scary when you consider the size, scale and financial clout of these mega-fintechs where recently Ant Financial raised $14bn dollars in one single fund raise, the largest in history which valued the fintech at $150bn – just one affiliate of the much larger Alibaba group. In the coming years, it now aims to reach 2 billion consumers globally with its payments network, backed by investments and strategic partnerships with Southeast Asian payment firms as well as tie-ups in South Korea, Japan and India.
Given these plans it may be no surprise that a trade war has started to raise tariffs on goods and services that threaten some of the US’s most lucrative assets and exports.
Open Banking FOMO
In summary, there may be more to this treasury report than first thought. My summation is that the US are keeping a very close eye on global shifts towards more open, digitally enabled and technology led financial sectors. We may still be waiting a while to see any of these proposals move into law, however its clear to see the US have moved progressively forward in their thinking on embracing consumer empowerment and technology as a catalyst for growth. Given the global landscape on things like open banking has progressed so far in recent months, there is almost no doubt that the US is now playing catch up to the rest of the world and their fear of missing out on the greatest paradigm shifts in financial services , post the advent of the internet, has undoubtedly triggered, an initially reactionary, response.