Open banking brings great promise — and new questions — for banks and customers alike, says Carl Slabicki, Director, Immediate Payments, Treasury Services at BNY Mellon.
Open banking will soon arrive; that is certain. PSD2 (Europe) and the Open Banking Standard (UK), in order to force collaboration opportunities between banks and third-party providers, have mandated that, beginning in 2018, banks will be required to share — with client approval, via Application Programming Interfaces (APIs) — access to client accounts and account information with third parties, mainly fintech providers, opening a door to a transformed future payments landscape.
These third-party providers will be of two types: Account Information Services Providers (AISPs) and Payment Initiation Services Providers (PISPs). AISPs will be allowed to access and extract client information — balances, history, transaction data—and PISPs will be allowed to initiate and make online payments, drawing directly from a client’s account, without bank intermediation.
To appreciate the magnitude of this change, consider that since the advent of banking, banks have held a monopoly on the information they retain on their clients. That such information would be privileged and unshared has been core to the very idea of banking and maintaining the security of such proprietary information has been strictly regulated by law and typically enforced with various firewalls within individual banks, access allowed on a need-to-know-only basis in order to thwart inappropriate pooling, leaking or misuse.
Indeed, the maintenance of rigorous privacy has been the historic selling point for Swiss banks (if not always for commendable reasons). How could it have been otherwise? Clients are, after all, trusting banks with their money. But the monopolization of vast amounts of data is a very valuable business asset as well. And it is this that open banking is on the verge of changing and forcing banks to give up.
What is not Certain
The ways this access can be used are myriad. For example, an AISP might be able to compare offerings from numerous banks and provide them to clients. This could include information on car loans, mortgages, business loans, savings account returns, and checking account charges. For businesses or banks themselves, a client’s creditworthiness could be readily and directly ascertained, without the intermediation of a ratings company.
AISPs might serve as financial advisers to both corporates and individuals, with the ability to manipulate and analyze massive amounts of data virtually and provide investment information in real time. This would enable them to advise that monthly bills are coming due. PISPs could pay those bills, oversee spending and provide budget advice. Competition will drive ideas and shape the market, all ostensibly to the consumers’ benefit.
But that benefit comes at some expense. The growth in networks and solutions, capabilities and services provides a wealth of new options, but at the potential expense of clarity for consumers, who want an experience that is intuitive and self-explanatory.
This was reflected in a Payment Experience Client Survey, conducted in August of 2017.
Asked whether they thought direct peer-to-peer system interaction via APIs would bring a fundamental shift in interbank correspondent banking, more than half of responding client banks were uncertain as shown below (and more than half of respondents thought the first meaningful API interaction with their providers was one to three years away).
The enormous amount of private financial data that will be made available to third parties will be an equally large target for those seeking to obtain it illegally and they will have more avenues available by which to try to gain access to it. The creators of the initiatives have taken steps to address this, codified within the legislation.
AISPs and PISPs, in order to be licensed, must convince regulators of the soundness of their data security and will be required to submit to annual inspections. They will also be required to acquire fraud insurance, adding another layer of prevention, in that insurers have a clear stake in seeing that security procedures are optimal. Also, regulations requiring a more robust authentication and two-step verification will make on-line payments more secure than they are currently.
Still the risks cannot be overstated. Regulations on paper and put into practice can be very different issues. This will be a rapidly changing and unpredictable market and the regulatory environment must be fluid, not static. Replacing a single bank portal with numerous lines of access will provide many more opportunities and points of attack for criminal activity.
It should come as no surprise that many banks look at these changes with trepidation. At BNY Mellon, our policy has been to view change and uncertainty not as threats but as opportunities. As the full effects of these initiatives come clear, we expect to be in position to take advantage of them to the benefit of our clients.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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