The UK has taken a giant step into the unknown, launching Open Banking ahead of its European counterparts. While not all the designated banks were ready on time, the initiative lays the groundwork for a range of new propositions for consumers and businesses. Joy Macknight reports.

Open Banking

A radical shake-up in the European financial services landscape began on January 13 with little fanfare. That deadline for the EU’s Payment Services Directive 2 (PSD2) transposition into national law also saw the launch of the UK’s Open Banking initiative, “helping to make PSD2 a reality in the UK”, according to Christopher Woolard, executive director of strategy and competition at the Financial Conduct Authority (FCA).

Speaking at the Future of Retail Banking conference in November 2017, Mr Woolard outlined three aims for PSD2 and Open Banking: improve consumer protection; establish new and more convenient ways for consumers to manage their finances; and enhance competition in retail banking.

The first nine

While banks in other European Economic Area countries have until the regulatory technical standards (RTS) come into play – most likely September 2019 – to comply with PSD2, nine banks singled out by the Competition and Markets Authority (CMA) as the largest UK providers of current accounts to consumers and small businesses (up to £6.5m [$9m] turnover) were held to the January 2018 deadline. The so-called CMA9 account for 85% of the UK current account market.

Under Open Banking, the CMA-mandated banks are required to: share transaction data with account information service providers (AISPs), and send immediate payments when requested by payment initiation service providers (PISPs) and authorised by customers. To participate in Open Banking, both types of third-party providers (TPPs) must be regulated by the FCA and registered on its publicly available directory. Consumers and business can choose which TPPs to share data with, effectively putting the end user in control of their data.

The CMA also mandated the adoption of standard application programming interfaces (APIs), which means that TPPs do not have to create different bridges to connect with each bank. In this respect, the UK leads the world, according to Imran Gulamhuseinwala, implementation trustee at the Open Banking Implementation Entity (OBIE). “There is no other country that has created access to [current] accounts through standard APIs,” he says. “We have secured both data portability and interoperability in financial services, which creates a space for innovation.”

Importantly, Open Banking has established a dispute resolution procedure, which will help allay consumers’ security concerns when using TPPs. For data breaches, the consumer’s recourse will be with the liable party, whether bank or TPP, says Yvonne Dunn, partner and head of fintech at international law firm Pinsent Masons.

If a payment goes wrong, the consumer can go to the bank for recompense, so the consumer will not lose out. “The interesting and slightly challenging area is the dispute resolution mechanism that then applies between banks and TPPs, and clarity around voluntary dispute resolution is quickly going to be quite important,” says Ms Dunn.

A rolling start

Despite 18 months’ preparation, not all CMA9 banks got over the line. Only three – Allied Irish Banks Group, Danske Bank and Lloyds Banking Group – managed to be ready, while Bank of Ireland, Barclays, HSBC, Nationwide, Royal Bank of Scotland and Santander were given extensions.

Mr Gulamhuseinwala was not surprised that not all hit the deadline, due to the complexity of the initiative. “But we ensured that what they have landed with is safe, secure and fundamentally works,” he says. “We have given a little leeway: a week in some cases, possibly a month or so in others. However, when we look back in a few years’ time, a few weeks here or there is not going to have a lasting impact on the programme.”

This is phase one of the launch, as well as the first of four releases in the programme leading up to the implementation of the PSD2 RTS. Phase one is comprised of a six-week testing period with authorised TPPs, essentially fintech start-ups. The second phase will begin when those TPPs are ready to deliver their propositions to end users.

In addition to sharing transaction data, single immediate payments are part of the first release, which will allow consumers to execute a push payment in a secure way without showing user names or passwords. From the second release, the OBIE will add functionality to the API standard, such as future-dated payments, recurring payments, international payments and foreign exchange payments, as well as bringing other products into the standard, including credit cards and e-wallets.

“The managed rollout is similar to how fintechs operate, for example with a minimum viable product or closed beta testing, whereby products can be worked up without showing them to mainstream consumers until they work,” says Mr Gulamhuseinwala. Currently, the testers are staff members of the CMA9 and OBIE, with the TPPs’ staff being added towards the end of the rollout.

Spring target

The main challenge HSBC faced in preparing for Open Banking was related to the testing and specification discussions, which took longer than expected, according to Raman Bhatia, head of digital, UK and Europe at the UK bank. HSBC was ready with its account servicing API on January 13 and spent the following four weeks testing end to end with six TPPs and HSBC.

On the payments initiation side, the bank is expecting to go live with its APIs at the end of February. “The extra time is to ensure that the experience is safe and positive for customers,” says Mr Bhatia. The bank’s other brands – First Direct and M&S Bank – will go live with their APIs in April.

Danske Bank, which met the deadline, found that coordinating with other banks to ensure a superior customer experience was challenging. Another major hurdle, according to Søren Rode Andreasen, chief digital officer at Danske Bank UK, was creating a robust security model. “As a bank, we spent the past 200 years making it as hard as possible for third parties to gain access. But now we need to make this data freely available to TPPs, so we had to reinvent security,” he says.

Danske Bank is in a unique position, with one foot in the digitally mature Nordic region and the other in Open Banking. It is currently sharing data with more than 100 partners in its home markets, and has launched a few fintech-type solutions, including MobilePay and digital investment platform June. The bank is using this experience to help it work with fintechs in the UK. As Mr Rode Andreasen says: “We are already in that mindset, which will help us collaborate in an Open Banking environment.” To increase its profile among the UK fintech community, the bank recently launched a competition, with partner techstartNI, inviting fintechs to pitch Open Banking ideas to win a £60,000 investment grant.

Danske Bank is also looking to differentiate itself in its home markets by leveraging lessons learned from the UK experience. With Open Banking launching ahead of PSD2, Danske Bank can use the UK as a test environment in which to try out innovative propositions and, if they work, then roll them out across the Nordic countries.

Security priorities

Thinking about security, while also providing a great customer experience, was also a prority for Steve Smith, group director of competition at Lloyds Banking Group. “This meant bringing security and fraud management front and centre, and working with customer focus groups to build the kind of experience they wanted,” he says. 

“Other challenges included the level of complexity of the programme. This was a regulatory programme across Lloyds Banking Group, which meant we needed to take an agile approach to system development at this scale.” The group created a single team made up of colleagues from across the business and consultancy expertise areas.

“We also needed to have the right mindset and be prepared to experiment, develop and test new ways of working that would enable us to drive the programme forward – delivering to time without compromising on quality was key to our success,” says Mr Smith. “We carried out colleague training and communications to help our people understand Open Banking and help them support our customers in an Open Banking environment.”

Yolt’s early start

Yolt, an ING-owned smart money app, was the first TPP to successfully integrate with a member of the CMA9, Lloyds Banking Group. The first successful connection was made on January 17. Because it had been previously testing with Lloyds, Yolt had the correct set-up and within half a day had “connected with Lloyds’ production end points and could see the data flow back and forth”, says Leon Muis, Yolt’s chief operating officer. The connection works across the group’s three brands: Lloyds Bank, Halifax and Bank of Scotland.

Lloyds has subsequently integrated with several TPPs and demonstrated that the AISP and PISP services worked successfully end to end. “Lloyds Bank can now work with any authorised TPP to deliver these services,” says Mr Smith.

As a TPP providing aggregation services – effectively putting a customer’s credit card and banking accounts in one place – Yolt was keenly involved in Open Banking from the outset, according to Mr Muis. He believes that APIs are a fast and secure way of connecting a user’s bank account to the Yolt app. “We have participated in the testing working groups and helped draft testing scenarios to ensure that [Open Banking] becomes an ecosystem that works for everyone – banks, TPPs and end-users,” he explains.

He agrees with Mr Gulamhuseinwala that a managed rollout is a sensible approach to implementation and never expected a ‘big bang’ moment. “Banks have worked hard to get where they are, but not all were able to participate in the industry testing phase,” says Mr Muis. “The phase-in approach allows for tweaking and tuning on both sides.”

European developments

While Open Banking has drawn much attention recently, many banks in Europe have focused on the opportunities that PSD2 opens up. For example, Austria’s Erste Group started its Open Banking journey almost six years ago, when it realised that the banking industry had to reframe its payment services and products.

According to Erste Group chief retail officer Peter Bosek, both PSD2 and Open Banking will allow banks to use payment data to create relevant customer offerings. “While most banks roll out direct marketing relating to specific products, it doesn’t necessarily mean that a client needs a mortgage just because the marketing campaign is related to mortgages. We now have an opportunity to use payment data to come up with relevant propositions at the right time,” he says.

In January 2015, the group launched its open digital banking platform, George, to deliver a personalised customer experience. It developed a solutions store, where some solutions are free while others come at a cost. “We use a ‘sandbox’ approach to learn which services are adding value from a client perspective and test out whether they are willing to pay for them,” says Mr Bosek. Erste is now rolling George out across the whole group in seven countries. It is also looking around for co-operation opportunities with partners, especially fintechs, to add value for clients.

The group’s objective is to create an open ecosystem, with services developed in house but also in collaboration with others outside the group. Erste launched an open API developer hub in the Czech Republic, where coders are invited to access the bank’s APIs. “This gives us momentum in the market because it changes popular perceptions of the banking industry overall,” says Mr Boesk.

Building the ecosystem

HSBC is also embracing an open ecosystem approach and sees Open Banking as an opportunity to ‘plug and play’ with TPPs. In September 2017, it announced HSBC Beta, which is a test-and-learn mobile banking platform for trialling products and services. It is being tested by 10,000 customers and will be rolled out soon, according to Mr Bhatia.

In October, its subsidiary First Direct partnered with Bud, a platform which aggregates financial services for better money management. “We are taking baby steps in the direction of what it means to be a marketplace,” says Mr Bhatia. “Regulation or no regulation, the open ecosystem idea is the direction of travel for HSBC and APIs make it that much easier. We believe our customers still want a trusted brand in the hub, and we want to create a much more contextualised experience on top of our trusted brand.”

Dr Markos Zachariadis, associate professor of information systems at Warwick Business School and co-author of research paper ‘The API Economy and Digital Transformation in Financial Services: the Case for Open Banking’, says: “Theoretically, banks could take a leadership role and become platforms, where they could mediate added value for their customers and attract new propositions and services. That requires a shift in the competitive mindset. Being more efficient, adaptable and ready to integrate are the required characteristics at an organisation and technology level.” 

Mr Zachariadis is currently working on another paper, with strategy professor Pinar Ozcan, that identifies five different types of platforms in the banking industry that have emerged within the Open Banking context and explores the different challenges they face.

Some challenger banks are better at ‘banking as a platform’, Mr Zachariadis argues, because they can think through everything from scratch and ‘design in’ this approach. “They are more agile and think of marketplaces that integrate outside apps,” he says, pointing to Starling Bank as a good example, which “is like the App Store on your iPhone”.

In September 2017, Starling Bank went live with Marketplace, an ecosystem of financial products accessible through Starling’s app. Flux, a rewards and receipt platform, was the first partner to sit within Marketplace, and in February 2018 Starling added digital pension provider PensionBee, robo-adviser Wealthsimple, mortgage broker Habito and Kasko, which provides travel insurance.

The bigger picture

While many banks have been spurred into action by the regulatory push, Dr Louise Beaumont, strategic adviser at Publicis.Sapient and co-chair of the techUK Open Banking Working Group, argues that they have ignored other drivers of change: consumer attitudes and behaviour; enabling technology for hyper-personalised, predictive and pre-emptive services; and competition, not just from fintechs but also tech titans and organisations with massive amounts of customer data, such as retailers, telcos and energy providers.

Daniel Kjellen, founder and CEO at personal finance management platform Tink, agrees that it is a misconception that PSD2/Open Banking is driving change. “There is enormous consumer desire to use banking data elsewhere and get simpler advice from different sources. This is the mega-wave that we have seen over the past decade,” he says. “And while PSD2/Open Banking removes the roadblock that has prevented this consumer need from being addressed, many banks have their eyes on the blockade instead of the oncoming tsunami of change. The most progressive banks are those that point to the tsunami and say ‘that is where we need to be to create services’.

“Unsurprisingly, many banks are still very hesitant and haven’t dared place their bets yet,” he adds. “That is a sign of how much is at stake for this industry.”

Ms Beaumont identifies four core characteristics for success in an open future. First is the ‘stretchiness’ of a bank’s brand and its ability to accommodate new customers, services and partners.

The second is how a bank talks and listens to people, and whether it is in a language they understand and which resonates with them at the right time. “If a bank is delivering hyper-personalised services, it needs to get the timing right, as well as words, pictures and substance,” she says.

The third defining characteristic is design. “Banks need to design and deliver services that work in an ecosystem,” she says. “Banks may claim to have lots of customers, but so do the tech titans and they are digital/data natives. Tech titans already deliver services that are built as an ecosystem and attract the talent needed to develop new services.”

Fourth is the vitally important data capability. “It is not just the ability to find the data, but the willingness to augment and interpret that data,” says Ms Beaumont. “Listen to the data because it won’t tell a bank to push a dumb product without any consideration of the end consumer via mass marketing. It will tell the bank of the unmet and underserved needs the customer has, what they want and what they value.”

Her advice should resonate with banks across the globe, because the move to Open Banking is not confined to Europe but is being considered in many other jurisdictions, including Australia, Hong Kong and Japan. Today the UK has taken the lead and the world is watching with anticipation for new products and services to emerge that will truly bring the potential of Open Banking to life.

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