Open banking will inevitably mean greater competition and new types of aggregation services where you can manage your money more effectively in one place. But it also signals the end of high street banking as we know it, predicts Chris Price
Just as telecommunications were opened up when third parties were allowed access to BT’s telephone network back in 2005, creating BT Openreach in the process, the banking sector is on the verge of a similar revolution.
Tomorrow (January 13th) marks the introduction of Europe’s Second Payment Services Directive (PSD2) which effectively allows third party access to your banking data with your permission, through various APIs (Application Programming Interfaces).
These include PIS (payment initiation service) for initiating money transfers, AIS (account information services) for accessing data on your accounts including past transactions and PIIS (personally instruments issuer service) for accounts balance checks.
Currently third parties, including fintechs (financial technology companies), are only able to provide banking services using a work-around solution called screen scraping where bank account information is accessed on a customer’s behalf using their access credentials.
However, with the introduction of PSD2 a new open banking interface will mean fintechs will have to use APIs instead following a transition period. In the UK this will require a licence from the FCA (Financial Conduct Authority). In addition, new types of aggregation services will emerge to help you manage your money effectively.
According to Adam Land, Senior Director at the Competition and Markets Authority (CMA), open banking is ‘a major milestone’.
“These reforms will transform retail banking, completely changing the way that people interact with their accounts. Open Banking will allow you to take control of your own data and use it to find the best deals, help you switch and manage your money securely and more effectively. The possibilities are endless.”
Richard Ransom, Head of Business Development, Bottomline Technologies agrees:
“Open banking will change the game by enabling smaller fintech companies and challenger banks to compete more fairly with traditional financial services incumbents.
“The net effect will be a proliferation of innovative solutions for existing bank customers, with a greater level of financial products designed to fit the requirements of the new, digital landscape.”
One company which is welcoming the arrival of open banking is evestor.co.uk. It has just announced a free-to-use money management app for customers. Says Anthony Morrow, evestor’s CEO:
“The concept of the Open Banking regulation is long-overdue and a positive step forward. It’ll encourage market competition and innovation, and should better serve consumer interests.
“The key thing for consumers is to check-out the money management, account aggregation apps and platforms they’re using to make sure they offer a full and accurate view of their financial situation – and do not get involved with any services or apps that are not FCA approved.”
According to Morrow, aggregation apps could help those struggling with debt to take better control of their finances in a secure, reliable and convenient way.
Banking on social media
Widely expected to enter the fray with the arrival of open banking across Europe are social media companies, including Facebook and What’s App.
For example, across Asia currently nearly one billion users are registered to use China’s social media giant WeChat for making payments both online and offline in places such as restaurants and bars.
As a result, China has seen a major shift away from cash and towards online payments via digital devices. “Money isn’t used by millennials in China, they just use their smartphone or smart watch,” claims Jeff Jiang, Senior Vice President, West Europe of Huawei, a Chinese technology company which supplies all the necessary infrastructure for digital banking, including cloud computing and big data analysis.
Speaking at a conference in Berlin last year, Jiang told delegates that around 80 per cent of transactions in China are now made either by mobile phone or smart watch with biometrics, including retinal scanning, also being trialled by some Chinese banks.
Death of the old high street bank?
So is this is the end of the established banks? Probably not, but it will almost certainly mean more high street banks closing down and becoming coffee shops in the coming months and years as they take stock of the new banking landscape.
“Banks need to ask what is their role? Are they happy being relegated to providing only the financial ‘rails’ or do they want to continue having the relationship with the customer?” says Amin Lalani, CIO, Financial Services Sector Huawei.
In particular, they need to accept an increased pace of technological change which the consumer now demands. One problem many banks face is they are using 1960’s COBOL mainframe systems rather than the latest real-time, modular, cloud, API-based systems.
Given these mainframes are costly to replace and will cause significant business disruption in the process, this makes it challenging for the banks to process payments as quickly as customers expect.
“Whereas companies like Facebook introduce around 4000 changes a day to their platform, banks probably make 400 a year,” he adds. “They have to adapt the way they work as well as their entire organisational culture.”
For Lawrence Freeborn, Research Manager, European Banking, IDC, open banking will simply encourage banks to work harder. “They won’t to lose that customer relationship,” he says. “They’ll build out interesting partnership and ecosystems so they can start to offer new services.”
He’s also sceptical that people will move away from their current banking providers: “Customers are generally apathetic and lazy and can’t be bothered switching their banks.”
Whether banks come to see PSD2 as an opportunity rather than a threat remains to be seen. However, there’s no doubt that the new legislation will bring a whole raft of innovative new services and will revolutionise banking for the consumer across the UK and Europe. Just don’t expect to find any banks on the high street in five years time!