Allie McGowan

Increased use of digital banking

Although bank branches have not closed as a result of the UK lockdown many branches have significantly reduced their opening hours. Understandably, there is also a reluctance from customers to visit bank branches unless necessary. Recent research from Virgin Money shows that since the lockdown in the UK almost 3 in 10 people have downloaded a mobile banking app. It is thought that the majority of these new digital banking users are in the over 60 age group. In addition to this just over 4 in 10 digital banking users have been using their banking app more frequently during lockdown than they did before it began.

It may come as a surprise to some that challenger banks in the UK have however suffered a significant drop in app downloads. This could be due to traditional banks having increased the functions on their digital banking apps or perhaps the reluctance of some customers to move from traditional banks in these challenging times.

Shift in payment methods

With fears that banknotes could potentially spread COVID-19 the World Health Organisation has encouraged the use of contactless payment methods. Indeed, some businesses are currently refusing to accept cash payments. To reflect this shift to contactless payment, the limit for contactless card payments in the UK was increased on 1 April 2020 from £30 to £45.

Another method of payment is using contactless payment apps or Apple Pay where the £45 spending limit does not apply. These apps allow users to make larger contactless purchases. Some apps do apply their own limits on spending, for example Barclays supports contactless payments on Android devices within its own mobile banking app for purchases up to £300. The drastic shift to contactless payment methods has resulted in reports that COVID-19 marks the real beginning of the end of cash.

Increased acquisitions of fintech companies

Considering the increased use of digital banking and contactless payment methods we expect that traditional banks and challenger banks will continue to apply tech to adapt both their services and products in order to facilitate their customers’ needs. Investment into UK fintech has however fallen dramatically during the pandemic and we therefore expect an increase in acquisitions of fintech companies by traditional banks.

Increased technology risks

The increased use of technology results in the potential for increased technology risks. According to VMware Carbon Black data from February to April 2020 cyber attacks against the financial sector increased by 238 per cent. Banks require to ensure that they can withstand these increased attacks and the sophistication of said attacks. The FCA will also require to remain at the forefront of technology risks.
We expect that increased technology risks will result in traditional banks acquiring fintech companies to assist with managing these risks. In turn it is likely that many fintech start-ups will focus their efforts on reducing these risks.

Regulatory requirements

Banks require to ensure that any financial decisioning undertaken through their apps strictly complies with regulatory requirements. The increased use of digital banking apps has also resulted in an increase in those applying for bank accounts, overdrafts and loans via apps. Many of these apps allow the customer’s identity to be verified digitally. Safeguards require to be put in place to ensure that Banks continue to comply with their regulatory requirements. Challenger bank Starling for example requires new customers applying for an account to verify their identity by uploading a copy of their driving licence and submitting a video.

Banks also require to ensure that they pay due regard to the interests of their customers and treat them fairly. The FCA has published extensive guidance on how Banks and other firms may adapt their practices to ensure that they continue to comply with their regulatory requirements. The FCA’s guidance on their temporary measures for firms submitting regulatory returns is available here.

Conclusion

It will be some time before the full extent of the impact COVID-19 has had on the UK fintech sector is realised. The pandemic has resulted in a further shift towards digital banking and the use of contactless payment methods. While the speed of this shift is a result of potential health risks given the convenience of digital banking it is unlikely that new users will revert to their old practices. The speed of this shift highlights the need for banks to continue to invest in their tech capabilities to meet their customers’ needs, ensure robust resilience to increased cyberattacks and ensure strict compliance with regulatory requirements.

Please do not hesitate to contact us if you would like to discuss technology risks or the regulatory landscape in more detail.

Allie McGowan is an associate at Shoosmiths LLP