Regulators encourage competition in UK banking and payments sectors
Hot on the heels of last week’s fin.tech-themed Digital Sizzle, two important (and welcome) pieces of news from the regulators regarding the UK financial services.
Firstly, the FSA and the Bank of England have released their review of the barriers to entry into the UK banking sector. The key changes being introduced as a result of that review are a relaxation of the capital and liquidity requirements for new banks, and a reduction in the timetable for achieving authorisation, to six months.
As I wrote last week, the lack of innovation in the UK banking sector is the result of a lack of competition. Making it easier for new entrants to achieve the authorisation they need to start offering banking services should lead to greater competition and, indirectly, to more innovation, as the new entrants create service offerings that have a better product/market fit than the incumbent banks. For example, there’s a clear opportunity here for the creation of a new “branch-less” bank targeting SMEs who don’t need to handle physical cash or cheques. Once you remove the physical component from a bank’s business model, the cost structure changes drastically.
Secondly, HM Treasury has launched a consultation on “Opening up UK payments“, soliciting feedback on the government’s proposals for a “new competition-focused, utility-style regulator for retail payment systems”.
The brass ring for payments would be the introduction of a regulatory regime that makes it significantly easier for new payments schemes to plug directly into the UK payments infrastructure (i.e. Bacs, Faster Payments, the LINK ATM network), in the same way that the regulations supporting liberalisation of the telecoms market in the 1990s required that BT interconnect with new telcos, thereby attracting a slew of new entrants and spurring both competition and the development of new business models (e.g. Freeserve’s dispensation of the tradition subscription-based model for dial-up Internet access in favour of a model based on interconnect revenue). Such a move would create opportunities for companies like Transferwise and Droplet to reduce the friction caused by the “air-gap” between their services and their customers’ bank accounts.
These are significant steps forward for the UK and should ignite even more interest in the fin.tech space.