But as with any emerging technology standard, progress is littered with both milestones and speed bumps. Below I will outline some of my key observations from working with leading players in this space.
Open Banking will reshape the global financial services system
It is no longer a question of if Open Banking will continue to evolve, but a question of how quickly it will accelerate. As Open Banking’s remit continues to expand, it will fundamentally change how we use financial products.
Open Banking can be used to assess a consumer’s creditworthiness, for example, by opening the doors to novel products aimed at supporting financial health and inclusion.
The complex world of credit scores will be simplified through the transparency Open Banking provides. Authorised Open Banking fintechs can securely access a customer’s bank account to see incoming and outgoing transactions, providing a foundation from which to accurately assess users’ credit scores and personalise services accordingly.
Personal Financial Management platforms (PFMs) like Money Dashboard are leveraging Open Banking technology to provide their clients with insights into transaction behaviour. Its retailer clients, such as supermarket chains, benefit from a better understanding of what their customers spend their money on when they are shopping at other stores. Its investor clients, meanwhile, use the data to predict how companies are operating in order to decide whether to invest in a stock.
Another example of a company paving the way forward is Bud – which is demonstrating what is possible through Open Banking-powered personalisation and AI automation. Banks use Bud’s products to automate lending decisions and perform more accurate affordability checks – improving risk assessment while delivering more tailored services to their customers.
From Open Banking to Open Finance
In the future, Open Banking will evolve into Open Finance, meaning that data-sharing will not be limited to transactional bank account data only. Other types of (financial) information will become accessible to authorised third parties, creating a more interconnected financial ecosystem.
Crypto wallets, pensions, insurances, mortgages, stock trading and other wealth management accounts – will all become accessible to facilitate easier exchanges of data, helping providers to establish a comprehensive digital overview of a customer’s financial position and encourage continued innovation.
These benefits will not be limited to retail customers. Another important area of expansion will be to use Open Banking solutions in the B2B space. Highlighting the potential use-cases, McKinsey estimates that merchants collectively spend $100 billion annually on transaction fees. Through account-to-account (A2A) payments, Open Banking players are already enabling the direct transfer of money between accounts without relying on third-party intermediaries or payment cards – offering a real-time and cost-effective solution to the problem.
Overcoming the biggest challenges
There are three main obstacles on the road to Open Finance:
1. Access to data
How do we make it easy for providers to access data from a broad range of financial institutions? Technological integrations (APIs) must be built to support the efficient flow of data, but building integrations that work with each financial institution is a tedious and fragmented process. To facilitate this, data and API standardisation needs to be implemented in order to make the task of providing access to data across the whole ecosystem simpler.
On the other hand, the reluctance of institutions to share highly valuable customer data will restrict access. This means regulators will need to step in – as they did for Open Banking – to create a legal environment that opens financial data for third parties to access through standardised APIs.
2. Analysing the data
Making sense of huge volumes of data is already a gargantuan task, even when it “only” covers Open Banking data. This becomes even harder if data from a wider set of financial products is considered. Fintechs will need advanced categorisation engines and other analytical tools to structure and analyse the information they receive.
Fintechs and companies can have access to all the Open Banking data in the world, but if they cannot create a way to analyse it, they will struggle to draw out any valuable insights. Leading providers like Money Dashboard have already done the legwork when it comes to data analysis – its Open Banking categorisation engine has been trained on over 10 years of data, which allows it to accurately classify consumer transactions. Other providers must follow suit if they haven’t already.
3. Compliance
Whenever personal information is shared, it is crucial to have a stringent compliance framework in place, to prevent any breaches or misuses of data. This, however, is not the challenge – the real challenge is ensuring that regulation protects the consumer, without stifling innovation.
In order to achieve this delicate balance, regulators will need to have open and constructive dialogues with Open Finance providers, and together create an environment that nurtures innovation without threatening data privacy.
An M&A outlook
Open Banking is still a relatively early-stage technology, so we will continue to see a lot of investor activity in this space, with the market expected to grow to $43 billion by 2026.
Companies with an innovative product and state-of-the-art tech will have no problems raising funds. For instance, UK-based Bud raised $80m in June to continue to scale its AI-based Open Banking platform and expand internationally.
In the M&A space, we expect to see an increase in activity as small, unprofitable companies (who have developed good technology) might decide to look for a buyer as Venture Capital funding becomes harder to access. Some of the industry’s largest players could also merge in order to consolidate the market, create synergies and expand their reach.
Notably, Apple’s recent acquisition of Credit Kudos, which develops software that uses consumers’ banking data to make more informed credit checks on loan applications and is a challenger to the big credit reporting agencies (Equifax, Experian and TransUnion)., signals interest from further afield. With more and more businesses making inroads into financial services, M&A activity in this space is heating up.
Having advised on a number of M&A and fundraising transactions in the Open Banking space, Royal Park Partners have seen first-hand the impressive leaps companies are making to transform Open Banking and increasingly Open Finance into a positive and productive tool for customers and businesses. In the future, Open Finance will provide the infrastructure to connect all financial products that consumers and businesses use, while also providing access to innovative new solutions.
The digital imperative for financial services firms cannot be understated. In order to ensure their (and their products’) relevance in the future, they will have to embrace Open Banking and Open Finance technology.
About the author: Ricardo Falter is Fintech M&A Associate at Royal Park Partners.
On Thursday, Visa agreed to acquire Tink in a deal that aims to boost digital ambitions by the financial services giant. Back in January, Visa had attempted to buy Plaid. However, the takeover was abandoned after the US Department of Justice blocked the sale on antitrust grounds. Plaid, recently valued at $13.4 billion, has since gone it alone as an independent company.
Both Plaid and Tink are open banking platforms, a concept which invites lenders to consensually provide third-party firms with access to consumer baking data. Tink was founded back in 2012, with the goal of changing the banking industry for the better. Its technology allows banks and fintech firms access to the banking data needed to create new financial products. The Swedish-based company was recently valued at €680 million, as open banking thrives in the UK and EU thanks to new regulations.
While these new digital banks do not boast the same kind of experience as their traditional rivals, this is a big part of their success. What they lack in heritage, they also lack in being tied into the established banking system. While banks that have been around for decades have made great strides to adapt to a digital market, they have no choice but to depend on technologies that have been around for just as long for some of their processes. Challenger banks are not tied down in the same way and benefit from being built around technology that is difficult, if not impossible, for the more established names to deploy.
1. Cloud Computing
Virtually everyone has heard of cloud computing, even if only in terms of storing their photos in the cloud. It shouldn't come as a surprise that banks rely on vast amounts of data storage and that the security of this data is of paramount importance. For a website, deciding to switch to cloud computing is relatively simple. It involves a simple data transfer and perhaps a few days of downtime at most. However, for a bank, moving data is not as straightforward. Banks that have been around for many years may have vast amounts of data collected before cloud storage was even a concept. Those established names cannot afford downtime either – even outages lasting just a few hours make national news in some countries.
The advantage that challenger banks have is that cloud computing existed as a robust, secure concept before they did. They had the opportunity to start collecting data in the cloud immediately, with no need to ever look back. In practice, this makes their data storage just as secure as any other bank but far more flexible and sustainable. These incredible connectivity levels also ensure few restrictions on new features and ideas, as cloud data can plug into just about anything.
2. Blockchain
Many people associate blockchain with cryptocurrencies, and while this is undoubtedly the most prominent connection to date, there are far wider use cases. Blockchain technology also underpins the trend for non-fungible tokens (NFTs) and also powers some of the latest functionality in challenger banks.
While some people value cryptocurrencies primarily due to their lack of relationship with the traditional banking system, some challenger banks use the concept extensively. At some of the biggest digital banks, this involves providing wallet storage for existing and emerging cryptocurrencies. Others go further and use blockchain technology at the core of their offering, favouring blockchain-based currencies over their fiat counterparts and providing traditional banking services without a dollar in sight.
3. Open Banking
Open banking protocols vary in popularity depending on where in the world a bank is based. It remains an emerging technology in the US, although support is increasing all the time. It is already so established in the UK that many of the biggest banks now utilise the technology to some degree.
In an industry where rivals can quickly become enemies, the concept of sharing data and financial information was virtually taboo for a long time. However, the sheer number of digital banks that have entered the market meant they learnt the importance of working closely early on.
Many of these new digital banks were built with open banking in mind. Even those that do not explicitly utilise it themselves are happy to share that information with financial services beyond banks. An increase in solutions to view balances, outgoings, and payment schedules on apps that are not banks in their own right, makes banking easier for consumers. The concept of shared data without any negative impact on security will remain a cornerstone of digital banks and one that their established counterparts will need to catch up with.
4. Microservices
An individual does not need to go too far back in time to remember when a transfer from an account with one bank to another could take several days. This remained the case even as the internet and e-commerce became mainstream. The delay reflects the outdated processing systems in place at established banks and the limitations on implementing change.
In some cases, those traditional banks are still working to catch up to this day. Digital banks benefit, once again, from launching at a time when the framework to operate a bank was far more advanced. Microservices are a fairly advanced concept even compared to current IT services, let alone banking infrastructure. However, they also represent an invaluable tool for digital banks to be faster and more reactive to the needs of their customers.
In the past, changes to established banking protocol could take months or even years. In one case, a digital bank founder left a senior role with an established brand to start a digital alternative because it was easier to create a new bank than fix the old one. However, these days, updates and new features can go live instantly with absolutely no downtime thanks to microservices.
Some say that established banks are a relic of the past. Between digital banks and cryptocurrencies, their role has diminished over time. That remains to be seen, and some are doing better than others in adapting to new opportunities. However, the rapid increase in popularity of challenger banks indicates a sentiment among the general public for faster speeds, more features, and greater flexibility. It would take many years for the big names to disappear if that were to be the case, but it is clear that their upstart rivals have vast technological advantages, and it is up to them to capitalise.
Andria Evripidou, Policy Lead at Yapily, shares her thoughts with Finance Monthly on the state of finance in Europe and its opportunities for improvement.
Fragmentation has been one of the biggest obstacles to growth in the European Open Banking ecosystem to date. Even within the Berlin Group, there are differences in how banks communicate with technology companies and how they connect with APIs.
Because of this disparity, Europe has been slower to adopt Open Banking than the UK and other countries around the world. There were 178 firms in the UK permitted to share bank account and payment information with third party providers (TPPs) in 2020, but only 36 in Germany, 18 in France, 9 in Spain and 6 in Italy.
There is a real opportunity here to consolidate the market and deliver more value-add financial services with the promise of Open Finance. Promoting innovation and creating a level playing field for all payments and data companies, while giving consumers greater visibility over their data and enhancing their financial wellbeing.
Open Banking is the first mile in the Open Finance marathon, and Europe’s regulators are starting to make their next moves towards crossing the finish line.
Catch me if EU can
There are a number of different factors that have contributed towards the fragmented Open Banking landscape we see across Europe today. In some countries, like the Netherlands, consumers have deep-rooted trust in their banks but a distrust in cards. As such, iDeal, an eCommerce payment system initiative driven by Dutch banks, was quickly adopted when it launched in 2005.
In comparison, the level of enforcement by National Competent Authorities (NCAs) of PSD2 requirements was patchy in places. Which in turn created a fragmented approach to PSD2’s implementation across central Europe. And so led to mixed uptake in adoption.
There is a real opportunity here to consolidate the market and deliver more value-add financial services with the promise of Open Finance.
How developed a country’s financial ecosystem is has also played a role in Open Banking adoption. Eastern European countries, for example, that have more outdated financial products and infrastructure have been more receptive to innovation than countries with more advanced financial systems that already meet consumer needs.
The ingredients for Open Banking success
The maturity of the market is intrinsically linked to the adoption rate – adding another layer of complexity to the landscape. Those in the industry know and can see the potential of Open Banking and Open Finance. But wider consumers and businesses are still in need of educating on its benefits and security.
There are active discussions and working groups on how to move Open Banking adoption forward. To address the issue and catch up with the UK and other countries like Australia, the European Banking Authority (EBA) recently published its views on what NCAs should do to further adoption across the region. The aim was to ensure they remove any remaining obstacles that could prevent TPPs from accessing payment accounts or which restrict EU consumers’ choice of payment services.
This move has been well received. It is likely that, going forward, Open Banking integration within Member States will become easier. Over time, this move should make payments via Open Banking more prominent within the mainstream.
An open future for Open Finance
The natural evolution of Open Banking is Open Finance, which has the potential to completely change the way we look at our financial lives and bring about the fourth industrial revolution. Use cases are boundless, and the primary objective is enabling people to properly understand and then ‘optimise’ their overall financial position, ultimately leading to greater financial inclusion for all.
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In an Open Finance era, consumers can get a better understanding of their investments using financial management applications that have a holistic view of an individual or business’ financial position in real-time. This will give consumers the ability to consider whether investments continue to meet their needs with access to up-to-date information on costs, tax treatment, performance, risk and other necessary factors.
The same consumer-centric approach that will see the rise of Open Banking across Europe will lay the road for Open Finance.
We have a lot to learn from the Open Banking experience to date to ensure the success of Open Finance. We also know that whichever shape the legislative framework ends up taking, Open Finance needs to be secure and easy to use, and that user journeys need to be properly considered ahead of any legislation design.
A lot more needs to be harmonised compared to the Open Banking experience. And without adequate supervision by NCAs, the implementation of directives is likely to be patchy and may hinder the uptake of Open Finance. But there’s no doubt that we will see the European Open Banking system consolidated in the coming years, giving way to the rise of Open Finance.
Wayne Johnson, CEO & co-founder of Encompass, explores trends in open banking and their implications for financial services in the UK.
The UK banking industry faced some serious challenges throughout 2020, as financial institutions responded to restrictions on business activity designed to stop the spread of COVID-19. Crucial to this response was the fact that we had the technology and infrastructure available to facilitate remote operations and digital banking, particularly during a time when customer need was greater than ever.
The popularity of open banking has surged in recent years, paving the way for fintechs to provide seamless access to cutting-edge financial management services. It is a secure way to give authorised third-party providers access to financial information from banks, such as spending habits and regular payments, with the aim of helping people to understand financial needs and find new products and services to help customers.
At the beginning of 2020, the main goal for banks in the UK was to continue pushing towards more mature, scalable, and resilient open banking plans so that they could still compete with players in other markets. However, after the global pandemic hit, banks had to turn their attention to health and safety, dealing with branch closures, remote working, and efforts to support their customers and clients as thousands of businesses had to close and jobs in all industries were on the line. A benefit of open banking is that it allows financial data to be shared across everyday financial life, making banking more convenient. Now that 1 in 4 millennials and gen-Zs are using challenger banks, it is clearly a desired way of using services, and inevitable that more banks will use open banking to provide a better customer experience.
Many organisations that customers share data with could be budgeting, lending services or other banks, as well as various fintech companies on the market to consumers. Open banking is therefore very advantageous to the fintech industry and will likely contribute to its growth in the UK as the data provided will be much easier for start-ups to see and use. Since the outbreak of COVID-19, Open banking’s benefits have taken on a new significance. Now, open banking can be considered as a powerful tool in helping finance providers evaluate cost efficiency during difficult times and as consumers face changing circumstances.
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With the current pressure on personal finances, and three out of five UK households negatively affected financially, Open Banking can help obtain an accurate view of the consumer’s financial situation which then helps them make important decisions and gain additional insight to help tailor products for individual needs.
In 2021, the focus of the finance sector will likely be on improving the digital experience, and we have already seen that there has been a major shift in the fintech ecosystem, with it seen by many as a source of potential innovation for banks, rather than a direct competitive challenge. When it comes to open banking, this is only the beginning. Despite the industry still being in the early stages of implementation, there is increasing interest in moving beyond this to include a far broader spread of financial products. It is also likely to encourage a shift in regulation through the increased demand for transparency, with RegTech here to help solve the problems of regulatory compliance.
Kris Sharma, Finance Sector Lead at Canonical - the publisher of Ubuntu - offers Finance Monthly his thoughts on APIs and how firms are already using them to enhance their services.
Cloud computing, big data analytics, artificial intelligence (AI), machine learning (ML), distributed ledger technology and process robotics are all playing a key role in reimagining financial services for a digital world. A growing number of financial institutions are drawing plans to adopt these technologies at scale as part of their digital transformation initiatives to accelerate financial data processing, deliver mass personalisation and increase operational efficiencies.
Most organisations currently deploy a complicated mix of technologies, legacy software platforms, applications, and processes to serve customers and business partners. On their digital journey, financial firms will have to integrate data, processes and business functionality from legacy systems of record to this set of new technologies. Many businesses have tried to adopt various transformation approaches such as re-platforming and re-hosting, direct integration between applications, rip and replace, and deploying middleware technology to deal with legacy systems and their integration with new technologies. But each of these approaches have their own drawbacks and can limit the adoption of new solutions within the constraints of legacy technology debt.
An evolutionary approach to digital finance, however, will unify information and data without the need to merge operational systems. Application programming interfaces, or APIs, can overcome the challenges involved with adopting new technologies and more innovative solutions while integrating with legacy run-the-business applications.
Where APIs become a core piece of the puzzle
APIs are increasingly playing a central role in digital finance. They essentially bind different parts of the financial value chain together, even though the underlying components may be based on different systems, technology, or supplied by different vendors. Using APIs, financial firms can securely share digital assets while masking backend complexity, integrating software applications and focusing on maximising their proprietary strengths by sharing data, systems, and functionality with customers, partners and developers. This in turn drives digital transformation without a complete overhaul of existing infrastructure.
Application programming interfaces, or APIs, can overcome the challenges involved with adopting new technologies and more innovative solutions while integrating with legacy run-the-business applications.
Since APIs are self-contained, they can be readily deployed and leveraged for innovation at speed, enabling financial institutions to introduce and integrate new features. When powered by the cloud, firms can develop, test and launch new services to customers quickly and cost-effectively, fuelling business growth. For example, insurance firms can make more timely offers by cross-selling home, auto and life policies. Financial institutions can leverage APIs to connect sources and use cloud computing to handle massive amounts of data, as well as AI and ML services live in the cloud, thereby analysing all this data faster and cheaper than they can on-premises.
Who is successfully using APIs?
Challenger bank Starling was designed and built completely on AWS cloud to deliver and scale infrastructure on demand. Additionally, by building a bank with open APIs from day one, Starling is natively compliant with the European Union’s Payment Services Directive (PSD2) directive.
According to ProgrammableWeb research, financial services is ranked highly in the fastest growing API categories, given the rise in digital forms of payment, an ever-increasing customer demand for connected solutions, and open banking initiatives. APIs are at the heart of the PSD2, the UK’s open banking mandate, as well as the Bank of Japan and the Monetary Authority of Singapore’s open banking initiatives.
Finastra’s Open Banking and collaboration: State of the nation survey 2020 finds that “86% of global banks surveyed are looking to use open APIs to enable Open Banking capabilities in the next 12 months”.
As APIs attract an ecosystem of developers, a financial API provider can encourage participation to fill go-to-market gaps and extend its services and data to new markets and use cases. Barclays is fostering collaboration and generation of new ideas through secure, innovative APIs. The Barclays API exchange has built an API library that is available for use by third parties to develop and test new products. Barclays and third-party developers work together to create, develop and test new product ideas before releasing them to the regular API catalogue. Similarly, Starling Bank provides a marketplace that enables developers to build their own products and integrations using its API.
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Unleashing the potential
There is an opportunity for financial firms to leverage the power of APIs by bringing them together with digital technologies to broaden the possibilities for innovation and expand customer experiences. Financial institutions need to reimagine APIs as product offerings that will drive business expansion and increase revenues.
The future of digital finance will be driven by organisations building digital business models, redefining their API strategies and bringing new customer propositions to life using modern web architectures, best-in-class technologies and new ecosystems.
Finance Monthly hears from Jay Floyd, Senior Principal Financial Crime Consultant at ACI Worldwide, on the threat faced by banks and countermeasures they can employ against it.
Fraudsters are natural opportunists and extremely innovative with their methods. Whether through authorised push payment (APP) fraud scams, phishing attacks or even targeting vulnerable people during the COVID-19 crisis, they will always find new ways to make money with no remorse.
Making the task of protecting consumers and companies from fraudsters relentless activities an increasingly challenging one for banks. Especially during a time of global crisis and uncertainty along with growing payment channels through Open Banking.
However, by thinking seriously about how they (banks) can embrace strategic anti-fraud technologies and ensuring that their Open Banking platforms are secure by engaging with QTSPs (Qualified Trust Service Providers), banks can protect their customers against fraudsters both today and tomorrow.
Fraud is constantly evolving and growing
A decade ago, deploying malware was the easiest and most common method of getting into someone’s account. But as banks have strengthened their technical defences, fraudsters have increasingly turned to social engineering. Whether via email or telephone, many criminal gangs now impersonate a victim’s bank or other authorities like the police, persuading the victim to hand over account authentication codes or even make fraudulent transactions themselves.
Taking this one step further, some fraudsters are even combining remote access trojans with social engineering. Persuading victims to install malicious software on their device so they can carry out their fraudulent activity without needing to engage with the victim in the future. With such scams constantly evolving, it is increasingly difficult for banks to combat fraud.
Fraudsters are natural opportunists and extremely innovative with their methods.
As such, instant payments fraud is growing at an alarming speed. And while it should be acknowledged instant payments have revolutionised banking – in an era of pandemics, it’s no exaggeration to say we are dealing with a payments pandemic.
Recent figures from UK Finance add stark colour to this picture. Card fraud (both debit and credit) accounted for £288 million in the first half of 2020 – an 8% decrease compared to the same period in 2019. However, cases of remote banking fraud and APP fraud both increased – by 59% and 15% respectively. When combined, this amounts to £287.5 million lost to remote banking and APP fraud in the first half of 2020 – almost on par with card fraud. Though there are industry initiatives such as ‘Confirmation of Payee’, in the very near future, it is expected that remote banking and APP fraud will overtake card fraud across Europe and UK. And this is worrying.
Engage with QTSPs to mitigate fraud
The rise in remote banking fraud may further be accentuated by the proliferation of open banking services. But despite the fact fraudsters will look to exploit weakness in Open Banking, this relatively new service should be embraced. Its benefits cannot be underestimated or denied. In fact, recent OBIE data suggests 50% of UK small businesses now use open banking services to see their accounts in real time, forecast their cashflow and issue paperless invoices to clients. But banks do need to think seriously about weakness and loop holes and how they protect customers from fraud in the coming months and years.
Fraudsters are already exploiting the vulnerabilities around open banking, especially when it comes to Account Information Service Providers (AISPs). Authorised to retrieve account data provided by banks and financial institutions, AISPs are a critical piece of the open banking infrastructure jigsaw. However, it is believed criminals are starting to create fake AISPs. In some cases, pretending to be legitimate AISPs, much like doxing, to gain access and data to customers’ accounts.
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To mitigate this risk, banks need to think seriously about how they engage with Qualified Trust Service Providers (QTSPs) to certify and validate AISPs and PISPs. QTSPs provide banks the digital certificate for AISPs and PISPs, and are themselves regulated under the eIDAS directive. But while they have been around since early 2019, QTSPs still remain largely invisible in the financial community. Banks must configure their anti-fraud technology to monitor AISP and PISP activities and also establish a process to validate eIDAS certificates via QTSP’s to ensure that they only release access to customers’ accounts to the right people. Not only will this help banks mitigate the risk of fraudulent AISPs and PISP’s or man in the middle attacks, it will also enable them to meet a range of other electronic security requirements as well.
Real time payments bring a sense of urgency for both the fraudster and the victim of the bank. And while instant payments and open banking have undoubtedly brought countless benefits, the rising levels of fraud are real cause for concern. Fraudsters will always find new ways to make money illegally. But by ensuring they have the right fraud technology and aligning that technology to integrate with Open Banking messages and with QTSPs, banks can put themselves in the best position to detect fraudulent AISPs / PISP’s and prevent as much fraud as possible.
Paul Marcantonio, Executive Director for the UK & Western Europe at ECOMMPAY, offers Finance Monthly his predictions for open banking and the fintech sector in 2021.
The UK leads the charge in open banking; 2019 bore witness to a surge of growth in the country’s open banking ecosystem, when UK open banking hit one million users, regulated providers hit 204 and there were 1.25 billion API calls. It is evident that open banking has played a significant role in consolidating London’s place as a global leader in the fintech industry, comparable only to New York. With Brexit looming, there are many unknowns on the road ahead for UK businesses and their ability to deliver open banking services to the wider EU market after 31 December. Will open banking be affected by Brexit? And what is the outlook for the UK fintech sector in the new year?
The Brexit effect
Many companies are worried about maintaining the smooth digital experience that the modern consumer now prioritises post-Brexit. Looking ahead, UK businesses will lose their ‘passporting’ rights to do business across the EU, with organisations in the EU suffering similar barriers when seeking to operate in the UK. To overcome this barrier, many firms have created bases in the EU, while companies are also applying to the FCA for temporary permission to operate in the UK.
In order to minimise the disruption to open banking services post-Brexit, the FCA has said that third-party providers (TPPs) will be able to use an alternative to eIDAS certificates to access customer account information from account providers, or to initiate payments. eIDAS certificates of UK TPPs will be revoked when the transition period ends on 31 December. This means that TPPs have a compliant way to access customer information and ensures any changes as the UK leaves the EU will be smooth.
Businesses are having to audit their suppliers, as well as their payment service providers, to ensure they have all the necessary licenses to operate in the EU. Many companies are also building separate EU entities so that they can function in the EU under any Brexit agreement.
Many companies are worried about maintaining the smooth digital experience that the modern consumer now prioritises post-Brexit.
EU regulations
The role of open banking will only increase after Brexit, since the open banking agenda cannot be achieved by existing major banks. Open banking allows banking services to digitise so that consumers gain access to more choice than ever before, and extends the market to new entrants able to offer products and services that banking incumbents do not.
Furthermore, regulatory intervention serves to foster competition in the finance industry and is evidently necessary. The EU Payment Services Directive 2 (PSD2) was brought in during September 2018, and brought open banking requirements in across the EU, going further than the Retail Markets Investigation Order 2017 (CMA Order) in the UK which mandated that the biggest banks provide customers with the ability to share data with authorised APIs. The CMA Order revealed how regulation can motivate banks to modernise their services, but PSD2 gives consumers more choice and protection in opening up payments to third parties so they can access a variety of options when deciding how to pay and with whom to share their data.
Consequently, PSD2 will be a crucial mechanism for the UK financial services industry in order to remain competitive in Europe and across the world. The UK will therefore need to ensure it complies with EU regulations if it is to cement its position as a leader in open banking and continue to let the sector thrive. This means the UK is likely to align with EU regulation where it meets the needs of its own internal market, and is predicted to use regulation as a blueprint for its own but adjusted to meet its separate needs.
The road ahead for UK open banking
Regardless of the nature of the UK’s relationship with the EU, many experts suggest the UK open banking standard is broader than the EU’s PSD2, and therefore has potential to be utilised as a blueprint for other countries worldwide. Although the route forward for open banking is not clear, what is evident is that open banking technology will carry on driving innovation and competition within the financial services industry, with the consumer able to access more convenience and choice.
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The UK will make routes to economic growth a priority, which means open banking must play a major part in this. After the UK agrees technical standards and governance, open banking can present a competitive advantage via open APIs and enable the fintech sector to benefit from sustained growth into 2021 and onwards.
Learnings for businesses
The modern consumer wants efficiency, with services and products on demand. As such, open banking must be looked to when seeking to cater to the consumer. For example, cross-border payments, innovation around APIs, and automation, are all enabling companies to simplify complex payment processes, and make the experience quicker and easier, as well as allowing for easy scaling.
Payment solutions such as ECOMMPAY’s utilise open banking technology to enable consumers to initiate payments to merchants without the need for debit or credit card transactions, and are crucial in expediting efficient payments within and across borders, customised according to localised requirements.
Brexit has been on the horizon for several years now, allowing businesses time to establish contingency plans. As long as companies have invested wisely in their payment infrastructure, they will be in a good place to ensure sustainable growth for years to come.
Simon De Broise, Senior Associate at Collyer Bristow, examines the likely impact of the acquisition on the two companies and the financial sector as a whole.
The UK Competition and Markets Authority recently cleared the global card network Visa’s acquisition of Plaid, a US-based fintech, whose primary business is to act as an ‘aggregator’ in the payments sector. The deal, first announced in January of this year, is another interesting tie-up between a fintech and one of the established card networks, and the jury is out on whether this move will help or hinder the open banking movement. The acquisition comes at a somewhat difficult time for Visa, as we recently learned that it is being investigated by the European Commission after complaints of anti-competitive behaviour from e-money providers.
Plaid’s aggregator business provides third-party apps and financial institutions with secure access to consumers’ bank accounts, either by means of the aggregator entering into Application Programming Interface (or API) agreements with the consumer’s bank or by managing the consumer’s banking login details directly (a method that banks are now clamping down on for obvious security reasons).
The benefits of this deal for Plaid are plain to see. The aggregator market is competitive and the issuing banks (i.e. those ultimately sending payments from consumers’ accounts) are in a strong position to decide how and when, and with whom, they do business. For instance, the ‘scraping’ of consumers’ online banking details by aggregators for use with other institutions is increasingly considered by banks to be unnecessarily risky from a data security point of view. This means aggregators entering into an API agreement, which are notoriously difficult for aggregators to negotiate, and so the tie up with Visa is likely to put Plaid in a much stronger negotiating position when it comes to doing business with the large retail banks.
The aggregator market is competitive and the issuing banks (i.e. those ultimately sending payments from consumers’ accounts) are in a strong position to decide how and when, and with whom, they do business.
How the deal benefits Visa is more difficult to see. This is certainly not the first time that Visa has made a relatively large investment in a fintech company – it took a stake in the hugely successful Klarna in 2017 - but, in the scheme of Visa’s existing customer base and market share, the purchase of Plaid seems unlikely to have a big impact on the business. One view is that Visa is positioning itself for the greater adoption of ‘open banking’ (the idea that consumers and SMEs allow financial institutions access to some, or all, of their banking data, which in turn provides them with more advantageous terms on certain products and services). As noted above, this would certainly boost Plaid’s power in the market, in particular when dealing with retail banks, and some suggest that this could lead to a more standardised approach to agreeing APIs, thereby making it easier for other participants also and facilitating the development of open banking more generally.
Another view is that the acquisition has little to do with facilitating open banking for all, but rather that Visa is attempting to control the development of open banking in a way that suits its strategic goal of becoming the ‘network of networks’. The argument goes that the purchase of Plaid simply provides Visa with a further avenue through which to channel its existing business - which is to earn revenue from payment transactions. Precisely how it might do this is not yet clear, but it is quite possible that Visa could introduce a revenue raising measure that is something similar to the interchange fees that are currently levied on card payments.
The European Commission’s investigation into Visa may or may not impact on its strategy for Plaid, but, in any event, how Visa develops it aggregator business will be watched closely in the payments sector. Banks, whilst still in a relatively strong position to dictate business terms, will be conscious that the game has changed somewhat given the scale that Visa can now apply to Plaid’s business operations. Others in the sector, fellow aggregators in particular, will hope that the direction of travel will eventually provide them easier access to banking data and, with it, further opportunities in the open banking market.
Jan van Vonno, Research Director at Tink, looks more deeply into the trends currently altering Europe's financial sector.
Convenience and ease have become the new normal for consumers and the demand for better, more personalised digital experiences in the financial industry has skyrocketed. Thanks to PSD2 and the UK's Retail Banking Market Investigation Order, Europe has been leading the way with its open banking initiatives — representing the beginning of a journey to democratise money management, empowering everyone to access the right products and services to meet their financial needs.
Over the last few months, Tink has been reporting on the attitudes and sentiment of Europe’s financial institutions towards open banking, with our research revealing that 61% of financial executives feel more positive towards open banking than last year.
This is extremely encouraging — particularly considering the current climate we find ourselves in. With COVID-19 accelerating the shift toward digital channels, we expect this positivity to continue to grow as more financial institutions concentrate on the digital transformation of products and services.
However, our research also revealed that 46% of financial executives aren’t confident that the benefits of open banking are widely understood within their organisations. So clearly the industry has more work to do. To reap the full rewards of open banking, it’s essential for financial institutions to remain nimble, open-minded and strategic in their approach. Here are three things they can focus on.
Thanks to PSD2 and the UK's Retail Banking Market Investigation Order, Europe has been leading the way with its open banking initiatives.
Create a clear open banking strategy
Adoption of open banking starts with the belief that it will create value. Once financial institutions embrace this, the next step is to implement a clear and detailed open banking strategy which can be translated into concrete business objectives.
To do this, they need to embrace change — educating people at all levels of their organisation on the benefits of open banking and incorporating it into the product, service and technology roadmaps of their business. Thankfully, 59% of respondents indicate that they already have a clear strategy in place, while 58% view open banking as an opportunity.
It is important that financial institutions also look to embrace the role of a TPP — consuming APIs to enhance their current products and operations and leveraging the available data to improve customer acquisition, accelerate onboarding, increase conversion, lower risk, and improve customer satisfaction rates. A great example of a company that is doing just this, is Nordea — who are going beyond PSD2 and aggregating all their data (e.g. investment, savings etc). In addition to this, they have successfully created a business-to-developer (B2D) open banking strategy to produce APIs and create better solutions for their customers.
It’s important to note that while some financial institutions approach open banking as a long-term strategic play, there are also a growing number who see the opportunity for short-term, quick-win value creation. There is no right or wrong way to approach this as both offer their own rewards. Ultimately, the most likely scenario is that financial institutions’ open banking journeys will begin with more elementary open banking use cases, eventually evolving into more sophisticated use cases over time.
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Allocate budget (no matter how large) wisely
While the positive shift in attitudes is a solid indication of the importance of open banking, it doesn’t fully reflect the significance of the movement. The real proof is in increasing budgets that are being invested in open banking initiatives across Europe as the industry mindset moves from compliance to value creation. According to our data, open banking investment budgets for European financial institutions are typically between €50-€100 million, with 63% saying open banking budgets have grown since last year, with annual spending rising by between 20%-29%.
Of course, not all financial institution decision-makers have access to this level of budget. The key here is to focus on the low-hanging fruit and taking advantage of open banking by operating as a TPP. In doing so, executives can experiment with elementary use cases with clear outcomes before proceeding on to more advanced and exploratory use cases. In addition to this, creating an open banking scorecard can help measure the impact of investments and set clear parameters that help to navigate the open banking journey.
While the positive shift in attitudes is a solid indication of the importance of open banking, it doesn’t fully reflect the significance of the movement.
Forge fintech partnerships
What became clear through our research is that the general confidence in open banking isn’t purely reflected by the understanding of the opportunity it offers, the strategy, or the sum of investments. It’s also indicated by the number of partnerships that financial institutions have formed with fintechs to help accelerate innovation and realise their objectives. 69% have increased their number of fintech partnerships in 2019, while the majority of executives are also working with more than one partner.
Such partnerships are invaluable, as they can provide financial institutions with the technology, expertise and vision to drive open banking value creation — creating both short and long term value for financial institutions and, in turn, for their customers. One thing to keep in mind, however, is that in order for partnerships to truly work, fintechs must be able to navigate the complicated procurement process and onboarding requirements that many larger banks have in place.
What it boils down to, is this: 2020 will be the year of value creation as the industry starts accepting there is considerable money to be made in open banking. The winners will be the banks that place a relentless focus on building clear strategies, using existing budgets wisely and prioritising fintech partnerships. This, in turn, will lead to a host of new use cases springing up across the customer journey — with institutions leveraging open banking data to improve customer acquisition, accelerate onboarding, increase conversion, lower risk, and improve customer satisfaction rates.
A huge opportunity lies ahead; the benefits of open banking are now ripe for the picking.
Across the UK, lenders have approved nearly £27.5bn in government backed loans, through bounce back and business interruption loans, to more than 650,000 businesses affected by COVID-19.
This is an astronomical effort by all involved to keep businesses afloat, but it’s not been quick enough for many ailing businesses. The total amount of business loans available amounts to £330 billion, and businesses should be receiving these funds at a much faster pace then we currently are. Matt Cockayne, Chief Financial Officer at Yapily, explores how open banking may be the solution to these businesses' issues.
It’s clear lending will be needed throughout the year to help these businesses stay afloat as they reopen. And while lenders could be a lifeline for SMEs over the coming months, it’s thought that many believe that future lending or loans are too high risk, or that they just can’t tell what the future holds to lend to businesses. This is likely to cause further frustration for business owners who, until coronavirus happened, ran successful, growing businesses.
This has created a conundrum for the UK business landscape. As we emerge from the initial COVID-19 fallout, businesses need financial support to stay open and to ensure the economy bounces back, but lenders are either too slow or too wary of lending too much to businesses who are facing huge pressures to avoid going bust. To solve this problem, we have to look at new ways of accessing and sharing financial information to make quicker and better decisions. And in open banking, I believe we have a solution that answers these problems and more.
Speed, security and agility
The initial backlash in response to the government's three loan distribution schemes (BBL, CBIL and CLBIL) has centred around frustrations in the time it took to distribute essential funds. To keep up with this demand, lenders have to make faster decisions. But without the right information about the borrower they can’t make them consistently or fairly.
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It is normally standard for lenders to request three months' worth of financial statements, but through the CBILS scheme, lenders must now request six months. This can slow the process down for businesses, providing an added layer of friction in finding and sharing bank statements, and an added layer of delay with the lender having to review the statements manually. Through open banking, lenders can gain instant access to up-to-date financial information and can retrieve historical data in just seconds.
This means they can quickly onboard customers and determine lending limits, without needing to send documentation such as bank statements, ID or other documents back and forth as you would traditionally. By gaining instant access to bank statements and a secure verified source of income, lenders can quickly analyse credit decisions in real-time, and make better, more informed decisions, which is crucial as we begin to step into the new normal.
Lending in the new normal
Up until now, the government has relied on a panel of lenders - established banks and the likes of Funding Circle - to distribute the schemes. But as the crisis continues, more loans need to be disbursed, presenting an opportunity for smaller lenders to play their part to support SMEs too.
One of the biggest struggles of the schemes has been around lenders being unable to meet the demand for onboarding new customers. Some businesses have reported that it is taking longer than expected to open a new account and receive essential funds. However, if conducted through open banking, these processes could be sped up and enable more lenders to operate and offer their services to UK businesses.
One of the biggest struggles of the schemes has been around lenders being unable to meet the demand for onboarding new customers.
This isn’t just a benefit for lenders in terms of meeting soaring demand, it also means an added layer of trust and greater loan personalisation for customers. Lenders can make fairer and more accurate decisions, based on a customer's financial picture.
Fueling the economy post-pandemic
With lenders able to grant more loans quickly and efficiently through open banking, businesses will have faster access to the much-needed cash required to stimulate the economy; keeping companies running, people in jobs and ensuring spending continues across the country. Lenders will also have the opportunity to monitor the borrowers finances after the loan has been granted, with the borrowers consent of course, to offer continued support and create future offerings if required.
As more businesses across the UK seek government support, the role of lenders will continue to grow in importance. But rather than shut up shop due to the risks at play, they should utilise open banking to make better, informed choices to ensure the economy recovers quickly.
What are you seeing as the most important corporate payments trends affecting treasurers right now?
Perhaps more than ever, corporate treasurers are navigating uncertainties and opportunities created by 1) global growth and 2) emerging technologies. The challenges of the current environment largely stem from the fact that corporations are now evolving into international businesses at an accelerated pace. Some studies have shown that more than a third of corporations now have operations that span 11+ countries, rely upon six or more different banks, and deal with payments in six or more different currencies. The corporate growth driving these circumstances is often the result of acquisitions, which means integrating unfamiliar IT systems and infrastructures within existing payments systems and technologies.
This reality places tremendous pressure on corporate treasurers from two directions. First, treasurers need to cope with the technical conflicts and associated challenges of getting disjointed IT systems and payment data stores distributed across the world to cooperate. Second, the rapid pace of growth requires treasurers to wrangle this breadth of global portals, accounts, clearing systems and formats while finding ways to achieve greater efficiency. This means adopting modernised payment solutions able to support seamless operations – even across cross-border, cross-system, and other operational frictions where the seams are all too apparent.
Payment volume also continues to rise; some studies show that nearly half of corporations are generating more than 10,000 global payments every month. That unprecedented volume and complexity not only means daunting workloads but also increases in formatting errors and other inaccuracies which can result in delayed payments and increased fees and costs. Corporate treasurers are well aware of the challenges and opportunities of this predicament and are actively pursuing solutions and technologies that enable simplified, error-free straight-through processes and real-time payments.
Studies show that nearly half of corporations are generating more than 10,000 global payments every month.
Additionally, the introduction of ever-more regulatory compliance requirements demands that corporate treasurers stay on top of the latest changes. For a specific example, the National Automated Clearing House Association (NACHA) in the US is challenging corporate treasurers with strict requirements around account verification practices. This can include maintaining beneficiary account lists and closely vetting beneficiary matches, with the purpose of defeating dangerous account takeover attacks. The new regulation is reshaping practices and forcing change, a reality that smart treasurers are embracing as an opportunity to introduce new and more effective security protections.
In the same way, the European Union’s Second Payment Services Directive (PSD2) has strict compliance restrictions requiring multifactor authentication for all online and credit card transactions. Under PSD2, financial institutions must provide third-party payment services with customer account access (if customers consent to it). Those requirements are being leveraged by corporate treasurers to move their businesses toward open banking APIs that ensure the required access, as well as biometrics and other highly trustworthy authentication technologies.
What's next for real-time payments?
The technology behind real-time payments is here, albeit largely in a development stage. However, corporate treasurers’ keen demand for the advantages of real-time payments is speeding up that development process.
The aforementioned global growth, corporate M&A, and increasing payments volume is also important here. Corporate treasurers are outgrowing standing relationships with their banks, dealing with a larger array of financial intuitions, accounts, currencies, payment formats, and connections. Real-time payments offer a welcome respite from this mounting complexity, simplifying and expediting payment processing. The automation and straight-through processing that real-time payments have to offer are a form of wish-fulfilment for overworked treasurers. Ideally, corporations would leverage real-time payments to deliver instant and error-free payment processing and confirmation, immediate confirmation of cash fund availability, and transparent visibility into the payments process at all points in the pipeline. The drive for treasurers to adopt solutions that deliver on these needs is immense, and any and all technological advances in this area will be adopted and celebrated as soon as they become available.
Ideally, corporations would leverage real-time payments to deliver instant and error-free payment processing and confirmation, immediate confirmation of cash fund availability, and transparent visibility into the payments process at all points in the pipeline.
What do you think the future holds for open banking?
Open banking has every potential of bringing treasurers’ dreams of real-time payments into reality. While only a limited collection of financial institutions are active participants in the open banking initiative today, the demand is there. That said, the technology behind open banking solutions will need to improve (and there needs to be a standardised approach to protocol and format across banks) if it’s going to realise the mass adoption it has the potential to earn. I’ll give you an example. Today, some bank APIs are limited by restrictions on total transaction volumes. Others have restriction on settlement networks that disallow certain payments from being processed through API networks. Athe technology grows to offer a wider array of solutions, a wider breadth of banks will be in a position to embrace it.
With corporations sure to increasingly champion open banking as a means of streamlining banking connections, realising real-time banking, and commanding more control and visibility into payments, banks will have clear competitive reasons to be a part of these solutions. Open banking APIs will similarly enable treasurers with self-service options that connect and play nicely with internal treasury management systems and other solutions, expediting what have been month-long integrations down to mere hours. I foresee an industry of the near future where the chance to introduce stunning new efficiencies like these will capture the imagination of banks and corporate treasurers – enough to become commonplace.
What are you seeing as some of the biggest challenges to accurate cash forecasting?
Handling the day-to-day duties of cash flow management is so manual right now – and necessary at such a volume – that businesses are limited in their abilities to create reporting that rises to a level of providing accurate foresights. Compounding the challenge is the fact that forecasting must gather data across disparate business units and, as we’ve established, are often global and involve a multitude of operational factors.
Cash forecasting currently requires a tremendous administrative lift on the part of corporate treasurers. To overcome this challenge, treasurers require solutions and automation intended to more easily orchestrate all pertinent data. Treasurers can also find benefits in solutions that leverage historical trends and produce multiple forecasts based on potential scenarios and outcomes, refining forecasts as reality exerts its influence.
Are you finding that companies are prepared for the transition away from LIBOR?
Corporations are at various stages with their preparedness for a world without LIBOR. Some are ahead of the game and actively making provisions for the new reality. Others know they are behind where they ought to be. The pressure will only intensify.
Do you have any advice about how businesses should prepare for their LIBOR transition?
Businesses should begin by taking an inventory of their standing loans, investments, and credit connected to LIBOR. Then, they need to conduct a thorough review process. This means contacting their lenders and servicers as appropriate to negotiate fallback provisions and replacement rate settings to take effect once LIBOR is no more. At the same time, any new contracts must include similar fallback provisions. It’s also wise for treasurers to become well-versed in the ins and outs of operating in a post-LIBOR environment.
