Ten years ago, I was presenting the concept of banking-as-a-service, with the idea that I could find a wide range of plug-and-play software in a cloud-based marketplace and build my own bank by bringing these pieces of code together into an easy-to-use banking service.
A decade later, that vision has come true as more and more fintech firms offer plug-and-play code in the cloud to make banking simpler and easier. What I did not anticipate is that the regulator would push this service, making it mandatory. That is what open banking has become. It is no longer just a UK thing, but has gone global.
Australia has introduced open banking rules that will force the banks to share data with trusted third-party providers by June 2019; Mexico has introduced a fintech law; South Korea and Singapore have enforced rules around financial data sharing between banks and third parties; and the US has seen several banks innovating around open financial structures, although there is no law forcing them to do so, yet.
Leaders and laggards
What intrigues me about the market movements is that some large financial players are taking a lead in this space, as with Citibank and Deutsche Bank’s open application programming interface (API) markets, while some are resisting the change.
I have heard several reports in the UK that the large banks have made data sharing incredibly difficult for the customer, by making the permissioning process onerous and time-consuming. Equally, the implementation of European rules under the second Payments Services Directive has seen several fintech firms cry foul, as each bank creates its own interpretation, and therefore API interface, of the law. The result is that any third party wanting to interface with the EU banks has to write integration code for each bank, due to the non-standard implementations across the markets.
But these are purely teething troubles as the markets move towards full open banking platforms. Interestingly, those that are embracing the change are seeing positive results. For example, the UK is now nine months into its implementation of open banking and, although progress has been slow, there have been advances.
Dutch bank ING offers a digital banking app in the UK called Yolt, which has been one of the first to fully implement third-party access integration. The service links to all Lloyds, RBS and HSBC brands, as well as challenger banks Monzo and Starling. Equally, HSBC launched the Connected Money app in May, allowing customers to see all of their current account, savings and mortgage accounts in one space, regardless of the provider. Using open banking, the app links to other banks, such as Santander, Lloyds and Barclays. The app’s ‘balance after bills’ feature shows how much is available in a user’s current account until pay day, once regular bills have been paid.
There are other information-rich services being developed around these themes, making HSBC more of a challenger than some of the challenger banks. Speaking of which, Metro Bank, Starling, Tandem and Monzo are all developing around API marketplaces and information services in order to differentiate their offerings.
This is why the momentum is building. The UK’s Open Banking Implementation Authority shared figures that show 3 million users of open banking APIs in July 2018, up from 2 million in June and just 720,000 in May. There are now 67 regulated providers of APIs, made up of 44 third-party providers and 23 deposit account providers. Progress indeed.
The wrong question
What this leads to downstream is a rich market of start-ups, service providers, banks and non-banks, enriching the services and knowledge about their customers in real time, all the time. This will benefit the customer by telling them more about their digital financial lifestyles, and provide a better, more personalised service.
Meantime, a word of caution. If you asked customers: "Do you want to share your bank account data with third-party providers?" they will probably say no. In survey after survey, I see this question being asked, and typically 80% of respondents have a negative opinion of data sharing, particularly when it comes to their money. But what these surveys miss is the benefits customers get in return. If the surveys asked instead: "Would you like us to analyse your data to help you save more, spend less and generally be smarter with your money?" then most would say yes.
All in all, the world is moving to an open banking structure where banks share data with trusted third parties, if the customer gives permission, and the march of this change is nigh-on unstoppable today. Bearing in mind that most countries are starting to implement versions of these rules as regulations, if you are not engaging in creating your own banks’ open structures today, then you had better start pretty soon. After all, I can pretty much guarantee that an open banking regulation is coming your way. Better to be ready for it than let it be a surprise you had not considered.
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
