- ‘Open Banking’ begins in the UK on January 13.
- The legislation required banks to open up data on customers to third parties and let them execute transactions on customers’ behalf – if customers agree.
- The change is meant to encourage bank account switching but its long-term potential could shakeup the way banking is done in the UK.
LONDON – An invisible, but important, change is coming to British banking from Saturday: Open Banking.
Regulators in Europe and the UK are ordering banks and credit card companies to share customer data with other companies if their customers agree. The companies will also be able to carry out payments on a customers’ behalf.
The changes are meant to encourage switching and comparison in UK banking but it also has the potential to fundamentally disrupt how banks operate and make it easier for rivals to compete.
Open Banking “could fundamentally change how we manage our money,” according to the project’s chief UK architect.
Here’s everything you need to know about Open Banking.
What is Open Banking?
At the moment, many startups wanting to access your banking data – transaction history, direct debits etc. – ask for your banking password and username, and then login on your behalf. Then they use relatively unsophisticated “screen scraping” techniques to harvest data. Some do plug directly into the banks but these are direct deals negotiated between startups and banks.
Open Banking forces lenders to offer a digital “fire hose” of data that any third party can use to get standardised access – provided the startup is registered with the UK Financial Conduct Authority (FCA) and the customer agrees to share their data. They won’t have to negotiate deals with banks, just plug into their digital systems and go.
“Companies have access to building blocks that they didn’t have access to before, which is the ability to pull data or do transactions on behalf of customers wherever that customer is,” said Ed Maslaveckas, CEO of fintech startup Bud.
Bud is working with HSBC to build an app based on open banking that will scan customer accounts to make sure they’re on the best phone and energy tariffs – just one potential application of the technology.
Maslaveckas told BI: “No longer does the banking experience have to be siloed in one specific app or website, it can start to feel like your money is actually able to serve you wherever you might be.”
Who’s behind it?
There are two main strands to Open Banking: a piece of EU legislation – the second payment services directive (PSD2); and the “Open Banking” project specifically spearheaded by the UK’s Competition and Market Authority (CMA).
Both have forced the UK’s “Big Nine” banks -Barclays, Lloyds, Santander, RBS, HSBC, Danske, Bank of Ireland, Nationwide, and Allied Irish Bank – to open up customer data to third parties.
Credit card companies and other payment service providers, such as prepaid cards, will also have to share data eventually under PSD2 rules, although the timescale here is longer.
What is it trying to achieve?
The aim of Opening Banking is to give customers greater control over their data and to encourage account switching.
An investigation by the UK Competition and Markets Authority in 2015 found just 3% of customers switched their banks in the last year, meaning many were left with accounts that were not right for them.
By opening up account data for analysis, people will hopefully be able to more easily compare and contrast bank accounts. Banks must provide a live feed of all the different products they are offering, which will help the comparison.
Imran Gulamhuseinwala OBE, a partner at accountant EY, has been running the Open Banking Implementation Entity (OBIE), which is charged with spearheading the project in the UK.
He said in a statement before Christmas: “This is the culmination of a huge amount of collaborative work done by the UK’s largest banks and building societies, the OBIE, and companies from across the technology and financial services sectors. It’s an extraordinary achievement which, in time, could fundamentally change how we manage our money.”
How does it work?
The OBIE has been working with banks since 2016 to design APIs. These are a little like standardised digital doorways that will act as the gateway to the data stored by the banks.
Because the APIs are standardised, companies that want to access banking data will only have to build one API interface for all the banks, rather than build technology for each lender.
The banks will continue to safehouse all customer account data. PSD2 requires new security standards and banks have 18 months to develop these systems.
What does it mean for consumers?
We’re likely to see much more sophisticated comparison apps and financial analysis services, as startups take advantage of the detailed product data that banks publish. One banking executive BI spoke to suggested we could soon see the financial equivalent of Strava, the popular fitness app that tracks and shares exercise data.
Beyond this, Samantha Seaton, the CEO of financial dashboard Moneyhub, told Business Insider she is excited for the potential to build totally new financial “apps” that weren’t possible before.
“When we did the Lloyds Bank hackathon recently we were able to get into your bank account and set up default limits so that as a consumer if your current account gets below say £300, you can move money from a savings account to top it up to X,” Seaton said.
“Then when you have enough money, it moves back into your savings account. That’s so that you never, ever go overdrawn. There’s loads of stuff like that.”
Maslaveckas said: “The uses of open banking are so numerate. You walk into a shop, you scan a barcode on an item, you press buy and you walk out. That’s a new Sainsbury’s experience, a new Tesco experience.
“That’s the kind of stuff that, while it won’t start happening on January 13, over the next 3 to 5 years these things will start happening.”
But Peter Myatt, the CEO of subscription management startup Bean, said: “In terms of new products and services that will come to market, I don’t see that many new exciting products out there.
“Companies like ours have already been saying what interesting stuff can we do with this data? There’s not a huge number of new and exciting models that don’t exist now that can exist with the read-only model.”
Products like Bean may become slicker but they won’t fundamentally change, he believes.
What does it mean for banks?
Open Banking is both a threat and an opportunity for traditional lenders. The threat comes from the fact that they will no longer be able to control their interaction with their customers – an HSBC mortgage could theoretically be sold on Google, for example. The fear is that they will be reduced to mean “dumb pipes” – providing banking infrastructure but with profit margins eroded to razor-thin levels as banking becomes commodified.
The opportunity is the same as that offered to all other businesses looking at open banking: a huge wave of new data from rival banks could be used to build smarter, better products.
“I definitely think it allows challengers, whether challenger banks or challenger brands, to push forward,” Maslaveckas told BI. “Equally, it allows banks to innovate and do things they couldn’t before because they can create new products and services that sit outside of their ecosystem, so it’s not a tech risk.”
“A year ago, there were active blocking attempts [from banks] because they thought they could stop it,” Myatt said. “About six months ago that changed because they realised they couldn’t. They have now tried to actively embrace it.”
Engineering Open Banking on such a tight timescale – the government kicked off the OBIE in 2016 – has been hugely challenging for banks dealing with a raft of other issues. Still, one executive at a High Street lender who spoke to BI on background said it is a “challenging but hugely opportunistic time,” with executives hopeful that open banking could help spur innovation internally.
What does it mean for startups?
Open Banking has the potential to improve startups’ services by offering a reliable, rich stream of customer data.
Christoph Riech, cofounder and CEO of online small business lender iwoca, said: “Innovative finance providers, like iwoca, will be able to use Open Banking data, which only the banks can currently access, to eliminate endless form filling and make fairer credit decisions – helping small businesses and unlocking faster economic growth.”
But Bean’s Myatt says it’s not all upside for startups.
“Open Banking raises the bar and makes it harder to get access to it [data],” he said. “Now we have to get authorised by the FCA, we need to get a certain type of insurance, which is not cheap.”
Myatt adds: “It’s exactly the right thing to do – we should have to be authorised by the FCA, we should have insurance that means the customer is fully compensated. I’m 100% behind those parts of open banking.
“We are moving from essentially a wild west to [a system of] proper, authorised companies who are having conversations with banks and customers to produce good products.”
Another downside is that customers will have to consent to share their data every three months – meaning companies will effectively have to re-win their business four times a year.
When does it start?
PSD2 comes into force in the UK on January 13, making the UK the first country in the world to implement the idea of “open banking.” However, five of the nine banks involved have said they won’t meet the deadline and have been granted an extension.
Bud is in conversation with many of the big High Street banks and Maslaveckas argues: “Some of the delays actually show the seriousness of this.
I really believe in three years time, when we look back, it will have changed the landscape significantly
“A bank could throw out a bunch of APIs that are non-functioning or not effective. The banks we deal with are very much taking hold of the opportunity.”
Maslaveckas believes Open Banking will really start to take effect in two to three years time, with more ambitious projects coming in five years.
Bean’s Myatt said that many of the banks that are set to launch some version of Open Banking on January 13 still have kinks to iron out.
“From what I understand from those companies [working with the APIs], it’s just not working,” he said. “If you try and authenticate your connection and your documentation isn’t good enough, it just physically doesn’t work.
“Realistically we should be entering another six months to a year of private testing before it goes fully public. That’s realistically where we’re at.”
Moneyhub’s Seaton said: “It’s not going to go viral but I’m sure there’s a lot of people who would like it to. It is significant. I really believe in three years time, when we look back, it will have changed the landscape significantly.”