Open Banking: “The Quiet Digital Revolution”

By Chris Gibson

 

Open Banking adoption growing globally

The financial crisis of 2008 ignited worldwide interest in competition within the banking sector. In particular, regulators in the EU and the United Kingdom identified insufficient competition as a key obstacle to reform. In its 2016 report entitled “Making banks work harder for you”, the UK’s Competition and Markets Authority (UKCMA)  summarized the problem: “we found that older and larger banks do not have to work hard enough to win and retain customers, so it’s difficult for new and smaller banks to grow.”  The solution, for the UKCMA and the EU, was to open these markets to new entrants by requiring incumbent banks to share data with each other and new entrants in order to facilitate new account information and payments services for consumers. This, along with the addition of the necessary technical standards, consumer protection rules and implementation guidelines, is the beginning of what is now called Open Banking.

For European and British consumers, Open Banking means access to a new range of services built upon consumers’ new-found rights to share access to select portions of their data and accounts at incumbent banks with new service providers. For these consumers (businesses and individuals), Open Banking means more payments options, Personal Financial Management services with fewer security risks, new savings tools, better loyalty programs, new cash management tools, and a host of other services limited only by the market’s imagination and ability to innovate. All of this will be delivered by an infrastructure as robust and secure as that which provides online banking services today.

Outside of Europe and the UK, the regulatory approach to Open Banking has been adopted in Australia, Hong Kong and Turkey.  Elsewhere, it has proceeded on a different track.  Canada, the United States, India, Japan, Singapore and others have not (yet) adopted the compulsory regime of Europe and have instead chosen what Deloitte describes as a market-driven approach with uneven government involvement in the form of encouragement without legislative mandates. Where business and technical standards have not emerged, firms have either employed bilateral agreements and APIs, such as BBVA’s Open Platform, or employed screen scraping like Mint which has 20 million accounts in North America but is facing challenges arising directly from its unregulated status.

Open Banking-style innovation of its Personal Financial Management (PFM) tools  requires committing to bilateral agreements that may limit or slow it’s ability to offer advice and new services because partners are more interested in a walled garden than an open playing field. For this reason, former Mint competitors PlaidMX, and Yodlee have either abandoned or eschewed providing PFM services to end users and now sell exclusively to banks and other financial institutions who then provide these API-driven services to their clients.

 

What are the Open Banking services that are gaining traction in the marketplace?

Account Aggregation may be the most common service. From Personal Financial Management services like Yolt and Spendee or Cash Management platforms for businesses offered by Fractal, these services offer a natural use case for APIs generally and Open Banking specifically. They capture and consolidate account activity from multiple institutions  and add budgeting, accounting, payroll, price comparison and other capabilities.

Payments services also figure prominently. Citizen and Vibe provide card-less payments to businesses and individuals respectively while Currensea adds competitive foreign-currency rates to existing debit cards. Even borrowing can be improved via Open Banking: CreditLadder allows individuals to capture rent payments in their credit histories while Credit Kudos streamlines loan applications for businesses using their banking history.  Other applications capture digital receipts, offer cash rewards, or  integrate with loyalty programs and savings products.

 

Regulatory regimes are in early stages with security as the top concern

It is still early days: the British and European regulatory regimes are less than three years old and Open Banking elsewhere has even less history. Nonetheless, growth in the United Kingdom is encouraging: by the end of 2019, the UK had one million Open Banking users, 204 regulated providers, 61 providers with at least one active customer-facing service, and a total of 1.25 billion API calls. Looking ahead, PWC predicts an adoption rate of 71% for  Small Medium Enterprises (SME’s) and 64% for adult consumers in Britain by 2022.

Surveys on Open Banking in Australia, Canada,  and Europe all tell a similar story: consumers cite security as their main concern but they are willing to share their data for services that address this concern and provide value. Corporate and SME clients are better informed on Open Banking and more enthusiastic about its’ potential. These clients desire cash management, payments and B2B solutions and have a significant willingness to join public (that is, regulated) or private (unregulated) API ecosystems to access new and improved services. At a minimum, adopting Open Banking will require firms to scrupulously guard customer data and provide credible assurances of security. This alone, however, will not be enough: firms will have to innovate at the product level and build relationships with experienced and innovative providers.

 

Open Banking is here to stay

Four years after the UKCMA’s report on competition in Britain’s banking sector, it is clear that Open Banking is both global and here to stay. Firms that decline to offer a product because they lack expertise or technology may now discover that a similarly situated competitor-or new entrant–can employ APIs and partnerships to bring a compelling offer to market. New products, new services, and new delivery methods fuelled by technology and business innovation are here now and growing rapidly. Financial institutions, new entrants and the Fintechs serving this market can adopt Open Banking or lose ground to those that do.  The “quiet digital revolution” of Open Banking has fundamentally changed the competitive landscape.

 

About TickTrade Systems:

At TickTrade Systems, we have designed our FX, Payments and Analytics technology for the API economy that powers Open Banking. That is, capabilities and context made for API delivery rather than adapted to it. Our suite of APIs and microservices allow financial institutions to add to their capabilities and create solutions that best meet the needs of their customers and then to scale those solutions with speed and agility.

 

 

 

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