The Opportunity Of Open Banking
On 13th January 2018, the UK will apply the EU’s second payment services directive (PSD2). It will be significant in many ways, the most important of which is Open Banking.
Open Banking will force banks to provide third parties – such as fintech companies – with access to customer data. It’s set to revolutionise the banking landscape in the UK and beyond. But some claim it’s a dangerously liberal move that could put highly confidential client data at risk of manipulation and fraud.
With this in mind, it’s worth exploring why the European Banking Authority (EBA) crafted this dramatic policy and look at what benefits it can bring.
What Open Banking will look like and how precisely it will be enforced in the UK remains open to debate, as the group responsible for its application, Open Banking Ltd, continue to iron out the details. But the details we do know are significant. PSD2 is being brought in to modernise 2009’s PSD1. This updated version will cover a number of aspects of modern, tech-centric finance, much needed given the explosion in innovation and progress over the last decade.
Specifically, PSD2 will improve security of customer authentication, communication and regulation, whilst promoting interaction between banks and third party providers. This last aspect is most important, as it will allow fintech companies – often small, dynamic and growing – access to data from major banks, which have millions of customers. Via open APIs, fintech companies will be able to view compliant customers’ payment preferences and bank account details. As a result, huge opportunities for fintech companies will be created.
Client data is extremely valuable. Coming at a time when profits are under threat, Open Banking is seen as a danger to the traditional banking business model. It’s thought that if you offer customers more choice, you lose some control, and if you lose control, you risk profit. Some banks have spent vast sums lobbying for the watering down of the legislation, in an attempt to keep as much client data in-house as possible. Even American banks – fearing similar legislation heading across the Atlantic – are pre-emptively building a case against it.
The central argument being used by doubters is that Open Banking is dangerous, with open APIs susceptible to hackers and fraud-merchants. This is naïve, and underestimates the technology and regulation being employed to securely deliver the new directive. In exchange for data, fintech regulation will become more stringent, particularly over data protection. So the long-term pay off for all participants will be worthwhile – with higher security and more opportunity for collaboration and progress.
London’s fintech community has seized upon this opportunity, with investment being made into companies who seek to take advantage of the new banking landscape. The EBA stated from the outset that PSD2 aims to increase competition for the benefit of consumers. And competition is what London’s fintech community thrives on.
We’ve already seen companies build propositions in readiness for the successful roll out of Open Banking. Business finance provider, Iwoca, plan to use the access to the data to build products that allows businesses to sign up to its services direct from business bank accounts. DueDil, a due diligence tool, will use the data to populate an e-passport for businesses to illustrate their financial credentials.
So London’s fintech players are positioning themselves for a banking revolution and the only barrier to that revolution may be banks themselves. Hence the need for the EBA to hold its nerve and follow through on its original promise.
Encouragingly, some progressive banks are embracing the challenge, adapting to the brave new world through partnerships. Spain’s second largest bank, BBVA, is now a major shareholder in UK start-up bank, Atom and purchased US fintech, Simple, which uses APIs to help customers analyse financial activity. Expect more of this activity as banks seek to play catch up by buying their way ahead.
At Origin, we support progressive regulation like PSD2 and welcome Open Banking, which we believe will modernise and democratise the banking sector further. It’s why we do what we do – to remove layers of friction that increase cost and decrease accessibility and choice for banks and their customers. Open Banking, whilst a step into the unknown, if delivered in a measured, regulated way, will benefit all who want to participate in the future of banking.