OPPORTUNITY OF THE MONTH

Open Banking means a world of new services and tools built by third-party app makers. Nicole Kobie reveals what the banking revolution means for consumers and businesses

Open Banking is about far more than switching from one of the Big Six. Nicole Kobie explores all the ways we can take advantage even if we don’t want to switch, and profiles the startups that are sprouting up with exciting products.

The future of banking is open – whether the big banks want it or not. British and EU regulators have rolled out a series of changes under the guise of Open Banking, which forces the largest retail finance players to offer customer data to third parties via an API, so they can build innovative new services.

That means you can keep your account with RSB, Lloyds or Nationwide, but not be limited to their services. So your data could be accessed by apps tracking your invoices, managing your spending and helping you save for taxes.

“This is a remarkable project: one with the potential to change retail banking forever,” explained Imran Gulamhuseinwala, trustee of Open Banking Limited and global fintech lead at EY. “If we get it right, we will for the first time anywhere in the world put the customers in control of their financial data, their privacy and their money. It is difficult to overstate just how revolutionary Open Banking could and should be.”

What is Open Banking?

The shift to Open Banking was required by new regulations at an EU and a local level. On the latter front, after an investigation by the Competition and Market Authority revealed a lack of innovation at British banks, plus serious difficulties for customers trying to switch providers, it demanded change.

Open Banking is the retail banking industry’s response, said Gulamhuseinwala, but it also comes alongside EU regulations known as PSD2 ( see p128) that force large retail banks to open up their data to thirdparty developers via APIs. “[Open Banking] is tasked with delivering the APIs, data structures and security architectures that will enable developers to harness technology, making it easier and safer for individuals and SMEs to securely give access to their financial information (should they so choose),” he said.

Open Banking Limited is governed by the CMA and funded by it, the Financial Conduct Authority (FCA) and the nine biggest British banks: AIBG, Bank of Ireland, Barclays, Danske, HSBC, Lloyds, Nationwide, RBS and Santander. As of January, those banks were required by the PSD2 to offer Open Banking tools, although six missed the first deadline.

Gulamhuseinwala doesn’t think regulation is the only impetus behind the changes. “Open Banking is not happening simply because the regulators are mandating it,” he told

PC Pro. “It is happening because there is commercial opportunity.”

And that’s been spotted by startups. “Financial services has traditionally been a utility-based sector with a small number of players providing a largely homogeneous set of products,” said Gulamhuseinwala. “What the fintechs are demonstrating is that you can come into the market and you can provide a great proposition because the barriers to entry are so low now. There is an opportunity to challenge some of these established players. I anticipate seeing non-financial services companies also entering this space – mobile phone operators, pure tech companies and insurance companies. All of those lines are going to blur.”

That said, we’re in the early days of Open Banking. The regulations only landed in January, and some of the efforts have been set back by banks’

“We will for the first time anywhere in the world put the customers in control of their financial data, their privacy and their money”

delays offering those APIs. Plus, it also takes time for developers to get the necessary approvals from regulators, said Chris Gorst, fintech researcher at innovation quango Nesta and lead of its Open Up banking challenge. “I think it’s been a fairly slow start in terms of actual products and services coming to market,” he said. “I think that will change over the coming months. You’re seeing more and more organisations getting all of the authorisations they need to start using Open Banking.

“We’re kind of in the early stages of waiting to see how this is going to play out. I think that’s the reality, and I think people are increasingly realising that Open Banking is quite a long game, and that maybe we’ve just inched over the start line now.”

What it means for you – and businesses

Startups and fintechs are already popping up with services. While many remain in beta or limited release, they show the direction Open Banking is taking and suggest what the future of finance is for individuals and SMEs.

Gulamhuseinwala says Open Banking could unbundle current accounts from overdrafts, letting customers get an overdraft from a lender with a better rate, as well as shift their payment processing to a cheaper provider.

Nesta’s Open Up Challenge has picked ten Open Banking startups to back, with support including £100,000. They offer a range of tools: Coconut helps freelancers and sole traders track taxes and expenses, Credit Data Research rates companies’ potential for credit to make lending easier, and Funding Options lets SMBs compare financial services products.

Gorst predicts that take-up of such services will be faster among sole traders and SMBs than individuals, as the former have plenty of pain points that could use treatment. “I think on the very micro end of the scale, in particular sole traders and freelancers, those are often people who don’t necessarily have the time to deal with the financial and tax and administrative side of their business, and they may not have the capabilities as well,” he said.

Gulamhuseinwala agrees. “I think SMEs will be one of the early beneficiaries of Open Banking – and it will be every bit as game-changing as it will be for individual customers,” he said. “The CBI [Confederation of British Industry] estimates that SMEs spend 20 to 25% of their time on managing finances and accounting – that’s a huge investment of resource which Open Banking can erode by automating routine filings, freeing entrepreneurs up to focus on what they do best: building their business.”

For example, Open Banking apps could automate invoicing, expenses, tax, accounting and other administrative burdens faced by small businesses – and help them raise funds, by letting them share banking information with would-be loan providers. “What Open Banking does is to enable the process of small businesses sharing data and information… so the decisioning and even the provision of funds can be more or less real-time,” Gorst said, making it easier and faster to find a wider range of loan options. “Open Banking is just super well-suited to making that happen.”

Better data also means a more accurate eye on cash flow, with Gorst pointing to Open Up startup Fluidly. This helps SMEs see their current financial situation, as well as what’s likely to happen in the next few weeks. “We know that cash flow is the thing that kills a lot of small businesses unnecessarily,” said Gorst. “If you can help a small business to get on top of that more quickly, it might [survive] by taking corrective action more quickly, whether that’s calling in a debtor or maybe even kind of getting a short-term overdraft arranged. Because Open Banking has that real-time picture of where things are, it’s very well suited.”

“I think people are realising that Open Banking is quite a long game, and that maybe we’ve just inched over the start line now”

The future of finance

Such visions may have small businesses eager to join the Open Banking revolution, but be patient: services will take time to build. “We are really just at the start of our story: new technologies and practices take time to bed in and while I truly believe that this will change the way we work in our economy, that promise will take time to realise – several years at least,” said Gulamhuseinwala.

Indeed, adoption has so far been slow thanks in part to negative press coverage focusing on data risks, Gorst believes, as well as low public awareness. “That will change with some killer app that wasn’t possible, or services that weren’t possible before,” he said. “I think we haven’t seen that service quite yet emerge.”

That killer app may arrive as more data is released. So far, PSD2 only requires banks to share data that’s already being “exposed through existing online channels,” Gorst said. “Banks actually have richer data than that, which could potentially be useful for their customers.” That may happen in future versions of the standard, which is set for frequent updates to better keep up with changing technologies. “The idea is that this standard will get better and richer and enable more and more use cases,” Gorst added.

Such changes will not only encourage startups to work with bank data to create new tools and services, but Gorst predicts bigger players will step into the ring, be it underpressure banks themselves or tech firms such as Amazon and Facebook. “That would obviously be a massive game changer,” he said. “It’s hard to see those guys not thinking of that as a potentially interesting thing for them.”

Should that prove true, the implications for data privacy are major, he added. “Some people have said that it’s a bit unfair that Amazon can now get your banking data, but the bank can’t get your Amazon data.”

While it’s early days for Open Banking, Gulamhuseinwala is optimistic about the work he’s already seeing. “New products are emerging from incumbents as well as new entrants,” he said. “Innovative new ways of making money, of making life-changing financial decisions and paying for things are slowly beginning to appear.”