Bank concentration is a problem in many markets, but it is particularly acute in the UK where the Big Four control 77% of the consumer market and 85% of the SME market. Despite many attempts by government and the private sector for many years, nothing has changed. This research note outlines why this may finally be about to change thanks technology driven regulation.

Evidence from recent funding rounds that investors are sensing opportunity

Atom Bank $128 million

Starling Bank $70m

Mondo raises $1.4m on Crowdcube in 96 seconds 

(Demand was so high it even crashed the Crowdcube site as per reports on Business Insider!)

Tandem Bank gets banking license and goes on funding trail.
Recent IPOs such as Aldermore and Shawbrook and M&A such as the acquisition of TSB by Spanish bank Sabadell are further evidence of investor interest in this sector.

Deposits are the regulatory heart of banking

Banking is being unbundled. Lending is moving to Altfi, loan origination startups and Lending Marketplaces. Current accounts are going to Payment Banks and mobile services. Deposits are rightly highly regulated – the opportunity for fraud is very high. So a “full stack bank” has to include Deposits and that is where the regulations are tough.

Technology driven regulation is different 

We think of regulation as being rulebook driven. The regulator says you must do x. Banks say “that will take time because we have to develop the technology to support that”. During that time, lobbyists can work to tone down the regulation in the details. Lots of good intentions get lost during this process.

Technology driven regulation is different. This is where regulators say “here are the technology standards, go implement them”. The regulators have to be technically savvy enough to only mandate something that is technically feasible. They have to launch a regulation like a startup with good standards docs and a reference implementation. In EU terminology this is a Regulatory Technical Standard (RTS).

XS2A is the technology driven regulation that could crack open bank oligopolies.

XS2A (Access To Accounts or more formally Payment Initiation and Account Information Services) is part of PSD2, which was defined on 16 November 2015. It enables a third party provider (TPP) access to accounts held at Banks. For TPP read Fintechs and Challenger Banks. Basically it mandates that banks must provide access to customers of the Fintechs and challenger Banks. That is a big deal. It will reduce the dominance of a few big banks and open the market to competition and innovation.

For more on PSD2 and XS2A, go to this excellent explainer from Starling Bank (yes, a Challenger Bank in the UK)

The UK regulator, FCA, has a specific competition mandate. So even if UK does a Brexit, the FCA may cherry pick XS2A as good regulation. If so, the UK will be a market laboratory for consumer banking innovation and that will enhance London’s Fintech Capital status.

Challenger Bank version 3

Gross simplification alert – Challenger Bank innovation is moving to version 3:

• Version 1: Better branches, better service & better tech. An example is Metro Bank.

• Version 2: Digital only, old money. Almost all the Challenger Banks raised money the old fashioned way, on the insider’s circuit in the square mile (City of London)

• Version 3: Digital only, new money. This is where Mondo raising on Crowdcube is so groundbreaking.