Open banking is a slightly unsettling term: instinctively, we want our banks to be shut up nice and tight, with our money stowed safely inside. But, more than a year after the January 2018 launch of the UK’s regulator-mandated Open Banking initiative, there are signs that opening up of customer data to other service providers – with the customer’s informed consent – could have some very positive consequences.
The project is adding momentum to the digital transformation of financial services, by encouraging technical and commercial innovation and opening up the retail banking market to more competition. It should help businesses and consumers find better value and more appropriate financial products and services, while helping financial services providers to refine offerings and business models.
It may also help accountants improve the services they offer their customers. The significance of this initiative lies in the way it gives customers control of their own financial data.
It is the product of the EU’s second Payment Services Directive (PSD2), which came into effect in January 2018; and of a 2016 report by the Competition and Markets Authority (CMA) into UK retail banking, which concluded that the largest banks were not being put under enough competitive pressure. Open Banking is being delivered by the Open Banking Implementation Entity (OBIE), which is funded by the nine largest UK retail banks and building societies.
Those nine companies are also now legally obliged to allow customer information to be shared securely with other regulated financial services providers, with the permission of the customer. Other financial services providers can participate voluntarily; a growing number are doing so, or will do so in future. The sharing of customer data is enabled by Application Programming Interfaces (APIs), which allow different software applications to communicate with each other.
Open Banking has created specifications for standardised APIs, alongside guidelines for Open Banking ecosystem participants, to ensure information sharing is consistent and secure. “It is difficult to overstate how revolutionary Open Banking could, and should be,” says Imran Gulamhuseinwala, a trustee at OBIE and a partner at EY.
“This is a project with the potential to change retail banking forever. In giving customers the ability to share data, and allow companies to initiate payments from their accounts, Open Banking creates real choice. New products will emerge from incumbents and new entrants will join the market.” Jason Maude, head of technology advocacy at mobile-only bank Starling, agrees.
“It’s going to make it much easier for specialist providers of, for example, loans to small businesses, to get the information they need to provide an offer that will suit that business’s requirements,” he says.
At the end of January 2019 OBIE released figures illustrating the progress made during the first year following the launch of the initiative. There were 104 regulated providers of open banking services: 71 third party providers (TPPs) and 33 account holders, although only 17 of the 71 TPPs were delivering services to customers.
OBIE also publicised results of research commissioned by Accenture that showed 77% of SMEs and large corporations are already using or plan to use Open Banking ecosystem platforms in 2019; and 90% of banks were ready to create ecosystem platforms with TPPs to serve business customers.
By the first quarter of 2019, Barclays and the HSBC, RBS and Lloyds banking groups all supported the full suite of the most up-to-date Open Data APIs; while other providers supported at least some of them. Two challenger banks, Starling and Monzo, had created their own APIs which offer open banking-like services. In February 2019 M&S Bank launched the first Open Banking-assisted mortgage applications.
The high street banks are developing account aggregation services for consumers, the marketing of which will increase awareness of the Open Banking concept. Some of the early partnerships between banks and providers will clearly be of significant practical use to business customers, particularly those relating to debt finance. The progress that the challenger banks make could also be significant, even if they are not yet using APIs built to the official Open Banking specification. Starling Bank customers have been able to access third party products and services via the bank’s mobile app since 2017, through its Marketplace feature, underpinned by bespoke APIs that allow personal account customers to access TPP services including mortgage, pensions, insurance and investment apps.
Starling’s business account Marketplace provides access to some insurance products, to the Xero cloud accounting platform, and to lending services via Growth Street. Such service portfolios indicate the potential for a much broader range of bank customers to use Open Banking for multiple purposes. They will be given the opportunity to do so by the TPPs.
Those that have achieved regulatory authorisation include Coconut, a current account plus accounting and tax service designed for microbusinesses and the self-employed; Fluidly, which uses machine learning technology to predict and optimise business finances; and a growing range of business finance marketplaces and providers.
Among the latter group is iwoca. It provides finance worth between £1,000 and £200,000 to SMEs, using bank account data to assess a business’s trading history, so informing credit decisions quickly and efficiently. It has built open banking relationships with Barclays, HSBC, Lloyds and NatWest, enabling it to tap into a vast potential set of business customers; and to offer more than 90% of existing customers the option of linking its service into their account details.
“For us, Open Banking is an enabler,” says Sharif Mohammed, head of affiliate partnerships at iwoca. “It’s making business finance seamless for customers.” But even those who work for OBIE admit overall progress has been slow; and that awareness and understanding of Open Banking is still low among consumers and many businesses. In part, this is because Open Banking is, in effect, a vast, multiindustry collaboration; and even with standardised APIs there have been some missteps and unsatisfactory experiences for early adopters.
The TPP pipeline is also slowed to some extent by the process of obtaining authorisation from the Financial Conduct Authority (FCA), which can be time consuming, particularly for smaller TPPs that may not be well equipped to complete onerous regulatory processes. The development of payments applications is likely to play an important role in pushing the initiative forward over the next two years. There are examples in place already: payments platform Adyen has launched a service powered by an API-based payment mechanism.
It authenticates payments directly between consumers and their online banking solution, effectively creating an alternative to card payments. Authentication can be via methods including facial or fingerprint biometrics or an online banking password. The initial launch is in the UK, but the solution will be rolled out elsewhere as a PSD2-compliant payment option. Other payment service providers using Open Banking include UK-based fintech TrueLayer. The development of Open Banking initiatives outside the UK may help to drive future activity.
In Europe, a number of banks in the Netherlands are working on open banking-type services. Elsewhere, Open Banking will launch in Australia in July 2019, with four major banks, CommBank, ANZ, Westpac and NAB all included in the first implementation round. Standards for Open Banking have also been developed in New Zealand; in January 2019 the Canadian government opened a public consultation; and steps have also been taken towards developing Open Banking standards and APIs in Singapore, Hong Kong, Japan and Israel.
The bottom line for businesses – and particularly smaller businesses that often find it difficult to access finance – is that the intiative should strengthen their hand as they seek support from the FS sector, says Julien Tavener, COO at the alternative business funding platform ABF. “Open Banking is just one part of the business data stack – a collection of data points from Open Banking, cloud accounting and various other sources that can provide a sophisticated, real time view of the business,” he explains.
“That stack can give real power to the SME. We see this as part of a fundamental shift in the way businesses go about accessing finance over the next few years.” Starling Bank’s Maude agrees. “It will open up competition,” he says.
“When you have ease of use, ease of transference of data and ease of opening bank accounts, then customers will start shopping around more. Bigger banks will have to narrow down their focus and drop some services in certain areas because those services won’t be profitable enough.” Philippa Kelly, head of financial services at ICAEW, is also optimistic.
“It comes at a time when individuals and businesses are more aware of their data footprints, of the value of their data and what that means for them,” she says. “As customers are getting more savvy and businesses are able to do more for them, it could be massively beneficial, bringing more competition and pushing existing businesses to deliver services better. I hope it lives up to its potential.”
What open banking means for accountancy
The ability for service providers to access bank account data quickly and easily could have implications for accountants: by enabling digital accounting service providers to continue to automate and commoditise some accounting services; and helping accountants to enhance their own services. Open Banking also enables the development of niche propositions such as Open Banking TPP Coconut’s offer to freelancers, sole traders and microbusinesses, which blends banking and accounting services. Coconut founder and CEO Sam O’Connor and Adam Goodall, now chief of product, created ProConfirm, a technology service that accelerated audit processes and was acquired by confirmation.com.
In 2016 they began a second entrepreneurial journey with Coconut. “We realised the smallest companies in the SME segment, the five million companies with one or two employees, are very under-served by banking and accounting services,” says O’Connor. Coconut offers these business owners and sole traders an integrated banking, tax and accounting solution and has attracted 7,000 account holders in its first year of operations. O’Connor claims the tool is a better fit for the smallest businesses than are cloud-based accounting solutions, which are more suitable for businesses with more than a handful of employees.
Iain Wright, ICAEW director for business and industrial strategy, says the accountancy sector should not see such services as a threat: they should encourage firms to focus on delivering more value-adding, higherrevenue-generating advisory services. Another value-added service that Wright expects to be facilitated by the use of Open Banking is cashflow forecasting; and another Open Banking TPP, Fluidly, has developed a solution that links into accounting packages and bank accounts, then uses machine learning to forecast and manage cashflow.
As innovative service providers continue to develop new ways to offer accounting services, accountancy firms would clearly be wise to monitor developments in relation to Open Banking; and to seek to help business clients take full advantage.