Open banking has yet to win over consumers and corporates with its promise of greater competition and innovation across the financial services industry. But with banks and fintechs beavering away creating solutions and infrastructure to support it, the initiative looks to be building up a head of steam, with advocates certain it will, eventually, prove irresistible.
Open banking, which requires banks to make customer account data they hold available to third parties so that they can create new, innovative financial products, is being hailed as revolutionary. Yet, so far, almost a year from it coming into force, the concept seems to be having a tough time making much of an impression on those who it is intended to benefit most: consumers and corporates.
A YouGov poll in August 2018 found that nearly three quarters of Britons had not even heard of open banking and that, moreover, over 77% of the 2,074 polled are wary about sharing their data with companies other than their main bank. Just 12% said that they would be prepared to share their financial data in order to access new and innovative products or services.
Further evidence of consumers being distinctly underwhelmed by open banking came in November, with design and technology firm Splendid Unlimited revealing that just 22% of UK adults polled had heard of open banking as a concept and for many of them trust remained a big issue, with security and privacy high on their list of concerns. Just 9% of the 2,000 adults surveyed by Splendid said they use open banking.
On the face of it then, despite its bold and honourable mission of opening up financial services to greater competition and innovation, open banking appears to be struggling to win over the public. And if a live audience poll at the recent Eurofinance International Treasury Management conference in Geneva is to be taken at face value, corporate treasurers too seem to be wondering what all the fuss is about. Approximately 60% of the treasurers polled at a plenary session said they believed open banking and the EU regulation that enables it, PSD2, are not relevant to them.
The regulation that launched open banking in the UK came into force in January 2018 but the groundwork for it was being laid as far back as 2015. The Open Data Institute (ODI), an independent, non-profit organisation co-founded by the inventor of the web Sir Tim Berners-Lee and artificial intelligence expert Sir Nigel Shadbolt to champion open data and its innovative use, played an instrumental role in creating the technical framework that underpins the initiative.
David Beardmore, the ODI’s Commercial Director and an expert on open banking, recalls the early period of its conception: “We corralled and convened all of the regulators, the banks and consumer groups to help that framework come into being and we provided a lot of the written paperwork that went into the UK Competition and Markets Authority’s (CMA’s) report that eventually led to open banking coming into force.”
In 2016 the CMA mandated the nine largest personal and small business account providers in the UK – Barclays, Lloyds, Santander, Danske, HSBC, RBS, Bank of Ireland, Nationwide and AIBG – to adopt an “open standard” that would enable third parties such as fintechs to easily tap into their data to create new products and services. With the nine mandated banks accounting for 85% of all personal and small business current accounts, the body could be certain that the open banking regulation had the potential to impact most Britons and SMEs.
Slow burn
Beardmore is well aware of the reticence of consumers and corporates to fully engage with open banking but insists it is still very early days for the mission. He recalls that even before the mandating of the banks by the CMA there was a lot of talk that open banking was never going to happen for one reason or other. “That has proven not to be the case and there is a lot more to come. For sure we are on slow burn here with open banking but make no mistake, momentum is building.”
The mandated retail banks have been active with launching open banking solutions, of course but for Beardmore, a rather more powerful indicator of the forces that will help drive and shape open banking going forwards is “the absolutely thriving, burgeoning fintech sector around open banking that is growing at an exponential rate”.
He adds: “There are about 50 fintechs out there already accredited by regulators to operate in this open banking space and behind them there more than 150 looking to secure the same privilege. That all amounts to an awful lot of creativity and enterprise being expended on open banking. Add in the efforts of the high street banks, and the direction is clear. So, corporates absolutely need to take notice of open banking – it would be an absolute folly for them to ignore or believe it is irrelevant to their business models or financial operations.”
So, what exactly is open banking and how does it relate to PSD2? Beardmore explains that open banking is essentially the UK’s take on PSD2, the EU regulation that enables it. The big difference is that while PSD2 also requires banks to open up their data to third parties, the EU regulation is leaving the technical format for how that is enabled up to the market to define. The UK’s open banking, by contrast, demands banks open up their data according to a common standard format: “That is a really important aspect and distinguishes the UK from the other countries.”
With open banking, the nine banks mandated by the CMA have been required to implement a pre-defined single application programme interface (API), the underlying plumbing that enables software at one company to gain very fast, secure access to software at another company. “Many people get very excited about APIs and think that is what open banking is all about – it really isn’t. An API is just a piece of code that allows two applications to talk to each other. It is like a universal power socket for the digital world, allowing multiple systems to work together and speak to each other and we have been using them for many, many years.
“Uber, for instance is built on API calls, so when you stand in the street and say “I need an Uber right where I am now”, there’s an API call from the GPS module in your phone to the GPS server that locates where you are. When you pay using the credit card registered with Uber, there is another API call to your credit card provider to take the payment.”
The open-ended formatting proposed by PSD2 means that across the rest of Europe we could see the rise of various groups of standards driven by consortiums of European banks and third-party providers. That has given rise to concerns that the development of new services to clients of specific banks could be limited. The Berlin Group, consisting of 40 banks, payments associations and payment service providers from across the EU, has been formed to define a common API standard called NextGenPSD2. Although several other PSD2 API initiatives have been set up, the NextGenPSD2 looks to be in pole position to become the leading API framework across the EU as it has the greatest scale and number of participants.
API days
Whether it is PSD2 or open banking, the prime objective of both is that once consumers and firms have given permission for their bank data to be shared with third parties, they will be able to access new services and products from those parties. Within such an open environment, corporates, especially those that enjoy multiple bank relationships, are likely to benefit from more convenient payment management across different banks via a centralised platform, enabling more effective cash management. “An example here would be fintechs offering an account aggregation solution. They would create a platform where you can see accounts from multiple providers on a single platform, see the operation of those accounts together. That is just one potential and obvious application of open banking.
“The real beauty, though, and the reason why there are so many fintechs developing open banking solutions, is that they can build whatever service they want to put out there. As long as they do so with this common API recipe, they know they can go to any of those nine banks mandated by the CMA in full confidence that their app, service – whatever it is that they’ve built – will connect directly to those banks without any middle ware, without any transition or transposition, and directly to the customer’s accounts providing, of course, they have been given permission by that customer.”
Clearly fintechs are mightily keen on tapping into a market that potentially offers them access to up to 85% of bank customers in the UK alone, but they are not alone. Beardmore says there is growing, active interest in open banking right across the financial services industry: “There are a lot of legacy players – banks like TSB, credit card companies like Amex, credit reference agencies, all kinds of institutions – none of whom were mandated by the CMA. They too have noted that the big banks are playing to this single API recipe and feel it would make a lot of sense if they were to follow suit by building APIs to that same recipe. They also want to leverage into the seamless, interoperable banking space. So that again is another powerful signal to corporate treasurers saying: don’t ignore open banking because not only are the institutions mandated by CMA doing it, so too are those who weren’t told to do anything and were outside of that order. Momentum is building.”
Don’t ignore open banking because not only are the institutions mandated by CMA doing it, so too are those who weren’t told to do anything and were outside of that order. Momentum is building.
David Beardmore, Commercial Director, Open Data Institute
For treasurers, one of the most important benefits that open banking and common API standard is expected to offer is speed in access to data. Corporates today may receive details about their account balances at set times through SWIFT MT940 messages but in an API enabled world, there would be no need to wait: they would be able to access up-to-date balance information via their TMS, ERP or online banking portal in near real-time. Batch to near real-time processing will become far more ubiquitous and accessible to firms of all sizes.
Beardmore believes that when it comes, open banking’s impact on businesses, it will initially be the small firms that benefit most: “They are the most underserved in the whole spectrum. In fact, I think the first real evidence of the positive impact of open banking will actually come from small firms and their experience will then encourage ordinary consumers.
“Although it might lag behind for a while, I think there will be significant benefits for corporate banking. Instead of having them go through the more manual processes for decision making, whether that’s for lending, underwriting, payments, insurance, they’ll have a very rich API ecosystem that will give them fast, accurate, granular information for automated decision making. Open banking will also allow firms to pull in other sources of data, to marry up with existing data streams to make far richer, more informed sources of decision.”
Tangible benefits
Among the banks, HSBC has been one of the most proactive in offering open banking solutions. Like Beardmore, Lance Kawaguchi, Managing Director and Global Head – Global Banking Corporates for HSBC’s Global Liquidity and Cash Management (GLCM) division, also believes open banking and PSD2 are paving the way for innovation, transparency and open market competition and as such “provide a wealth of opportunity for corporate treasurers to leverage”.
In considering their benefits for firms, Kawaguchi points first to their potential for easing the heavy administration and ‘non-value added’ workload on founders and directors of SMEs and mid-market enterprises. Solutions that integrate technology like machine learning and AI with open banking and PSD2 will help to reduce these burdens, he says, freeing up management time for greater focus on growing their business.
For the larger corporates, one of the benefits is likely to be the eradication of the interchange fee charged by payment gateways like Paypal and Worldpay and card processors like Visa and Mastercard. Corporates that receive money from consumers via existing card or wallet providers will be able to utilise open banking and PSD2 to allow transfers to be made instantly and so remove or reduce the interchange cost.
Kawaguchi says HSBC is committed to developing “compelling open banking propositions” that help all parties do what they need to in a frictionless and secure way. “We are working with some interested corporate clients to build and enhance our propositions. Our goal is always to work in partnership with a broad set of customers to build propositions that solve real client problems.”
Cash flow forecasting is one area HSBC believes can benefit greatly from open banking-based solutions, with SMEs and mid-market enterprises especially well placed to gain access to a service that extracts and visualises information in a clear way, and allows them to aggregate and consolidate the data using apps, all without the need of SWIFT messaging.
Within its Global Liquidity and Cash Management business, HSBC recently launched a liquidity management portal to give corporate and financial institution clients a clearer picture of their cash position globally and provide tools to self-manage their liquidity, enabling improved funding and investment decisions. The portal uses data visualisation to give treasurers an accessible, real-time view of their cash and cash-equivalents, across multiple banks and products. Kawaguchi says the portal aims to provide “easily consumable information” and likens it to HSBC’s ‘Connected Money’ app, which allows retail customers to see their various bank accounts together in one place.
He adds that HSBC has a significant portfolio of customers and evident leaders among them looking to actively pursue opportunities that are arising from open banking, especially across sectors where they can disintermediate banks and/or third parties, and own the relationship with the end consumer.
But he adds that the “vast majority” of treasurers are yet to understand the tangible opportunities open banking and PSD2 present and are waiting for either banks or fintechs to come up with propositions that solve real problems and evidence of their benefits: “Our focus at HSBC is to really understand those customer pain points and innovate to solve them.”
