Open Banking: Know the rules to avoid a shipwreck

Twelfth Night starts with a shipwreck. Emma Rice’s production at The Globe was magical: Shakespeare would have applauded. Superb were Feste, the wise fool, and Malvolio, the whistling regulator.  The extraordinary begins to unfold and slips into a farce. In less than six months, Open Banking sets sail, so to avoid floundering we need to understand the rules:

1.    Third Parties can, with client approval, access data and make payments

You may have wondered why some credit scoring companies or financial services providers are now offering free ‘credit scores’. A service that used to be charged, is now free? Well, come January companies providing loans can ask for, and will be able to see, the actual amount of money coming into the bank account of that person or organisation requesting the loan. The regulatory question of affordability of any given loan will be clear and importantly visible to any regulatory review. The bank account amounts shown are actual figures and not estimates.

The Third Parties can be any supplier. The supplier is not necessary another bank or one with financial attachments to the bank that ‘owns’ the bank account. The Third Parties can be independent of the bank account provider.

 2.    Banks must ensure Third Parties operate securely

The bank owning the client’s bank account must make certain the Third Party can operate in a secure environment as the bank does and will continue to do so going forward.  The Third Party must meet security standards required by the banking industry and must link electronically to the banks through Open APIs.

3.    Clients must be informed of Third Party data or transaction requests

The bank is responsible for ensuring their client, if taking advantage of the Third Party’s offerings, is continuously informed of any requests, their response to those requests, and any data or transactions made between the bank and the Third Party. This puts even more pressure on the banks to respond in real time to the client.

Banking is changing

Hold on a minute; the bank must do all this to let in Third Parties for a share in their clients’ wallets? Yes, and it is part of the on-going regulations to create greater competition.

One of the items highlighted by the regulators was the £1.2 billion per annum generated by the banks for fees on unapproved overdrafts on current accounts. Fees charged often exceed payday loan companies for similar amounts of credit. The FCA report, recently published, on high–cost short-term credit, shows that the average overdraft line is £120 whereas the average outstanding is £130; a mismatch in the banks’ favour. “Malvolio” would approve as anyone who is overdrawn at the close of the day, the computer software, probably written in Cobol from the 1990s, charges those accounts in overdraft from a central fee file.

While banks can manage cash flows avoiding costly unauthorised overdrafts and do so very well in the private banking, large corporate and wealth sectors, few have tried this across current accounts in general. Third Parties can now offer solutions, across multiple banks, assisting people and companies in avoiding overdrafts.

Doing nothing is not an option

Banks must be compliant with this, and the work must be done regardless, so let’s look at the opportunities. The key is to provide a secure data path to the cloud. Once in the cloud Third Parties (who can be the banks) can offer:

• Active wealth money management services, using AI/Bots technology, for all
• Multi-bank services to best service our increasingly global footprint in both retail and commercial banking
• On-going provision of better digital services for you or your business including sharing FX margins and same day international payments

Who better to do this, then the banks themselves.

The rules are set, and the key question is: “how will the retail and corporate banking markets react to Third Party solutions”. Again, Shakespeare has advice for banks planning to go beyond compliance, and compete with the Third Parties: “Be not afraid of greatness”.