With the EU’s Second Payment Services Directive (PSD2) and the UK’s open banking framework set to come into force next year, regulation may well tip the scales between banks and fintechs for customer loyalty.

The Competitions and Markets Authority (CMA) calls it a “technological revolution” that will give people and small businesses greater control over their money, but open banking is more than that.

For the first time, the UK will have a transparent and financially inclusive market propelled by the power of the app economy, where innovative and secure apps can provide personalised services and easily accessible financial information in one place. From streamlining financial services to boosting transparency on account data and transaction history, open banking may herald a brave new world of financial freedom.

Related: The Open Banking initiative: One year on — what’s changed and what can we expect?

But without technological innovation, open banking will just be an empty marketplace that does lip service to the government’s vision. The industry hasn’t changed all that much since the 70s, which is why stimulating innovation ahead of January 2018 is all the more crucial, says Chris Gorst, prize lead at Nesta.

“Over the next eighteen months, the challenge will support and reward teams building next-generation services, apps and tools that can transform how the UK’s five million small businesses discover, access and use financial services,” he explains. Nesta recently launched Open Up Challenge, a £5 million prize to attract and incentivise the most innovative tech teams in the UK to build these apps and tools powered by open banking.

According to Gorst, open banking enables smart, frictionless ways for businesses and consumers to share banking data with and opens up accounts to trusted third parties. With a push from CMA, the sector has agreed on common standards across organisations for small businesses to be able to share data in a secure way by January 2018, which adds the pressure of a time crunch for innovators in finance.

“Small businesses can derive value sharing data, for example, with accounting systems and payment systems. But there are many other valuable services if you can get insight from their data, he says.

Small businesses have three main areas of concern: credit, cash flow, and time. Looking at credit, Gorst explains that the traditional loan approval process is long and tedious, and could be relying on old data. Open banking gives small businesses direct access to lenders, potentially opening up new ways and models of credit. It also gives lenders direct access to real-time account data and transaction history, so even businesses with less than 18 months of trading history can be eligible for certain types of credit, with the old model wouldn’t allow.

Poor cash flow could kill a small business, Gorst adds. Through open banking, cash flow management products could help these businesses keep tabs on their spending, while getting cash through the door quickly. Those are services that can be built in with access to data.

In terms of administrative burdens that hold small business owners back, again, open banking can help.

“The smaller the business, the more painful administrative tasks can be. A lot of entrepreneurs are not comfortable with admin, and they shouldn’t be wasting time on that. They should be looking to stimulate innovation,” says Gorst. Direct access to account data, transactional history, opportunities to automate processes can provide insight to help make better decisions quicker.

While open banking makes these things possible in principle, making it happen in practice takes a lot more effort. It starts by getting the world out to stimulate developers and programmers to innovate, whether they’re teams in fintechs or other industries, says Gorst.

The Open Up Challenge aims to do just that in two stages. Applications for stage one, the innovation stage, opened on the 23rd of March and will close on 31st May.

“We expect teams to come to us with strong technical skills and creativity. In exchange, we provide the tech support, legal and regulatory support, information security and user experience expertise, to help them develop apps and tools that will be received well by small business users,” Gorst explains.

Nesta remains agnostic about where the teams come from, whether they’re from large corporates or start-ups, he adds. “We’re looking for teams that demonstrate strong ideas and the ability to implement them. Unlike accelerators or investors, we have no other agenda other than making sure that they can solve problems for small businesses and are on the front foot for all the changes on the way. We don’t take equity, we don’t take the IP. We just want to make sure that we’re ready for the opportunities and challenges open banking will bring.”

The big question facing banks in Britain and beyond is how can they transition from being holders of customer data to actually challenging the agility and ease of use that their fintech counterparts provide. With open banking, PSD2 and the global consumer appetite for the uberisation of banking, the opportunity for fintechs are unprecedented. Banks may need to rise to the challenge, according to experts, or prepare to be toppled off the throne.

“The market desperately needs more transparent and consumer-orientated financial products, and we simply don’t see enough of this coming from the banks,” says Matt Ford, founder of FCA regulated fintech firm, Pariti. “The recent CMA investigation into retail banking highlighted the need for technology disruption and the benefits of open banking; this partnership with Zopa is a great example of how such a business model can work to really help benefit the consumer,” he adds, referring to Pariti’s partnership with peer-to-peer consumer loans giant Zopa, helping consumers pay off their credit cards.

Zopa has been one of the first fintechs to push its proprietary loan application service API, which launched in May 2016. The API allows like-minded financial technology firms to tap into Zopa’s lending platform, risk expertise, and peer-to-peer funding model to bring Zopa loans to their customers.

Challengers and disruptor banks are fast to comment on their readiness for these regulatory changes.

Innovator Starling Bank’s successes are anchored in its technology-first approach to banking. Developing a full-stack cloud-based platform and an API-based approach, the bank has wholly embraced the changes on the way. It’s the first licenced UK bank to launch a public API, Starling Bank now enables third-parties, including fintechs, to securely access customer data and build on top of the Starling platform using the mobile-only bank’s APIs.

The bank expects integrations with money apps and technology platforms in the first instance, such as money advice chat bots or spending analytics. In the future, the capabilities will extend for lifestyle, retail and wellness products that could integrate with other apps, wearables or even the internet of things.

Fidor Bank VP of European expansion, Sophie Guibaud believes that the pros outweight the cons for banks to share customer data, which makes this a win-win change on the horizon. “The very idea of sharing banking data could set alarm bells ringing in the minds of many ordinary consumers in terms of security and privacy. As a result, the use of APIs in banking has largely been limited. However, open banking really ramped up this year and will give European banking industry the shake up it needs in the coming year,” she says. “The benefits of sharing this data, which gained real traction this year due to PSD2  – with customer consent – greatly outweigh the risks as it will help increase transparency, competitiveness and foster innovation that should ultimately benefit consumers.”

Also see: Why fintech should think beyond banking the unbankable

The prize

The Open Up Challenge has a £5 million prize fund available, 90 per cent of which will be available as cash awards directed towards a range of innovative solutions. Up to 20 successful entrants will receive a £50,000 grant up-front in July and a share of a further £3.6 million if successful during the Challenge.

Stage 1: Innovation stage

Applications open 23rd March 2017 and close 31st May 2017:

• Approximately 20 finalists will be selected by in early July 2017 to be awarded £50,000 each as a development grant to help build their product.
• Approximately 10 winners will be awarded cash prizes from a £1m prize pot in  December 2017.

Stage 2: Market ready
Applications open in January 2018 and close in March 2018.

• Up to five entrants will be selected by May 2017 to be awarded development grants from a pot of £500,000 to help build their product.
• Up to three winners will be awarded cash prizes from a £2.1 million prize pot by October 2018.