This post is an abridged version of a larger white paper - 20 mins - on Open Banking.
What is Open Banking?
In this case, Open Banking is a term used to describe two pieces of financial regulation: The competition and Market Authority’s (CMA’s) ‘Open Banking Remedy’ and the European Payment Services Directive 2 (PSD2). These two pieces of regulation require businesses
to:
- Make it possible for people to share their transactional financial data easier with third parties, online.
- Allow third parties to initiate payments directly from a person’s account as a bank transfer, an alternative from a payment
- Make public and openly share their product information, including satisfaction scores, as well as other service level indicators.
In short, Open Banking aims to create more competition in the financial market, putting an end to customers paying high prices for low-quality services.
How does it work?
The technology that will make all of this possible are called APIs: Application Programming Interface. APIs allow companies to seamlessly and securely link their services together to create a better customer experience. They are what Uber uses to overlay
their taxi booking software on google maps.
Does it matter?
In short, yes. It will mean third parties will be able to analyse your financial data, a source relatively untapped for product development and increased services.
Will everyone use it?
Research done by Ipsos Mori for Barclays in 2015 showed, even before people were having products marketed to them, 40% would be happy to share their data to receive free personal financial management services. And in 2016, Accenture conducted research that
showed 85% of 18-24y/o would trust third parties to aggregate their financial data.
How much is it worth?
Research from some sources suggests that Open Banking will be very attractive to consumers. A survey by PwC suggests that banks could lose up to 24% of their business, a whopping £8.5bn in new revenue streams.
Winners and losers?
Yes, Open Banking presents an opportunity for new players to create dramatic shifts in the market. But it also allows for existing institutions to build on existing relationships. Digital-first services are likely to offer increased value to consumers and
collaborations are possible between companies to deliver the best results for customers.
The benefits for consumers and SMEs
Six key benefits of Open Banking greatly effect the ability for people to source better deals to save money or streamline processes to save time. They are:
Aggregation
Analysis
Monitoring
Recommendation
Automation
Payment requests
Personal Finance Management platforms, PFMs, aggregate bank accounts and credit cards together in on place, providing consumers and SME’s with smarter interfaces to understand their money. Research from Barclays conducted in 2015 shows that this was the
most appealing case for users.
Open Banking could give rise to ‘robo-advice’, automated data-lead advice. Algorithms that recognise patterns and suggest ways of avoiding adverse financial situations or introduce products to you when you need them most.
More access
Consumer experts believe that better decision making and more transparent credit scoring could result in improved access to suitable credit products. Speeding up analysis of transactional data can be useful for assessing creditworthiness and affordability
checks.
New types of products
The rise of ‘Marketplace’ services offered by banks or digital comparison tools means that new products will be able to come to market more quickly. With the increase of pan-European models, it means that new marketplace offerings could give people access
to products in other parts of Europe.
All the benefits of Open Banking rely on consumers and SME’s knowing how to make the best use of the services. The full capability and possibility of Open Banking is not entirely known. But the opportunities for innovation and, ultimately, improved services
for consumers, seem infinite.
Potential risks
The possibilities are seemly endless, yes. But as with everything, where there are opportunities, there is also the risk of harm. Some of the key concerns that regulators will be watchful of are conflicts of interest, asymmetries of power and exacerbated
financial exclusion. Convenience, speed and simplicity may come at the expense of losing more control over our data.
What next?
The author of the original report, Faith Reynolds, used a great metaphor to describe Open Banking:
“Open Banking is like a dandelion whose seeds blow far and wide. They blow beyond the field of financial services, causing people to think more widely about the data-driven economy of which we are part of”
Open Banking and its opportunities are plentiful. The responsibility of regulators, startups and financial institutions is a large one. This shift could create one of the most dramatic changes to the personal finance world since online banking. Open Banking
offers exciting and compelling ways to re-shape people’s and businesses’ experience of financial services.