New rules meaning banks must let customers share financial info with other authorised providers are now in effect. But why have these 'Open Banking' regulations been brought in and what do they mean for businesses? Banking and finance lawyer and FinTech expert Adrian Shedden gives us the lowdown.
In the simplest of terms, Open Banking is a number of reforms to the ways in which banks deal with financial information, as called for by competition watchdog the Competition and Markets Authority (CMA). Its introduction came alongside the implementation of the second Payment Services Directive (PSD2) in January. The purpose of the changes was to encourage more competition and innovation to financial services. In the business context, the overarching opportunity is increased transparency of information. This can come in the form of the businesses as service providers and also service users.
As service providers, new businesses can use banking customer data to provide new finance models to compete with incumbent financial service solutions. For example, more efficient and tailored risk modelling to provide a better-priced line of credit to SMEs or consumers or insights that allow those customers to make more informed business-decisions and link them to more effective financial services solutions.
As service users, it will also enable SMEs that may traditionally struggle with cash flow to get access to those more competitive financial solutions that take the SME's profile and historic banking data into consideration. It will also enable the provision and access to financial data analysis that was previously expensive and reserved for larger businesses.
This should enable UK business to remain competitive and become a much more effective allocation of capital and risk.
One month since implementation, many banks are still struggling to come to terms with the requirements of Open Banking (and PSD2). This means that the new businesses seeking to provide innovative solutions still don't have complete access to the data (with the customer's permission, of course) meaning the revolution as intended, is yet to happen.
It will take time for the new business models to develop – they will improve as access to data improves and the innovators can test and tailor their business models against real world data (where previously they were limited to synthesised or anonymised data, for example through Nesta or the FCA Regulatory Sandbox.
Currently, the biggest challenges relating to this initiative are focused on the lack of complete implementation by the banks, disagreements on implementation standards and customer inertia, as they have not been shown the real benefit of open banking (or the pain of doing nothing, eg more expensive credit than could be obtained).
Added to this, the initiative raises questions regarding data privacy and security. Even the most highly- regulated firms are not immune from cyberattacks and many bank account transactions can often include extremely sensitive data. Attempting to answer privacy questions remain a work in progress and will be refined over time as the impacts of open banking play out. Naturally banks are understandably concerned about such details, as any perceived disclosure missteps will almost certainly affect their brand reputation.
So what can businesses do to ensure they are prepared for the changes open banking will bring?
Read up, try out some solutions and feed back to both banking incumbents as well as new providers. This will drive the Open Banking project toensure that it follows a "human-centred design" approach where customers' real-world financial problems are at the heart of any new products rather than the historic profit-centred design of 1970s to 2000s banking product push (oftentimes without real need for the product!).
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