A guest blog by David Gardner, partner at UK law firm - and BSA Associate member - TLT
Open Banking is the result of the UK Competition and Markets Authority (CMA) investigation into retail banking. The CMA investigation arose due to concerns about the lack of competition in the market for current accounts and banking services for personal customers and small businesses. Open Banking is intended to introduce more competition and more choice into the market. Open data standards will reduce barriers to entry for smaller banks and non-bank new entrants and, it is hoped, will foster innovation, using data and technology to create new services.
From January 2018, the Open Banking mandate required the nine largest current account providers in the UK (the ) to give registered service providers access to customers' banking data through secure open application programming interfaces (open APIs).
The CMA has aligned its delivery roadmap with changes required under the EU's Second Payment Services Directive (PSD2), which also took effect in January 2018. PSD2 requires all "account service payment service providers" (i.e. the CMA9 and other banks and payment account providers) to allow open API access to two new categories of regulated service providers – Account Information Service Providers (AISPs) – who may provide services such as price comparison services and credit assessments – and Payment Initiation Service Providers (PISPs) – who may initiate payment transactions from customers' accounts.
These changes provide the tools for software developers to build new apps, services and solutions that plug into online banking platforms and create the potential for innovative services that make use of customer data. In different ways, these opportunities are open to banks, building societies, newly regulated AISPs/PISPs and un-regulated FinTech service providers, creating the conditions for a more dynamic and competitive financial services market place.
An early assessment of 'life under Open Banking' at our Open Banking Conference in February this year revealed that banks and building societies are facing an interesting balancing act in driving innovation and fostering customer confidence, at the same time as managing the technical challenges and regulatory risks presented by the recent changes.
The sentiments at the event were unanimous: Open Banking has the potential to create some incredible opportunities for data-driven innovation through new technology and collaborations. However, news stories of data losses, privacy breaches, fraud and cyber security attacks continue to make the headlines. With this backdrop, the technical challenge of securing customers' data and the commercial vision required to arouse sufficient consumer confidence in Open Banking present considerable hurdles to success.
Early lessons include:
- Disruption: The disruption for established banks and building societies will continue, as newer bank and non-bank players seek to gain a foothold in the market. In the longer term, companies like Google, Amazon, Facebook and Apple are looking at what Open Banking means for them. They have the customer base, the budget and the data analytics tools to make further moves into the financial services market, facilitating banking services directly through their existing platforms. This is likely to increase the incidence of non-bank providers inserting themselves between the customer and their bank or building society, further disrupting the traditional banking service model.
- Collaboration: While there is a natural competitive tension between banks, building societies and FinTech service providers, early indications are that collaboration between market players can yield positive results. Collaborations have been successful where each participant offers different strengths e.g. banks may have a large customer base and a trusted brand, whereas a FinTech may possess new data analytics technology and the agility to realise rapid deployment.
- Choice: Early indications suggest a developing marketplace that can offer customers an increasing choice of products and providers, and the power to design the banking experience they want. However, the picture is far from clear. Recent news suggests that early adopters of current accounts provided by new mobile-only entrants are the most satisfied with their banking experience. However, UK current account switching remains generally low, suggesting that these new players have a lot more work to do to persuade most customers to make the change from more traditional providers.
- Consumer confidence: Initial publicity and promotion of Open Banking has been limited and often uninspiring (e.g. arriving in the form of new account terms and conditions). It has also had to compete for consumers' attention against headlines about the risks of sharing data with third parties and, most recently, record fines for Facebook from the UK Information Commissioner's Office following the Cambridge Analytica scandal. Larger banks and building societies, particularly the CMA9, have also been primarily focussed on preparing themselves for the requirements of Open Banking and PSD2 (among other regulatory changes). The industry will need to do more to win consumer confidence in Open Banking.
- Opportunity: Despite the challenges highlighted above, Open Banking remains a huge opportunity for the bank or building society that (alone or – more likely – in collaboration with the FinTech market) can be the first to release a "killer app" to realise its true potential. While innovation cannot be rushed, there is pressure to innovate quickly to secure early market share ahead of the competition.
David will return with a follow-up article on Open Banking in the next issue of Associate Knowledge.
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