Revolutions pit the old order against the new. An unlikely source of just such a clash is currently happening in financial services. The Open Banking revolution, as it has come to be known, is a direct result of the EU Directive on payment services (PSD 2). This rather dull sounding piece of legislation is ripping open the banking sector’s monopoly on client data. The way we conduct our finances is fundamentally changing.
Why do they call Open Banking revolutionary? Firstly – for the first time – it gives customers a clear view of their banking finances. Secondly, it aggregates those finances into one place. Again, for the first time. As a result, you can do a lot of things you could not do before. You can better manage budgets and find better deals on the internet. You can take control of your finances. Thirdly, it is driving a whole new industry based on innovative ways to use your data.
Importantly, Open Banking means that any banking data on an individual belongs to that individual. This change in the ownership of such data is really what makes it revolutionary. In the past, such information belonged to the banks. Indeed, it was considered their competitive advantage. All that is now changing. That data can now be sliced and diced by third parties in ways not previously conceived and the beneficiary is the consumer.
This quiet revolution began with a low key review of retail banking. In the UK, it was observed that some 70 million banking relationships weren’t functioning as customers wanted. Clients were unsatisfied with their banks, and the competition authorities were concerned. These individuals were not changing their banks because they found the process too complex and complicated. Indeed, a married bank customer was more likely to get divorced than change bank. As such, in order to make it easy for people to change banks, the UK championed the PSD 2 legislation.
So, to make changing banks easier, Open Banking was first introduced in the UK in 2018. Now there are a million customers using Open banking applications (APIs). These are delivering new services over the internet and making our lives easier.
The concept is being rolled out right the way across the world: Australia, Argentina, Brazil, Canada, Hong Kong, Japan, Mexico, Nigeria, Taiwan, as well as New Zealand. That said, the UK was first and is learning a lot in the process. It is fuelling Fintech innovation. It has made Scotland the home of The Global Open Finance Centre of Excellence (GOFCoE).
The UK discovered that changing the relationship between customers and banks had good but unforeseen consequences. Banks have been around for 378 years and in that time have been reticent to let go of banking data. Client information gives them a business advantage. With it they know their customer better than the competition, so they can extend loans to them more competitively.
Data is valuable. It can be processed and analysed. It can be used to pay electricity bills and manage mortgage payments, all sorts of stuff. We could even say that data is the new oil. The idea that banking is done in an old high street building has changed. Financial services is now about financial data over the internet. The concept of banking as a service (Baas) has been born.
With Open Banking, the customer gives a regulated app permission to access a banking website securely. This gives third party access to existing financial information. This can be used to make quick and easy direct payments and/or download financial data. It becomes possible to make direct payments to a bank or building society, and to work out individual credit assessments. It transforms pricing and at the same time, it makes online digital transactions smoother.
Open Banking has seen a proliferation in new APIs and business concepts. Individuals and their banks now sit side by side with third party Fintech companies. The latter are doing innovative things, taking requests and processing data. In this way, Open Banking has become an enabler. It makes your mobile phone your personal assistant and makes financial services more efficient.
In conclusion, we are talking about a revolution. With financial technology we’re developing the concept of the “bank in a box”. Its going to make financial services smoother, faster and more inclusive. It will facilitate better comparisons and cheaper, more appropriate products. It will allow us to change banks at the click of a button. Importantly for the economy, it will result in a whole lot of new entrant fintech start-ups. Vive la revolution!
Daniel Broby, Director, Centre for Financial Regulation and Innovation, Strathclyde Business School
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