It’s a funny old world. Once upon a time, not so long ago, many bemoaned the glacial pace at which financial services were moving when it came to embracing digital technology and the pending transformation that inevitably accompanies such a foray. Today, you’d be forgiven for rubbing your eyes and blinking three times to make sure that what you’re seeing isn’t a figment of your runaway imagination – banking and financial services practically leading the pack of digital dissidents, and bringing the rest of the world with them. We recently explored how to leverage the power of conversational banking and the top 5 fintech trends for 2020, today we’re exploring Open Banking and PSD2 – everything you need to know.
Fintech, Wealthtech, Regtech and Blockchain, AR and AI – mere morsels of the veritable digital banquet that any finance enterprise worth its salt has been busy getting its teeth into in order to meet the growing needs of a demanding audience. The latest on the hit list? Open Banking. The message: brace yourselves, this one’s big:
- The Open Banking sector could quadruple its worth to generate £7.2bn of revenues by 2022.
- 8 out of 10 financial firms are adopting or planning to adopt Open Banking, or are interested in doing so.
- 94% of FinTechs are considering how Open Banking can enhance their current service.
- 71% of financial institutions feel that Open Banking is a positive initiative and 77% agree that it is a radical change for financial services.
- 72% of the UK adult population will bank via a phone app by 2023.
- 77% of banks in Europe plan to invest in Open Banking initiatives for their commercial customers
The question on most folks lips is, ok, this all sounds pretty impressive, but what exactly is Open Banking? – We’ve all heard about it, but does it really affect us, and how does it help us as well as the banks? That’s three questions, yes, but let’s not get picky, let’s dive into the soothing waters of understanding and find out what all the fuss is about …
What is Open Banking & PSD2?
It depends on who you ask, but most would agree that Open Banking means banks are now obliged to allow you to share your financial data with whomever you’d like to. But while many of us would assume this has always been the case, that’s not how it used to work. Before Open Banking, getting visibility of, and sharing our financial data was complex. Banking, mortgages, investments and the plethora of financial activities that go alongside these made providing and sharing our information a monumental pain – a robust, accurate and complete picture of our finances was a distant dream, and the financial playing field felt restricted, competition virtually non-existent, innovation stifled and options – as customers, at least – limited.
Powered in part by the EU’s revised Payment Services Directive (PSD2), Open Banking was the resounding answer to these problems – introduced not only to put control of our financial information back into our hands, but to provide a more level playing field across the banking industry. According to Barclays, Open Banking obliges firms to:
- Make it possible for people to share their financial transactional data far more easily with third parties online.
- Allow third parties to initiate payments directly from a person’s account as a bank transfer as an alternative to credit or debit card payments.
- Make public and openly share their product information and importantly, their customer satisfaction scores and separately other ‘service level indicators.
Open Banking essentially exists to help drive innovation across the sector, swinging open those giant old doors to make way for competition and choice. making banking faster, easier, more cost-effective and more secure – but it also . To do this, banks are obliged to open up their APIs to 3rd party providers, allowing them on to the financial playing field to offer us a smorgasbord of new products and services.
For banks, connecting with other APIs across the sector means they get to enhance their service offerings by providing access to new fintech innovations through their own ‘shop front’ – the Experian Connect API, for example, offers customers access to their credit score through their bank’s interface. But – and it’s a big but – the elephant in the room can’t be ignored. Open Banking’s APIs tapped into by bright young fintech start-ups mean the banking stalwarts may well be pipped at the post by leaner, meaner more flexible and proactive providers that allow us to manage our finances – including regular transactions, savings, investments, spending habits, borrowing – in ways that most banks simply don’t, creating ever-widening gaps between the larger institutions, and their customers.
For these newcomers, as the sharing of financial information becomes standard, the opportunity to drive high-value, relevant innovations, products and services has reached fever pitch as the Neobanks spring up ripe, ready and tripping over each other to fill the gaps left by some banks, and reap the rewards for being quick off the mark.
And for the customer? We’re now spoiled for choice. Open Banking means not only tighter control of our own financial data, but new opportunities to eke out more value than we’re used to from the financial ecosystem. We get to save, borrow and pay in ways that were never before available – but what does all this look like in real terms? In what ways are we really going to benefit from Open Banking? Let’s find out!
The road to Open Banking & PSD2
As we touched on earlier, finance was once upon a time an industry that desperately needed some kind – any kind – of an overhaul to kick it into the 21st century and deliver what our brave new world needed from it. Cloaked in secrecy, tradition and complexity, only those that worked in finance had much of an idea of the machinations that make the world go round. But these places also happened to look after our monthly salaries, our mortgages, our investments and our borrowing. When it came to our cash, there was no such thing as ‘shopping around’ … chances are if your pay went into one bank each month, you’d be securing your mortgage from that same bank, saving with the same bank, and borrowing from the same bank. No one really understood how any of it worked, and most of us were quite happy, thanks, to leave the numbers stuff to the experts – after all, it was all so very … boooooriiiiing.
Then in 2008, the financial crisis removed the blinkers of our financial ignorance – millions around the world lost their homes, their jobs and their pensions. At the same time, many smaller banks were absorbed by the giants, allowing them to further cement their growth and quash any potential newcomers. But nothing can stem the steady march of change … dissatisfaction with the status quo, the lack of control over our money, the ever-quickening advance of the burgeoning digital world around us, and more information than we could ever need at the tips of our fingers meant the stars aligned to create the sparks of what has become a monumental paradigm shift across the world of finance. It was time to get serious about managing our money – and time for the banks to get serious about helping us. Hello, Open Banking.
…. for the big banks, progress has been rather … slow. Open Banking innovations, it’s fair to say, have not exactly been banging down our financial doors -though it would be unfair to say that there aren’t a few taking steps to ruffle some feathers. Santander, for example, partnered with Moneybox last year to bring its customers the option of connecting their accounts and rounding up ”spare change” from financial transactions to deposit into a savings account.
HSBC was one of the first banks to make the move, releasing their Connected Money app last year, one that allows their customers visibility of their current account along with financial data they might have with any other bank, breaking transactions down into various categories and making for a rather useful budgeting tool. And Barclays customers now have an app by which they can view all their bank accounts – including ones with rival providers – via the one tool. The app also makes use of Open Banking technologies to provide robust security minus the usual in-app friction (that’s filling in countless passwords and jumping through endless security loops to get to where we’re going) that many others often require.
But these examples are hardly a tsunami of bold, exciting forays into the world of financial opportunity and exploration. Indeed, we can see the really big strides only once we go beyond the Big Bank space where the neobanks such as Monzo and Chime are positively smashing the systems of yore and carving out a nice little space for those who want to be as active with their financial management as they are with the rest of their lives. Of course, it’s much easier for a startup with big ideas to bring these to a people ready for change – financially as well as operationally …
Financial freedom arrives
Take your place on the early morning commute, people … whip out your phone and check what your spend has been so far this month … maybe more on weekends out than you’d like? And you’re over on your utilities spend – no Pret lunch today then. But a quick check and your crypto investments are doing a bit better … and while you’re on a roll, isn’t it time you took a look at that trading app everyone’s talking about?
Of course, you haven’t even looked at a traditional bank to do any of this, just the plethora of fintech apps you’ve added to your phone over the last 12 months. Monzo, EToro, Acorns, Coinbase, Plaid … most folks today would know what you’re talking about if you rattled off many of the hundreds – nae, thousands – of fintech apps that have found their way to the app stores over the last 24 months. Yet it’s thanks to Open Banking that many of these innovators exist, relying on the very data these big banks are beholden to share if asked. If anyone’s in any doubt about who’s leading the charge, perhaps it’s time to put these doubts to bed.
McKinsey recently estimated that there are now 5,000+ finance startups around the world – startups which are netting some serious investment – $2.9 billion so far this year going to the Neobanks alone. The same folks are also saying that come 2025 up to 40% of banks’ collective revenue could be at risk from these new digital upstarts. But why? Surely the big banks aren’t just standing by idly watching their own undoing?
First of all, launching a startup, whilst not ‘easy’, is certainly far more straightforward than launching a legitimate banking operation – something that can take years, not to mention millions in investment, legalities and infrastructure. Relatively fast, inexpensive and most of all relevant to the consumer who demands their life on their phone (who banks on their PC these days?), the new way to do finance is waiting in the app store, ready for anyone that’s seeking the ease – and fun – that finance can be. But for any organisation seeking to take advantage of the Open Banking initiative and PSD2, there’s way more to fintech success than having a flashy mobile app with a slick UX and intuitive front-end and this is where start-ups are held at a distinct disadvantage.
This presents a seismic commercial opportunity to the large, established banks to take advantage of their significant track record and expertise in providing a robust range of banking products and services, in a way that fintech start-ups with flashy mobile apps could only dream of. Delivering banking products and services in a frictionless manner is difficult and there are a whole bunch of factors that need to be considered way above and beyond the mobile experience. By embracing the power and potential of mobile and digital transformation, large banks can gain a massive advantage over lean start-ups. The same cannot be said for fast moving fintech start-ups, with a great customer experience but with no discernible track record in delivering financial products and services against a backdrop of stringent rules and regulations.
Here are a couple of areas where Open Banking is freeing up our financial futures …
Personal Financial Management
Once the domain of spreadsheets and notepads, Personal Financial Management – or PFM – is one of the biggies in the fintech space, and one that Open Banking, in particular, has had rather a helpful hand in creating. What’s driving it? Ninety-two million millennials. Or rather, a lot of people approaching what Goldman Sachs has named their “prime spending years”. Coupled with the oft-touted evidence that this group – responsible for an annual spend of around $1.3 trillion – have an aversion to the traditional financial institutions, and we’ve got the perfect environment for a new kind of financial control. Control that makes it easier to budget, save, borrow, and share – and that’s just off the top of my head. Here’s our pick of the ones that are surfing the coattails of Open Banking and, so far, nailing it:
Emma – Described on their homepage as your “financial friend,” and acting like your own personal financial advisor (minus the exorbitant fees!) Emma allows users to connect to their various bank accounts and crypto wallets so they can track spending, helping you to budget better and save money where you’d otherwise be wasting it. It’s got a few great wee features such as alerting you to how much money you’ve got to play with until next payday, searching for subscriptions you may be paying out for but never using, and notifications that will help avoid drifting into overdraft (again).
Money Dashboard – The Money Dashboard app made big waves this year with big investments – folks are excited about this one, and the latest £4m+ input confirms the excitement. Around for 10 years now, and connecting to 70+ financial institutions, the MD app enables users to both view and manage their money from a single platform – with the added benefit of including cryptocurrency services alongside the more traditional (for now, anyway) monies, something millennials are particularly fond of. But where it really starts to drive value is for the multi-banked consumer – the one that’s got several accounts doing several things across several providers, meaning a holistic, real-time, accurate view of where they’re at can be difficult. Money Dashboard not only delivers that single view, they also help users find the best deals on products and services such as credit cards, loans and mortgages, levelling out that playing field, and putting customers firmly in the driving seat of their financial dabblings.
Yolt – “Unthink Money” says Yolt’s homepage … not a bad chat-up line, when most of us would put money at No1 in our worry list. Yolt has been pushing the innovation button for some time now, partnering with a number of enterprises to drive new products and services that are adding real value to their customer base. Monevo, Raisin, MoneySupermarket and Santander; price comparisons, commercial applications and innovative budgeting functionality and account aggregation and payment initiation services, this team are moving fast and we get the feeling they’re only just getting started. We particularly love the ability to make payments and transfers via that handy ‘single-pane-of-glass’ rather than the usual jumping between various banking apps and screens (time saved – priceless) – we’re just waiting for the next partnership that’s going to make money management even more fun.
Payments – or rather, how we do them, is a field in which we’ll likely see huge changes over the coming years thanks to Open Banking and the PSD2 regulations that have made it their business to respond to the modern banking customer and their demands for a hyper-personalised, real-time payments experiences. The profundity of the rewriting of payments means that several fintech players are angling to capitalise – and why not?
The predicted changes across the traditional payment model (payments via Open Banking are predicted to hit £300bn in transactional volume come next year) that the PSD2/Open Banking combo is heralding in are likely benefit both payer and payee with new opportunities knocking for both consumers and businesses.
For customers, Open Banking makes payments safer and more secure – a good thing. But we’ll also likely find it far easier to borrow (a good or a not-so-good thing) at the ‘point of payment’, and when we do, we’ll also find business competing for our credit custom as access to our account information and user authentication serves up the winning instant credit offer. You can see something similar on both eBay and Amazon when at the point of payment we’re offered to ‘spread the cost’ with PayPal credit or and Amazon credit card. It sounds innocuous enough, but something as simple as this could completely redefine the credit and lending sector, and probably for the better too.
For businesses, the payments effect will be more profound, with an expected reduction in the enormous transactions fees that companies are required to cover for card transactions – due in most part to the middlemen we never see but which get a big slice of the payment pie … until now.
Thanks to Open Banking, payments can run on what’s called the Faster Payment network – a place where banks are forbidden to charge fees any differently than they currently do – which is zero. This means that smart fintechs can massively undercut the card payment, or simply not charge at all. But it’s not just card payment fees.
The way payments currently work is that a business has to open a merchant bank account, separate from their main business account but, and this is the big but, run by the payment service provider, not the business. The downsides don’t need much explaining – fees and chargebacks are commonplace, and crucially, the business won’t have access to their own money for days post-transaction. Open Banking puts a halt to this by delivering funds straight to a business’s bank account – no waiting, no lost interest, money in the bank when it should be to run the business. Goodbye middleman, hello making money.
Of course, the one area that we’re excited about at WHQ when it comes to Open Banking and payments is digital payments, powered by – you’ve guessed it – your mobile device, and it’s all thanks to SCA – or strong customer authentication. The concept of SCA means it’s going to be much, much harder for someone other than yourself to log in to your account – and it’s about to alter all methods of digital payment, aligning both the customer experience of both card and Open Banking transaction, with the smartphone being the facilitator. A good example of this would be the RBS/NatWest Pay service which allows customers to pay for goods and services without using their credit card. Powered by Open Banking technology, payments are instead made directly through their bank account, removing the friction of inputting long card numbers and making for a far smoother, faster, frictionless transaction. Customers simply choose the preferred payment method along with their bank when checking out, then are redirected to their bank’s online banking web page or mobile app to log in before the transaction completes automatically – something that now takes seconds, as opposed to the minutes of old.
The opportunities created by combining our financial data, APIs and other emerging technologies like AI and machine learning are officially up for grabs! Open Banking is now well on its way to providing consumers not only with control, but with unlimited new insights that enable us not only to better manage our money, but which bring us new products and services that we may otherwise never have known about. The good news is that we’re enjoying the early years of a huge industry shift that’s going to see the rapid emergence of fintech – and other – innovations that deliver us the transparency, simplicity and flexibility that we’ve been seeking from finance for years. Benefits that are turning a once inefficient, complex industry into one that we’re all rather keen to get involved with, and making for a very interesting road ahead. Now, where are my shares at today ….
If you’re interested in exploring the incredible commercial opportunities associated with Open Banking and PSD2, we’d love to hear from you. Contact Waracle today to get the conversation started.