Below, Danny Phillips, Zscaler's Senior Manager of Systems Engineers, discusses the importance of cloud technology and its implications for older entities in finance.
In the financial sector, bigger has always meant better. In fact, if a financial institution is suitably large, it is deemed so vital that, as the popular terms suggests, it is “too big to fail”. This situation has provided two key benefits for large players in the financial sector: the potential cushioning from government when things go wrong, and a tacit understanding that they’re essentially untouchable when smaller competitors enter the marketplace.
This all held true for some time, and newcomers in the space have generally carved themselves a niche, remained relatively small, and never really threatened the incumbents. As such, it can be argued that complacency has permeated the halls and boardrooms of some of the biggest players in the finance sector.
There are, however, signs of change across the sector. Whilst the financial institutions of old aren’t likely to shutter their doors anytime soon, recent technological innovation is shifting the balance of power considerably. It’s not the only technology playing its part in this equation, but cloud IT is the driving force behind disruptive industry newcomers, providing the agility they need to launch products and services faster, push forward better customer experiences and target new markets more precisely.
There have always been barriers to entry to the financial services sector. Chief amongst them has been the tight regulatory landscape, which ensures that smaller players can’t operate without first having the required licences (PSD2, PCI etc.). Although regulation is a necessity, a potential drawback is that it’s yet another barrier for smaller outfits to traverse.
There are efforts, however, to clear a path for smaller businesses. The success of Open Banking has allowed third parties to develop services around financial institutions, with plans to extend this beyond the retail banking sector and encompass products in the general insurance, cash savings and mortgage markets, under a new model called 'open finance'.
This has opened the door to smaller fintech companies to create a host of consumer-focused products, including money saving and credit-building apps. This has been significant because, when considered in conjunction with cloud, it’s arguably putting larger financial institutions, particularly banks, at a competitive disadvantage.
Cloud IT is the driving force behind disruptive industry newcomers, providing the agility they need to launch products and services faster, push forward better customer experiences and target new markets more precisely.
Cloud is enabling new businesses to be set up without the burden of the physical infrastructure so intertwined with the older, larger industry players. For new entrants, any part of the business can be picked off the shelf. Salesforce for your CRM system or Workday for your HR, all paid for monthly or quarterly. Computing functionality can be purchased as-a-service and can even be paid for in increments as small as a CPU cycle. All that’s needed to enter a market is a great idea, a laptop, an internet connection and a credit card.
Bringing the conversation back to banking in particular, we’re already seeing the benefits disruptive new players are reaping. The likes of Monzo, Revolut and Starling Bank, are releasing new features and functions nearly every month (often based on customer feedback), enriching the customer experience and generating positive word of mouth. They’re able to do so because of their lean and agile structures, unburdened by a reliance on physical hardware, paperwork or branches. Currently, high-street banks are struggling to compete at this level.
Imitation is the sincerest form of flattery, so why aren’t larger financial institutions just doing the same as these smaller competitors to ward off the competition before it gets too big? A 2019 research paper from 451 Research revealed that financial services companies are behind other business in deploying cloud as a central part of IT operations. Around 70 per cent said their cloud projects were only at the initial, or trial and testing, stage.
There are a number of reasons why this might be the case, namely legacy IT debt, unfinished upgrades and compliance. Obviously, like any business, financial institutions are under pressure to use what they have already paid for before moving on to the next generation of infrastructure. Established businesses have to plan migrations, with business as usual taking priority.
In my experience, what we see instead is a one foot in, one foot out hybridised attempt at cloud adoption from larger financial institutions. Newer applications will be running in the cloud, but the majority will remain housed within the main datacentre. The end result is virtual machines running in the cloud with permanent connections between the corporate network and the cloud provider. So, when someone wants to access this application remotely, they have to dial back into the office on a VPN to get to the cloud instead of connecting to the cloud directly.
This dilutes the benefits of the cloud, and isn’t really a true step forward.
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If plans to open the financial services sector up to new businesses continue along this trajectory, we’re going to be seeing a far more varied industry landscape than we’re seeing today. If larger institutions are still playing catch-up on cloud, by the time they make it there the conversation will have moved on.
Financial services institutions therefore have a doubly difficult route ahead of them. As well as accepting the sunk costs of now outdated infrastructure and upgrading to a cloud-first mindset, they also have to keep an eye on the future. For my money, what they need to be thinking on is how to leverage 5G for competitive advantage, and how to do so in-step with their smaller competitors.
As the use of 5G becomes more widespread in the 2020s, local area networks (LANs) are set to disappear. We currently look to Wi-Fi to access the internet, but when every PC or mobile phone is equipped with ultrafast 5G, the use of Wi-Fi becomes an outdated notion. The traffic from 5G devices will connect the right people to the right applications—through a digital services exchange—and this will deliver faster, more secure, and more reliable access to apps and services.
The promised low latency, high data capacity and reliability of 5G networks has a host of applications in financial services, and creates a new platform for the delivery of services on mobile. For banking, reliable video conferencing sessions with mortgage brokers, or financial advisors, without having to travel to their nearest branch could be commonplace, rather than a seldom used novelty. Real-time data streams from customers, perhaps in conjunction with a machine learning platform, could aggregate a customer’s behavioural data in real time, enabling contextual financial recommendations.
If larger institutions are still playing catch-up on cloud, by the time they make it there the conversation will have moved on.
5G will not be solely a benefit to a bank’s customers though. Its impact will be felt so broadly that banks need also to think about how their own employees will utilise 5G. It’s highly likely that, as 5G becomes the norm, expectations for quick and hassle-free access to applications will climb. When applications are hosted in the cloud, fast internet access is more important than ever. If a user’s device has faster internet access than the corporate network, those users are likely to continue using their superior mobile access, as opposed accessing the internet via the corporate network. It’s a matter of human nature to take the path of least resistance.
However, security may not be top of mind for these users as they access work applications while away from the corporate headquarters. Protecting an on-premises network infrastructure will become less relevant and financial organisations will have to adapt to secure the “edge” once more: in this case, the individual user on their mobile device. Banks and other financial institutions will have to be able to respond to the effects of evolving user behaviour introduced by 5G.
In many ways, financial institutions are facing an uphill struggle to make back the ground they’ve already lost by dragging their feet on cloud adoption, both in terms of fulfilling the needs and expectations of their customers as well as their staff.
Ultimately, for end consumers, these newer, faster and more convenient financial services are inevitably coming our way. Whether they’re brought to us by one of the big four, by a challenger like Monzo or Starling, or even by Google or Apple, is still to be decided.
This week Revolut launched what it’s calling an ‘Open Banking’ feature in the UK; an additional function within its mobile application that allows users to see their bank accounts form other providers.
Revolut partnered with TrueLayer to deliver the new feature, which has already had plenty of encouraging press. The challenger bank has made full use of the open banking environment that exists in today’s banking sphere to offer its customers something beyond the usual.
The new Open Banking feature means Revolut’s mobile banking customers can see other accounts they have, see balances and transactions and set budgeting controls that include their other accounts as well as their Revolut account.
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Joshua Fernandes, product owner at Revolut, said: “With the launch of our new Open Banking feature, UK customers can now view and manage multiple external bank accounts, enabling them to interpret their day to day spending across all of their accounts, with the added benefit of making our offering even more relevant, user-friendly, faster and more cost-efficient for our customers,” according to Finextra.
Visit the Revolut site for more information on how it works and what an API is.
So why does no one care? Because the only people who are interested in quadruple revenue within the banking sector… are businesses in the banking sector.
It’s been over two years since the PSD2 text, standards and framework were published. But more than two-thirds of the population still have no idea what Open Banking even is.
My question: Is this a surprise?
Open Banking Awareness
I hear some members of the Open Banking community calling for some kind of public awareness campaign to drive interest and engagement. Something similar to “I ♥ PIN” from 2006 where no counter was complete without a love heart poster.
Let’s face it. “I ♥ OPEN BANKING” just doesn’t have the same ring to it. But that’s okay. Because it wasn’t PIN that people bought into. In fact, it could have been any technology.
No one loves PIN. They just love the benefits of it. It’s quick, easy and secure. People were able to pay faster with more peace of mind. That’s what drove engagement back in 2006. It wasn’t the technology, it was what people gained from it.
No one considers their internet provider’s innovative new infrastructure when they load up Netflix to binge the latest must-watch series.
The only people who are interested in quadruple revenue within the banking sector… are businesses in the banking sector.
Unfortunately, though, PIN had it easy. It cut fraud by £34m in the first half of 2005 and (way more importantly) meant way less time spent in checkout queues.
Open Banking has a bigger mountain to climb. In 2018, Open Banking Implementation Entity listed 18 regulated providers on its website. As of December 2019, the number is over 180. This makes it a lot harder to take all the different offerings and uses from all the different players and distil them into a headline or elevator pitch.
But does it need one?
The Open Banking Elevator Pitch
Let’s look at the Open Banking Implementation Entity’s website, again. Their website homepage reads: “The future of money, where you’re in control”. I see this echoed all across the Open Banking landscape. This is the future. More control of your money, more control of your data.
But what does this actually mean? Most people will say “I have control of my money now. I can see my payments, manage standing orders or direct debits and move money between my accounts”.
“More control” isn’t a tangible benefit - it’s ambiguous.
And when it comes to data, do people really want more control? Three out of four people[1] aren’t even bothered about the data they share with companies, they just want something in return.
Sure, we need to consider we’re talking about financial data. Of course, the trust barrier will be higher. But people are already more than happy to share their location, names, emails, shopping habits, relationship statuses and more. They just want to know what they’re getting back.
You won’t bridge that trust barrier or get buy-in for Open Banking as a whole by telling people you’re giving them more control. People need to know the tangible benefits and why it’s better than what they’ve got at the moment.
This is why the majority don’t know what Open Banking is. But the same people will rave about an app that talks to them and tells them whether they can afford to go out.
And it’s the same reason why early wins in Open Banking have come from some of the simplest implementations:
We all know that these benefits only scratch the surface of what Open Banking could do. But these simple implementations all have equally simple benefits. They are all demonstrably, emphatically better than what was before them.
If new, more complex implementations and products can’t match these clear, concise and tangible benefits, then Open Banking will peak at being able to see different accounts in the same app.
Final Thoughts
When I interviewed the Head of Open Banking at Mastercard, David Head, he made a point that’s stuck with me since. He said: “The phrase Open Banking won’t exist in five years’ time. It’ll just be called banking”.
Best-case scenario, people will never know (or care) about the regulations, legislation and technology that changed the way they manage their money. There is no “I ♥ PIN” equivalent in Open Banking.
But they will know the products that they continue to use. They’ll be the ones that had a clear and tangible benefit, making users lives demonstrably better than before.
Will yours be one of them?
[1] https://info.viber.com/US-Consumer-Survey-Report-Privacy-Security.html
But it’s not a perfect world, of which you are undoubtedly aware. And the fact is, 2020 is not going to be open banking nirvana. The vision has been well articulated. But the vision is not reality — and it will take considerable work for the reality to emerge.
That is not to say that 2020 isn’t going to be incredibly significant for open banking and its future. With PSD2 and its related Strong Customer Authentication (SCA) firmly in place, many more European consumers are going to become more familiar with the new frontier of banking.
For them, a world in which consumers can conveniently, in one place, see their full financial profile and easily compare terms, fees and interest earned on multiple accounts, loans and investments will be tantalisingly within reach. The promise of easily budgeting and accurately examining every expenditure they make — the ability to better rein in unnecessary or ill-advised spending, the capability to manage subscriptions and suspend underused ones — will be right there in front of them.
Regulations and rules allowing for data to be shared among banks, third-party service providers and businesses, including retailers and others selling services, make a whole, new kind of commerce possible.
But new paradigms are complicated. This one requires constructing the right technology, alliances and incentives. And the truth is, banks are not fully prepared to offer all that is necessary to seamlessly provide this new form of commerce and consumers appear not ready to take advantage of it.
For the unbanked, open banking is a non sequitur and a non-starter.
In short, things are going to break.
User experiences will vary by bank and by third-party provider — and even by consumer. Open banking tilts toward the haves and the have-nots — those who have enough money to make use of apps that keep an eye on it for them, and those who have smartphones, connectivity and a second-nature comfort with the technology and apps that deliver the value provided by third-party apps.
For the unbanked, open banking is a non sequitur and a non-starter.
The convenience that comes with sharing data will be accompanied by the risk of having a larger surface area for cybercriminals to attack.
If some financial accounts integrate seamlessly through banks with third-party providers, but others fall short, consumers could be faced with a half-baked view of their financial standing. Worse yet, they might operate under the assumption that they are getting the big picture, when in fact, vital information is missing from the resource they consult to make important financial decisions.
All that means is rather than 2020 being the year when open banking flourishes, 2020 is the year that banks, FinTech and regulators need to sell consumers on the new model of conducting commerce — a model that more than likely will get off to a shaky start.
Banks seeking to deliver on the open banking promise are going to have to over-index on communication — relentlessly explaining to customers why things are the way they are and how things actually work. And, yes, maybe sometimes, how they intend to do better in the future.
More importantly, they will need to listen. What are their customers’ experiences with open banking? What works? What doesn’t? What new services and possibilities would make open banking more valuable?
All that means is rather than 2020 being the year when open banking flourishes, 2020 is the year that banks, FinTech and regulators need to sell consumers on the new model of conducting commerce — a model that more than likely will get off to a shaky start.
Banks and FinTech businesses looking to provide services enabled by open banking need to practice humility, compassion and customer obsession because they have some catching up to do.
The stated goals of PSD2 and open banking were to provide increased security, more choice and better experiences for consumers. But regulators and open banking architects moved ahead without consulting the end-users of their model.
Consider that vision of building meaningful online portfolios for consumers by sharing data across banks, businesses and institutions. Sharing that data requires a consumer’s consent, which is a good and necessary thing. But public opinion polls show that consumers are reluctant to allow their banks to share their data.
At the dawn of the open banking era, Accenture Research found in late 2017 that 69% of consumers in the UK said that they would not share data with third-party service providers. And 53% said they’d never make use of open banking options, instead sticking with the way they’ve always banked.
Sure, people change, and as more services are rolled out it’s possible that some who thought they’d never embrace open banking will give it a try. But the idea is hardly catching on like wildfire. Earlier this year, the Financial Times reported that only 25% of those polled by banking technology company Splendid Unlimited had heard of open banking. Only 20% of those said they actually knew what open banking meant.
The inevitable hiccups in these early stages of open banking will undoubtedly increase consumers’ scepticism. It’s hard for people to trust you with their data and especially the personal financial information they hold dear when you don’t seem to be able to accommodate everyday digital transactions and requests.
So, banks and those in the FinTech sector have a big job ahead of them — not just in keeping up with the changes required to successfully deliver on open banking, but in evangelising the value that the new model offers. The rewards for those who can get out ahead in 2020 will be substantial. They will be the ones that early adopters turn to and those early adopters will potentially become advocates.
Some players are at least showing the way. There’s HSBC with an app that allows consumers to access all their accounts, including those at competitors, Chip, which algorithmically determines how much a person can afford to save each month and then automatically deposits that into a savings account; Credit Kudos, which analyses a user’s finances and determines their creditworthiness and what financial services they are eligible for; and dozens of others that monitor the mortgage market, create spending reports, automate loyalty programs and more.
The open banking operators in the market today provide a reason for optimism. They are a strong sign that the open banking vision can become a reality. Plenty about how much of a reality - and how soon - will come down to how the key participants perform in the year to come.
Online Banking is a global trend that banks and institutions are currently following to improve the current connections across digital services. In addition to it, Open Banking is the representation of a next-generation business model in an open data economy.
With Open APIs, banks can be easily linked to financial technology companies using affiliated services from a single dashboard using specific applications on a smartphone.
The leading jurisdictions in Open Banking include the United Kingdom (UK), Australia and the European Union (EU).
About it, LearnBonds explained: “The United Kingdom leading the way in Open Banking explains why so many UK-based challenger banks and tech startups like Revolut, Monzo, Starling and Curve are thriving in the banking sector.”
Countries such as the United States or New Zealand are considered ‘Beginners.’ These are countries and jurisdictions with small or no progress on regulation or standards.
Meanwhile, Switzerland, India or China are considered ‘Risers’ because the whole market is unregulated but they are registering Open APIs and evolving standards.
To understand which countries are currently at the forefront of Open Banking, the report takes into account four different factors that include the spread of Open APIs, regulatory requirements, standardization initiatives and the presence of a central TPP regulatory body.
The protocol is designed to make sure that during a transfer, the name of the recipient exactly matches the name on the account receiving the funds. Intended to give greater assurance when it comes to transactions, CoP helps users to avoid directing payments to the wrong account.
It was then announced in 2019 that the name checking service would be delayed until March 2020 at the earliest. But given the security implications, Chris Stephens, Head of Banking Solutions at Callsign, asks: why has the deadline been pushed back?
After a consultation with groups in the industry, The Payment Systems Regulator (PSR) deemed the expected implementation deadlines “unachievable”. However, with the personal details of consumers at risk, banks are searching for various ways to address fraud to keep their customers secure. This is especially important given that in 2018, a total of £1.20 billion was stolen from the banking industry by those committing fraud. Justifiably, there has been a great deal of worry that this delay will leave consumers at risk of fraud. But many people are questioning whether its introduction will really help to reduce fraud levels, and if there are any other measures banks can be put in place to keep their customers money safe and secure?
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While it seems like a logical way of combating bank fraud, putting the CoP scheme into practice will probably only work to a certain degree. A fraudster’s natural reaction to any such regulation is to improve upon their current skillset and work out a means to bypass the new security infrastructure and regulations. In the context of CoP, all a fraudster would have to do is set up a new account in the victim’s name to give the victim further confidence that they are transferring money to a “secure account.”
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Another problem that can potentially arise is the idea that customers will become complacent when it comes to security due to the belief that CoP provides them with another layer of protection. Even though CoP will absolutely protect customers against crimes such as authorised push payment fraud, the scheme could leave them vulnerable to more advanced types fraud which are of far higher value.
In addition, almost every bank would have to implement CoP for it to be successful. While the decision to implement the scheme is down to each individual bank, The Payment Systems Regulator has said that Lloyds, Barclays, HSBC, Royal Bank of Scotland, Santander, and Nationwide Building Society, which together account for about 90% of bank transfers, must all have their CoP schemes up and running by March next year. Banks that don’t sign up to the scheme would automatically become targets in the eyes of fraudsters as they won’t need the details of the bank account to match the name of their intended target. Therefore, there would have to be a more collaborative approach from banks for the implementation of CoP to work.
While the decision to implement the scheme is down to each individual bank, The Payment Systems Regulator has said that Lloyds, Barclays, HSBC, Royal Bank of Scotland, Santander, and Nationwide Building Society, which together account for about 90% of bank transfers, must all have their CoP schemes up and running by March next year.
Regardless of when CoP will be introduced, there are other tools to help banking customers tackle fraud, such as dynamic authentication journeys, which requests that a user states why they are conducting a transaction and offer fraud warnings, that are very effective at preventing APP fraud. However, the logic behind these policies can be complex and they require constant monitoring in order to be kept up to date. Once the implementation of these dynamic user flows has been done, it also highlights the question about how the outcomes can be accessed by the third parties that leverage a bank’s Open Banking APIs.
To have any chance of reducing banking fraud, it’s crucial that financial organisations today use all the relevant information they have to generate a full picture of their customers. It is imperative that they utilise the data at their fingertips in order to safeguard their customers while still providing the seamless, friction-free service they demand. A customer’s digital presence will only be protected from fraudsters once banks look at all the elements of security as interconnected, rather than separate components.
By feeding data into a strong and dynamic policy manager that can be nimble and adaptive, banks will be better compliant and secure while at the same time provide robust user journeys that provide the right amount of friction when necessary. By having a more holistic approach to security, rather than focusing on single point elements, they have a far better chance of beating the fraudsters and allowing their customers to live their digital lives uninterrupted.
It seems only yesterday the Competition and Markets Authority (CMA) decreed that larger banks’ long-standing customer relationships impeded competition and innovation.
Open Banking has opened the door for third parties to access bank held account data as well as giving the ability to initiate payments from a customer’s bank. Features designed to allow new services to be delivered giving users enhanced financial services along with new, safe and secure ways to pay.
Soon these opportunities will be reflected in the rest of Europe as all banks ready themselves for a September go-live date. So what can Europe learn from Open Banking in the UK?
State of the UK
It’s well versed that Open Banking has been slow to take off in the UK. Indeed, by the time the implementation date arrived only four of the UK's nine biggest banks were ready. Nonetheless, we are now seeing some signs of impressive applications powered by Open Banking setting the standard for Europe.
The biggest challenge in the UK was that the concept and technologies used were new, resulting in a number of iterations being required to deliver products that meet market needs.
A key differentiator in the UK has been the Government introducing the Open Banking Implementation Entity that sets and polices progress.
PwC has estimated £7.2 billion in revenue will be created by Open Banking by 2022.
The European Landscape
The European landscape looks quite different. With no equivalent regulatory or policing body and no specific government drive, we are anticipating considerable variation of standards from bank to bank. Lack of consistency in how Open Banking is deployed will slow adoption as the development of new services becomes more complex and users do not receive a common experience.
To address this there are groups such as STET in France and the Berlin Group working to define standards for implementing Open Banking. There is also pressure from various banking trade bodies such as DDK in Germany pushing for commonality in standards.
The development of standards by such groups will help to create consistency, yet it still begs the question as to who will enforce regulation and uphold financial institutions to the specified due dates?
Cooperation between the banks
Naturally, the scale of this European go-live is not as straightforward as the UK’s due to the number of banks involved. Yet, it has the potential to unlock financial services and technological innovations that could position Europe as one of the leading financial regions when it comes to Open Banking.
Indeed, PwC has estimated £7.2 billion in revenue will be created by Open Banking by 2022. European banks need to view this as an opportunity to enhance banking capabilities and deliver for increasingly tech-savvy consumers both within and cross country borders.
One lesson to be learnt from the UK is that embracing Open Banking allows banks and financial institutions to innovate and deliver exceptional services to their customers.
Embracing Open Banking
And what about the wider world? In Europe, there are two aspects of Open Banking, one covering access to data and the other dealing with payments. Adoption around the rest of the world is developing at a pace, with many countries either already living with viable applications or in the process of introducing legislation. Differing areas are focusing on specific aspects of Open Banking, for instance, Australia looks more to the data usage whereas India already has a successful payment infrastructure based on these principals.
Despite the local and regional nuances affecting markets yet to go live with Open Banking, one lesson to be learnt from the UK is that embracing Open Banking allows banks and financial institutions to innovate and deliver exceptional services to their customers. Open Banking requires banks to cooperate with others to deliver the desired objectives of innovation to meet the ever-changing needs of customers.
Then, and only then, will we witness an explosion of new products and services for consumers throughout Europe and realise the true benefits of Open Banking.
That is why, when the Competition and Markets Authority ordered the implementation of so-called Open Banking almost three years ago, everyone excitedly welcomed the prospect of upstart new banks and other fintech companies using technology to challenge the Big Five. Here Kevin McCallum, CCO at FreeAgent , talks to Finance Monthly about the different ways big banks are making the most of Open Banking.
More than a year after roll-out began, however, it looks more like the little guy is not yet making the inroads expected. In the new Open Banking race, it is the incumbents which are still leading the field.
When the CMA found insufficient competition in banking, it was no surprise - almost 90% of business accounts are concentrated with just four or five institutions, while 60% of personal customers had stayed with their bank for more than a decade.
The central solution was to be Open Banking, starting with requiring banks to allow rivals and third-party services access to customers’ account data - subject, of course, to the necessary permissions. This, the theory went, would spur competition through innovation - we would see banks reduced to interchangeable commodity services, mere infrastructure providers, with nimble, agile third-party services innovating on top, spurring the banks in to action.
In the same timeframe, we have certainly seen the emergence of digital-only challenger banks like Starling, Monzo, Tide and Revolut. While all of them offer 2019 features like savings round-ups, spending analysis, budgeting and merchant recognition, most of the innovation has happened within the walled garden of the traditional account.
Starling and Revolut are already registered for and engaged with Open Banking. Starling is now supported by MoneyDashboard and Raisin UK, while Revolut’s API is supporting connection to many third-party apps. But it’s fair to say the upstarts were expected to dive in to Open Banking faster and deeper than this, some consider them to be behind the curve.
What we have seen, instead, is the big banks leaning heavily in to Open Banking.
HSBC was amongst the first to offer account aggregation, the practice through which consumers can access account data from rival banks, inside a single provider’s own app, initially through a separate Connected Money app. Barclays, Lloyds and RBS/NatWest have since gone as far as offering the facility inside their core apps.
Of course, the big banks are incentivised to pull in rivals’ account data. Being the first port of call for all finance matters is attractive, whilst account data from other institutions can be used to aid product marketing and lending decisions.
In truth, we have begun to see the first signs of innovation amongst third-party services which plug in to those accounts. CastLight is helping lenders more quickly understand customers’ affordability, Moneybox is helping users round up spending in to savings, Fractal Labs uses knowledge of account activity to help businesses better manage their cash. We have even seen a large bank powering such new-style services in the shape of TSB’s loan comparison service, powered by Funding Options, which surfaces products from across providers.
But, even so, these use cases are not a step-change from the kind we already had before, albeit using less sophisticated methods of data collection. At FreeAgent, where we have offered bank account integration through more rudimentary means for several years now, we sense strong customer demand for efficient, API-driven bank account access. Most onlookers, and digital-savvy customers of the new-wave banks, expected more than this by now.
Why has the pace of Open Banking innovation to date been relatively underwhelming?
First, only the UK’s nine largest banks were mandated by the CMA to make account data available through APIs by the January 2018 deadline.
Ironically, the upstarts have been relatively more free to sit back. Indeed, unlike the legacy holders, they have no burning platform they need to quickly save; for them, the future is growth.
In fact, though, as smaller, less-well-resourced entities, they also have to plan out their investment more carefully than wealthier institutions, rather than dive headlong in to costly initiatives. Monzo is on-record as saying it will embrace the possibilities slowly, exploring whether to build features like account aggregation “in 2019”. When you’re a bank - even a cutting-edge, agile one - “move fast and break things” is a hard mantra to follow.
Furthermore, actual technical implementation of Open Banking is, shall we say, non-trivial. Adoption is complex, and far more complex for account providers than for third-party accessing services. In many cases, writing native code to enable integrations, whilst it may be considered messy, has been more straightforward than adopting Open Banking APIs.
Finally, the big banks, the “CMA 9”, have pushed compliance with Open Banking right down to the wire. Whilst they have been first to the punch, had they managed to launch sooner it may have encouraged the upstarts to compete more quickly.
It won’t stay like this forever. The Open Banking timeline has been an ironic inversion of the class of companies we typically expect to be canaries in the mineshaft of technical trailblazing. But banking innovation is about to become more evenly distributed as the balance between big guns and small players levels out.
From September, all banks, even the smaller ones, must be compliant with Open Banking standards. That is going to be an interesting moment for the new wave - can you really be considered the plucky upstart when you are subject to the same compliance framework as the lumbering giants?
Further regulatory compulsions on the big banks - and one in particular - could further spread Open Banking innovation downstream.
As part of conditions attached to its £45 billion government bail-out during the banking crisis, RBS has been compelled to funnel £700 million in previous state aid in to measures supporting business banking competition.
This so-called Alternative Remedies Package includes several pots of innovation funds, and the scheme’s independent administrator has just made the first innovation awards - £120 million to Metro Bank, £100 million to Starling, £60 million to ClearBank. Metro is promising “radically different” business banking, including “in-store debit card printing, lightning-fast lending decisions, fully digital on-boarding, integrated tax”; Starling says it will build “full suite of 52 digital banking products to meet the needs of all sole traders, micro businesses and small SME businesses”.
Even more awards are due to be made through 2019, likely spurring new use cases for Open Banking, and more besides, that many had not yet dreamed of. This level of funding is going to be an enormous catalyst for the kinds of companies that are really well placed to deliver.
The pace of technology adoption doesn’t always happen as quickly as it sometimes can feel.
Sometimes a great idea can take a long time to bubble up and gain widespread adoption. Shortly after the invention of the horseless carriage, Michigan Savings Bank is said to have forecast: “The horse is here to stay but the automobile is only a novelty - a fad.”
Technology becomes successful when innovation becomes normalised, when enough adoption has been seen that what, once, was considered new fades away and becomes part of the furniture.
Although we have spent the last couple of years talking about the Open Banking initiative, and although its roll-out has been slower than expected, this should not distract us from the likelihood that, in a short while, the innovation and adoption cycle around it will have accelerated to the extent we see many, many new use cases all around us spurring more services and more competition.
The ultimate test of Open Banking, then, will not be who is first to market - it will be when we no longer talk about it at all.
Many thought it was too good to be true, but was it? Below Karen Wheeler, Vice President and Country Manager UK at Affinion, gives Finance Monthly the rundown.
YouGov research highlights that 72% of UK adults haven’t heard of Open Banking and according to PwC, only 18% of consumers are currently aware of what it means for them. However, that doesn’t mean the changes aren’t filtering through.
The story so far
The Open Banking Implementation Entity (OBIE) reports there are now 100 regulated providers, of which 17 Third Party Providers (TPPs) are now using Open Banking in the UK. Open Banking technology was used 17.5 million times in November 2018, up from 13.9 million in October and 6.5million in September, with Application Programming Interface (API) calls now having a success rate of 97.7%.
One of the earliest examples was Yolt, by ING Bank. It showcases a customer’s accounts in one place so they can see their spending clearly and budget more effectively. Similarly, Chip aims to help people save more intentionally. Customers give read-only access to their current account and then sophisticated algorithms calculate how much a customer can afford to save, and puts it away automatically into an account with Barclays every few days.
High Street banks have certainly taken inspiration from fintechs. For example, HSBC released an app last year enabling customers to see their current account as well as online savings, mortgages, loans and cards held with any other bank. The app also groups customers’ total spending across 30 categories including grocery shopping and utilities, making it a really helpful budgeting tool.
Perhaps, most advanced of all, Starling Bank allows customers access to its “Marketplace” where they can choose from a range of products and services that can be integrated with their account. The offering currently includes digital mortgage broker Habito, digital pension provider PensionBee, travel insurer Kasko, as well as external integrations such as Moneybox, Yoyo Wallet, Yolt, EMMA and MoneyHub.
Open Banking and GDPR
One key question is whether Open Banking puts the needs of financial services companies over those of the consumer. There is a general cynicism regarding the real reasons for encouraging Open Banking and this is exacerbated when most customers aren’t seeing the benefits.
Also, there is confusion caused by the apparent conflict of interest between Open Banking and GDPR.
In this day and age, do consumers really want more organisations to have access to their data? Can they trust the banks? According to PwC, 48% of retail banking customers cite security as their biggest concern with Open Banking and this is a significant barrier to overcome.
The way forward
It’s hard to overcome cynicism and doubt. Perhaps, once customers begin to enjoy the positives, they will be less sceptical about Open Banking, leading to more opportunities to build longer term customer engagement. For example, if products help them avoid going into debt or nudge them when new mortgage rates are on offer, they will see that banks are using the technology to support wise financial management rather than just serve their own marketing purposes.
It’s also hard to change entrenched consumer habits. To encourage consumers to get in the habit of comparing and switching, financial organisations must create truly compelling propositions. They need to focus on delivering intuitive, useful digital products which make a real difference to customers’ daily lives.
They also need to demonstrate how seriously they take their role in the fight against cybercrime while educating the consumer about how Open Banking works and how to protect their data. For example, many may not realise that one of the key tenets of Open Banking is security. Open Banking uses rigorously tested software and security systems and is stringently regulated by the FCA.
Placing the customer at the centre of their finances and giving them complete control directly increases competition and brings a myriad of everyday benefits to the customer. There is huge opportunity for traditional banks, fintechs and disruptors to use Open Banking to pioneer new products that build longer term customer engagement. However, the current priority is communicating the huge advantages and opportunities that Open Banking brings while reiterating that their data will remain secure.
The findings form part of a report into borrowing practices and frustrations with the consumer credit market. The research, conducted by Duologi, surveyed 1,000 UK residents and found that, on average, 34% of people think that UK businesses could be doing more to provide point-of-sale (POS) finance to their customers.
Despite many large brands already providing POS finance on purchases, more than two in five (42%) shoppers believe that retailers could do more in this respect.
Another 42% of people said that this payment model could be better utilised in the property industry for payments such as estate agent fees, conveyancing costs or added expenses for mortgage advisory services.
A further 32% of people believe that the education and training sector could do more to offer POS finance, with another quarter (24%) of people saying that the health industry should work harder to offer these options to help patients access a wider range of services and procedures like IVF.
Lastly, 32% of people stated that the travel industry’s POS finance offering could be made more accessible – not only for splitting the cost of a holiday, but also for fees like rail season tickets, which often offer a better deal when paid upfront.
The research also showed that almost a fifth of shoppers would want to borrow from as little as £100 – but that many brands only offer finance over a certain amount; therefore, limiting their ability to tap into this market.
Duologi credit director, Rob Cottingham, commented: “Currently, POS finance is used most widely in retail but consumer appetite for credit options across a wide range of sectors is evident, and many think that these industries should be doing more to offer POS finance. Given the ongoing growth of e-commerce, the ability for these retailers to provide credit both on and offline could prove crucial in the future.
“Clearly, there is consumer demand for POS credit – so for those brands that do already provide finance options but aren’t seeing results, it’s vitally important to promote it more heavily. Simple tools such as pop-up banners near till points, posters in the waiting room or a clearly-visible website header can alert potential customers to the benefits of finance solutions, providing a clear reason to purchase from that business in particular.”
Backed by global investment firm, Oaktree Capital, Duologi offers merchants the chance to increase their sales, boost customer satisfaction and grow profitability through the delivery of tailored point-of-sale finance options.
(Source: Duologi)
Open Banking was implemented a year ago to create a revolution in consumer finance. While the initiative is taking time to fully embed, it is without doubt having a profound impact and we expect it to play a central role in the banking sector in the years ahead. As more companies evolve the new technology into live customer journeys, consumers will begin to experience the full benefits of the proposition and demand for Open Banking will increase.
We envisage services going beyond banking data, for example encompassing social media information so consumers can manage their data in one place to gain easier access to tailored services. Open Banking also has the potential to play a key role when it comes to addressing problems such as persistent debt.
Open Banking data greatly enhances companies’ level of understanding of individuals’ financial circumstances, enabling them to better assess their suitability for lending products. For those individuals with thin credit files, for instance, someone relatively new to the country or the self-employed, Open Banking data can be harnessed to get a more accurate view of their capacity to repay credit. The fusion of credit reference agency (CRA) data and granular transactional data is likely to build the best picture of affordability. “Open Banking is still in its infancy and, of course, many challenges still lie ahead, namely an educational deficit regarding how Open Banking can improve consumers’ financial lives, as well as understanding data’s positive predictive capabilities. It is equally important that reassurance is provided around the control and maintenance of individuals’ data, reiterating the information will only be used with their permission and they can revoke access at any time. It’s up to the banks and providers like ourselves to communicate the real life benefits the initiative can bring. We expect 2019 to be a successful year for Open Banking as impetus, insight, awareness and product-based solutions grow.
As an enabler for increased competition and customer choice, open banking is transforming the banking sector for consumers, challenger banks, FinTechs and traditional players alike. The UK’s version of the second Payment Services Directive (PSD2), open banking is forcing UK banks to open their data sets via secure application programming interfaces (APIs), resulting in them re-positioning their services away from being one-stop shops for financial products, to open platforms, where consumers can embrace a more modular approach to banking by allowing third parties to access their financial data directly.
As we enter the second full year of an open banking environment, Kevin Day, CEO of HPD Software, the asset based lending and factoring software platform, discusses the opportunities and challenges that the sector is likely to face in 2019.
Rapid and significant innovation in financial services to grow the market considerably
Open banking’s data sharing rules are aimed at developing new technologies and innovation, which have been advancing at a rapid pace, and which is expected to continue, resulting in increased competition between banking providers and FinTechs. The open API data, which includes account aggregation, improved financial management, credit scoring thin-file customers and integrated lending and accounting platforms allows companies to create bespoke products and target potential customers in a completely new way.
Through such innovation, customers will be able to quickly compare accounts, helping them to understand where to find the most suitable products. Financial management meanwhile could now be offered by an array of financial service providers, from established banks to charities, in a move that encourages customers to shift from traditional ‘under one roof’ banking services to specific, individualised services that are suitable for their personal financial situation. The potential revenue opportunity across a range of SME and retail customer propositions is estimated by PwC to be £2.3bn at the end of 2018, of which £1.8bn could be cannibalised by existing or new players in the market, with the remaining £0.5bn representing new revenue opportunities. Based on forecasts for adoption across the same markets over the next four years, PwC expects incremental revenue will total £1.3bn, where £5.9bn is ‘revenue at risk’.
A lack of homogenous technical standards may make operating processes susceptible to corruption and companies need to be clear on how they will safeguard their data against fraudulent activity.
Enhanced industry collaboration
Another considerable advantage of open banking is the enhanced industry collaboration that will result from data sharing as providers, traditional banks and FinTech companies will between them be able to offer something that the other cannot. With so many players in the financial services industry, the formation of partnerships between banks and their FinTech competitors will result in increased choice for customers, and will help both players to survive and expand their services in a rapidly evolving industry. Any new products formed through such forward-thinking partnerships will likely see the benefits at both ends of the spectrum.
Traditional customer platforms are going to change
Open banking will enable a new league of consumer profiling that will require minimum effort to find the most relevant information on products and services across the industry that are tailored to their individual needs and history. From personalised investment solutions to retail overdraft decoupling, the shift in data optimisation will become the new normal, altering the way traditional price comparison platforms operate. This movement won’t stop there: bank account and transaction data can provide an opportunity to collaborate across different sectors where retailers, utility providers and tech companies can function together on aggregated data platforms.
Access to consumer data increases responsibility around security
The opportunities created by initiatives such as open banking, which have the potential to transform the industry, of course come with responsibilities, and one of the major challenges will be around managing risks related to security. A lack of homogenous technical standards may make operating processes susceptible to corruption and companies need to be clear on how they will safeguard their data against fraudulent activity. Any major data breach is likely to negatively impact retail customer uptake – many consumers consider their financial data more personal than their medical information. With complex chains of data access, both banks and FinTechs must also consider the obstacles associated with responsibility for any security breaches, and ensure that their software is able to identify, predict and react to risks or breaches in good time.
By bringing third-party providers into the banking system, there is a considerably increased risk of scammers gaining access to customer information.
Liability becomes an issue
By bringing third-party providers into the banking system, there is a considerably increased risk of scammers gaining access to customer information and the finance provider will be liable, unless there is evidence of fraud or negligence. With both banks and FinTechs alike facing increased security threats, without proper legal clarification, it’s inevitable that finance providers will do what is necessary to push liability on third parties.
Open banking is still a relatively new initiative
A lack of awareness and education around the capabilities of open banking will be its greatest challenge in the short term. Finance providers will need to convince customers of the benefits of sharing their data in the first instance, and as yet, banks are not marketing open banking, which directly impacts the ability for it to innovate and provide new propositions.
While the corporate sector and SMEs in particular seem far more willing to embrace open banking, consumer review body Which?, has found that 92% of consumers had never even heard of the initiative. As such, banks and FinTechs need to embark on a considerable education programme for consumers to better understand the benefits of open banking and how it can help them take control of, and better manage their finances, from monitoring spending to making better savings and investment decisions.
For finance providers in the Asset Based Finance space, there are opportunities to leverage efficiencies from open banking, in particular in the area of cash processing with the potential for virtual bank accounts to streamline cash reconciliation. There are also value added services that can be offered to SMEs to assist them with other aspects of running their businesses. Finance providers will need to have an open mind and be prepared to collaborate with FinTechs and other technology providers.
Once banks have stronger propositions to offer their customers, they will become more vocal and the lack of awareness will gradually cease to be an issue. For the financial services industry and new entrants alike, it is important that all parties embark upon this education programme with the proper systems in place for proper levels of monitoring, security and scalability to ensure a success of the industry.
Website: https://www.hpdlendscape.com/
