The twentieth century witnessed a revolution in the High Street.
Where the traditional retail store kept most of its goods behind the counter, and shoppers had to wait to ask a shop assistant to fetch what they wanted, by the end of the century self service was near universal – with all goods neatly packaged on open shelves where the customer could pick and choose at will.
Who would have imagined that the decision to put the customer in control would have such far-reaching effects? How many people resisted the change? Perhaps they argued that it was not safe to allow the masses to wander around open shelves, or that no-one would want to buy goods that other people might already have handled?
On the other hand, could any Victorian grocer have foreseen the out of town hypermarkets and malls that were to come? Or the “shop ‘til you drop” retail spree that would define the late twentieth century?
Despite all this change, there remained a corner of the street that was barely touched by this revolution. It was the High Street bank. By the end of the twentieth century customers were still queuing to get to a counter so they could ask for whatever services were being offered.
From January 2018 the UK Competition and Market Authority (CMA) will require all banks to offer personal and small business customers “Open Banking” – basically, a chance to take greater control of their financial services.
Open Banking will, for example, give the customers an option to share their bank data securely with other banks and third parties, so that accounts with multiple providers can be managed through a single digital ‘app’. It means they can take more control of their funds – to avoid overdraft charges and manage cash-flow, for example – and they can more easily pick and choose between competing financial services.
Just as the open shelves of self service retail led to better, more informative packaging and detailed descriptions to attract shoppers and help them choose, so will Open Banking require banks to publish on their websites and in branches clear and objective information on their services and quality of service, so that customers can compare how each bank shapes up. It also requires banks to send out appropriate ‘prompts’ – such as announcing any increase in charges – to remind customers to review whether they are still getting the best value, and decide whether or not to switch banks.
Will Open Banking repeat the dramatic success of the self-service revolution? Or will banks resist this challenge to traditional ideas of security, will they hold on to control rather than share it with the customer? Or might customers themselves not want the option to choose from such a plethora of financial packages neatly laid out for them?
It is worth pointing out that rigid ideas about bank security had already been challenged towards the end of the twentieth century, when High Street branches started replaced heavy Victorian brickwork and massive oak doors with glass fronting. It was the realization that, in many cases, transparency can actually be more secure than secrecy – an important consideration in the move to Open Banking.
To answer some of these and other questions raised, NetEvents organised a Fintech panel Debate and a series of interviews on Nov 7th chaired by award-winning broadcaster Georgie Frost and featuring: Steve Walker, Lead Analyst at Global Data technology; John James, First Direct’s Head of Digital Product; and Scott Manson, Head of Payment Strategy, Nationwide. Also on the panel was Vaduvur Bharghavan, CEO of a US company called Ondot – and the significance of his presence will be explained later.
Open Banking: Challenges and Opportunities
At the start of the debate, Steve Walker gave the example of UK app developers that were already complaining in 2014 that the difficulty in accessing customer data from banks was “uncompetitive”. It was not that they were trying to overturn the financial world, they were simply wanting to offer a smartphone app that enabled users to scan their financial status across all their bank accounts, cards etc on a single interface instead of having to log on to each account and add up the totals. Steve pointed out the frustration caused by such restricted access: “Effectively, it was shutting down a whole innovation layer on top of bank services, around money management and financial insight.”
Sure enough, considering examples from all over the world, Steve concluded that: “Progress is not a straight line but, globally, we think we’re moving towards openness, and that’s going to change the fundamentals of the industry.” Number one consideration would be security: “It’s a well-known fact that banking receives 300, 400 per cent more cyber-security attacks than any other industry. That’s because the rewards are that much higher in terms of not only lost funds, but fraudulent identity, identity fraud, and banks have traditionally protected that by keeping the drawbridge closed.” Legally we are also entering muddy waters: “The liability model is complex. We could have a bank, we could have a payment provider, we could have a fintech firm. Who’s responsible for what data, when? It not easily resolved”.
In a subsequent interview, Georgie Frost was asked whether the public knew what was going to be offered, and she replied: “I don’t think the banks are doing nearly enough, if arguably anything, to prepare the consumer… We’re getting our letters through the post, talking about changes in Ts and Cs and, at best, people will file them in a drawer to read later, and never do. At worst, they’ll probably just file them in the bin, and then come January, no one’s really aware of what’s going on.” It was a valid point, but how could you explain to shoppers in the Edwardian era that allowing them to wander around collecting goods, instead of simply ordering them at the counter, might ultimately transform shopping into the world’s favourite pastime?
John James, on the other hand, had a vision of the immediate possibilities, and was clearly excited about potential opportunities: “First Direct, where I work, announced a partnership with a fintech called Bud to test a marketplace app that will allow customers to aggregate all their financial products together, so they’ll see what’s happening in one single log-on, and get some money management insight. But also, if they want to buy a product, they’ll see something called a ‘marketplace’, and that will allow them to access products beyond what First Direct and HSBC Group can offer them.”
The analogy with the supermarket shelves becomes very clear. Instead of having the goods handed to the customer, they will be all laid out for inspection, comparison and choice. For the vendors, that will mean open competition – and their financial products will have to be attractively packaged with clear labelling, ingredients and pricing. That is exactly what the backers of Open Banking want to see.
Also interviewed was Scott Manson from Nationwide, who said more about the way that Nationwide was preparing for the change. When asked about the thorny question of being instructed by a customer to pass data to third parties, Scott responded: “Personally, I think it’s a great idea… It’s about changing the ownership of the data from the banks and the building societies back to the customer, and I think that’s a great idea.”
So, what does Open Banking really offer?
With the panel mostly expressing high hopes for Open Banking, Georgie Frost took the role of Devil’s Advocate, pointing out that the public has not really grasped what is being offered. She even suggested that, in times of uncertain change it might only take one major cyber attack or security breach to turn the whole world against the project. But was she right to conclude: “I just don’t think customers are getting it. So, I don’t think we can look at open banking in the future unless we get this right”?
The fact is that Open Banking is not that easy to explain for the very reason suggested: that Open Banking is not so much a bank with an open door, as a doorway to a whole new world of banking. As with the self-service revolution, how can one describe a whole new world, or accurately predict where opportunities might eventually take us?
Maybe in anticipation of this challenge, a fourth speaker was included on the panel, who was neither a banker nor from the UK, but representing a US company that had independently been working on ways to help financial organisations to “return ownership to the customer”, and had already taken this a practical stage further.
Vaduvur Bharghavan is CEO of Ondot, a US company that has recently launched in Europe and the UK. He explained: “The core value proposition of Ondot is really to put consumers in control. It’s one thing to provide visibility. It’s another thing to make it actionable. The core value proposition that Ondot brings to the table is really making this information actionable.” In other words: here is an example that is already happening, rather than some future possibility.
What his company does is provide financial companies with software that enables their customers to take more control. It either provides a white-label app (branded by the issuer) that lets customers manage their accounts themselves, or else similar functionality that can be integrated into the company’s existing apps or interfaces.
So, what happens when a cardholder finds their card is missing? It usually causes some panic – when did they last use it? Where? What the issuer wants them to do is immediately inform the company that it is missing, so that the card can be cancelled before any harm can be done. But most customers wait a little, hoping it turns up. With the card management facility, however, the card holder could immediately turn the card off via their phone app, so no-one can use it and, should it then be discovered behind a cushion or in a jacket pocket, they can immediately turn it back on and sigh with relief.
There are also immediate steps that the card-holder can take to anticipate and reduce the potential fraud risk from a lostof stolen card. If, for example they only use the card to pay for meals, they can use the same app to restrict it to restaurant purchases, or they might limit its use to specific stores, restaurants, locations, or times of day. Anyone who steals the card to buy a widescreen TV will be sadly disappointed, and the card owner will be immediately notified on their smartphone. But what if one day they really do want to buy a TV and only have that card to hand? Then they simply go to the app and unblock it for the one transaction, as needed.
The fascinating thing about passing control to the customer is that people start finding new ways to use this service that even its developers had not anticipated. A parent issues cards to the children, tailored to how they should use it: so a daughter leaving home for university could have a card that only works in the university neighbourhood. A small company starts issuing company cards tailored to specific duties: so the van driver’s card will only buy fuel, and maybe only at certain stations.
So how do you summarise what this type of software is offering? The answer again is that it is actually opening a door to a whole new world, and the only way to describe that is to start experiencing it. While Open Banking lies ahead in the UK, Ondot’s version of open-ness is already giving people a taste of what might soon be available. Vaduvur Bharghavan pointed out a growing network of business partners: “We have two of the top 10 global banks in North America, where we really have a lot of market presence. We have six of the top 20 banks and six of the top 15 credit unions, and we have just over 3,000 financial institutions worldwide. So, we have significant deployments in North America, in India, in South East Asia, in Latin America, and now we are hoping to get to the European market.”
One amusing consequence of their white label sales approach is that, when pitching their solution in the US, they are increasingly getting a response along the lines: “That’s already available, it’s called Card Valet”, or “another company is offering Total Control” or “isn’t that just the same as Card Rules?” Of course, all these ‘alternative solutions’ are actually rebranded versions of their own software!
But is it good for the industry?
The benefits to the card-holder of offering this empowerment – the ability to make real-time management decisions – are patently obvious, but what does it do for the company that is giving away this power? The first answer is that it makes a compelling offering – for most customers, a card that allowed real time control would go straight to “top of wallet”. Less obvious perhaps is the way that it builds a closer relationship with the customer, it enables interactive analytics about usage and choices and it opens the door for targeted promotions.
Another potential benefit for the provider is that such added functionality might provide a means to address some of the growing demands of legislative compliance. The October 2016 Visa/MasterCard Alerts mandate, for example, requires US card issuers to offer users optional transaction alerts – just one of the many features offered by personal card management.
There is also something very important happening here. Steve Walker had referred to the massive attacks being directed at the finance industry. The challenge for financial institutions is to defend against a storm of intelligence pitted against them. There is the intelligence of the black hat hacker community, plus the intelligence or organised crime, and now the intelligence behind potential cyber warfare and industrial espionage. How much intelligence – human or artificial – can the industry afford to compete against such a focused onslaught on its security?
The answer is that Open Banking, through customer empowerment, could contribute a massive new security resource, if properly handled. Just taking the example provided by Ondot for the panel: the combined intelligence of a card-holder base that understands its own spending patterns and is now able to become actively engaged in defending its own capital and way of life is already reducing fraud costs, false declines and call centre calls, while increasing card usage, according to the finance companies that have adopted the software. What other form of authentication could possibly match that?
It is never easy to specify the benefits of something that is by nature an “opening” to a new world of potential, let alone make clear predictions about how it might develop. As John James said in the interview: “This is going to be a gradual thing. This isn’t all going to happen next year, and then that’s it. This is a long-term change.”
But VaduvurBharghavan’s example does provide a reassuring foretaste of certain ways that an Open Banking world might evolve. Just as glass walls have reassured the public that certain types of “transparency” can actually be more secure that secrecy, so does his company provide a comforting glimpse of a world where the public has greater control over their finances.
As Steve Walker, Lead Analyst at Global Data Technology put it: “I think in the move to open banking, for customers to be reassured enough to share their data, they need to have transparency around where it’s going, the ability to turn sharing on and off, and Ondot are delivering precisely that capability.”
The quoted NetEvents interviews can be experienced in full at…LINK
Local authorities and business networks play a key role in small business success, and must be protected during COVID rebuild
- 23% of UK’s top performing businesses have been supported by local enterprise partnerships and growth hubs
- Similarly, 30% of Britain’s strongest businesses have obtained external finance in the last 3 years
- New findings come as part of an independent, holistic study into small business success, commissioned by Allica Bank to support British businesses
A new study, commissioned by business bank, Allica Bank, shows that a high level of engagement and interaction with external institutions and resources, is central to SMEs’ prospects of success.
The study analysed data from over 1,000 companies and ranked their success on a scale that evaluated factors including productivity, growth, consistency and outlook. To measure SMEs’ external engagement, survey respondents were asked whether or not they had engaged with local enterprise partnerships, growth hubs, or external financial advisers, as well as whether they had obtained credit or sought re-financing advice, in the last three years.
The benefit to small businesses in making the most of external resources are clear to see, with a quarter (23%) of the UK’s top performing SMEs – those in the top tenth percentile – actively engaging their local enterprise partnership or growth hub in the last three years. This compares to just 16% of all other small businesses. With such a clear benefit to businesses, these external networks must not only be protected but prioritised by any Government plans to rebuild the economy post-COVID.
Similarly, of the top performing SMEs in the country, 30% have obtained external credit in the past three years, compared to less than a quarter (24%) of all other businesses. This figure drops even further for the weakest performing businesses – those in the ninetieth percentile – where just 12% of businesses have obtained external financial support in recent years.
Chris Weller, Chief Commercial Officer, Allica Bank, said:
“At Allica Bank we understand that no two businesses are the same. We also know that no-one knows a business as well as its owners and managers. But they can’t be expected to be experts on everything.
“In the UK there is a wealth of external advice and support for small businesses and we urge each and every business out there to tap in to the external resources around them. Third-parties, such as business clubs, chambers of commerce, local enterprise partnerships and trade bodies, can be invaluable sources of advice and further resources. And although they have excelled in their given field, business owners may still lack knowledge in many other areas of running and growing a business. Therefore, engaging with third parties can give business owners the kinds of insight – and fresh perspectives – they need to succeed.
“As the economy and the country comes to terms with the impact of the COVID-19 pandemic, it is important these vital SME resources are protected and given the funding they need to continue providing invaluable insight and support to small businesses up and down the country.”
Allica Bank’s SME Guide to Success identified six ‘rules to success’ that were more likely to be displayed by top-performing SMEs compared to their counterparts. The full report contains a wealth of additional data and insight into each of these topics.
As part of its mission to empower small businesses, Allica Bank is making the findings freely available and running a series of free online workshops with relevant partner organisations for businesses to attend.
Do we really need banks? Yes, but digital transformation industry-wide is vital
By Charley Cooper is Managing Director at enterprise blockchain firm, R3
The Coronavirus crisis has taught us that we are capable of going digital quickly when we need to. As the banking sector faces a second wave, the ability for individual firms to grow and succeed will be reliant on better connectivity and efficiency at the industry-level, writes R3’s Charley Cooper.
The sudden and dramatic pace of change has been seen globally over the last six months. Decades of paper-based practices are being updated, digitised and overhauled as the whole word adapts to working online. As of today, countries are accepting “alternative arrangements” for original paper export certificates, New York is allowing notary services by video, and global banks are accepting “original” documents and acceptances by email.
Over the coming months, we will see this digital transformation extend from individual use cases and firm-level deployment to entire industries. And perhaps in no other industry is this more critical than in financial services, where the role of banks continues to be challenged because of the inefficiencies they face as a result of decades of siloed technology deployment.
While unquestionably an improvement over reliance on manual processes, regular “digital transformation” as implemented by a single bank has limited benefits. These typically include greater automation of business processes, acceleration in adoption of electronic channels, elimination of manual processes, standardisation of non-value-adding business practices and a focus on driving up data quality and speed of information flows.
Now consider achieving digital transformation at the level of the entire market, rather than on a bank-by-bank basis. Whilst a digital transformation project for a single bank might automate a business process between a front and back office, a digital industry transformation project might optimise the trading and settlement of the asset between buyer and seller and their custodians too.
Of course, such things have been attempted before. But there have been many failures and the successes are notable by how they have resulted in new dominant centralised providers – for example for market data, messaging or settlement. The advent of blockchain architectures showed us there was a new way to tackle the problem, one that worked with the grain of existing markets.
Done right, the prize is a huge “productivity dividend” as entire markets are unshackled from their analogue histories.
Tackling interbank reconciliation at the industry level
The Italian financial services industry provides a pertinent use case of digital industry transformation. 32 banks in Italy went live in March with one of the first real-world deployments of enterprise blockchain technology in interbank financial markets. 23 more banks went live in May, with further institutions scheduled to go live this autumn. Built by the Italian Banking Association, ABI, the Spunta Banca DLT app on R3’s Corda Enterprise platform tackles the market-wide issue of interbank reconciliation.
The traditional reconciliation process for interbank transactions in Italy—formerly governed by the “spunta” process— is notoriously complex. Resolving mismatches in transactions is a labour-intensive process, hampered by a lack of standardisation, fragmented communication and no “single version of the truth.” The Spunta Banca DLT app automates the reconciliation process and enables banks to pinpoint mismatches in interbank transactions quickly by sharing common data in a secure way.
Connecting such a large and diverse group of banks in a live environment to tackle a shared problem is a major milestone for digital transformation in the Italian banking sector, providing a glimpse into a brighter, more efficient and interconnected future for all financial markets.
The current crisis has accelerated the launch of digital technology for many use cases across a diverse range of sectors, but those that stand the test of time will be developed with an industry-level mindset, not firm-level.
It is now clear that the age of inter-bank optimisation is over – the path forward from this crisis will be paved by software that focuses on adding real value for entire markets, connecting banks to overcome the biggest challenges they share as an industry.
Banks must adapt and start thinking about technology in new and innovative ways if they are to retain their critical role in the global economy.
How open banking can drive innovation and growth in a post-COVID world
By Billel Ridelle, CEO at Sweep
Times are pretty tough for businesses right now. For SMEs in particular, a global financial and health crisis of the sort we’re currently witnessing represents a truly existential risk. Yet there is hope of a brighter future. Digital transformation is already helping organisations in countless sectors, with everything from building supply chain resilience to rolling out potentially life-saving contact-tracing schemes. Yet it’s not just delivering transformative benefits in grand projects like this.
Thanks to open banking rules, a new wave of fintech innovation is sweeping the globe, offering business leaders a new launchpad for success. Even something as simple as corporate expenses can be transformed by the power of open data — to help firms cut costs, reduce fraud risk and become more productive.
Opening up data to innovation
It’s easy to get bogged down in the technical details of open banking, and the slew of new acronyms it has ushered in: Third Party Providers (TPPs), Account Information Service Providers (AISPs), Payment Initiation Service Providers (PISPs), and Application Programming Interfaces (APIs). Yet at the heart of the open banking revolution is a simple concept: the idea that forcing banks to open up their customers’ financial data will create more competition, and fresh opportunities for market entrants to create innovative new services.
This was at the heart of the UK government’s world-leading strategy when it was introduced back in 2016. A revised EU payment services directive (PSD2) gave it legal teeth, mandating that all payment account providers in the region provide third-party access for customers that want it. The push is also about reducing banking fees and enhancing financial inclusion, of course, but it’s in competition and innovation that the benefits really shine for businesses.
Access to real-time financial data via open APIs has already resulted in a range of new services which are helping businesses ride out the current economic storm. Whether it’s capabilities that can help freelancers prove loss of income to receive targeted loans, or services designed to streamline business processes to reduce costs and fraud — examples of innovation are endless.
What’s more, it’s already global. Aside from the PSD2, open banking rules are taking shape in Australia, New Zealand, Japan, Singapore, Hong Kong, Mexico and elsewhere. According to frequently cited Gartner predictions, regulators in around half of the G20 countries will create an open banking API regime over the coming year.
In the UK alone this is set to create a £7.2 billion revenue opportunity by 2022, with 71% of SMBs and 64% of adults expected to adopt it by then, according to PwC.
Making expenses pay
Corporate expenses and travel management might not be an area one immediately associates with high levels of innovation. But here too, open banking is having a profound impact. By combining automation, in-app approvals, integration with corporate policy and secure open banking APIs, companies like Sweep are offering new ways to solve old problems.
Part of the legacy challenge relates to productivity. Managing corporate travel costs and expenses was cited last year as the biggest concern of the UK’s small and mid-sized firms. Separate research claimed that SMBs are estimated to lose over £8.7 billion annually due to the time it takes employees and managers to complete these menial tasks. By automatically integrating real-time corporate bank account information into an easy-to-use app, we can save up to 15 hours a month on data input and travel administration per employee. That’s all time they could be spending on growing the business.
Another key area of concern is fraud. According to some estimates, fraudulent expenses claims could be costing UK firms £1.9 billion each year. In the US, the figure could be approaching $3 billion annually. Whether it’s the result of submitting expense claims for personal purchases, claiming for additional mileage on work trips, or over-claiming for other items, it all adds up. What’s more, fraud tends to spike particularly during times of recession, when normally diligent employees look for ways to supplement their income.
In this use case too, there are benefits to be had from open banking-powered solutions. Traditional manual processes offer too many gaps that can be exploited by fraudsters. Submitting paper receipts to finance departments — which must then input the information into spreadsheets or accounting software — is slow, error-prone and lacks accountability. However, with modern digital systems, transactions are automatically fed through from bank account to expense management platform. Here they are seamlessly checked according to policy and automatically approved, rejected or flagged for further investigation.
The future’s open
Thanks to the power of open banking, innovative fintech use cases like this are transforming operational challenges into opportunities to cut costs and fraud risks, improve employee productivity and become more strategic. With real-time data fed through from corporate bank accounts, finance directors can better understand spending patterns, react with greater agility and gain the insight they need to run their businesses more efficiently.
So what of the future? The good news is that open banking is only just getting started. As more sophisticated machine learning algorithms are developed, it has the potential for even greater disruption by empowering SMEs with predictive analytics and forecasting tools, or more accurate fraud checks, for example. Those in Europe may benefit most as PSD2 allows businesses to use tools that work seamlessly and securely across markets, without requiring any duplication of work.
In fact, open banking is not just good for individual SMEs, it’s important for Europe as a whole if we are ever to nurture successful digital unicorns to compete with those coming out of the US and China.
Open banking been described in the past as a quiet revolution. With the right buy-in from business and the continued innovation of digital platforms, it may soon become a full-throated roar.
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