Open Banking, which is the sister regulation of the EU’s PSD2 legislation, is off to a slow start – but that is to be expected. We’re only at the start of a revolution which will unleash an incredible range of innovative financial services and products, and profoundly change the financial and tech industry. Ultimately, it may radically alter how we think about money and do business.
For many years fintech companies have been severely restricted by the power banks have over access to customers. Data sources have been restricted or denied, integration was complex and slow, and there was no universal regime for security and compliance. In short, all the cards were stacked in favour of financial institutions – they could push exclusive arrangements or buy any solution perceived as a threat at a very early stage. As a result, innovation has been largely restricted to international payment processing, automation, peer-to-peer lending and accounting software. Scaling a consumer focused fintech solution that seeks to do a core banking service better or cheaper has been incredibly difficult to pull off. Open Banking turns this situation on its head.
Businesses and consumers will gain access to products that will make their life a lot easier. The comparison services that have profoundly changed the travel, hospitality and retail sectors are likely to be among the first services to emerge. Consumers and businesses will finally have the freedom to immediately and accurately compare the rates of current and business accounts, mortgages etc.. This will lead to services that vastly increase access to financial products – going far beyond what is currently available today. More complex finance management tools will also be built. People will soon have all of their financial information collated onto easy to manage dashboards – including utility bills, loans, insurance, loyalty cards and current accounts. Printing out bank statements to prove your identity or earnings will soon seem quaint and arcane as companies can simply confirm these details with a click of a button.
Undoubtedly, by creating new opportunities for direct bank payments, competition and consumer choice will increase, especially in the credit card market. Credit in general will be disrupted as credit bureaus and banks face stiff competition. The result should be a substantial increase in the availability of finance, especially for those who have been traditionally locked out of financial markets.
Artificial intelligence will also be used to analyse cashflow or create a new range of financial assistant bots or data insights for SMEs. We may soon see AI driving financial recommendation engines generating personalised loan, investment and insurance products for consumers. By linking with tools such as Google Calendar, Amazon Echo, or Facebook Messenger, banks will be able to better serve their customers by sending notifications to remind users of payments or charges.
The innovation Open Banking enables is only limited by imagination. Think about any industry or solution that has been created with personal data and then add financial information to the mix and you can soon see the scale of the opportunity.
Of course, as with any revolution, Open Banking will not be without incident. Currently, there is some scepticism about the security and utility of Open Banking – especially among consumers. The vast majority of this concern is misplaced and largely fuelled by media coverage that does not fully get to grip with the purpose of Open Banking or the safeguards that have been created. As more solutions with clear benefits get created and launched, adoption will rapidly increase and apprehension will dissipate. It’s worth noting that Open Banking and PSD2 creates a security framework that, if applied to other data-heavy tech sectors such as social media, would make hacks and breaches an exceedingly rare occurrence.
For banks, the outlook is more complex. On one hand, the growth of challenger banks and bespoke solutions is likely to spur competition and innovation – lowering the price of some services and increasing the acquisition or in-house development of new technology. Monzo and Starling are already delivering a superior customer experience at a fraction of the cost structure compared to high street banks. Their platform approach and API-enabled banking is already transforming the industry for good. This is a silent revolution that will create a lot of pressure on traditional institutions and an opportunity to re-think banking as a software platform.
On the other hand, it could completely change the role of banks in the financial sector. It is not inconceivable that financial institutions could simply become the pipes through which financial data flows. Perhaps they will become hubs for innovation – platforms on which startups are encouraged to build solutions.
Predicting exactly how Open Banking will develop is an impossible task. However, what we can say is that it’ll have far-reaching and positive consequences. The bottom line is that competition, choice and access will increase, and costs will fall.