The Real Impact Of Open Banking

Open Banking.

Working at the intersection of finance and technology, we’ve been hearing that phrase grow louder over recent months. For those who don’t obsess over the fintech press, it probably feels opaque, perhaps a little trivial.

There is a lack of widespread awareness on this subject. Last week, The Independent ran an article, “Open Banking: The Money Revolution Nobody Knows About”.

In fact, Open Banking is worth knowing about. It promises a meaningful change to the way that customers access financial services. Whilst we don’t work on the retail side, Open Banking is set to impact us as consumers. So it’s worth delving into this topic.

The Open Banking Implementation Entity was created by the UK’s Competition and Markets Authority to create software standards and industry guidelines that drive competition and innovation in UK retail banking. It builds the software standards and sets the industry guidelines that ensure you can use this new world of financial services with confidence.

On 13th January 2018, the UK implemented the EU’s second payment services directive (PSD2), ushering in the era of Open Banking.

Open Banking allows you to give companies access to your financial data (transaction history, spending patterns etc.) so they can provide products and services to help you move, manage and access your money. On a practical level, it forces the UK’s biggest banks to give third parties access to their client data. Customers must give permission for their data to be shared and third parties must be FCA-regulated, if they want to plug into banks’ systems via APIs.

This legislation has been designed by the European Banking Authority to increase competition for consumer and commercial business. It looks set to do just that, with tonnes of innovative startups building products that rely on access to client data.

The benefits of Open Banking go beyond better loans, cheaper overdrafts and speedier processes for switching banks. A range of startups are creating products that provide consumers with more visibility, analysis and control over their personal finances. Think automated tax reporting, AI financial assistants and intelligent cash flow engines.

These technologies will have profound ramifications for credit provision, cash flow management and financial planning.

In the near future, customers will be able to choose which providers they use for different financial services. Those with multiple accounts spread across providers could use a single app to view balances across their current account portfolio. They might use an online lender for their mortgage and a P2P lending platform for a business loan. They might obtain wealth planning advice from a robo advisor and hold a current account with a high street bank. The options are endless, and this new culture of choice will increase competition and drive down fees.

Open Banking will also lead to new opportunities for adaptive participants – startups and large financial institutions. Right now, it’s estimated that 85% of business current accounts in England and Wales are provided by the four banks. Open Banking is set to disrupt this hegemony.

Critics of Open Banking say the legislation is at best imprudent, at worst, dangerous. They argue that it leaves customers exposed to hacking and financial crime. It’s true that banks tend to have unwieldy legacy IT systems that make it challenging to create secure APIs. Open Banking can only be as good as the technology that it has been built upon.

However, the Open Banking Implementation Entity is there to build the software standards and sets the industry guidelines that ensure we can all can use this new world of financial services with confidence. Only FCA regulated firms can access client data and as part of the regulator’s requirement, they must adhere to stringent security protocols.

With greater transparency and access comes greater regulation. The FCA has been progressive in its approach to fintech, leading the charge amongst global regulators. Now Hong Kong is getting in on the act, recently asking banks and tech companies to provide input on an Open API Framework, its first crack at Open Banking.

I expect Open Banking to usher in a new era of increased regulation for the fintech industry globally, coinciding with the maturation of our movement. This is a good thing, facilitating more opportunities for collaboration and progress and enabling us all to use the next generation of products and services with even more confidence.