Welcome to Open Banking
Twitter and LinkedIn are alight with excitement. And while it might seem that every month sees a new, game-changing disruption to the banking industry, Open Banking certainly warrants our attention.
Globally, the pressure is on. Both regulatory bodies and – more importantly – consumers, demand a more open and accessible marketplace. Europe has formulated this with the Revised Payment Services Directive (PSD2).
PSD2 will (hopefully) achieve a market where banks and intermediaries interact and work together for the benefit of everyone. We, the customers, will have a more open, managed and benefit led service – after all, it’s our data!
It’s not a totally new concept. In the US, for example, Mint has amassed over 10m customers to its account aggregation and personal finance platform since 2006. They claim to own the final, and most important touchpoints of a customer’s relationship with their money and banking decisions. And closer to home, OnTrees has succeeded in presenting our financial data in a way that most incumbent organisations could only dream of.
You can see why the traditional banks might be a little panicky. And it’s how they respond to this change that will help shape their future – they can’t just buy their way out of this one.
The opportunities derived from the PSD2 legislation are numerous. Much like GDPR, how banks read and leverage these opportunities will determine whether they win, securing the early adopters and important market share; or lose, and merely survive this next phase of ‘disruption’.
I want to explore some of these opportunities, but first, some context…
Technically, how it works…
Open Banking is the coming together of standards with safety, transparency and ease at its forefront.
The PSD2 legislation dictates that banks must provide access to their customers’ data to third-party entities, should the customers give consent. It reflects that essentially, it’s your information and you can do what you want with it. The bank is a custodian, not the sole handler.
It means that different third parties can use your data to service you better, while also potentially partnering with your bank to enhance their products and services. Again, only with your permission.
Previously, services that wanted to access your banking and spending data would require bank login details, where it could then use screen scrapers and other slightly crude methods to retrieve your data (see Ontrees again). Or, they would need to enter into long, protracted and costly negotiations to partner with a bank officially.
The powers that be – specifically the EU PSD2 legislation driven by the UK’s Competition and Market Authority – have been working with the ‘big nine’ banks* since 2016 to provide customer data through a series of open APIs.
The APIs are standardised, so start-ups and fintechs will only need to build one interface or design one journey, even if they want to connect to several banks.
The customer will always need to give their consent, and banks will need to adhere to new security directives that stem from PSD2 (albeit they have 18 months to do so). Each third party must be FCA regulated, as well as have directory permission managed by the Open Banking Implementation Entity (OBIE).
How will it affect the banks?
Firstly, incumbent banks will need to compete with the blank page infrastructure of the challenger banks (and Facebook and Amazon for that matter!) Traditional behemoths will need to ensure they drive ideas and solutions that may sometimes seem difficult or protracted due to historical IT. That said, challenger banks are still challengers, and will continue to have the scale issues they are currently battling with.
Some larger banks will still likely be riding the crest of the Digital Transformation wave. Therefore, it is imperative they do not stall but incorporate Open Banking into their existing and continuing IT&S investments – far easier said than done.
And for the start-ups?
This is a huge opportunity for start-ups and innovators willing to commit to the legislative and legal requirements. There is no doubt, that banking in the future will be better than it is now, especially from a consumer pov. Overlaying intelligent services on top of banking products is the fastest way to market. Why take two years to get a banking licence when you can build on someone else’s?
It’s not all positive here, PSD2 is legislation after all. Fintechs and 3rd parties will now have to have the right liability cover, get onto the directory and be FCA approved. Not always the easiest process. So, for some, this is a fantastic data capability and route to market, whereas for others it could spell the end of a dream.
Most importantly, what does it mean for the customer?
The possibilities are endless. Better insight into how you spend and manage your money will allow 3rd party services to more accurately reward ‘good’ behaviour, whilst better managing ‘risk’ factors. Customers will be more informed, while the utility partners/services will be able to make more versatile decisions and more easily incorporate human and environmental factors in their decision making and credit scoring.
Bud has already begun working with HSBC’s First Direct to push better financial and wider utility deals through a new app. Watch this space! This is only one example of many.
There is lots of opportunity
A few weeks ago, I was asked to comment on GDPR and its impending impact on businesses, both big and small. My sentiment was a positive one, and it’s something I feel strongly about when we talk about PSD2. The legislation is here, it isn’t going away anytime soon and it’s how the industry, including Six as a consultative and creative partner, reacts to it that will mean it changes the world or not.
It’s very easy for me to only see opportunity when I’m not the one heading up the change and transformation division of a large retail bank. But I feel that the complexity, risk and opportunity will only come to the fore quickly if we have an imaginative, positive and customer first dedication to how we talk about it and move forward.
Pace to perfection
Banks are already under intense pressure to keep up with their challenger rivals and, more urgently, customer expectation in the digital sphere. The bank that provides the most seamless and connected experience with third-party fintechs and apps, that customers actually want to interact with, will have a head start.
Understand and present the benefits of this new world
The banks must learn to translate and sell the benefits of their strategy – delivering culture and education internally, and context and USPs externally will be key skills. Especially for those internal teams who are already migrating a more Agile and “Systems Thinking” mindset.
Partner planning and the API economy
Embedding data as an opportunity will enable product teams to imagine and conceptualise true end-to-end customer journeys.
Thinking about moving home first and a mortgage product second will open up a host of opportunities that are now achievable through the APIs and the right partners. How deeply can Zoopla integrate with a bank’s mortgage journey and add value for example?
When will we see it?
2018 will see an ongoing thread about Open Banking, but with banks such as Bank of Ireland, Santander and Barclays already seeking a deadline extension, it will realistically be the end of 2018 before we get sight of any tangible changes that the incumbents plan for or adopt, and in addition, it’s likely to be 2-3 years before we see the real impact of 3rd party and intermediary partnership at a customer level.
With all its complexity and regulation, Open Banking will take some time to ramp up. But we are absolutely headed in the right direction.
*Barclays, Lloyds Banking Group, Santander, RBS, HSBC, Danske, Bank of Ireland, Nationwide, and Allied Irish Bank.