How client data sharing rules will destroy current providers Wednesday 25 Nov 2015

Changes to European Union payments directives could “screw over” established financial services firms, as they let more tech savvy disruptors have access to client data, according to a tech innovator.

Speaking to FTAdviser, Andrew Tarver, who used to build algorithmic trading platforms at UBS, explained that incumbent banks, asset managers and insurance companies have a wealth of customer information, but barely use any of it to personalise their products and services.

He argued that these established providers need to watch out, as the new payments directive may give rivals access to client data, which has the potential to “screw over financial services companies”.

Currently, he said start-ups have to try and get information by scraping websites, which is very time-consuming, but with standardised APIs [application programming interfaces] appearing soon, that could all change.

Mr Tarver, who spent four years building low latency technologies for Bank of America Merrill Lynch, but last year founded his own start-up called Boldrocket, which aims to use personal data to better satisfy customer needs and ensure suitability, said: “I used to spend a huge amount of my time on building predictive macro trading, but hardly any on what actual individuals are doing.

“The robo-advice focus is following the same path. Most models seem to be focused on automated trading and rebalancing, rather than getting a better idea of changes to individuals and how they impact suitability.”

He pointed to the new Payment Services Directive - agreed in the summer by the European Parliament, European Commission and the Council of Ministers - as a potential tipping point between the tech-savvy and the traditional in financial services.

Much like Solvency II or Mifid II, it is in fact the second iteration of something initially adopted some years ago. Crucially, the new version introduces a legal framework that supports access to accounts and prohibits banks from blocking such access other than for “objectively justifiable reasons”.

The directive is due to be implemented in December 2017, so banks have two years to prepare for the changes, which will allow third party access to accounts. Until that date, the rules will be refined but most of the initial discussion has been around Application Programming Interfaces.

APIs are foreseen to allow all Payment Initiation Service Providers and Account Information Service Providers (AISPs) to share banks client data.

John Salmon, financial services sector head at Pinsent Masons, explained until now AISPs have had to make do with ‘screen scraping’ to collect information, but now the possibility of aggregating data from various accounts and providers through one portal is becoming a real one.

“One concern raised by the banks has been that AISPs are not subject to the same capital requirements, so what happens if they haven’t put in the security infrastructure to protect all this data they’re getting?” he pointed out.

“To be fair, many of the banks are actually quite keen on this, as they often struggle to share data across their own departments, plus they can also get access to other firms data, which could help them move back into wealth management and pensions,” added Mr Salmon.

His colleague and lawyer for Pinsent Masons’ Out-Law website, Luke Scanlon, also noted the UK government is set to publish a paper by the end of the year looking into open APIs, which are the driving force behind the Open Identity Exchange and Gov.uk’s Verify project and in turn may power theTax Incentivised Savings Association’s project to create an industry wide financial services digital passport.

“This will mean richer data for deciding suitability, possibly in real time, which could help bridge the advice gap,” Mr Scanlon added.

Gemma Godfrey, founder and chief executive at soon-to-be launched online wealth manager Moo.la, argued banks need to invest in their digital capabilities or collaborate with the potential disruptors.

“High costs and legacy technology will hamper an ability to keep up with new players in the market, able to provide services cheaper and designed around what they customer truly needs.

“The ability for new players to utilise customer data more effectively also means banks’ strategy of cross-selling other products is under threat, as customers are recommended products from other providers that better meet their needs.”

She also stated that transactions once reliant on banks to facilitate them can now take place between people and institutions without involving them at all.

Her message to the big incumbents is to “build what people want rather than what you want to build, solving a need rather than selling a product”.

By Peter Walker, published on the FT Adviser website on the 24th November 2015

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