Why banking needs more innovative regulation

The European Union is turning Europe into a playing field for FinTech entrepreneurs. In the post PSD2 world any accredited third party provider will be able to access the data of payment accounts whenever the owner of the account has granted the right to do so. Banking is in many ways an old fashioned industry, but the complete neglect of doing anything else with financial data that storing was surprising – to say the least. Other industries were growing vital thanks to exploiting such data sources, however, banks and other incumbents decided to not only to forego the opportunity to make use of them but also to limit access for others. Which is somehow proving, that banks know about the true value of financial data but at the same time declaring that oneself is not able to harness it, and thus, no one should. More entry barriers and protection were welcomed to make it even more complicated for outside players to enter the industry. The classical story of protectionism.

PSD2 is an incredible opportunity for every entrepreneur or industry outside player to  harness the true value of banking data. But somehow this feels like an invasion into the property of banks for some people. In their opinion the European Union is putting FinTech startups above banks with forcing banks to provide every accredited third party provider access to the financial data of their customers. Other industries have never been forced to do so, why should banks is their argument.

XS2A is not about banks

Banking is necessary. Average Joe can not live his life without a bank account and depends strongly on the banking industry. Some might argue that inventions like Bitcoin will change this, but this is very long down the road – if at all. In today’s world Joe Average would not even be able to find an employer to pay him his salary without a current account, and we are not even talking about paying his rent, electricity, internet or parking tickets. There is no alternative to having a bank account, the only choice is the selection of a bank.

Building up on that point, banking differs also because it touches every single part of our lives. Banking is not just about finance, but an industry that affects so much more. Convenient payment methods allow whole industries to grow, smarter investment services lead to more capital available for investments and financial education can foster a whole economy. Banking can hold all of this back or support it. Therefore, innovation in banking cannot only improve the way how we bank but also our living standards as people in general.

All of this is might not be sufficient yet for the regulator to step in. However, the banking industry has proven successfully in the last decades that innovation, and thus change, has to be avoided. As it applies to many other industries, incumbents do not have any incentive to innovative and change status quo. But entering the financial service industry requires to overcome high entry barriers ranging from capital to legal requirements. Innovation is inevitable coming from outside but the financial service industry was designed to make life hard for new players. The new PSD2 solution makes it now easier for new players to enter the industry and provide new services on existing rails.

The industry needs a push

We have seen whole industries being disrupted by the usage of new technologies and mindsets, but the financial service industry was always lagging behind. PSD2 is not forcing a dramatic revolution in the industry but it is rather a controlled push for all players into the right direction. Also banks and other incumbents had to miss out many opportunities since customer data was not accessible for them. The fact that more and more banks are making use of open banking opportunities is a strong indicator for this. PSD2 is not an attack on banks but a push for the banking systems as we know it. The industry is just too important to leave innovation to just themselves.

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