22 February 2018
Open Banking - 1 month on
- 80+ firms have applied for FCA authorisation
- Openwrks first third party provider to connect to all banks currently providing functional APIs
- Zopa partners with TrueLayer to allow customers to verify income without uploading documents
Since the 13th January, it has been hard to miss the mainstream and trade press coverage on Open Banking – a significant milestone in UK banking. The BBC covered this as “a fundamental change to the way people can bank, manage and spend their money in the digital world”. Effectively, this marks the debut of independent API (Application Programming Interface) driven services as a new banking channel to sit alongside branch, telephony, digital and mobile. Just as you can integrate Google Maps or even parcel tracking functionality, soon firms will be able to import banking data and payments capabilities. When we consider the innovations which API enablement has led to in other industries – from Expedia to Uber – this new ecosystem marks the beginning of a new era for banking, for banks, and for their customers.
As a result of the CMA’s (Competition and Markets Authority) market investigation in 2016, the nine biggest UK banks and building societies were ordered to open up their data and payments capability via APIs to any licenced service authorised by the bank’s customer. This comes ahead of PSD2 (the second Payment Services Directive). PSD2 became law in January – in fact, the same day as Open Banking launched – and from Q3 2019 requires banks across Europe to implement similar solutions for all customers.
Open Banking means that UK consumers and businesses can now securely allow authorised firms other than their bank to view the current account data their bank holds, and initiate payments from their current account. These firms are known as Third Party Providers, or TPPs. Similar services – primarily focussed on providing money dashboards – have existed for a while, with trade association FDATA estimating the existing UK user base for TPPs at two million consumers. However, these services previously required customers to share their login details in a practice widely called ‘screen scraping’. This approach – although stated as safe by the services using it – contravened most banks’ terms and conditions which required consumers not to share such information. In comparison, the alternative API-based approach offers these service providers – and their customers – a more stable and secure basis going forward.
The consumer proposition is potentially compelling, and the CMA and HM Treasury have great hopes in it shaking up not just how consumers interact with their banks, but also the broader financial ecosystem. To use Open Banking’s own words…
Open Banking expands the range of financial services you can access by allowing companies other than your bank or building society to securely and safely access your accounts and make payments.
This could enable a company to take the pain out of budgeting or making tax returns, provide detailed financial advice, give you accurate comparison services for any product that’s paid for from your account…
You will decide which (if any) companies can access your accounts, for how long and what they can do with them – whether short term access to make sharing data for a mortgage application easier, or long term financial management help
Reports state that 80+ new firms have applied for FCA authorisation, with licences coming through as we speak. Yolt, the smart money management app owned by ING, became the first third party provider to complete a successful connection (with Lloyds Bank) under the new Open Banking system. Openwrks – another money management app - shortly after became the first third party provider to connect to all banks currently providing functional APIs. Others will follow – for example, Zopa, online personal finance peer-to-peer lending company, has partnered with TrueLayer to enable consumers to verify their income using Open Banking data, without having to upload documents . This use of Open Banking to simplify applications for new products is expected to be one of the first use cases to achieve scale.
The launch of Open Banking was significant not because it is expected to be a “big bang” with millions of customers signed up from the start – but because for the first time, it moves account data and payments officially out of the bank’s domain and opens up/regulates third party access to firms looking to create services building on these. Effectively, it reduces the ‘stickiness’ of the customer, and means they can – for example – pay by a means other than their bank’s debit card or app, or treat their information as their own and view it how they want to, not how the bank chooses.
Conversely, with some firms in other industries generating the majority of their revenues via their API channel, this represents a departure point for banks, who have a new channel and therefore, a new range of opportunities. Salesforce reportedly generates 50% of its revenues through APIs, eBay nearly 60%, and Expedia 90% - showing the potential benefits available to those who seize the potential opportunity. Open Banking therefore creates a new channel – API banking – for providers to compete in, and where the efficiency and breadth of services offered will be key.
Time will tell whether the revolution is a fast or slow burn. As expected, the first six weeks have been quiet given banks going live at different times, and all initial participants operating on a “friends and family” testing basis. What happens next is the interesting bit - and the Open Banking roadmap shows there is much more to come. The Chancellor of the Exchequer’s November Budget committed to extending the Open Banking standards to cover all products with payments capability such as credit cards and e-wallets throughout the course of 2018 and 2019 (in alignment with PSD2). The full roadmap extends even further – potentially including all financial products from pensions, to mortgages - and linking in to broader consumer initiatives to help people reduce the costs of their bills and improve their financial health. As PSD2 drives banks across Europe to open up APIs – enabling cross-border use – volumes will no doubt increase. With the consequent growth of the Open Banking market – and adoption of supporting infrastructure to drive it beyond pure regulatory compliance – this has the potential to drive benefits for all parties.