Brexit and the future of digital banking
As the dust settles after the UK’s rather unexpected decision to leave the European Union, at Mapa we are looking carefully what Brexit means for us and for our clients.
There is unsurprisingly a great deal of uncertainty in the financial markets and around how exactly the UK’s withdrawal will play out. We expect that while there will be some initial anxiety in banks, in time we will actually see that these institutions are in fact going to be resilient to any dramatic economic volatility. The Basel capital requirements, the broad ranging reform of banking law and regulations, and the FSCS mean banks are robust and customers are unlikely to see them as unsafe.
However, banks are going to have to make some big strategic decisions very soon. The core issue is regulation. While we do not expect a great change in the sentiment or purpose of financial services regulation, the cost of transitioning to new legal frameworks will be significant. We expect that banks will anticipate major compliance costs that will affect their ability to spend elsewhere. Alongside this cost pressure Brexit could also damage revenues if there is a downturn in the economy. In short, banks are going to be looking at how they can further streamline and reduce the costs of their retail businesses.
The knee jerk reaction would be to say that we might see a massive reduction in tech spending and especially in the consumer-facing digital space. However, what is more likely is that rather than looking away from digital they are in fact going to (at last) fully embrace it as they seek to lower costs. Indeed, Brexit may accelerate the existing move away from high street banking and the focus on reducing branch costs.
Looking to the longer term it will be interesting to note the impact on revenues. Another trend that Brexit might accelerate, alongside digital development, could be the end of free banking services. This could be a reality if there is significant reduction in economic output, higher prices and a reduction in the availability of credit, which could see saving deposits reduce. A great deal depends on how the Bank of England responds.
So, it’s not all doom and gloom and in a way Brexit might just push retail banking toward a place it was already headed to. However, it is also very apparent that we might have lost something very important.
In the last year there has been a great deal of excitement about PSD2, a major piece of European legislation that would require the opening of banking to third parties and could have driven us toward a significantly more competitive financial services environment. Forcing banks to give access to customer information and allow third parties to act on a customer’s behalf would have had major implications. Now we need ask: will we still get this kind of open banking?
Will London remain a FinTech capital? Additional commentary by Jess Morley:
“I believe it’s not just whether we will have to sign up to PSD2 that matters but what PSD2 represents. It is designed to encourage competition. London has been lucky enough to be seen as one the global hubs for FinTech innovation over the last few years, I can’t help but think that its role as such might diminish. This is because most modern company founders don’t just aspire to have a successful local business, but to have a successful global business. Start-ups like Revolut and Monese might be tackling the UK market first, but they have made it very clear that their intentions are to take their concepts across the UK’s island borders. The EU is the one of the world’s largest trading blocks, and accessing that market is critical to any start up success, so conforming to its rules will be a prerequisite. It is here that the UK will potentially suffer. Having left the EU and removed itself from contributing to the shaping of the EU rules, the UK runs a risk of having to conform to regulation that is crafted by contributors with a different agenda to its own and that may disadvantage us.”
In or out, regulation is still a fundamental of what drives the industry and determines what can or can’t be done. What that looks like without potential UK influence remains to be seen.
What we expect is that we will see a short period of stagnation in investment in banking technology. However, in the longer term we hope that the drive to digital will continue. We just need to hope that the banks wrote the risk of Brexit into their investment and digital strategies.
Nonetheless all most of us can do now is wait and see. The ball is in the court of European Union leaders and our own political leadership.