Open banking will transform financial services through osmosis

As UK’s open banking regulation reaches its first birthday it comes as no surprise that most people have not even heard of it. Nor is it surprising that banks are taking it slowly.

What seems to be clear is the view that open banking rules will transform the financial services sector if not particularly quickly.

I am currently working on an analysis of where open banking is today. I have seen a few developments from the big banks, but little to get excited about. So I asked around.

While I will be putting together some of the comments into an analysis I thought I would blog some of them first in the hope of getting some reader feedback.

I will kick it off with comments from a couple of analysts.

First up is David Bannister from Ovum.

Unsurprisingly he saysthe first year hasn’t been that dramatic as banks and fintechs rolled out minimum-level services to comply with the regulations. This included  account aggregation apps that allow customers to access information from accounts held at other banks all in one place. HSBC and Barclays are examples.  “Not staggeringly new, but with smartphone apps becoming the preferred way of managing bank accounts it’s a first and necessary step that will quickly be so normal to most app users that they will think it’s no big deal.”

He says over the next 12 months these aggregation services, in retail banking, will lead to more advisory services. “Your bank will be able to suggest moving savings to a higher interest account, for instance, Third-parties will be offering more services that will let consumers shop around for better deals- instead of going to a comparison website, the app will make suggestions.”

He also expects the first payment initiation services, allowing people to make a payment from any of their accounts from one app.

Bannister says it will get more interesting for businesses too: “We’re already seeing the business software companies like Sage, Inuit and Xoom connecting their accounting software direct to bank accounts, which makes life easier for firms to manage accounts, reconcile invoices and eventually make payments directly from their accounting package.”

In the longer term bannister says other regulatory changes coming in will affect the services that will be developed on top of open banking. For example he says the UK’s Making Tax Digital initiative is already driving business in the direction of filing tax returns electronically, and it’s only a small step to having those returns filed by an accounting package that is linked to up-to-date account data. “Hard not to imagine a similar shift on the way individuals interact with HMRC, which gets into Big Brother territory quite quickly.”

 “Another initiative in the pipeline for the UK is the introduction of Request to Pay, which will provide an alternative to standing orders and the Direct Debit Scheme. Request to Pay allows billers to present customers with a range of options: pay now, pay part now, pay on the due date, ask for more time and so on. For lots of people working on zero-hours contracts or in the gig economy, whose income is variable and irregular this will be a boon, and billers seem to like it to as it improves the predictability of their cash flows.”

“All of these things are coming together (not just in the UK) to suggest a shift in payments away from the card model. There are huge issues about data protection to be addressed, but it would be relatively simple for an online retailer to store bank account information in the way that they store card details at the moment, and initiate a payment directly from the customer’s account.”

Next up is Gareth Lodge, analyst at Celent. He says it is important to make a distinction  between the UK’s open banking regulation and the EU’s PSD2. “Which open banking we’re talking about – CMA9 (UK) or PSD2. He said they are different standards and have different timelines, which made it challenging for banks that have to do both.

“So year one, I didn’t expect much to happen to be honest – how can you explore the possibilities …. when you can’t yet explore the possibilities? Until the banks went live, it was difficult for anyone else to start figuring out what they might do,” says Lodge.

Lodge doesn’t expect that mush this year either. “But I do think it will definitely happen, and it’ll change banking forever – it’s just not instant, in the same way as Faster Payments took a fair while to become a game changer.”

He said the regulators, both at UK and EU level, have decided that Open Banking is the way forward, that’ll create competition and he thinks it will. “However things don’t just happen instantly because the regulator says they will.”

He expects the big banks rather than fintechs to take make most changes as a result. “Most of the changes I suspect will be where the bigger banks (rather than the fintechs) taken advantage of Open Banking, and the investments they’ve made because of Open Banking. For example, it allows corporate customers to control their accounts better from their ERP systems, or big banks to sell data or services to third parties.”

But in the long term Lodge expects open banking to transform the industry. “Banks have traditionally done the same thing, the same way, and all made money in the same way. The use of APIs for both external and internal use means that banks can create products in a fundamentally different way, as well as consume technology themselves differently.”

“Banks are already offering the entire banking stack for other banks to consume for example – as we see from some from some of the challenger banks, running your own IT or own premise may not be the norm going forward.”

I will soon blog some of the feedback I have received from fintechs, but if you have any comments or thoughts please put them into the comments.