The introduction of Open Banking legislation is designed to establish a more streamlined, customer-centric future for personal banking. Open Banking will offer consumers an unparalleled degree of control over their finances and data, whilst sparking a new wave of innovation and competition in the industry.
Mike Allan, Director of Operations at LendingCrowd thinks Open Banking has the potential to be a real game changer in the way that financial products are marketed and operated for the benefit of consumers. However, he thinks questions remain around what will happen and who will be affected.
“The real winners will be the companies with marketing-based business models. Banking data, especially current account data, is gold to marketers. As a result, I’m sure we’ll see new offerings aimed at better serving the consumer. The comparison sites are well placed to become ‘account aggregators’ but I haven’t seen any evidence that they’re getting on board. Instead, we’ll see new players such as Monzo, Bud and Raisin benefit from being the “shop front” for multiple banking services.”
“I would also expect the likes of Facebook, Google and Apple to offer ‘free value-add’ services with the consumer being the product. We’ll have to wait and see if and how they play a part, but their natural entry point will be an expansion of the existing Apple and Google payment services.”
“Clearly, there will be efficiencies. Applications for credit and investments will become more streamlined as organisations can access financial data directly. This will assist with credit assessments, anti-money laundering checks and bank account verification.”
Modernising the market
The focus on modernising the industry and improving efficiency was a key factor in the introduction of the new legislation. In 2016, The Competition and Markets Authority (CMA) concluded that the large incumbent financial institutions held too much control over the industry. They believed that this monopolisation of the market was stifling growth and limiting access to smaller companies, whilst creating high costs and poor service for customers. The new rules are intended to aid new entrants to enter the market and compete, in the hope that this will drive innovation and choice.
This emphasis on using Open Banking rules to deliver more efficient and user-friendly services is very much the focus for many of the new entrants. Phil Grady CEO of Castlight said: “We believe the opportunities to create a safer financial world, whilst enhancing and modernising the banking system can be realised through Open Banking, as long as the customer sees the benefits from sharing their data.
“This may be attained through cheaper products, faster service or a better customer journey – but the benefits must be real and tangible for the consumer. For example, it’s ludicrous that a mortgage takes at least six weeks to complete, when under Open Banking the financial element of the mortgage can be completed in less than 10 minutes.”
Key changes from implementation
Central to the Open Banking revolution are a number of legislative changes brought forward by the UK and European Union. Most notably the CMA’s Open Banking mandate and the Second Payment Services Directive (PSD2). The former requires nine of the UK’s largest current account providers to adopt a common API framework to open access to current account data. Whilst PSD2 extends to all Account Servicing Payment Service Providers across the EU, and requires open access to regulated third parties.
Data sharing in practice
Open Banking establishes a common API standard to securely share customer information between trusted third parties. This allows customers to permit these companies to access financial data and transaction information and use it to offer additional products and services.
API’s are already used by many companies worldwide to offer integrated digital services. Apps such as Uber already integrate with Google maps, for example, to provide a more extensive service. Whilst social media platforms like Facebook and Instagram also overlap in their content and services. Open banking is the same idea, consolidating your banking into one compact, easy to use service.
In this regard, open banking will pave the way for a website or app to provide a single point of access to all of your financial information, from current and savings accounts, to credit cards and investment portfolios.
The real change to the status quo is the level of customer control. Under the current system, consumers are required to provide the access details for their banking information to third party financial services – which often risks breaching T&Cs. Under the new rules, the customer can permit third parties to access this information directly, without needing to negotiate with the bank.
Steve Tigar, CEO of Money Dashboard says that this shift in data rights is the pivotal change: “The most important thing is that consumers will now have the right to share their account information online with third parties to access services. This right will be protected by law, and consumers will not be in breach of any bank T&Cs for doing so.”
“The consumer consented availability of this data can both speed up purchasing decisions and match Financial products better. As the Financial Services market begins to use this data on an aggregated level, I’d expect to see new types of products or product mixes being created to serve specific segments of society.”
Collaboration and co-competition
Aggregation of services will be a key feature of Open Banking, whilst competition has been positively encouraged through the shift to open banking, there is huge scope for collaboration, partnership and a fundamental evolution of the industry. “The story doesn’t have to be about Davids and Goliaths fighting for the top spot,” says Mickael Paris, Marketing Director at Fintech Scotland. “It’s about synergies and respect in order to deliver great customer outcome.”
“With Open Banking we’re witnessing what other sectors have been through in the past few years. Uber doesn’t own taxis, AirBnB doesn’t own hotels, will the next banking giant manage any product at all? – It is fair to say banking products are becoming more and more commoditised, Unique Selling Points now lie with the customer experience and how well or badly customer needs are being addressed.”
“Although Open Banking seems to be a lot about “fin” and “tech”, I believe it is much more about UX and making our industry more experience focussed.”
Just the beginning
Whilst change is already under way, this is still the beginning of the journey: the rise of Fintech and the introduction of new challengers has introduced a healthy dose of competition, but the market share for key services is still largely dominated by the big five providers.
For a long time incumbent organisations have been heavily protected by large customer bases, with even dissatisfied users reluctant to switch due to the inherent complexities and frustrations of moving service to a competitor. Conversely, new entrants to the market have been constrained by these same issues and the very challenge of getting access to customers.
Open Banking has the potential to help address many of these barriers, by increasing access to customers and lowering the pain points in switching services. This is why many in the industry think that the wider Financial Service landscape is on the cusp of real change.
“This is really just the start for Open Banking,” says Gavin Littlejohn, Chairman of the Financial Data & Technology Association. “What we hope will happen is that other companies will take advantage of the standard framework and use it to create a better environment for customers. The common API standards bring a range of benefits, helping reduce overheads and the technical and security challenges so should be a real step in getting other companies to follow suit.
“This will drive a real shift in emphasis, away from competition around customer access to competition in customer service, standards and value. It is through this that the real benefits to the customer will come.”